the rising costs of employer health benefits: advice for CFOs.

Employee health benefits are considered a standard part of employment in most companies. Recent census figures show 86 percent of American private-sector workers and their families receive health insurance through their employers.

But these benefits come at a cost to employers — and the cost is rising. According to the Bureau of Labor Statistics, the average cost of health coverage is equivalent to paying each employee an extra $3 per hour. Health-related benefits in the private sector account for 6.9 percent of employee compensation.

Health-related benefits represent a major expenditure for most employers. How can CFOs better manage this burden?

strategic importance of health benefits

Before considering any changes to your employee compensation offering, it’s important to understand why health benefits are an essential part of your long-term business strategy.

Healthcare is enormously important to employees in the United States. Your team is counting on you to provide health benefits for them and their loved ones, and it’s one of the main reasons they stay on your team. This is borne out time and again in surveys:

• A 2024 SHRM survey found health benefits were “very important” or “extremely important” to 88 percent of employees, more than any other benefit.
• A study of 2,000 applicants revealed 88 percent would consider a job with a lower salary if it offered better health benefits.
• Pew Research reported health benefits are more important to employees than other core benefits, such as paid leave and retirement planning.
• A survey of small-business employees found half of them were staying in their current roles because of health benefits.

Healthcare is a load-bearing pillar of your talent strategy. A great benefits offering will help your company recruit talented people while retaining your best and brightest. In turn, this leads to higher productivity, more innovation and greater progress toward your long-term goals.

That said, the CFO’s duty is to balance ambition with prudence. This means responding to changes and dealing with the financial burden of providing exceptional health benefits.

the changing cost of employee health benefits

Health benefits seem to be a headache for many finance leaders, with 72 percent of CFOs saying healthcare is their most unpredictable expense.

Why are health benefits such a concern? There are several crucial issues that can impact budgets and financial forecasts.

rising cost of healthcare

Healthcare costs surged in 2023, rising 9.8 percent in North America. Things have eased slightly in 2024, although costs might increase by as much as 9.4 percent. These costs directly impact employee coverage, leading to higher premiums and higher deductibles.

inflation

The current inflation rate (as of June 2024) has fallen to 3.3 percent, which is substantially lower than its post-COVID high. However, many businesses are still reeling from price jumps in recent years. At the end of 2022, the average premium for Employee Family Coverage was $21,931, which is a 7 percent increase from 2019.

more high-cost claims

High-cost claimants (people with annual medical bills over $50,000) are the fastest-growing healthcare cost for employers. This is driven by several factors, such as an aging population, aftereffects of the pandemic and rising cancer rates among young people.

novel drugs and treatments

New drugs such as Ozempic are becoming hugely popular, as they offer a treatment for both diabetes and weight loss. This raises the question of how and when employer health plans should cover such benefits, and how it affects current premiums.

provider consolidation

Healthcare providers (including hospitals and medical practices) are increasingly consolidating into larger organizations. Consolidation often comes with increased costs to private insurers — literature on this subject estimates those increases at anywhere between 7 percent and 54 percent.

7 ways CFOs can help with the rising costs of employer health benefits

Finance leaders can play an active role in managing health benefit costs. Here are some ideas to get started:

1. collaborate with HR and other stakeholders

Benefits are a crucial part of your people strategy, which means any changes will directly impact some teams, such as Human Resources. It’s important to work with all stakeholders to discuss options and explore how changes might affect recruitment and retention.

HR can also provide analytics that will help you make decisions. For instance, HR can offer enrollment data, which illustrates the popularity of various benefits on offer. This allows you to focus on popular benefits while cutting things employees don’t use.

2. encourage FSAs and HSAs

Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) are excellent ways to supplement your main health benefits. Employees can contribute to their accounts from pre-tax earnings and use these funds for day-to-day medical expenses, including any deductibles.

If employees aren’t using their full HSA/FSA saving allowance, it might be because they don’t fully understand these benefits. Spread the message about savings accounts and encourage people to use their full entitlements each year.

3. leverage technology for more affordable solutions

Technology can have a huge impact on medical bills. For example, a telemedicine session will generally cost less than a face-to-face consultation. Make sure your team has access to these online options and knows how to use them.

Mental health support is also much more accessible when provided over the internet. This makes it easier for employees to deal with issues like stress, which might otherwise lead to long-term health issues. Encourage people to use benefits like access to online therapists, meditation apps or mental health resources.

4. look at a dynamic approach to health benefits

Most health insurance involves working with a Preferred Provider Organization (PPO), with care administered through the insurer’s network of practitioners. An alternative is to use a system like Reference Based Pricing (RBP), which effectively involves employers negotiating their own agreements with providers. This can involve extra administrative overhead, but some claim that it leads to lower costs.

Other options exist, such as using a narrow network or self-funding employee medical costs. Rather than choosing one approach over the other, it might help to consider all options and devise a dynamic strategy that maximizes potential savings without affecting the quality of healthcare.

5. invest in preventative measures

Some health packages offer additional benefits such as health screenings, fitness programs, nutrition education, stress management and substance abuse programs. These benefits might be packaged as add-ons and could possibly lead to an increased per-employee expenditure.

However, it’s important to consider the long-term benefits of such programs. Preventative measures and early interventions can help people manage their health and avoid serious illness. A healthier life is obviously great for your employees, but it also makes financial sense for the business, as it means less sick leave, increased productivity and fewer claims on health benefits.

6. promote wellness in the workplace

Workplace stress has been linked to a number of serious physical conditions, including cancer and heart disease, as well as poor mental health. Concerningly, around 80 percent of American employees say they experience stress at work. Reducing workplace stress could be a cost-effective way of reducing health-related expenditures.

Your health benefits provider can provide you with some options here, such as wellness programs, mindfulness training and fitness resources. However, it’s important to also tackle the root causes of stress: overwork, lack of support, poor communication with managers and issues with organizational culture. Work with other leaders to develop a strategy for building a stress-free workplace.

7. take action before the next renewal cycle

Most health benefits operate on an annual cycle. Employees can make changes during enrollment season, which typically starts in November. FSAs and HSAs follow the calendar year, so employees may need to use their benefits before the holidays.

That’s why it’s important to make decisions at the right time of year before you get locked into the next cycle. Work with your benefits team or broker representative and get a picture of the timelines involved in a transition. Remember, any changes to health benefits require a great deal of communication. You’ll need to provide details of how such changes might affect employees, their families and any other dependents. Also, you’ll need to communicate such changes to ex-employees covered under COBRA.

managing the high costs of health benefits

Employee benefits play an important role in your business strategy. Great benefits will make your current team more loyal and productive while also attracting the brightest new recruits. But unpredictable costs such as healthcare can unbalance your financial forecasts, leading to an uncertain future.

It’s important to have people on your team who can develop the right strategy. An employee benefits consultant, for example, can help balance the needs of the HR team and recruiters against your company’s financial reality.