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How to redesign employee plan contribution rates

Fifteen years ago, I purchased a 1969 Flying Scot sailboat. It’s a 19-foot daysailer. I was the fourth or fifth owner. While I didn’t know much about its original design specifications, it sailed fairly well. However, from time to time, I noticed certain strains and constraints in its performance and realized that rigging or hardware was literally installed backwards or upside down. For example, just last week, while refinishing the woodwork, I realized that the jib slide was installed in reverse — who knows how long ago. As you might guess, as I’ve slowly rebuilt the boat back to the original intent, her performance has greatly improved.

This story reminds me of how I feel now about employee contribution rates.

Quick quiz: Can you articulate your company’s group health plan employee contribution strategy? How does the math work?

I’ve realized it’s common for employers offering more than one health plan to bump the existing employee contributions up year over year by the same percentage — in other words, to let all rates rise by the same tide. It’s also common for the individual who originally set the employee contribution strategy to be long gone and for no one currently at the organization to completely understand the original intent or underlying mathematics. Just as I assumed that my Flying Scot was rigged and installed correctly, it’s easy to assume the same with employee contribution rates.

Healthcare.Enrollment.Bloomberg.jpg
An Obamacare enrollment informational pamphlet sits on display at a Community Clinic Inc. health center in Silver Spring, Maryland, U.S., on Wednesday, April 8, 2015. Led by the American Medical Association, three of the top five spenders on congressional lobbying have waged a campaign to urge Congress to revamp the way Medicare pays physicians and end the cycle of "doc fix" patches. Senate leaders predict quick action on House-passed legislation when Congress returns April 13 from its two-week recess. Photographer: Andrew Harrer/Bloomberg

But, just as buying a new sail, rudder or centerboard for an improperly rigged sailboat will not fully improve performance, investing dollars in improved care-management programs, well-being initiatives and plan-design modernizations won’t produce full ROI unless the employee contribution methodology is sound.

To review your current methodology, let’s first consider your lowest cost plan, which might be a high-deductible heath plan. Let’s determine the employer percentage contribution, dollar contribution and resulting employee contribution for each tier. For example:

ZP_Table 1.JPG

In this methodology, the employer sets its dollar contribution at a certain percentage of the employee- only rate and at usually a lower percentage of the family tier rates. This strategy results in those enrolling dependents receiving more employer dollar contributions (Column C). Does your current methodology resemble this approach?

Or perhaps you’re providing the same dollar contribution for all enrollment tiers. For example:

ZP_Table 2.JPG

If your current strategy doesn’t seem to match either of these examples, it could be the family contribution rate is built upon the employee-only contribution rate plus a percentage of the difference between single and family premium. While this approach is arguably overly complex, it’s not uncommon. For example:

ZP_Table 3.JPG

So far, so good? To check if your boom vang is installed backwards, let’s see what happens when we consider any additional plans offered. Here’s an example of adding a second plan to Example 1 and maintaining the same employee defined contribution amounts:

ZP_Table 4.JPG

Under this strategy, the employer’s budget is based solely on the HDHP plan. While employees may buy-up to the PPO plan, the employer contribution does not increase. The same strategy shared in Example 2 can easily be applied to this model, as well.

However, many employers use the same percentage contributions for both plans. For example:

ZP_Table 5.JPG

This strategy creates an additional employer subsidy for the PPO plan (Column C2), which incents employees to select the PPO plan over the HDHP.

Which of these methodologies is best? Some considerations:

While Example 2 is the most cost-effective for employers, it may result in uncompetitive family- tier contribution rates. Double-check by reviewing the benchmarks provided by the latest Kaiser Family Foundation survey.

Examples 1 and 4 provide the greatest opportunity for budget control, sound economic incentives, overall competitiveness, and compliance with Section 125 benefits and contribution nondiscrimination testing.

While Example 3’s math isn’t calculus, it’s not the easiest methodology to explain to executives, much less to staff.

While Example 5’s popularity endures, it increases employer costs, incents employees to buy more coverage than is needed, creates head winds for Section 125 testing compliance, and leaves the door wide open for rough-sea sailing if Congress ends up capping Section 125 benefits down the road.

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