There’s no getting around it – employers pay a hefty sum to provide health care benefits for their employees.
The average private-sector employer spends an average of $2.65 per hour, per employee, for health-insurance costs, according to Sept. 2020 data from the U.S. Bureau of Labor Statistics (BLS).
These aren’t low numbers. And the smaller a company is, the more consequential these numbers get.
The worst part: these costs tend to rise. Every. Single. Year.
In 2021, employer expenses for health insurance are expected to rise by 3.9 percent, according to Mercer’s National Survey of Employer-Sponsored Health Plans. This increase is in line with the average growth in annual health-insurance costs that employers have experienced over the last several years.
Although this increase may seem like a modest figure at first glance, this upward trend spread out over a decade – and longer – adds up quickly.
That presents business leaders an ever-present challenge: how to contain the cost of employee benefits.
Why benefits costs keep rising – and are more challenging for small- to mid-sized businesses to control
Wondering how to contain the cost of employee benefits?
Unfortunately, increases in health-insurance costs are driven in part by factors outside a company’s control, such as:
- The rising cost of care (known as medical inflation)
- Expanding regulatory and reporting requirements
However, a major driver of increasing health-insurance costs is plan usage and claims history.
In presenting renewal rates, insurance companies make assumptions about the next 12 months based on patterns that were established in the previous 12-month period.
As with car insurance:
- With more claims, the cost of coverage increases.
- With fewer claims, the cost of coverage declines.
It’s a predictable fact that health-insurance costs will rise. However, the extent of the increase is a bit harder to forecast. After all, life happens. It’s not easy for businesses to predict accidents, injuries and illnesses, or their frequency, over the course of a year.
Additionally, small to mid-sized businesses are often short on time and staff, and can lack the bandwidth, resources and expertise to:
- Research market rates.
- Comb through data within end-of-year claims reports and proposals for upcoming years.
- Identify discrepancies or inaccuracies that could ultimately reduce costs.
And, because of their lower numbers of employees, small and medium-size businesses tend to struggle in the negotiation of competitive rates. They simply lack the necessary leverage in the marketplace.
As a result, the National Conference on State Legislatures reports that small businesses pay an average of 8% to 18% more than larger organizations for the same health-insurance policy.
The importance of providing benefits to employees
Despite the high price tag, it’s critically important that employers provide quality benefits.
- An attractive benefits package is a valuable tool in recruiting top-tier talent. These days, many job candidates expect access to certain benefits. If you don’t deliver at least what’s considered standard in your industry, you won’t be able to compete – much less be considered an employer of choice.
- Your benefits package helps to keep employees satisfied, engaged and connected with your workplace, which impacts work quality, customer service and long-term retention.
- You have an interest in your employees maintaining good health and wellness. By providing access to benefits promoting health and wellness, and covering a portion of the costs, you’re doing your part to boost productivity while decreasing absenteeism.
- If your business has at least 50 full-time employees, on average, in the prior calendar year, you could be subject to penalties under the Affordable Care Act if you don’t provide your full-time employees with affordable health insurance that meets minimum standards.
In some cases, the cost of not providing competitive benefits could outweigh the costs of the benefits themselves.
For these reasons, most employers are committed to taking care of their employees and maintaining the prestige of their workplace by providing benefits such as health insurance. But that doesn’t mean you can’t take steps to reduce expenditures and protect your bottom line.
How a professional employer organization (PEO) can help with benefits costs
1. Time and resources
You’re busy running your business, and your time is valuable. But it’s difficult to lower or even contain the cost of employee benefits when you struggle to find the time to prioritize it between everything else you must do.
In a PEO relationship, the PEO typically assumes responsibility for offering benefits under PEO-sponsored plans. As the plan sponsor and administrator, the PEO negotiates contracts and manages vendor relationships to ensure compliance, cost containment and stability.
This means you will no longer need to spend time and resources devoted to offering employee benefit plans. This can result is a significant cost savings for your company.
When PEOs assume responsibility for providing benefits, they also assume responsibility for educating employees on their benefit plans.
The PEO will also handle employee enrollments and benefit plan questions, and many PEOs offer decision support tools to help employees choose the best options.
You will no longer be responsible for those tasks, which translates into additional time and money saved.
3. Fringe health and wellness-related services and benefits
Reputable PEOs often provide fringe benefits that can help encourage employees to live a healthier lifestyle, which can translate to your bottom line.
Fringe benefits can include:
- Creating and promoting participation in health and wellness programs aimed at improving employees’ physical and mental health. These programs could focus on exercise, stress management, healthy eating, weight loss or tobacco and alcohol cessation, for example. The idea is to act now to prevent serious, costly medical conditions later.
- Hosting on-site health fairs during which employees can get their blood pressure checked or other health screenings performed. The goal is to maintain awareness about one’s personal health and potentially catch issues that could escalate in the future. (Be careful, however, about the pitfalls of tracking employee health data.)
- Establishing safety policies to prevent accidents and injuries at work.
- Providing an employee assistance program that can help employees struggling with life issues like illnesses, grief or emotional distress.
Summing it all up
How to contain the cost of employee benefits is a prominent dilemma facing employers.
- Health insurance is infamous for predictable annual price increases.
- A significant amount of administrative time and effort is required for small to mid-sized employer to offer their own benefit plans, and they often don’t have in-house resources to handle these tasks.
- Partnering with a PEO can be an efficient solution.
Letting high-cost benefits drag your business down financially is a big mistake – especially when you consider the numerous benefits provided by a PEO relationship.