Cost Saving Strategies for Employer Health Plans

When self-funding your health plan isn’t an option

By Andy Yost

To deal with the ongoing, seemingly never-ending rise in health care costs, employers need to keep reevaluating how they fund their health insurance programs and the type of programs they offer. Most companies offer some level of health benefits to their employees, yet how they manage the cost varies greatly, and they may want to consider alternative cost-saving strategies that are gaining traction in the marketplace.

Consider this troubling statistic: For the past three years, health benefit costs for employers rose more than 5% year-over-year, according to Mercer. Companies that did not make any changes to reduce these expenses or explore other ways of covering their employees’ health care costs realized even higher increases. Employers estimated they would have experienced a 7% increase had they stayed with the status quo, Mercer reported.

Constantly Changing Landscape

Amid the soaring costs of health care is companies’ need to provide this powerful resource to their employees: Employer-sponsored health coverage is considered both an essential way to attract and retain a talented workforce, and it’s a requirement for companies with at least 50 full-time employees (under the Affordable Care Act’s “employer mandate”). As it is, many smaller businesses that fall under the threshold offer health care regardless of the regulatory requirement.

To deal with the rising costs, in recent years, some employers have opted to self-fund insurance plans, but this option tends to benefit only larger organizations that have the capacity to absorb the administrative costs and tasks associated with such plans. Companies of all sizes have also tried various ways to help employees manage their share of health costs, such as by raising deductibles, offering tax-friendly flexible spending accounts and health savings accounts, and introducing wellness programs that help to encourage healthy habits, such as gym reimbursements.

Companies that have determined self-funding is not an issue should take a close look at their current health plans.

On a larger scale, though, companies that have determined self-funding is not an issue should take a close look at their current health plans. Evaluate your utilization rates (the extent to which employees are using the benefit) and employees’ feedback about the plan, all while considering the company’s future growth. You may also want to consider alternative ways to cover some of the costs of health care beyond a traditional group health insurance plan.

Health Reimbursement Accounts (HRAs)

Employers can include health reimbursement accounts, or HRAs, in their insurance plans, and many do. These tax-advantaged accounts reimburse employees for qualified medical and dental expenses, prescriptions, and insurance premiums.

HRAs can also be offered within individual policies through an individual coverage IRA or what’s known as a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which is primarily for small businesses with fewer than 50 FTEs. They are growing in popularity, especially among larger employers, according to the HRA Council, which noted that 83% of surveyed employers said they were not able to offer health insurance to their employees before starting an HRA program.

A key benefit to HRAs is flexibility: Employers decide what their contributions will be and what expenses they will cover, and employees get to choose their own provider and insurance plan. Administrative costs and involvement by employers are lower and, unlike group plans, you will not pay for services not utilized.

How HRAs work: Employees usually pay upfront for their services, later getting reimbursed depending on their limits for the year and what the insurance company covers. Those reimbursements to employees are treated as tax-free (they do not affect their income taxes or the employers’ payroll taxes).

They could lose funds depending on when they transition to a new workplace and the specifics of your program.

Other benefits for employees include being able to carry over unused funds to the next year (if their employer allows it) and keeping their insurance plan if they switch jobs. Coverage can be extended to dependents and spouses. Employees will need to be aware, however, that they could lose funds depending on when they transition to a new workplace and the specifics of your program.

Gap Plans

To help employees meet the costs of a high deductible health plan (HDHP), employers are increasingly offering gap plans. These supplementary plans are designed to “bridge the gap” by giving people another option for paying toward their deductible and out-of-pocket fees, including copays. A downside is gap plans may not cover preexisting conditions and may not include some procedures that employees are accustomed to in more traditional health insurance plans.

HSAs are highly used and sometimes involve automatic enrollment at employers that use them

Gap plans are often used as an alternative to health savings accounts (HSAs), which are offered to employees as a way to manage their share of health care costs using pre-tax dollars. HSAs are highly used and sometimes involve automatic enrollment at employers that use them, according to a 2023 Plan Sponsor Council of America survey, but they do require more education and administrative involvement by employers.

Time to Consider New Health Benefits Options?

Changes in the health care marketplace and growth at your company may prompt you to review your current employee benefits offerings. Your broker can help you explore various rates from top insurance carriers as well as new options that could be the right fit for your organization.

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