By Bobby Hotaling
It is no secret that employee benefit plans make up one of a company’s biggest expenses. Companies and employees alike are routinely faced with an increase of 15 to 20% year after year in their health-insurance costs. Moreover, if health insurance costs are $6,000 to $7,000 a year for each employee, how does management still give each of its employees a raise that will be perceived as meaningful?
There have been many options proposed by everyone from President Obama to senior HR executives. The president, for example, recently spoke about employees not having to go to a doctor’s office. Instead, they could receive the necessary medical advice on the Internet. While a doctor’s office visit might cost a patient $200, an Internet consultation might cost as little as $40. If one has 300 employees going to doctors’ offices three times a year, the corporate cost would be $180,000. Replacing that with Internet consultations could reduce costs to $36,000.
There are, however, more substantial ways of reducing costs while not eliminating employee benefits. We are working with a company that paid $1.145 million in 2010 for that year’s health care premium. In 2011, its annual premium would have risen to $1.46 million. The company was willing to pay the 2010 rate, but not the one proposed for 2011.
An Innovative Cost-Effective Plan
To reduce its costs, while not demoralizing its employees as a result of decreased benefits, it asked us to develop an innovative, cost-effective plan. We proposed a massive overhaul of their plan, through the utilization of a Health Reimbursement Account (HRA). The plan that we proposed would have a gross savings of $370,633, assuming no utilization of the medical insurance. Based upon actuarial statistics of the number of doctors’ visits, emergency room visits, and surgical procedures that the company would likely have to fund, the net total savings of the proposed plan would be $235,160. Here’s how it works:
To begin, annual premiums would go from $1.46 million to $1.09million, which is where we get the gross savings of $370,633. We get these savings by increasing the copayment and deductibles. Using a statistical trend model, we determined that each employee or employee’s family would visit a doctor, on average, six times a year. Each employee would receive a debit card for the difference in copayments on these visits. So if all 108 employees visited doctors six times a year, each employee’s debit card would be charged $10, the difference between last year’s copay of $40 and the current year’s copay of $50. The total cost to the company would $6,480. We were also able to estimate, through a statistical trend model, that there would likely be 33 annual visits to emergency rooms by the company’s 108 employees. In 2010, emergency room copays were $50; in 2011, emergency room copays would be $100. The cost to the company would be $1,600.
Health Reimbursement Accounts
Health Reimbursement Accounts are being adopted by more and more companies as an effective stratagem for reducing corporate costs while providing attractive choices to employees. Typically, an HRA is used in conjunction with less expensive higher deductible plans. The HRA provides coverage for major illnesses, while also providing employees with funds necessary to cover routine out-of-pocket expenses. The major features of an HRA are the following: (a) its funds are used by employees, but are tax deductible to employers; (b) the funds are tax free to employees; (c) employers can determine the availability of funds for such specific benefits as prescription drugs, and dental and vision care; and (d) unused funds can roll-over at an employer’s discretion.
Altogether, the benefits of HRAs are manifold: Most important, its implementation will significantly reduce corporate costs, while providing employers with a long-term healthcare plan strategy. The plan also empowers employees, giving them vital healthcare choices.
As an integral part of an HRA, one can include flexible spending accounts (FSA), which allow employees to set aside money on a pre-tax basis to pay all out-of-pocket healthcare expenses. Such expenses can include copays, deductibles, and over-the-counter medications. Employees benefit from FSAs because they save money by paying medical expenses with pre-tax dollars, thus reducing their tax liabilities.
If Corporate America is to meet contemporary health-care challenges while not incurring dramatically increased costs, it will have to adopt health-care plans such as the one described in this article. As costs continue to spiral upward and health-care costs continue to be a major corporate expense, the need for innovation and flexibility will be the necessary ingredients for meeting the ongoing challenges facing Corporate America.
About the Author(s)
Bobby Hotaling is president and CEO of The Hotaling Group, an innovative insurance brokerage and consultancy that provides a full range of insurance services to Corporate America. For more information: www.hg-financial.com