For years, a small number of employers have been paying employees to leave the group health plan and find their own insurance in order to lessen administrative and premium-level costs associated with providing employee coverage.
Though this is certainly nothing new, more employers are asking questions about opt-outs as a financial quick fix, even though experts warn that over the long term, the strategy might be one employers should nix.
"With the onset of consumerism, the paradigm has shifted so that there are an increasing number of employers who are convinced that managing the cost of their health care is a responsibility that should be equally shared between the employer and employee. Therefore, the cash opt-out is one method that encourages the employee to consider not only how they spend their health care dollars in the coming year, but where those dollars will be spent," says Cathy Williams, manager, compensation & benefits, of SMART Business Advisory and Consulting, to explain the attractiveness of cash opt-outs.
In most situations, employers will offer employees a portion of the premium to persuade them to leave the company plan, thereby reducing the cash outlay. Williams recommends employers use this strategy by making a "cash contribution" part of a cafeteria plan so the employee could elect nontaxable benefits instead of receiving taxable cash.
However, employers must first ensure that employees accepting the payments indeed get coverage elsewhere. Employers should require that an employee sign an affidavit or statement affirming that they have indeed found other coverage.
But be forewarned: The process is "not as easy as it might look," says Ed Bleiler, director of group benefits for Baystate/Oceanstate Financial Services. To be successful, employers should "consider all the technical aspects, make sure the plan is in writing and make sure you've anticipated more than the first year of the program. It should fit into a long-term strategic approach to your benefits. It's not a quick fix."
Financial rewards are fleeting
Though it may seem advantageous to trade cash for coverage, the positives tend to be temporary.
"Over time, [an employer's plan] demographic is going to change. Even if they are pooled with other employers with the insurance carrier, they do get adjusted for the demographics," says Joan Smyth, a consultant in Mercer's New York office. Not only that, the employer may run into trouble with the underwriter if too many individuals leave and adverse selection becomes a threat.
Even if the opt-outs don't concern the underwriter enough to close the plan, employers still are skimming the pool - where the sick, not the healthy, are most likely to tread water, thereby driving up costs for both employer and enrollees.
Thus, though on its face the appeal of cash opt-outs is rosy, beneath the skin blood vessels are popping, some experts say. Animosity bursts from employees who may have been opting out for years without a pay out and an employer may be perceived as callous - not a sound strategy for large, public companies, whose public profile may be besmirched as a result, says Williams.
Some experts argue, though, that opt-out payments are not a valuable option for employers of any size.
"I don't think there's any economic reason for someone to do that. This is a tactic that should not be used because taxwise and economically speaking, it doesn't make any sense," insists Phil Lebherz, CEO of LISI, a large general agency in California specializing in small business.
But small and midsized companies may find it harder to make ends meet while offering a fully formed health benefit plan. After all, providing insurance for employees is "especially [more] cumbersome for a smaller group than for a larger group" because of the size of pool and the lack of an HR department, explains Steve Trattner, the president and chief marketing officer of Cinergy Health.
Adds Roger Edgren, account director at McGraw Wentworth, Michigan's largest employee group benefit brokerage/consulting firm: "For [small] employers that are not self-funding [and] are not experience-rated for their claims, they're paying out a rate for single coverage and a rate for family coverage." With an opt-out strategy "that's less than those premiums, they will save dollar-for-dollar," he says.
A similar strategy involves employers offering workers bonuses for getting their spouse to opt out - or allowing spouses to enter the plan for a fee.
It's the classic carrot and stick, though both are controversial - and none too popular. In its 2008 National Survey of Employer-Sponsored Health Plans, Mercer found that in companies with 10 to 499 employees, only 6% "include special provisions concerning coverage for spouses with other coverage available."
Nonetheless, there are obvious advantages to encouraging spouses, a group that tends to account for about half of a plan's expenditures, to opt out/pay in for coverage. Simply, Edgren says, it's "a way to cut costs without cutting benefits."
Williams concurs. "The economics of our time are forcing companies to look at every way to cut costs. So they feel less guilty [about saying to an employee's spouse], 'Please use your own health care coverage while we'll make sure that your spouse, our employee, is covered.'"
'A lot of talk'
"I know there's been a lot of talk between employers who believe that they're better off putting more money into payroll, essentially, and letting the employees determine how they want to spend it," observes Trattner.
Says Bleiler: "More employers are asking about it, but [there's] more of a trend toward reshaping the health insurance offering in the first place."
In fact, according to Edgren, employers are moving away from formal opt-out incentives and, instead, are allowing employees' payroll deductions to serve as the opt-out incentive.
To that end, experts recommend that employers take a closer look at limited medical plans and consumer-directed plans. Such products act like opt-outs in that they force the employee "to act as a consumer and begin to make better decisions," Williams says.
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