Is there a solution to health insurance rate increases?

The headlines are everywhere — the cost of employer-sponsored health care insurance is soaring. According to the annual Kaiser Family Foundation survey of more than 2,000 U.S. employers, the average employer-sponsored health insurance premium in the U.S. rose 7% as compared with a 1% increase last year.

An estimated 153 million individuals in the United States who rely on employer-provided health insurance consistently experience yearly hikes in their premiums. Generally, the cost of health insurance is shared between employers and their employees. On average, employers cover 71% of the premium, as reported by Kaiser’s survey. The rate of increase in 2023 has raised greater concerns with companies, especially with prices for other products and services going higher.

Although the survey is national, rate increases across the Greater Bay Area are higher. In 2023, the average increase we are seeing in the region is between 10 and 15% with outliers in both directions. In the fully insured market, which so many local employers find themselves in, there are few options to help control costs.

Health Insurance benefits are a large expense for organizations. Not all employers are worried about rising premiums, yet, but they should be. One thing’s for sure, everyone’s tired of the same thing year after year — premium increases on top of premium increases, often with a benefit reduction that is out of their control.

We’ve had numerous conversations with employers about solutions to this important problem impacting their bottom line. While most local employers do not have the financial resources to completely self-fund their medical insurance, which leaves their options limited, there are possibilities for alleviating the effects of rate increases.

Health Reimbursement

An ICHRA (individual coverage health reimbursement arrangement) is a type of health benefit plan that allows employers to reimburse employees for their individual health insurance premiums and qualified medical expenses. They are designed to provide more flexibility and cost control for employers while allowing employees to select health insurance plans that align with their personal health care needs.

Here are some of the key features:

1. Employee choice — ICHRAs allow employees to choose their own individual health insurance plans that best suit their needs. On the other hand, traditional group health insurance is where the employer selects a plan(s) for all employees.
2. Reimbursement — Employers set a monthly allowance or reimbursement amount for employees, which can be used to offset the cost of individual health insurance premiums and eligible medical expenses.
3. No minimum contribution — Employers are not required to make a minimum contribution, but they must offer the ICHRA to all eligible employees. The contribution amount can vary by employee class, such as full-time, part-time, or seasonal workers.
4. These plans are fully compliant with Affordable Care Act mandates.

ICHRAs can be beneficial for companies that may not want to manage traditional group health insurance plans. Employees also appreciate the ability to choose coverage appropriate for their own family’s situation.

Premium funding strategies

Often, employers pay a percentage of an employee’s health insurance premium — typically 75%–100% for employees and 0–25% for family coverage. But with insurance companies levying annual increases of 7%–15% a year, using an employer/employee cost-share strategy to fund premiums is becoming more difficult. It’s important for employers to model different funding options:

Defined contribution — With defined contribution, the employer contributes a fixed amount of money toward the premium that does not fluctuate with rate adjustments. As insurance premiums increase, the employer cost holds steady, while the employees’ expenses increase. This changes the percentage of the contribution to be more favorable to the employer. However, be cautious, the increased costs carried by the employees can cause backlash.

Level funding (level funded plan) — A level-funded plan is a form of self-funded arrangement where the employer provides and pays a monthly premium to handle expenses related to administration, claims disbursements, and stop-loss insurance. This approach offers distinct advantages when contrasted with fully insured plans and programs. For example, clients would receive a premium refund if the claims paid are lower than what was expected.

With escalating health care costs, exploring alternative approaches such as level funding and innovative premium funding strategies is imperative for employers seeking to provide quality health care benefits to their employees while managing costs effectively.

While we don’t have a crystal ball, it appears that large increases in health insurance premiums will not be going away anytime soon. We do know that adaptation and innovation in health care benefits — including plan design and funding strategies — remain key to addressing these year-over-year rising premiums and the associated financial pressures on businesses and their workforce.