Are employers overspending on health insurance?

There’s a major problem in the benefits landscape that has gone unaddressed for far too long. Businesses are spending too much on their health insurance while neglecting other important benefits.

It’s a topic that comes up almost every time I sit down with an employer to discuss benefits plans. It’s a concern that transcends industry boundaries, affecting businesses of all sizes and sectors. Left unresolved, this hyperfocus on health insurance will undermine a company’s ability to attract and retain top talent.

Fortunately, there is a way to create a more balanced and effective benefits strategy, and it doesn’t require employers to pony up more cash for their benefits. Rather, it calls for them to reconsider their current budget allocations.

Every benefit is an investment

One thing I always try to get across to employers is that they need to stop thinking of benefits as an expense. They’re an investment, and by definition an investment has a return. So, the allocation process is no different from running an investment account. You decide how to allocate the money you’re investing, look at all the available benefits, and then weigh the investment against the return. And here’s the kicker; there is practically no return on health insurance.

There are a couple of reasons for this. First, in the eyes of the employees, there’s no such thing as a good health insurance plan since most come with high out-of-pocket or high payroll deductions. Employer health plans rarely, if ever, meet the expectations of employees, which means there’s no return for the employer in the form of greater job satisfaction and retention.

The second issue is that no matter how much an employer contributes to the health plan, there’s a 100% chance the cost of the plan will increase every year. You can plainly see this in how health insurance rates in the U.S. have risen faster than the rate of inflation every year for the past 30 years. Employers should take a second to think about what that means. You’re buying a product that loses value with each passing year, and that’s where you’re putting all your money? It doesn’t make sense.

Now, none of this is to say that health insurance isn’t a critical component of an employee’s benefits package. It is still necessary and will continue to account for a significant portion of an organization’s benefits budget. But employers need to stop beginning with health insurance when deciding their budget allocations. Instead, they should start by asking what benefits they could allocate funds to that would have a higher ROI. Once they’ve worked that out, then they can turn their attention back to health insurance.

Striking a balance

How much does your organization spend per employee, per year, on all the benefits combined? I’m often surprised at how many employers don’t know this number. If you’re one of these employers, figure that number out. Go to your CFO and ask for this number because that’s where you start.

Let’s say the CFO comes back and says you’re spending $10,000 per employee. Now it’s time to figure out which benefits have the highest return. Take dental and vision insurance. Those are two really great benefits that not only meet employee expectations but also come at a low cost to the employer, usually $50 to $100 a month combined. Next, you’ve got life, disability, and critical illness insurance. All of these would make a great addition to a benefits package, especially if they can be rolled into one single individual plan. An employee will appreciate that, and although they hope to never use a life or disability plan, they’ll be glad to have it.

Continuing with the above example, let’s say you’ve added up all the benefits costs and it comes to $2,500. That leaves you with just $7,500 for health insurance. At this point, an employer might say, “Yeah, but I’m currently spending $8,000 on health insurance.” True, but keep in mind that the employee doesn’t know that. All they know is their payroll deductions.

Assuming you were to keep your health insurance spending at $8,000, the employee’s payroll deduction would be $20 a week. But if you dropped your spending to $7,500, the weekly deduction would be $22 a week. Do you really think the employee can tell the difference? I hardly think so. And, even if they can, they’re now getting a far more balanced benefits package overall, one that meets their needs and expectations.

Lifestyle accounts

Taking things a step further, you could provide most of your high-return benefits through a lifestyle account. Lifestyle accounts are a relatively new arrival on the benefits market in which an employer contributes a set amount to each employee’s benefits plan. Employees are then free to choose whichever benefits they desire. This has the advantage of allowing employees to set their own expectations, resulting in even greater returns for the employer.

Another advantage of lifestyle accounts is that they provide employees with a window into the individual insurance marketplace. No longer tied to group benefit plans, employees can now gain far more comprehensive coverage, which is individually underwritten to their specific needs. This has huge implications in the realm of life insurance, in which group plans still dominate. Allowing employees to sign up for their own individual life plans – while still maintaining the group coverage – gives companies a huge boost in their ability to attract and retain talent.

As for how much an employer should contribute to each employee’s lifestyle account, my advice is to pick a number that has a comma. So, no less than $1,000. If you can offer more, that’s great. But $1,000 should be enough to satisfy most employees. Providing a fixed sum also has value to the employer as they easily predict their benefits spending each year.

Related: 2024 employer health care costs projected to jump 8.5%: Here’s why

Final thoughts

To summarize, the overemphasis on health insurance inadvertently overshadows other critical components of a well-rounded benefits package. Organizations that neglect this issue will continue to experience challenges with attracting and retaining top talent. My view is that employers need to stop beginning with health insurance when deciding their budget allocations.

Instead, start with the benefits that will bring strong returns. The result will be a more balanced employee benefits program that achieves its primary goal of making your organization an attractive place to work.