As you prepare for this year’s open-enrollment period, now is the time to look at strategies to minimize the impact of your clients’ increasing health-insurance costs and communicate the value of the benefits plan to employees. A good starting point is your clients’ employee contributions and insurance carrier rate structures. Here’s what you need to do:
Contributions have a dual goal of premium cost sharing and motivating employees to make prudent coverage decisions that leverage employer dollars. A well-designed contribution strategy will save the employer considerable resources by eliminating payment for unnecessary coverage, specifically for dependents with coverage elsewhere. Also, employees attach value to a contribution, which they would not to a “free” benefit.
Check if your client’s insurance carrier rates and employee contributions to participate in the benefits plan are arranged in a three-tier structure. Many employers use a three-tier rating structure because it is easy to administer. If both rates and contributions are arranged in such a way, then you want to change both to a four-tier rating structure.
Why? A three-tier rating structure acts like a magnet for spouses who are covered under another employer’s group health plan. Consider an employee, Joe, who has a spouse, Mary, and two children. Let’s assume that Mary is covered under her employer’s health plan. She does not need additional coverage, and Joe wants to enroll himself and the children in your health plan. Under a three-tier contribution structure, nothing will stop Joe from adding Mary to the coverage because there is no additional cost. However, this additional dependent may actually increase the cost of the health plan as claims incur. Ultimately, the rates will increase.
Creating a four-tier rate and contribution structure (employee, employee + spouse, employee + child or children) and employee + spouse + children) adds cost for each dependent type that is offered medical benefits. This encourages employees to think twice before purchasing coverage for a spouse who may have access to coverage through his or her own employer.
Determining an appropriate employee-contribution level can be tough as each company is unique. Some questions to address are: What can the employer afford? What level of contribution will give the benefit value to employees? What message are you trying to send to employees through your contribution level? What are other employers in your industry charging when you are competing in the same marketplace for employees?
Although each employer ultimately needs to determine his own contribution level based on the above, I always recommend that it be done on a percentage basis as opposed to a flat amount. A flat amount may be easier to administer, but a percentage of the premium is more meaningful than. For example, 10 percent of $300 is more meaningful than a flat $30 because it puts the actual cost of the plan in perspective for the employee and allows for an automated and assumed annual change, when properly communicated.
In addition, it’s critically important to keep the contribution for spousal coverage on the slightly higher side (as compared to what that spouse would pay for coverage through his or her own employer as an employee). When it is less expensive for a spouse to be added to your plan than it is for that spouse to maintain coverage through his or her employer, you unnecessarily create additional plan costs. Keep your spousal contribution slightly higher than market levels for employee coverage.
Jason Lombardi, a member of the NAIFA-San Francisco Peninsula, is with Vita Benefits Group, a medium-sized employee benefits brokerage and consulting firm in California. He specializes in benefit plan contract negotiation, communication and compliance. Contact him at email@example.com.