Lower Health Plan Spending Without Cutting Benefits

SEPTEMBER 5, 2023

Rising medical costs – driven by inflation, higher prescription drug prices and staffing shortages in the healthcare industry – are expected to increase premiums for the coming year. To address this, many brokers will recommend raising co-pays and deductibles at employees’ expense. Smaller businesses already struggling to find workers and remain competitive will need to find a more sustainable way to control health plan costs. Don’t let your business fall behind because of a short-sighted renewal strategy.

One of the strategies we look at for reducing costs without impacting benefits is level funding, where you pay a fixed monthly premium to the insurance company for claims administration and payment — with the opportunity to see a return on premium if your plan runs better than expected. Employers often see savings up front by switching from a fully insured health plan to a level-funded one. If you have already explored level funding, but determined your health plan is not a good fit, you may still be able to reduce health plan costs by adjusting your plan design.

Switching to an HDHP Can Reduce Costs

Many fully insured employers switch from a traditional PPO plan to a high-deductible health plan (HDHP) as a way to reduce benefits spending. This transfers the cost of risk to the employees, who pay for more healthcare expenses out-of-pocket (OOP) before insurance pays its share. Switching from a traditional PPO to an HDHP can reduce the fixed costs of insurance by 25% to 30%.

While this can reduce health plan costs for employers, employees who are used to a gold-level plan — featuring a higher premium in exchange for a lower cost of service — may not be thrilled at the idea of suddenly being on the hook for OOP expenses and decide to seek employment elsewhere. Employers that want to switch to an HDHP should look at including a health reimbursement arrangement (HRA) to maintain employees’ benefits experience while still reducing health plan spending.

Help Employees Maintain Their Benefits Experience

An HRA is an employer-funded account that helps employees cover OOP expenses under an HDHP. Unlike a health savings account (HSA), any unused funds are returned to the employer at the end of the plan year. Employers may then choose whether to roll over HRA funds and, if so, how much.

Employers may be skeptical about funding HRA accounts upfront. However, USI has found that 75% of plan members incur $4,000 or less in claims expenses. Many employers that choose to switch to an HDHP apply the premium savings to the HRA – with unused funds, employers can see a 5% to 10% total reduction in health plan costs with this strategy.