Cost of Benefits: How do you manage?

Karen, yours is an oft-asked question these days. The costs of benefits are eating up budgets in companies both large and small. The last year in which the rate of salary/wage increase exceeded health insurance premium increases was 1996. Added to that, a health insurance policy that cost $500 per month in 2000 now costs in excess of $1300 per month. Those represent part of the pain your CFO is feeling. If there are revenue pressures for the firm, that pain will be even sharper.

I'm convinced that the days of being able to effectively shift costs from employer to employee are long past. Increased premium costs are creating: (a) a reduction in coverage, (b) greater cost shifting to the wage earner, (c) an increase in direct out of pocket earnings, or (d) some combination of the above.

The first thing I suggest in trying to manage the cost of benefits is to understand the real costs. Premiums are only one element. Make sure you are including the costs of benefit administration, both internally and externally. I've consulted for quite a number of HR departments who were losing battle after battle until the leadership accepted that the department's admin costs were part of the problem. If you are handling admin internally, are you also paying for it with a TPA or insurer? If so, negotiate costs to reflect the real workflow.

Second, recognize that changes in FSA rules will result in an additional tax burden for the company. Take a hard look at that structure, especially for medical expenses, and see whether an HSA or HRA arrangement makes better benefit and financial sense.

Third, look at voluntary benefit programs with capped dollar limits. Rather than trying to determine what is better for each employee, let them decide. A fixed pool of dollars can help effectively set multiple year budgets with greater cost certainty. The downside is that employees will bear cost increases; however, we are all accustomed to that from a consumer perspective. It it becomes too expensive, we'll do something different.

Fourth, take a very hard look at your current benefits and determine whether they can be adapted to better manage costs. High deductible plans with HSA/HRA options are increasingly popular for good reason. We just completed a project with an employer who thought they had done all they could. By shifting to a high deductile plan with a Destination HealthCare™ benefit, the net result was a reduction in year to year costs of just over $100,000, rather than a 23% increase that had been proposed by the prior carrier. If you're not familiar with Destination HealthCare™, please let me know and I'll be glad to share the benefits with you. It's the first option in many years that literally bends the financial cost curve downward.

Finally, do some benchmarking but do it carefully. Industry averages are effective for product pricing and sales, for example, but they don't often do as well for benefit comparisons. It can be analogous to comparing gas mileage for red and black cars. There may well be a difference in MPG, but it's more important to know which is a hybrid and which is a Hummer. Getting the criteria right is vital. You may be better off looking at companies of similar size, geography, and work skill requirements than at all companies in your industry.

Hope this helps from a high level.