What are the Most Obvious Factors That Impact Employee Benefits Cost?

Employee Benefit Plan Tips

Over the past couple of decades, employee benefits have increased in importance and have become a critical part of employee compensation programs. Employees are using their dental, prescription drug, paramedical and vision coverage at record levels. The three major factors contributing to the increases in benefits costs are:

  • Ageing: As we get older, we use more health care products and services.
  • Awareness: In the internet age, people learn more about their medical issues and find alternative therapies they can use to help them with their wellness issue. Many of these alternative therapy services are covered under their group benefits plan.
  • Activity: Health care providers are more effective at marketing their products and services. This increases utilization and increases the cost of employee health care benefits.

The combination of ageing improved marketing and the introduction of new and more expensive services by providers have contributed to the increasing use of these services and their overall cost.  It’s vital that greater attention needs to be paid to managing employee benefit costs.

The sustainability of employee benefit programs has become a concern for many employers. Annual increases are often over 10%. Employee benefits programs were a minor cost item at one time. But they are now a significant percentage of overall compensation costs for most employers.

Employees recognize the value of the health and dental benefits they receive. Still, employee benefit programs also provide vital protection under the life, accident disability and travel insurance sections of the policy. The group insurance coverage is often the only catastrophic protection many employees carry.

Employee benefit programs offer many unique values that cannot be obtained through other means:

  • Health & Dental Coverage is one of the few tax-effective areas where the employer can deduct the expense, and the employee is not taxed on the value of the benefit.
  • Life and disability Insurance obtained through a group insurance plan is easy to obtain and affordable for employees who may not have any other coverage.
  • For lower-income employees, benefits are an important source of income to help cover medical and dental expenses they could not otherwise afford.
  • For higher-income employees, employee benefits are a valuable recruiting tool that differentiates your company from your competition.

For employers, there is a major concern developing because the costs of employee benefits have risen at a rate far more than inflation.

  • A recent study estimated that in the year 2000, Employee Benefits were 6.4% of total compensation. (Salary, Government Benefits and Employee Benefits)
  • By 2010 employee benefit costs had escalated to 10.7% of total compensation.
  • If the trend from 2000 to 2010 continues employee benefits will be 17.5% of total compensation costs by the year 2020. At this level of expenditure sustaining a full benefit program becomes a challenge.

Employee benefit programs can be complex, and there are several issues to consider. There are several ways to approach the purchase of employee benefits.

One option is to purchase a generic benefit plan. These products have been developed based on the premise that a single design solution will work for all employers. One of the challenges with generic plan designs is the fact that they are not designed to further the employer’s business objectives nor to contain costs. The generic plans are designed
to lower the insurance company’s administration costs. This does contribute to lower administration charges to the employer; however, the majority of the expense of an employee benefit program is the cost of claims. Generic benefit plan designs are not always effective at addressing this issue.

There are alternatives to a generic benefit plan design. This starts with a careful analysis of employee benefit program costs. The initial research is developed to find out exactly where claims dollars are being spent. Once the cost dynamics are understood, it can be determined if there is a more efficient benefits plan design that can be used to lower costs. It is also possible to investigate if alternative service providers can be used to improve efficiency and lower the cost of services.

Many of the recent innovations in employee benefit plan design focus on making the employee more accountable for their health care spending. In some employee benefit plans, health care spending accounts are being used to bundle heath care services over which the employee can exercise some control. Health spending accounts do provide the employees with advantages over traditional group insurance that make the use of a health spending account attractive to both the employee and the employer.

When a health care spending account is used, it places a limit on the amount available for discretionary expenditures. As a result, the employee must choose carefully when they spend their available health care funds. This gives the employer control over these costs as they determine the rate at which they increase funding for these expenses, not
the insurance company. Health care spending account limits are flexible. The employer can determine different levels of funding for different groups of employees. This enables health care spending accounts to become a useful recruiting and retention tool for highly skilled staff.

Employee communication is a key element of the successful implementation of these cost containment focused plan designs. There are now online tools available that enable employees and employers to have up to date information on all their health care expenditures. When working with customers, we spend a considerable amount of time, creating a communication plan to support the transition from a generic program to a customized program.

The objective is to utilize cost containment strategies that can lower benefit costs without impacting the quality of service to employees.

The real value of your employee benefits program is what it does. This is demonstrated when it provides support to the families of your employees at a time of need.

Our mission is to work with our clients so that they obtain an employee benefit program that is accountable for what it does and how it performs.

A properly designed employee benefits program ensures the employer’s investment is efficiently used and the benefits provided to employees are sustainable.

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