(This column originally appeared in the Philadelphia Inquirer)
If you’re running a small business you know that the cost of just about everything has gone up this year. So it should be no surprise that it’s also going to be more expensive to offer healthcare benefits, too. Yes, thanks to supply chain shortages, tight labor markets and other inflationary pressures, healthcare costs, too, are going up — and likely more than in years past. That’s according to two recent studies from the giant human resources firms Willis Towers Watson and Mercer.
The Willis Towers Watson survey of employers found that most are expecting a 6% increase in their premiums with more than seven in 10 expecting to see significant increases over the next three years. A similar study from Mercer predicts a 5.6% average increase in 2023. So what can a small business owner do to control these costs?
Of course, you always have the option of making your employees pay more of their healthcare premiums or changing your plan to something with a higher deductible and less benefits in order to keep your costs down. But, given the popularity of healthcare coverage and today’s competitive labor market, taking these steps may risk losing good people. The good news is that there are other potential options for you.
One option is self-insuring, or self-funding your health plan. Instead of buying a health plan from an insurer, companies that self-fund their health plan pay directly for employees’ health care costs. Most hire a third-party administrator to manage the plan and process claims. In the past, self-insurance has been most common among companies large enough to accommodate risk, but the approach is increasingly appealing to small businesses looking to provide health benefits while saving money.
Level-funded plans are a type of self-funding that may be particularly appealing to smaller businesses. Under these plans, employers pay for employee health costs up to a certain amount — maybe a few thousand dollars per person per year. After that, a group insurance plan kicks in.
“A level funded plan is like quasi-self-funding,” says Noah Glassman, the President of Philadelphia Life and Health, a benefits advisory firm. “If you have a young healthy group or even a larger group that has a good health history this may be a good option.”
Glassman says that more administrative work may be required from the employer but the employee won’t see the difference and these types of plans have grown in popularity thanks to startups, which often employ younger people. “I’ve moved more small groups to level-funded plans in the past two years than ever before,” he says.
Gregory Grimm, a vice president at the employee benefits firm Exude, Inc. in Center City has also seen a significant increase in self-insurance options from his smaller company clients over the past few years.
“We have groups that are 40 or 50 employees who are self-funding in a safe environment [without fear of incurring catastrophic liabilities] right now where typically in the past it was hundreds of employees,” he says.
Another strategy I like to recommend to my clients is to consider paying a greater share of employees’ health insurance — even increasing their family coverage contribution — instead of just giving employees a raise. As an accountant, I like that there are significant tax savings to be realized because healthcare premiums are usually non-taxable to employees (and deductible for the company). Employers won’t have to pay federal and state payroll tax on healthcare contributions as they would if just giving a salary increase. In the end, the employee is still seeing a higher net paycheck and the business owner is saving money.
Health Reimbursement Arrangements — or HRAs — have also grown in popularity over the past few years. An HRA is a health benefit account that the employer contributes money to and that employees use to cover eligible health expenses, such as doctor’s visits, prescription medications and, in some cases, an individual health insurance plan. Most of the clients I have who offer HRAs contribute similar amounts to what they would pay under a group plan. But for them it’s a relief to not have to negotiate new healthcare premiums each year or become involved in the health histories of their employees.
“This is a potentially good strategy for very small businesses,” says Robert DeNinno, a principal at Precision Benefits Group in Philadelphia. “Particularly if your employees can take advantage of federal subsidies on the healthcare exchanges.”
If you opt for a high-deductible insurance plan, Health Savings Accounts (HSAs) are a good way to help employees manage their share of the cost. These plans are like a 401(k) for your healthcare costs. Employees can put away up to $3,850 in 2023 ($7,750 for families) pre-tax to use for out-of-pocket expenses, such office visit co-pays, prescription drugs and a long list of other qualified health expenses like reading glasses, acupuncture and certain over-the-counter medications. (See a full list of qualified HSA expenses here.) What’s great about these plans- in addition to being inexpensive to setup — is that employees won’t lose any unused amounts at the end of the year. Also, if they decide to leave their current employer the remaining balance stays with them.
“We tell our clients to maximize their HSAs, even before you contribute to a 401(k),” says DeNinno. “For many employees where they can’t control their healthcare premiums it gives them the chance to better control their out-of-pocket expenses and therefore their overall costs.”
Finally, there may be some savings to be realized by comparing and then negotiating premiums with the major carriers like Blue Cross and Aetna. Unfortunately, most of the benefits experts I know admit that any savings may be negligible as the carriers usually offer very similar rates. But, given a company’s demographics and a carrier’s interest, there may be some advantages to doing this, as long as the discussions begin well in advance of a plan’s renewal date. Grimm advises surveying employees early to see what benefits are important and what can possibly be excluded. Glassman encourages his clients to look forward.
“The most important thing is getting ahead of it early and understand what the next 12 months looks like from a hiring perspective,” says Glassman. “Unfortunately for many of my small business clients the healthcare decision gets pushed to the last minute and then it’s status quo. They say, you know what, I don’t really like dealing with this, but it’s worked and let’s just keep it going. Meanwhile, they’re getting hit with that increase.”