Series 1 — Employee contribution towards the cost of health care coverage : Defined Benefit Model
Health care costs are and have been a major cost to employers for many years. Over the last 50 years, health care costs have risen at eight times the rate of inflation for every other product or service. The costs of providing health care coverage to employees is expected to skyrocket to nearly $15,000 per employee per year, according to the National Business Group on Health. To maintain a competitive benefits and total rewards package, companies need to ask themselves one question: How can we contain health care costs?
One trend over the past several years for employers to reduce their health care costs is to increase the amount employees have to contribute towards the cost of their health care premiums. Although this seems like a sensible approach to reduce the employer’s costs, it is not sustainable over the long term. Additionally, this does not contribute to high employee morale as employees view this as the employer passing more of the costs to employees. Employees need to know what the true cost of health care is, what if any increases the insurance company has implemented at open enrollment and what their employer contributes towards their health care costs.
The following is a strategy that we have implemented successfully with many of our clients which has proven to stabilize the cost that employers spend on their employee’s health care costs.
Defined Benefit: Many employers have implemented a “defined benefit” model for employees to contribute towards their health care coverage. For example, instead of paying a percentage of each employee’s premium (which increases most years), employers have adopted a model which provides each employee a fixed dollar amount each month towards their coverage. This model accomplishes t
1. The cost of health care is now transparent to the employee because they are paying the difference in their premium vs. what the employer contributes. For example, if the total monthly health care premium is $500 for employee only coverage and the employer contribution is $400 per month towards the premium, the employee will pay $100 per month and will know the total premium is $500. If at open enrollment the new monthly health care premium increases to $550 per month and the employer maintains the $400 contribution, the employee’s costs will increase to $150. The cost of the premium increase (10%) is now transparent to the employee.
2. The amount the employer contributes is now transparent. Most employees don’t realize that the amount their employer contribute towards their health care premium is part of their overall compensation. If an employee’s salary is $50,000 per year and the amount the employer contributes towards their health care premium is $5,000 per year, this employee’s total compensation is not $50,000 but $55,000. This not only increases employee morale but also reduces employee turnover because they realize the value of their employment is higher than just their salary.
The key to making this strategy successful is employee communication. Employers must communicate to employees the amount they are contributing towards their health care premiums and the total monthly premium.