Creative Solutions Consider These Ideas for Cutting Employee Health Costs

Health and dental insurance costs are again rising by double-digit percentages. Many practices are coping with this by simply paying the increases or by requiring employees to assume a larger share of the annual premiums. You don’t have to just give in to these increases or pass them on to your staff. Some medical practices have made radical changes to contain these costs without sacrificing employee benefits.

Health Savings Accounts

One such change is replacing conventional group insurance with health savings accounts (HSAs). Virtually all major health insurance carriers are promoting these. Created by the Medicare Prescription Drug Improvement and Modernization Act of 2003, an HSA is a tax-advantaged custodial account established exclusively for the purpose of paying the qualified medical expenses of an individual who participates in a high-deductible health plan (HDHP). According to various surveys and census data, there are approximately 10 million people with HSAs in the U.S. This is more than three times the number with HSAs in 2006.

Why are these so popular? First and foremost, they are less costly than traditional health plans. One Connecticut practice was looking at a 17{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} premium increase on its group insurance plan. After evaluating various plan options, it switched to a HDHP with HSAs for its eight employee participants funded by the employer. The annual cost savings to the practice was about $20,000, as compared to a $10,200 premium increase under the traditional plan. According to a Kaiser Foundation study, the average premium savings of HDHPs over low-deductible health plans in 2008 were $780 per single-covered employee and $2,550 per family-covered employee.

Employees also benefit from HSAs. Whether funded by the employer or through pre-tax payroll withholdings, the balance in each individual HSA is 100{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} vested. Any unused balance remains the employee’s and is carried over to pay future medical expenses. Earnings are tax-deferred. If used for qualified medical expenses, all funds and related earnings are tax-free. Unused HSA balances may be used for retirement upon reaching age 65.

Health Reimbursement Accounts

Another interesting approach taken by one medical practice combines a traditional insurance plan with a health-reimbursement-account concept.

By performing a spreadsheet analysis of various deductible options and the related premiums, the practice was able to save thousands of dollars in premiums by selecting a plan with a $2,500 deductible to replace a $500 deductible plan. The practice pays 100{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the first $1,000, and the practice and employee each pay 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the remaining $1,500 deductible. The change not only saves the practice money, it potentially saves employees $500 with a maximum downside of only $250 per employee.

Self-insured Dental Coverage

With dental insurance costs continually increasing, the above medical group surveyed the actual dental charges its 10 insured employees incurred in the course of a year. With that information, the practice dropped its dental plan and replaced it with a self-insured plan with identical coverage for its employees. The practice deposited one year of premiums ($16,800) in a separate bank account and contracted with a service bureau to administer the plan, at a cost of $360 a year. Two years later, the account still had a small balance in it, saving the practice $16,000 over a two-year period.

Flexible Spending Accounts

The above medical group also established a flexible spending account (FSA) which enables employees to set aside up to $5,000 in pre-tax earnings through payroll withholdings to pay for co-pays, deductibles, and other medical expenses not covered by their insurance policy. The plan is also administered by an outside service bureau at a minimal cost but saves the practice more than $1,500 per year in payroll taxes. It also saves the employees income and payroll taxes by enabling them to get a direct, dollar-for-dollar tax write-off on their medical costs.

FSAs are not allowed if your practice uses health savings accounts, unless the FSAs are restricted to reimbursements for certain specific care such as vision, dental, cancer, or premiums for insurance that pays a fixed amount per day (AFLAC), or coverage specifically for accidents, disabilities, or long-term care.

Conclusion

Health-insurance premiums will likely continue to increase at rates beyond general cost-of-living increases, but by working with your CPA and insurance specialist, you can keep significant price increases in check for you and your employees.

James B. Calnan, CPA is partner-in-charge of the Health Care Services Division of Meyers Brothers Kalicka, P.C. in Holyoke.