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Beyond 'individual' and 'family,' some base premiums on each additional person covered
Now that employers in the U.S. must open their health benefit programs to employees’ adult children up to age 26, some of those employers are looking for ways to share the increased costs of this requirement. One way to do that is charging health insurance premiums on a per-participant basis. Some employers are already doing this and others are looking into making this change. However, before employers take action, they should consider the pros and cons of this move.
Employers have always differentiated premiums based on the type of coverage. For example, employees purchasing coverage only for themselves often pay one "individual/employee only" rate, while employees who were also purchasing coverage for their spouse and children pay a higher “family” rate.
What has changed is the granularity involved in structuring premiums. Instead of offering family coverage with one set premium no matter how many children are covered, employers are creating tiers of premium rates. Some employers limit the number of tiers to avoid making the coverage too expensive for families to afford. In these cases, a common four-tier strategy is:
• Employee only ("individual").• Employee plus spouse (or, increasinlgy, Employee plus "one," either a spouse, partner or child).• Employee plus child/children without spouse/partner.• Employee plus spouse/partner and child/children ("family").
Other options for employers that want to go beyond that involve expanding tiers to require higher premiums for three or more children, or having uncapped tiers that require employees to pay a higher premium for every person covered by the employer’s plan.
“What has tipped the balance a bit in the other direction (toward tiered premiums) is the requirement to extend coverage to children up to age 26,” said Beth Umland, director of research for health and benefits with consulting firm Mercer in New York. “As a result, employers that had not revisited their contribution strategy for some time are now doing so.” Mercer’s research shows that employers have seen an average increase in total health plan enrollment of about 2 percent since the adult-children coverage requirement took hold.
Creating a Disincentive
While sharing the higher costs of providing child coverage up to age 26 is a motivating factor for employers, they should be mindful that tiered premiums can create a financial disincentive for employees to add dependents to their employer’s health plan.
For example, an employee with an employed spouse has two choices when buying health insurance coverage for her three children—her employer plan or her spouse’s employer plan. If her employer makes dependent coverage too attractive financially, that employer is going to end up covering more dependents (and nondependent adult children) than other employers. “Tiered premiums can help to ensure that an employer does not end up with a disproportionate share of dependents in its plan,” said Umland.
Umland noted that tiered premiums are part of a broader effort among some employers to manage plan enrollment. For example, some employers are restricting health plan eligibility for employees’ spouses by stating that spouses with access to coverage from another source, such as their own employer’s plan, will not be eligible for coverage under the employer’s plan or must pay a monthly surcharge if they have other health coverage available elsewhere. “This is the latest trend in managing the levels of coverage,” she said. “It may not work for every employer, but it could help.” (For more on spousal surcharges, see the HR Magazine article "Spousal Exclusions on the Rise.")
But Not Too Much of a Disincentive
While employers can use tiered premiums as a way to keep their overall health plan costs on target, they need to consider the impact on employees. Creating too much of a disincentive to put dependents or adult children on the health plan could backfire. After all, if the employer makes dependent coverage too expensive, that could create difficulties for those individuals.
“I have worked with a few companies that have considered tiered premiums but decided against it,” said Christopher Calvert, vice president with Sibson Consulting in New York. “Their thinking was that people with large families really need health insurance that is affordable because they may be struggling with a lot of other costs in their lives.”
Instead of expanding premium tiers, Calvert suggested that employers simply adjust the structure that they already have in place. “Now that employers have been through an enrollment period, they have seen the impact of age-26 children on plan costs,” he said. “They can use that data to adjust the costs for each coverage tier so that the average cost for family coverage is slightly higher. That way, you don't need to change all of your communication and enrollment materials and you don't need to reprogram your payroll system to accommodate new tiers.”
In addition, before adding tiers employers should look at their entire health benefits cost-sharing structure. “Employers need to consider these issues in light of other employee out-of-pocket spending, such as deductibles, co-insurance, co-pays and monthly premium contributions, to make sure that it does not overtax employees,” advised Umland.
To deal with affordability issues, Umland noted, employers are showing much more interest in health plan premiums that are based on employees’ salaries. This interest can be traced to a clause in the health care reform law that says an employer cannot set health plan contributions higher than a certain percentage of the employee’s household income. “Employers are looking at salary-based contributions as a way to manage that requirement,” she said. (For more on salary-based premiums, see the SHRM Online article "Salary-Based Health Care Premiums at University of California.")
New Approaches to Calculating Premiums
Percentage of employers* using in 2006
Percentage of employers* using in 2011
4-tier contribution strategy (employee-only, employee + spouse/partner, employee + child/children, family)
Employee premium contribution based on salary
Special provisions concerning spouses that have other coverage available (including spousal exclusion provisions)
* U.S. employers with 500 or more employees.
Source: Mercer’s 2011 National Survey of Employer-Sponsored Health Plans.
Considering that health benefits are part of employees’ total rewards, the introduction or expansion of tiered premiums should be done with the labor market in mind. In other words, employers need to make sure that their health plans are competitive in the labor market without offering more than they need to.
Joanne Sammer is a New Jersey-based business and financial writer.
Applying Effective In-Network Incentives at CalPERS (sidebar: Health Plan Tiers at The Kroger Co.),SHRM Online Benefits Discipline, updated March 2012
Earn Less, Pay Less: Salary-Based Premiums, HR Magazine, March 2012
Spousal Exclusions on the Rise, HR Magazine, November 2011
Employers Accelerate Efforts to Control Health Costs, SHRM Online Benefits Discipline, November 2011
Per-Employee Premiums: PPOs Ranked Highest, CDHPs Lowest, SHRM Online Benefits Discipline, November 2011
Large U.S. Employers Revamping Health Benefits for 2012, SHRMOnline Benefits Discipline, August 2011
Salary-Based Health Care Premiums at University of California, SHRMOnline Benefits Discipline, October 2008
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