Carving Out' Spousal Benefits: Cost-Cutting, with Repercussions

The Affordable Care Act (ACA), for all its coverage and compliance costs for employers, also provides them with opportunities to reduce the number of people covered under their health plans—potentially limiting plan expenses.

The ACA mandates that employers with 50 or more full-time employees or their equivalents provide coverage to eligible full-time employees. The health coverage (or “shared responsibility”) mandate does not extend to employees’ spouses, although it does allow young adults to stay on a parent’s health care plan until age 26. So employers that “carve out” spousal coverage from their health plans could potentially generate considerable savings.

For many employers, “the rationale is, if spouses or partners of employees have access to health coverage through their [own] employers, there is no need to provide coverage,” said Jim Winkler, chief innovation officer with Aon Hewitt in Norwalk, Conn.

There are several ways to carve out spousal health care benefits:

• Restricting health care coverage only to spouses who do not have health insurance available elsewhere, such as through the spouse’s own employer.
• Imposing a surcharge on coverage for spouses who have health insurance available elsewhere.
• Eliminating premium subsidies for spouses who have health insurance available elsewhere.
• Offering a monetary reward to employees who do not enroll their spouses in the health plan.

Moreover, a November 2015 analysis by consultancy Aon Hewitt shows that 43 percent of large U.S. companies are considering using unitized pricing—where employees pay per person and not individual versus family.

Taking any one of these approaches can lead to significant cost-savings. “Where else can I save the $6,000 or so that it costs to cover each spouse in a transparent, immediate and recurring manner?” asked Howard Gerver, president of HR Best Practices, a consultancy in Franklin Lakes, N.J., that helps employers reduce their health care and workers compensation costs. “A business that operates on a 5 percent profit margin has to generate $120,000 a year in revenue to pay that $6,000 for each spouse.”

Reducing the number of health plan participants in general is also key to savings. “Covering fewer lives generally reduces costs,” said Hector De La Torre, executive director of the Transamerica Center for Health Studies, a nonprofit research foundation funded by the Transamerica Life Insurance Co., in Los Angeles.

This is especially true when you consider that spouses tend to spend more on health care annually than covered employees. A 2014 study by the Employee Benefit Research Institute (EBRI) found that insured employees spent an average of $5,430 on health care services, while insured spouses spent $6,609, a difference of $1,179 per insured spouse. This is attributed in part to pregnancy-related expenses for wives insured through their husband’s plan—spouses in an employment-based health plan are more likely to be female than male (twice as likely in EBRI’s study). “Gender explains about 23 percent of the [$1,179 annual] difference,” according to EBRI’s analysis.

Spouses covered under an employment-based plan were twice as likely to be female than male.

Carving out these benefits could yield lower overall outlays for self-insured plans and a better experience (and possibly lower overall plan premiums) for fully insured plans.

Why So Few Carve-Outs?

But if there are compelling financial reasons to carve out spousal health benefits, there are equally strong HR-related reasons to think twice before doing so. Spousal health coverage is often a valuable benefit to current and potential employees. If an employer eliminates spousal coverage, or imposes a surcharge or eliminates subsidies for that coverage, there could be some backlash among employees.

“A lot of organizations are very focused on developing and maintaining a reputation for being family-friendly,” said Winkler. “These organizations worry that a decision like this could hurt that reputation. Many employers are considering a carve-out but they have not pulled the trigger.”

Other reasons include that employers may be involved in a collective bargaining situation or concerned about turnover. Or it could be simple inertia, suggested Gerver. “Nobody wants to be the first to do it.”

For those employers that are concerned about implementing a full carve-out, Gerver suggested starting with a surcharge or even eliminating subsidies for health coverage for spouses who have coverage available elsewhere. However, understand that any spouses who stay on the plan under these circumstances, especially as their share of the cost increases, are unlikely to be in good health—typically without access to their own employment-based coverage—and could drive up the plan’s utilization and costs.

According to Mercer’s 2014 health benefits survey of about 2,800 employers:

• Only 9 percent of employers with 500 or more employees do not cover spouses who have health insurance coverage available elsewhere.
• Another 9 percent impose a surcharge on this coverage.
• Others offer either cash (13 percent) or benefit credits (1 percent) to employees who waive coverage for their spouses.
• Cash offers in lieu of spousal coverage average $1,481, and an average of 18 percent of employees with eligible spouses opt for these payments.

Employers that are interested in moving ahead with a full carve-out should carefully frame this move. “Explain the economic impact,” suggested Winkler. For example, the company may be able to save enough money through the carve-out to avoid premium increases for all employees, or be able to eliminate the need to move to a health plan with higher deductibles and more-restrictive networks.

Honor System or Audit?

Once an employer decides to implement a spousal coverage carve- \out, the next step is to determine how to verify whether spouses have coverage elsewhere.

Some employers opt for the honor system by asking employees the question, with employment termination the stated penalty for lying.

Others might choose to make this declaration more formal by requiring employees to sign an affidavit when their spouses do not have health coverage available elsewhere. “It feels more binding and legal to certify that your spouse does not have coverage someplace else,” said Winkler.

“In some cases, only 10 to 20 percent of employees say that their spouses have access to other health insurance,” said Gerver. To establish a benchmark for the number of spouses who have access to health insurance elsewhere, employers can conduct an employee survey early on in the process to obtain overall numbers.

Then, once the carve-out is implemented, the employer can compare the actual number of spouses removed from the plan with the number indicated in the survey. If there is a discrepancy, employers will need to decide whether to let things stand or conduct an audit to determine whether spouses that have remained in the health plan are eligible to be there.

There are other ways to determine if the percentage of spouses on the plan are entitled to be enrolled. Gerver suggested that employers consider employee demographics, including family structure, income and geographic location. For example, an employee who is supporting a family of six in a high-cost area and is making $40,000 per year is likely to have a spouse who works full time.

While this type of analysis will not necessarily uncover whether a spouse has other health insurance coverage available, it does provide a starting point for deciding whether a formal audit is warranted.

Of course, not all employers will feel comfortable aggressively pursuing proof that spouses have no other insurance available to them— indeed, not all employers will feel comfortable carving out spousal coverage at all. This choice, perhaps more than most benefits-related decision-making, will depend on the organization’s culture and the impact this policy would have on the workforce.

Joanne Sammer is a New Jersey-based business and financial writer.

Related SHRM Articles

• Spousal-Coverage Shifts Could Have Unexpected Consequences, SHRM Online Benefits, January 2014
• Health Care Costs: What is a Spousal Carve Out?, SHRM HR Q&As, January 2013
• Are Health Premium Tiers a Good Idea?, SHRM Online Benefits, January 2012
• Spousal Exclusions on the Rise, HR Magazine, November 2011