Health Insurance & the Year to Year Trap
If you offer health insurance to your employees you are aware that it is bought in one – year policy increments. Every year your insurance broker arrives at your office, spreadsheet in hand ready to explain why you received an increase. Insurance carriers do this in order to protect themselves from long-term losses by having the ability to adjust your premium on a yearly basis. Unfortunately, as a business providing health insurance you will almost certainly offer it for more than one year.
As a result, business owners need to start thinking about health insurance spend in longer-term increments, instead of year to year. When you think about insurance year to year the 9% increase on a $500,000 premium is rationalized down to only $45,000 more than you spent last year, $3,750 per month split between the employees and the company. Not so bad right? Well what if that 9% increase occurs every year for the next 5 years – that’s a policy increase of $269,000 over a 5 year period – creating an average increase of almost $54,000 per year.
If you were buying your policy for 5 years and were signing up for a $269,000 increase over the course of that policy, instead of $45,000 increase for the next 12 months you would approach the decision differently and be open to alternative options to combat the cost. Insurance carriers know this and that’s why they go year to year. They know business owners will become frustrated, on a time crunch, accept the increase, kick the can down the road and deal with the same problem in 12 months.
Employers must begin to think about health insurance on a multi-year basis. Remember health insurance is only being managed differently than your 401(k) and items on your P&L because the insurance carriers are pushing you into a way of thinking that is best for them.
- Develop a long term strategic plan that is 3-5 years minimum and includes a multi-year budget and plan to manage expenses within the budget.
- Don’t get distracted. Creating a multi-year approach allows you to better absorb a large claim, or high usage month knowing that over the course of 60 months things will even out if the right plans are in place.
- Data is your friend. Utilize your benefits advisor to review your claims history and trends as well as trends in the market. Analyze the data the way you would for any other aspect of the business and react accordingly.
- Explore alternative financing options that are gaining tremendous traction in the industry. Staying up on these options allows you to be educated about what is available. Again, your benefits advisor should bring these to you during your quarterly meetings.
It is important to realize that your health insurance carrier wants you to think of health insurance as a one year purchase. It benefits them and makes them a lot of money. Thinking differently, creating a long-term strategy and working with an advisor who has this mindset can put you back in control of the purchase of your health insurance!