Why are premums increasing again? I get that question asked a lot. People want to know why their premiums continue to rise year after year. There are a lot of factors you can point towards. The cost of providing healthcare, medical trend and demographic changes are the obvious. These factors have influenced yearly premium increases for as long as health insurance has been around.
Not only are today’s rate hikes influenced by the obvious factors, but premiums also face a barrage of unrelenting dynamics that will ensure yearly increases for some time to come. So what are these new dynamics? For starters, all policies nowadays are guaranteed issue. To the lay person, and even those in the know, this is a wonderful thing. No one can be denied coverage. However, THIS is a huge reason why most insurance carriers are expecting 14% – 17% rate increases for 2015.
Think for a minute what guaranteed issue really means. Not a single person, even someone recently diagnosed with cancer, can be denied coverage. What we saw in early 2014 was a flood of previously uninsurable individuals into the marketplace. Insurance carriers saw a spike in business, but the new customer base ate up a lot of resources (i.e. they required a lot of medical attention). The amount of sick claims went through the roof. Ultimately margins shrunk and in order to recoup some of that missing revenue, insurance carriers are raising their rates.
Today’s plans also have no annual or lifetime limits. Insurance carriers can no longer deny claims once a certain amount of money has been paid out. In the past, lifetime limits would be capped at anywhere from $1 million to $5 million. As mandated by the Affordable Care Act, Qualified Health Plans must also contain a set of 10 Essential Health Benefits. Mental health coverage and maternity coverage are two benefits that were not included with individual major medical insurance before 2014. Plans must also include preventive services free of charge. This includes things like colonoscopies, mammograms, yearly exams, immunizations and other services for adults and children.
So not only are insurance companies required to accept every applicant, but they’re also required to provide them with additional services that were previously not covered. The only “protection” put into place to prevent the entire health insurance industry from crumbling into pieces is the introduction of the open enrollment window. Unless you experience a Qualifying Life Event (e.g. marriage, divorce, birth, moving, change in income, loss of coverage, etc.) you’re only allowed to sign up for coverage from November 15th 2014 through February 15th 2015. This prevents people from waiting to sign up for coverage until they experience an accident or illness.
The goal of the Affordable Care Act is to increase access to affordable health insurance and to increase the population of insured Americans. Unless you qualify for tax credits or have more money than God, the reality of the situation is that health insurance is more expensive than ever. The government hit the nail on the head with the access part, but should consider changing the name of the law to the Unaffordable Care Act.
Eventually, as more and more people get coverage, prices should come down. With an emphasis on free preventive care, covered individuals will be more likely to go in for yearly exams and wellness visits. Early prevention is key to reducing diseases and the toll they take on insurance company’s bottom lines.
However, for now, and in the immediate future, we should expect to see yearly increases until the ultimate goal of the Affordable Care Act is achieved.
In this blog post, we examine the financial impact of offering employees a 5% raise versus offering employer-provided group health insurance. We’ll breakdown the true costs and benefits and determine which proposition is most financially sound. Keep in mind, this post is heavy on the details. If you prefer a high-level overview, we can certainly accommodate that.
Let’s start with a 5% raise. I think most people would be very happy with a 5% raise. However, looks can be deceiving. For the sake of discussion, let’s assume our employee’s annual gross salary is $50,000. A 5% raise would yield a salary increase of $2,500. This increases the employee’s annual gross ‘taxable’ salary to $52,500. Once taxes are taken out, the difference in take home pay (net income) between $50,000 and $52,500 is approx. $1,700. Thanks to Uncle Sam, the true value of the $2,500 raise is closer to $1,700. The more money you make, the more you pay in taxes (proportionately speaking).
So what’s the cost to the employer to pay for a $2,500 raise? For starters, you would include the gross cost of the raise which is $2,500. The less obvious inclusion would be the additional taxes the employer has to pay as a result of the employee’s gross salary increasing by $2,500. Those additional payroll taxes are approx. $200. When you combine the gross cost of the raise and the additional tax liability for the employer, you’re left with a total cost of $2,700. In the case of a 5% raise, the out-of-pocket cost exceeds the value of the benefit. Would you spend $2,700 on something that only has a value of $1,700?
Now let’s turn our attention to the cost of offering employer provided health insurance. Instead of using the $2,700 on a 5% raise that has a true value of only $1,700, the employer can instead use that money as a contribution towards employee premiums. That contribution comes out to $225/month. If the employee contributes an additional $175/month (done on a pre-tax basis), you now have $400/month going towards the cost of health insurance.
If you total up the employee’s monthly contributions, you have a yearly contribution of $2,100. Remember, that money is pre-tax (i.e. it reduces the employee’s taxable income). The employee’s taxable income is now $47,900 as oppose to $52,500 with the 5% raise. A lower taxable income means less payroll taxes for the employer. In this case, the employer realizes a savings in payroll taxes of approx. $400. If you subtract the $400 savings from the $2,700 the employer is contributing towards medical coverage, you come up with a benefit that has more value than the actual cost to provide that benefit.
If that’s not a good enough reason to investigate the possibility of implementing an employee benefits solution, the employer contribution of $2,700 is also tax deductible. If you apply this single scenario to a business with 10 employees, you’re looking at $27,000 per year that can be written off. This makes sense and it’s great for the bottom line.
Aside from the quantitative measures, there’s also a qualitative component. Employees appreciate benefits. Often times they don’t realize the true value of their benefits, but they understand the importance. Benefits can be used to retain and attract good talent. This is especially true in industries where businesses are competing for scarce talent. A good benefits package shows that you care about the well-being of your employees. Research shows that employees with good benefits are generally healthier and less likely to miss work. They’re also happier and more productive while they’re at work.
We encourage you to investigate the possibility of establishing your own employee benefits package. Our professionals will help you tailor a solution that fits your budget and also provides excellent coverage for your employees. Once you decide on a plan, we can even show you how it compares to other companies in your industry. Our benchmarking tool allows us to compare your plan to 31,000 employers and 50,000 plans nationwide.