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Blake Christian
Blake Christian

Ways to Mitigate Healthcare Costs

Twelve tips show you how.

October 27, 2011
by Blake Christian, CPA, MBT

Health insurance premiums have increased approximately nine percent this year, nearly three times the rate of inflation, according to a The Kaiser Family Foundation and Health Research & Educational Trust study. Average healthcare premiums rose to $10,944 for employers and $4,129 for employees for a total of $15,073 and this does not include out-of-pocket healthcare expenses. Adding to the bad news, employers can expect premiums to rise another 7.2 percent next year, according to the National Business Group on Health.

Possible factors for the increase in premiums include projections that employees would use more healthcare services, continued increases in doctor, drug and hospital costs and to a certain extent, the new federal healthcare rules. Under the 2010 Obama Healthcare (Affordable Care Act) legislation, adult children of insured employees can remain on their parents’ plans until age 26. Since the law was enacted, more than 2.3 million young adults have been added to insurers’ plans, adding stress to the medical-delivery system.

Regardless of which of the Obama Healthcare provisions survive court and Congressional challenges, business owners in virtually every industry are focused on rising healthcare costs. With respect to the Affordable Care Act, Centennial Group President Matthew Hanson observes: “Little in the legislation shows promise of reducing healthcare costs. Employers that are winning by having lower healthcare costs are those who are making strategic shifts in their thinking to recognize that employee health is a critical component of superior business performance. This shift opens up the possibilities for alternative funding strategies, employee engagement change and enhancements to productivity.”

With pressure to expand employee healthcare coverage, a languishing economy and continuing focus on minimizing operating costs, H.R. departments, small business owners and individuals are carefully evaluating ways to retain their healthcare coverage at a competitive cost.

So what can employers and employees do? Below are some approaches to lower overall healthcare costs for both employers and employees:

    1. Assess Demographics and Needs of the Employee Group. Both small and large businesses can tailor their group health plans to best meet their employees’ specific needs, while saving overall costs for the company and employees. By carefully analyzing the age, health and medical history of the employee base, policy features can be added or deleted to maximize employee satisfaction and/or minimize overall costs. There are often numerous “optional” benefits tacked on to standard group-health plans, which may not be attractive to certain employees. Eliminating unnecessary options can lower premiums.

      According to Trent Bryson, CFP/AIF, CEO of Bryson Financial Group in Southern California, “We are helping our clients focus on their healthcare utilization and specifically how we can reduce their loss ratios through the use of data mining, as well as establishing wellness programs.”
    2. Increase Policy Deductibles and Co-Pays. The more exposure the employees have for individual or “deductible” floors, co-pays and more per visit and other out-of-pocket costs, the less they and employers will generally pay in monthly premiums. The added exposure to out-of-pocket costs can be covered through other strategies discussed below.
    3. Use an HSA or FSA Account. High deductible plans are paired with a health savings account (HSA) or a flexible spending arrangement (FSA). These accounts enable employers and/or employees to make pretax contributions each year, thereby stretching their insurance dollars. The funds are then used to pay for health-related costs, including deductibles.
    4. Consider Catastrophic Insurance. Catastrophic health-insurance plans come with a high deductible, but low premiums. Coverage is limited as it is only intended for serious medical situations.
    5. “In-Network” Doctors. Health Maintenance Organization (HMO) plans limit the choice of doctor and medical facilities, but typically offer much lower premiums than Preferred Provider Organization (PPO) plans.
    6. Incentivize Employees.Employers can encourage employees to alter their healthcare and lifestyle choices with various financial and other incentives in order to improve employee health and minimize premiums. For example, employers can encourage employees to sign onto their working spouse’s policy and agree to share the savings with the electing employee. Another popular technique is to provide added cash or non-cash benefits to employees who lose weight, reduce cholesterol levels or stop smoking.
    7. Compare Group Plans vs. Individual Coverage. In some cases, it may reduce overall costs to have separate individual plans for the spouse and/or an adult child of a worker.
    8. Purchase Generic Prescription Drugs. The cost of brand-name drugs are significantly higher than generics and generally have no measurable advantages.
    9. Avoid the Emergency Room. Even with insurance coverage, avoiding the emergency will reduce current and future costs. Alternatives such as arrangements with an in-house doctor/nurse, after-hour access to “concierge” doctors or access to urgent-care clinics can reduce overall costs.
    10. Cash Is King. Some doctors may give discounts for cash or check payments. It is worth asking for those visits or procedures that insurance does not cover or only partially covers.
    11. Drive Safely. Employees with bad driving records pose a higher risk of having to make claims against their health insurance. Many insurance companies look at driving records along with health records when determining health-insurance rates. Employers may provide their good drivers additional benefits/bonuses.
    12. Proactive Focus on Healthy Living. Last, but definitely not least, focus on a healthy lifestyle. This includes watching your diet and exercising regularly. Due to the healthcare reform, most insurance plans will cover 100 percent of preventive care for routine checkups, immunizations and diagnostic tests. As previously mentioned, some insurers and employers will offer incentives for those employees who quit smoking, lose weight or achieve some other healthy goals.

Healthy Tax Breaks

One factor that should not to be overlooked is the utilization of the Section 125 cafeteria plan to minimize after-tax costs for both the employee and the employer. Cafeteria plans are employer-sponsored plans, allowing employees to choose among qualified benefits and generally avoid income tax on the elected benefits. Qualified benefits include health insurance as well as group-term life insurance, accident insurance, dependent-care assistance and contributions under qualified cash or deferred arrangements (i.e. FSA).

Certain small businesses may qualify to claim the federal Small Employer Health Insurance Credit (see IRC Section 45R). This credit is available to qualified businesses (less than 25 full-time equivalent employees with average annual wages of less than $50,000) that cover at least half of their employees’ health premiums. There is a phase-out for companies with more than 10 full-time equivalent employees or when average annual wages exceed $25,000. The credit is a maximum of 35 percent of the amount (25% for tax-exempt businesses) of employer-paid premiums, subject to state average limitations on premiums paid. Beginning in 2014, the maximum credit will increase to 50 percent of premiums paid (35% for tax-exempt organizations).

Certain equity owners are excluded from generating the Health Insurance Credit. Partners and members of LLCs treated as partnerships, owners of a single-member LLC, shareholders owning two percent or more of an S-corporation and sole proprietors are all treated as “self-employed persons” for health insurance purposes and are eligible for the self-employed health insurance deduction rather than the tax credit.

Conclusion

While businesses cannot control every aspect of their healthcare costs, there are numerous ways as mentioned to mitigate the impact. Rate shopping, research and planning will go a long way to minimize long-term costs, while keeping employees happy (or at least content).

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Blake Christian, CPA, MBT, is a tax partner in the Long Beach, California-based office of Holthouse Carlin & Van Trigt LLP and is co-founder of National Tax Credit Group, LLC. He can be reached at (562) 216-1800.