Insights for Employers on Managing the High Costs of Healthcare

Healthcare is an essential service that everyone needs at various points in their lives. However, the costs associated with healthcare can be highly variable, leading to confusion, financial stress, and, in some cases, compromised access to care. Understanding the factors that contribute to these variations can help demystify the subject and lead to more informed decisions.

Average healthcare costs for a family have risen from about $6,000 in 2000 to over $22,000 in 2023. These costs have become unsustainable and unaffordable for most Americans as well as for most employers. For many companies healthcare is the second highest cost on their P&L second only to payroll. Starbucks spends more on healthcare than they do on coffee beans.

Many cost reduction strategies which worked well 10 years ago, no longer work. Since the pandemic and the increase in remote workers’ expectations, and how to meet those have also changed.

The challenge for employers is to focus on the high value healthcare services which are needed and design a cost-effective plan around them. In healthcare roughly 4% of your workforce spends 75% of your healthcare dollars, so designing a plan for the 4% can be punitive for the other 96% of your workers. Finding a balance which fits the majority of your employees while still taking care of the 4% is the key to a good healthcare strategy for reducing costs.

Is there a silver bullet which will work for every employer? No! Working with a knowledgeable consultant who has a track record is a good starting point. There are many alternatives available for healthcare coverage, and those choices vary depending on the size of your workforce.

Some employers set a defined amount to reimburse their employees, then let them shop for coverage to suit their needs, while others have plans that offer one or more options for coverage. A basic plan which is affordable to all with buy-up options for those who choose it is usually the best starting point.

Very basic plans that meet the minimum mandate of Minimum Essential Coverage (MEC), and address the ACA fines for large employers can cost between $60 and $75 per employee per month (even lower for larger employers). Firms wishing to offer more comprehensive coverage can build a cafeteria-style plan on top of that basic foundation. If you are spending more than $10,000 per year per employee (employer and employee contributions combined), there is room for improvement.

We have one client with 500 employees in the US and overseas, and we reduced their costs by $1.5 million in the first year, $1.9 million in the second year, and $1.7 million in the third year. Another group of ours with just under 200 employees was spending $2.1 million a year in 2017, and now they are spending less than $700,000. One client with 100 employees was simply paying the ACA fines of $16,000 a month. We set them up on a very basic plan for $10,000 a month, saving them a lot of money, and now they are at least able to provide some basic coverage and avoid the fines and penalties.

Attracting and retaining good employees is essential to the success of every business. Offering competitive pay and benefits is a crucial part of that strategy. Pay should reward productivity, service, and safety. Comprehensive benefits should include not only healthcare coverage but also life, dental and disability, as well as retirement contributions. You invest a lot in your human capital and finding the right strategy which is affordable both to you and to your employees when they need it is critical. Healthcare is the one line item that not only enhances your employee productivity but offers a 100% return to your EBIDTA.

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