Reduce Employee Health Insurance Costs…with a Carrot!
Employee Benefit Plan Review Journal
Written by William A. Steffen
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The law of large numbers and compounding can work for employees participating in a 401(k) plan, but this mathematical wonder is not so favorable when it is the employer paying the large health insurance premiums and yearly rate increases. This “defined benefit” is on a crash course, and management should start evaluating alternative routes.
As a prime example, revisit the evolution of the retirement plan market and the transition that has occurred over the past 20 years. With the inevitable demise of the defined benefit company pension plans, employees have embraced the defined contribution 401(k) model. Most employees could not imagine a comfortable retirement if not for their retirement nest egg. But how does an employer execute this shift in strategy to unload the increasingly larger health care burden?
One way of alleviating the problem has been for companies to adopt a defined contribution insurance model or Consumer Directed Health Care plan (CDHC) such as a Health Savings Account (HSA). Typical characteristics include raising the deductible and removing the doctor office and prescription co-payments from the plan, in exchange for lower premiums and discounted network pricing for services rendered. While some may feel that this is just another way for their employer to shift costs back on to the employee, others realize that employers can no longer afford these benefit-rich plans – which may be in lieu of higher employee compensation.
If purchasing this higher deductible plan will deliver lower health insurance premiums, some employers contribute a pre-determined lump sum to each employee’s savings account, and share these newly found savings with the employees to ease the transition in year one. The employee is now in charge of his/her own health care for the first out- of-pocket expenses up to a certain annual maximum, and the individual is required to become a healthcare consumer -- possibly for the first time. This can be a positive experience if given the tools to succeed or a negative experience if employees are sent out on their own.
Suddenly, everyone has a stake in the game, and purchasing habits change. The lump-sum in the savings account is available to spend tax free for medical, dental and vision- related expenses to help satisfy the deductible. But if the employees are healthy or savvy consumers, any unused portion can be rolled over for future medical expenses or even retirement.
Driving Behavioral Change
This defined contribution shift forces several behavioral changes in the employee. Under the current group employer system, there are no financial repercussions to the health decisions employees make on a daily basis. In a CDHC environment, employees who practice healthy habits will be rewarded in many ways. Personal good health will allow a longer life expectancy, less expenses going towards doctors and prescriptions, and more money to roll over in savings accounts each year. Those who don’t practice healthy habits will soon realize the financial consequences that are attached to that decision. This represents a marked change from the current environment where the employer is the one paying the bill for the employees’ poor health decisions.
But how does a company help an employee adopt these lifestyle changes, ensure a smooth transition, and embrace the opportunity to share in the premium savings? The answer lies in ongoing employee education, access to health care resources, and actions from the employer that reinforces a “healthy” message. Communication from management must be clear, consistent and repetitive.
Full disclosure of actual costs will appeal to rational employees if they understand the pain the employer is currently experiencing. If the employees were educated on this topic, most would embrace the idea to change their behavior if there was an ability to share and benefit financially. Deliver this financial “carrot” and watch consumerism change the employee’s attitude and the dynamics of the smaller health care services market. Like any behavioral change, it will take some time to resonate amongst the employee base and the medical industry.
It’s a fact that healthier employees will ultimately reduce insurance costs and increase productivity. Adopting a CDHC health plan won’t fix the problem alone – a shift in employee behavior must occur in tandem. Employers must provide the guidance, tools and financial incentives to those employees that seek a healthier lifestyle and who want to save money on their preventative and small health care expenses. Consumerism and price transparency have definitely arrived in the health care market, with the Internet once again acting as an industry-altering tool. Government legislation and burgeoning CDHC related businesses will only force more competition on prices and quality ratings in the medical industry.
These new CDHC tools take on many different shapes, and are available through a number of companies in this blossoming market. They include prescription discount Web sites, online personal medical records access, and hospital/physician pricing and quality ratings. Some are very comfortable with e-mail to communicate with their doctor to take care of minor medical issues. This reduces employee absenteeism and medical leave. Others may prefer to use walk-in clinics that are currently opening up in major retailers across the country, including Wal-Mart or CVS. A choice in how medical care is administered is always a benefit to employees and their families. Medical advice can be delivered across all types of communication media, but it depends upon the severity of the medical condition.
Incentives for Healthier Lifestyles
Now that the employer has adopted the CDHC model, funded the savings account, and given employees access to tools on how to spend their money diligently, it’s time to consider the ways to change employees’ health habits to make the plan a success over the long run. Some companies are starting to adopt intriguing ideas to financially motivate employees. These financial incentives can either reward for healthy behavior, or penalize for bad behavior. A personal preference is the carrot approach, over the stick. They include bonus “points” for going to the gym consistently, attending a smoking cessation program, or completing a computer tutorial on general healthy habits. These incentive points can be spent on a variety of things including airlines, hotels, and movie tickets. A company can get real creative in this incentive category.
But it can’t stop there: The “healthy habits” theme should reverberate throughout the company and the building. The actions of the employer after instituting the new CDHC plan will reinforce the major shift in behavior, and not be perceived as an immediate short term financial fix for the company.
Examples of these actions could take the form of signs placed in the kitchen on better food preparation, or menus on how to prepare a quick healthy meal. The kitchens should be fully stocked with utensils and cooking equipment. The soda machines should leave the building, and replaced with bottled water. The snack machine should be filled with healthy items, not a candy store.
Even better, build a sandwich and salad bar on site, so fast food is not the only lunch alternative for employees who have a tight family or personal schedule. An on site workout gym is always a positive sign, along with paying for employer-sponsored sports teams. An analysis of the entire air conditioning system and air quality control would not only improve everyone’s health, but also show genuine concern. These actions will be louder than any words or correspondence delivered by management.
By following the steps above, most employees will leave the meeting excited to get back to their desk, armed with their new employee health insurance manual, consumer directed health care tools, and the fresh bowl of “carrots” the employer just handed out.
For more information from an H.S.A. specialist, you can reach William Steffen of Steffen Financial, Inc. at 928-252-2493.
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