As group medical insurance premiums continue to rise at an alarming rate, employers are generally faced with these four alternatives:
1. Find a cheaper carrier;
2. Pay the premium increase;
3. Reduce the benefits offered; and/or
4. Increase employee premium contribution.
Asking employees to share more of the monthly cost of their coverage seems to be the most common alternative used by employers facing escalating premium costs.
A well-designed cost-sharing program can do more than help employers control costs. Employees who pay more for their own health care coverage may gain a greater awareness of the cost of medical insurance, a better appreciation for how much the employer pays and a clearer incentive to help control costs.
Many employers draw a distinction between employee and dependent coverage. These employers may pay as much as 100% of employee coverage and as little as 0% of the dependent premium.
To reduce the risk of anti-selection, the percentage of the employee premium paid by the employer should be high enough that a healthy employee would have to pay more to get the same quality coverage through an individual policy.
Subsidizing dependent coverage is another story. Many employers argue that just having the availability of dependent coverage on a group basis is a valuable benefit, even without an employer subsidy. And it is, especially for dependents with ongoing medical conditions or the inability to qualify for coverage on their own.
Premium sharing is also a good strategy for eliminating duplicate coverage.
Assume employee Bill has a working spouse, Sue, with excellent group medical insurance coverage provided by her employer. And assume that Bill’s employer pays 100% of the employee and dependent premium for medical insurance. Bill has no financial incentive to decline coverage for his spouse. And he could argue that Sue’s plan does not provide 100% coverage anyway so his group plan will help fill in the gaps. But at what cost to Bill’s employer? Assume the monthly premium to insure Bill’s wife as a dependent is $500. Yet Bill’s plan is the secondary payer. Most of Sue’s claims will be paid by another insurance company.
Next, assume Bill’s employer offers to pay 75% of the dependent premium, $375 in this case. Bill must decide whether the secondary coverage is worth $125 monthly. The employer cannot lose. If Bill elects dependent coverage, $125 of the monthly premium has been shifted to him. If he declines coverage, his employer is freed from paying its $375 share of the premium.
The most popular alternatives to premium sharing are either charging employees a flat dollar amount or a fixed percentage of the employees’ own premiums.
A system that charges a flat dollar amount, such as $20 per paycheck, is easy to understand, but it discriminates against the lower-paid employees. Furthermore, in small group insurance plans where each individual’s monthly premium will vary by age, a flat dollar amount discriminates against the younger employees, who usually qualify for lower rates.
Charging employees a fixed percentage of their own premium, such as 20%, again discriminates against the lower paid. But if participants are individually rated by age, the older employees will pay more than the younger employees. Furthermore, a fixed percentage is easy to update, and there is a predetermined sharing of future rate increases.
Some employers will charge employees a fixed percentage of their monthly salaries. At employers that use this method, the higher-paid (and usually older) employees end up paying more of their respective costs. In addition, some employers will waive any premium sharing for employees below a certain income level.
The employer may be able to soften the blow of shifting more premium costs to employees by implementing a Section 125 cafeteria plan. This type of plan, which has a minimal cost, enables employees to pay their share of the monthly premium with before-tax dollars.
Here’s an important final note about avoiding anti-selection: Cost shifting is here to stay. However, the burden on the employee should not be so severe that healthier employees opt out of the plan and seek lower-cost alternatives on their own. Employers should endeavor to pay enough of the medical insurance cost so that the employee cannot secure coverage privately at a lower price.