When it comes to setting up benefits plans, one of the most common mistakes employers make is sharing the cost of health and dental premiums with employees. While it may seem like a simple way to offer extended benefits without footing the entire cost, cost-sharing almost inevitably leads to climbing prices for employers and employees alike.
How Does Cost-Sharing Work?
As the name implies, cost-sharing refers to any benefits plan where employees pay for part of the benefits they receive. In most cases, a cost-sharing plan will involve a company paying for half the cost of their employees’ premiums while the employees themselves are responsible for paying the other half.
On the surface, this often seems like a great plan. Employers get to offer an impressive, top-notch benefits package without going over budget, and employees receive extended medical and dental plans for a fraction of what they might have otherwise had to pay. But in the overwhelming majority of cases, cost-sharing actually leads to higher premiums for both parties.
Why Sharing Costs Drives Up Costs
Unlike non-cost-sharing plans, wherein an employer covers the entire insurance premium, cost-sharing puts the perceived value of a benefits plan squarely in the minds of employees. As with all financial decisions, nobody likes to pay for services they don’t receive. This means that when an individual is paying each month for their coverage, they expect to get the same amount of value in return for their investment.
For example, an employee taking $100 from their paycheck each month to cover their health and dental premium will want to get at least $1,200 worth of value from the plan each year. Even a generally healthy person with no pressing needs will be far more likely to make use of services that they feel they have already paid for.
This increased use of the benefits causes premiums to go up over time. So the next year, the employer and employee may each have to pay $110 or $120 for their previously $100 coverage. The added expense further prompts employees to get the most out of their plan and drives costs up yet again the next year, leading to a constant upwards cycle of insurance spending.
Alternative Solutions to Cost-Sharing
While the most obvious solution may be to simply cover all costs as an employer, this can be restrictive, especially in smaller companies. While paying full premiums does avoid cost-sharing’s issue of motivated insurance spending, some companies may not be able to afford the cost of an excellent plan.
A better solution that addresses both of these concerns is claims sharing. Unlike premium sharing, where employees pay the cost of their monthly coverage, in this kind of co-insurance system, employees pay for half the cost of their deductible from each particular claim. Not only does this de-incentivize using benefits unnecessarily, but it also reduces the cost of coverage for employees who don’t need it.
Crafting Sustainable Benefits Policies with Zarmac
Zarmac Benefits has been providing benefit programs to both new and established businesses for over 20 years. We take the time to analyze what you need and customize a benefits package specifically for your business style, now and for the future.
Zarmac provides substantial analysis specific to your business in order to deliver real choices, advise on trends, streamline renewals, and optimize your plan design. We make it easy for you and your team by supporting the management of your program. We also proactively educate and eliminate questions to ensure there are no surprises.
Ready to protect your business and your team? Find out more about the Zarmac difference!