5 Ways to Lower Your Health Care Costs—Without Cutting Benefits
It’s not your imagination—health insurance premiums are rising.
The Kaiser Family Foundation found that over the past year, employer health insurance prices increased by an average of 4% for individuals and 5% for family coverage. That puts the average annual premium for employer-sponsored health insurance at $7,188 for individuals and $20,576 for families in 2019.
The headline? Small business health insurance isn’t always easy to afford.
The thing is, offering health insurance can be more cost-effective than it appears. Health benefits can help you significantly reduce reduce employee turnover—and up your odds that employees will stay. In fact, over half of employees reported that satisfaction with their health plan is a key reason why they decided to stick with their current company.
So how do you lower your health insurance rates, while still keeping your team happy with their benefits package?
Here are five strategies to help you reduce health care costs as an employer, without sacrificing the benefits that are so crucial to you and your team.
Strategy #1: Shop around for the best health insurance plans
If you want to reduce health care premiums, you can start by comparing plan prices. Rates for small businesses vary by carrier and change quarterly. Just keep in mind that plans with lower premiums may have higher out-of-pocket costs or fewer benefits.
Before you switch health insurance plans, make an apples-to-apples comparison to your existing plan.
- Use an online comparison tool (e.g. a site like eHealth) to compare your plan’s summary of benefits with plans online.
- Ask a licensed health insurance broker to do it for you by finding the plan that best fits your needs and budget.
Unless you’re confident that you understand the ins-and-outs of health plans, you’ll likely want to consult a health insurance broker before you buy. You don’t want to choose a plan that may cost slightly less, but offers significantly worse coverage.
As you shop, take a look at any additional benefits that come with coverage. Some health plans offer premium discounts to beneficiaries who participate in their wellness programs. These programs help employees and their families tackle common health problems and lead healthier lifestyles.
Some popular wellness programs can help people with:
- Weight loss
- Smoking cessation
- Diabetes management
- Stress management
By choosing a plan from a health insurance carrier that offers wellness programs, you’ll lower your premiums while encouraging your employees to stay healthy.
Strategy #2: Offer a high deductible health plan
Offering a high deductible health insurance plan (HDHP) is one of the easiest ways to reduce your health care premiums. However, it’s not for all employees.
These plans require employees to pay a higher deductible (the amount paid out of pocket before the insurance kicks in), in exchange for lower monthly premiums. In 2020, an HDHP must have a deductible of at least $1,400 for an individual and $2,800 for a family.
With an HDHP, you’ll pay lower monthly premiums, as will your employees. That being said, some employees are unhappy with these plans due to the high out-of-pocket costs. The out-of-pocket maximum for an HDHP in 2020 is $6,900 for one person and $13,800 for a family, which is quite a lot. As a result, you should consult with a licensed benefits advisor to help you determine if this is the right strategy for your employees.
If possible, offer an HDHP plan in addition to plans with lower deductibles to give your team multiple options.
Strategy #3: Combine a high deductible health plan with a savings option
By combining a HDHP with a savings account, you’ll help employees cover their out-of-pocket expenses and enjoy the tax deductions that come with it.
The two most popular savings options are:
Both types of accounts offer tax benefits to both employers and employees.
You can pair an HDHP with an HSA to help your team cover deductibles and other health care costs.
With an HSA, employees can set aside pre-tax dollars (up to $3,550 for individuals and $7,100 for families per year starting in 2020) to pay for health expenses. Any unused savings remains in the employee’s HSA account, which is owned by and continues with the employee even after they leave their employer. This can be a relief for employees that are unsure if they’ll be able to spend the full amount.
To be eligible to contribute to an HSA, an employee must:
- Be covered under a high-deductible health plan.
- Not be enrolled in Medicare or a health care flexible savings account (FSA). Dental, vision, accident, and disability insurance don’t affect eligibility, and neither do limited use flexible savings accounts. (Learn more in our FSA section below.)
- Not be claimed as a dependent on someone else’s taxes.
If you offer an HDHP with an HSA option, be sure your employees know they can use their savings to pay for qualified out-of-pocket costs.
An HRA is an employer-funded health benefit that reimburses employees for out-of-pocket medical costs and health insurance premiums.
HRAs give employees a monthly allowance of tax-free money. They can use this to pay for any health care services they need, and get reimbursed up to the designated amount.
There are many types of HRAs, but let’s focus on the following four:
- Group coverage HRAs, which you can pair with a group health insurance plan.
- One-person stand-alone HRAs, which provides tax-free health care reimbursements for one employee. This may be a good option if you only have one employee. If your business is structured as a corporation and you’re the only employee, you may be eligible to enroll in a stand-alone HRA. If you’re a sole proprietor, the IRS doesn’t see you as a W-2 employee, so you won’t qualify.
- Retiree HRAs, which help employees pay for medical expenses during retirement.
- Qualified Small Employer HRAs (QSEHRAs), which you can only offer if you don’t provide group health insurance and you are not subject to the employer mandate (meaning that you have less than 50 full-time equivalent employees).
Your employees can participate in an HSA and HRA at the same time, but keep in mind that the IRS has strict guidelines for doing so. An employee can only contribute to both types of savings accounts if the HRA is one of the following:
- Limited purpose HRA
- Post-deductible HRA
- Suspended HRA
- Retirement HRA
Strategy #4: Offer an FSA
An FSA lets employees set aside pretax dollars from each paycheck to pay for eligible out-of-pocket expenses. FSAs are similar to HSAs, but there are a few key differences to consider.
The three types of FSAs you can offer include:
- Health care FSA: Employees can use this FSA account to pay for medical, dental, vision, hearing, and prescription drug benefits for themselves, their spouses, and their dependents.
- Dependent Care FSA: This account can be used to pay for eligible child and adult care expenses, such as day care, preschool, and summer day camp.
- Limited Purpose FSA: Your team can use this type of FSA to cover eligible dental and vision expenses. Other eligible expenses may include prescriptions and some over-the-counter items. Employees can enroll in a limited purpose FSA even if they have an HSA.
You can offer more than one type of FSA, and employees can enroll in more than one type of account. For example, a parent can enroll in a health care FSA and a dependent care FSA.
In 2020, employees can contribute up to $2,750 per year to their health care FSA accounts. Employers aren’t required to contribute to their team’s accounts, but they can match up to the individual contribution limit for a total savings of $5,500 per year. (Contribution limits differ for dependent and limited purpose FSAs.)
$2,750 (employee FSA contribution) + $2,750 (employer FSA contribution) = $5,500 (maximum FSA contribution)
With a health care FSA, you’ll avoid paying a 7.65% payroll tax (Medicare and Social Security) on the amount employees contribute.
Strategy #5: Consider offering a QSEHRA instead of group health insurance
If you don’t have the budget to offer group health insurance, a QSEHRA may be a solid option.
QSEHRA is an Affordable Care Act-approved program that allows employers to help employees cover the costs of individual Marketplace coverage. Employers that want to save on costs and avoid managing a small group health plan may also decide to set up a QSEHRA.
To qualify, you must:
- Have fewer than 50 full-time equivalent employees
- Not offer small group health insurance
- Require employees to buy individual health insurance in order to participate
In 2020, employers can reimburse employees for up to $5,150 per year for employee-only coverage, and up to $10,450 for family coverage. Employee reimbursements are tax-free, and employers’ contributions aren’t subject to payroll taxes and are tax deductible.
Keep in mind, your employees have likely never heard of QSHERAs. If you decide to offer this type of arrangement, it’s important for you to explain how it works and how they can use it to save on health care costs. This guide to the QSEHRAs will give you a good place to start.
No matter your budget, it’s important to communicate with your employees about the health benefits you offer. For example, if you offer a high deductible plan with an HSA, explain how contributing to an HSA will save them money. Or if you have a QSEHRA, make sure they know exactly how to get reimbursed and for how much.
Rising health care costs doesn’t mean you have to stop offering health insurance. By picking the plans that work for your business—and ensuring your employees understand those benefits—they’ll get more from their coverage and will be more likely to stick around.