A lot of CEOs I work with on a daily basis struggle with designing their employee health benefit plans. For most companies, after salaries, this is the company’s biggest expense. Not surprising, given that over the last 50 years, the cost of consumer goods and services have gone up eight-fold with one exception — healthcare.
Healthcare costs have increased 274-fold.
Splitting the healthcare cost between the employer and employee is a sensitive employee morale issue – if the employer takes on a major share, it’s good for the employees and recruitment, but can end up being expensive. It can also lead to economically irrational decisions on part of the employees, who would always choose the most expensive health plan if the company is paying for it. On the other hand, simply shifting a greater burden to employees just adds financial stress that indirectly costs the company down the road.
So how do you tread this fine line?
I often advise clients to look at insurance as a trade-off between peace of mind and guaranteed fixed expense. The premium is the guaranteed fixed cost that I to bear while the doctor’s bills are variable. The peace of mind I tend to buy is that a catastrophic medical incident will drive me bankrupt. So I tend to buy lower premium plans that come with higher deductibles and out-of-pocket expenses. The savings on the premium I put in a health savings account (HSA) for that inevitable day when I will hit a wall! This works out well as long as I am generally in good health. (The avoided doctor visits also give me added flexibility to contribute more to my HSA.) Of course, for someone with a chronic condition requiring on-going doctor care and medication, the math might work out better if they go with a high premium and low deductible plan.
For example, a client came to me with a sticky situation. His family of four had a $10,000 out-of-pocket max PPO plan for $928 / month. ($11,136 / year).
When I looked deeper, I saw that he could buy a $5,000 out-of-pocket max PPO plan but the cost goes to $1,546 / month. ($18,552 / year).
So to save $5,000 of expense on the deductible, he was taking on a cost of $7,416.
I skipped over some finer details in this example, but you get the idea!
I encourage companies to make this math transparent to the employees and encourage them to go for the cheaper plan and contribute part of the savings to the employees’ HSA plans. This is like a health 401(k) plan…employees get to take this pre-tax money with them when they leave. It’s a win-win for both you and your employees.
That’s my 2 cents towards making sure your health benefits expense do not become an albatross around your neck. As a CEO, how has your experience been while managing health benefits? What potential risks do you see to a higher deductible health plan for your employees? How do you mitigate it?
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