Health Insurance Costs: Save Money and Keep Employees Happy

If you have been frustrated by the continually rising cost of health insurance, you’ll like these practical tips to lower the cost of your office’s health insurance while also keeping your employees happy.

1. Fully Insured

In this type of plan the employer pays a set premium per month, and the insurance company pays all claims submitted on behalf of the insured. The insured share the cost by way of deductibles, co-pays, and co-insurance.

Employers can lower their portion of the cost by increasing deductibles, co-pays, and coinsurance. One way to handle this without upsetting the employees too much could be to raise the deductible from $500 to $1,000 while also reimbursing employees for their deductibles that exceed $500. This will usually save you far more in premiums than you would have to pay out in deductibles to your employees. This proved to be true in the orthopedic practice I managed in Indiana.

2. Partially Self-Funded Plans

With Partially Self-Funded Plans, you as the employer would act as an insurance company. You would fund minor claims out of your own cash flow and buy insurance from a reinsurance company for any large catastrophic claims. You would also have to pay an administrator to process and pay claims, and do other required administrative work.

If done correctly, this set-up could save you a tremendous amount of money. For example, a regular insurance company aims for a 25% margin on all of their accounts. With a partially self-funded plan, you get to keep that 25%.

You probably haven’t found out about this option for two major reasons:

a) Many insurance agents simply haven’t kept up to date and still assume that you’ll need at least 100 employees for this to be a viable option — yet it can work for offices with as few as 15 employees.

b) Such a plan cuts the insurance agents’ commissions in half, and so some of them may simply not be very motivated to switch their clients from a Fully Insured Plan to a Partially Self-Funded Plan.

3. Section 125 Plans

You can also reduce your cost by switching to a Flexible Benefit Plan or Cafeteria Plan. Internal Revenue Code (IRC) Section 125 permits employees to pay their share of the cost of qualified benefits with pre-tax income. This means the employee does not have to pay Federal Income Tax or Social Security Tax on their contributions. While the insurance itself is not less expensive, you, as the employer, will save on matching Social Security contributions and on other taxes based on payroll, and with a large staff those savings can add up.

Click here for an example of Employer and Employee Savings.

Employer Savings Example: W/O POP With POP

Annual Payroll $500,000 $500,000
Pre-tax Employee Premiums $0 $(25,000)

Net Taxable Payroll $500,000 $475,000 FICA Tax @ 7.65% $38,250 $36,337 Payroll Tax Savings With POP $1,913

Employer Savings Example: W/O POP With POP

Annual Income $30,000 $30,000 POP Premium Contributions $0 $(2,400)
Taxable Income $30,000 $27,600
Estimated Taxes @ 30% $(9,000) $(8,280) After-tax Premium Contribution $(2,400) $0
Net Take-home Pay $18,600 $19,320

INCREASED Take-home Pay With POP: $720

4. Health Savings Account (HSA) (formerly Medical Savings Accounts)

An HSA is a separate account set up in conjunction with your office’s health insurance account that enables the employer or employee to contribute money tax deferred into a savings account.

The money in an HSA can be used to pay an employee’s deductible and co-pays as well as a number of other health insurance costs not normally covered under traditional small employer heath insurance plans, including contact lenses, prescriptive glasses, dental treatments, orthodontics, drugs, psychiatrists, and more. This can really increase employee satisfaction and loyalty.

In addition, you will save a great deal of money because HSAs have high deductibles, which will lower your premiums substantially. Your employees, though they have to fund their HSAs with the deductibles initially, will get to keep the money they don’t spend, which works to their advantage as well.

Click here for an example.

This article is a very brief overview of just some of the options discussed in my book The Doctor’s Wealth Preservation Guide. As a physician you can order it at my cost to check out your options further.

EXAMPLE BELOW

In the following example, we’ll assume a small business health plan for a doctor/owner of a medical practice with a family premium of $700 a month with a $500 deductible. We will also assume that a family premium with a $5,150 deductible is $250 a month.

Total premium for Doctor Smith for 1 year $8,400 with a $500 deductible plan $3,000 with a $5,150 deductible plan
Total annual savings in premium for Dr. Smith $5,400

Dr. Smith’s total contribution to an HSA for one year $5,150 (deductible)

Total out-of-pocket cost for Dr. Smith
which include the HSA contribution (pre-tax) $8,150 ($3,000 + $5,150)

Annual out-of-pocket savings using an HSA plus
a high deductible plan over the $500 deductible plan $8,400 - $8,150 = $250

Assuming Dr. Smith spent $600 for his deductible and $600 out of pocket for deductible and co-pays on $1,500 worth of real medical expenses in the co-pays (non-deductible) traditional plan

Amount pulled out of the HSA to cover the $1,500 costs $1,500 (deductible through the HSA)

Total overall costs (pre-tax) of the $500 deductible plan $8,400 in premium (deductible expense) $1,000 (to cover the non-deductible $600 costs) $9,400

Total overall costs (pre-tax) of the HSA plan $3,000 in premium (deductible expense) $5,150 in HSA costs (deductible expense) $8,150

Total cost savings (pre-tax) with the HSA $1,250

Total assets at the end of the year $0 with the $500 deductible plan $3,650 In the HSA account ($5,150-$1,500)

In the example above, three good things happen.
1) The total out-of-pocket expenses for the health insurance and the HSA costs are $250 a year lower than the traditional $500 deductible non-HSA plan.

2) Dr. Smith’s family only used $1,500 of the $5,150 in the HSA account, and $3,650 stays in the HSA account that is owned by Dr. Smith.

3) Just as important is the fact that, IF the physician’s family is relatively healthy in years to come, the money accumulated in the HSA can roll to the next year, thereby cutting the next year’s out-of-pocket costs of the doctor. The doctor could also continue to fund the HSA at $5,150 a year to stockpile money in the HSA for other medical expenses (orthodontics) or for supplemental retirement benefits and, ultimately, that money can be used in retirement (like an IRA).