benefits
Offset the Rising Costs of Employee Benefits
Strategies to minimize skyrocketing increases.
BY MARK E. KROPIEWNICKI, J.D., LL.M. AND SANDRA E. D. MCGRAW, J.D., M.B.A.

Despite years of double digit increases in group health premiums, indications are that the trend will continue. One need only look to the plethora of health savings/reimbursement accounts now available as employers search for less costly options.

So with these rising costs, how have employers, including medical practices, reacted? Initially, many had a "knee-jerk" reaction, thinking that if they simply reduce headcount, they will cut expenses. Often, these cuts have been indiscriminate; we have all seen what happens when practices cut staff without considering the implications. First, they can no longer see the volume of patients they counted on seeing. Second, billing slows down even if key staff are left in that department. Overall, morale goes down, and knowledge about basic practice operations is often lost in the turnover of long-standing employees.

Another reaction has been to seek new solutions. This has included cost-shifting of premium increases to employees, higher co-pays and deductibles for the health plans that we do have, mail order and generic prescription drug programs, increased patient cost-sharing, and innovative health plans such as health reimbursement arrangements and health savings accounts. In most cases, these attempts have provided only one-time benefits in terms of cost savings.

So as we move into 2007, what actions do we take as we seek to offset the rising costs of employee benefits?

Where Do We Go From Here?

Recognizing that the average ophthalmology practice spends 21% to 27% of its revenue in personnel, are we maximizing our return on that investment? Hopefully, we have already delegated repetitious tasks to the person at the lowest level salary payment, or even to machines. For example, patient reminder calls, automated patient
posting and electronic funds transfers are all examples of services that have become so routine as to be relatively flawless and the use of human capital is no longer cost-justifiable.

Given the expense of training and educating the right people, are you keeping your good people happy? Rather than holding onto those few marginal players, simply for fear of being short-staffed, your practice should always be looking for the next best person. Do not be afraid to turn over your problem employees.

Resist the temptation to be the most generous boss on the block. Paying full family health coverage, or most of it, is no longer the norm in the market. Flexible spending accounts, cafeteria plans and other creative options enable employers to offer flexible benefits to which you are able to contribute while not necessarily incurring the full cost increases of each benefit offered to your staff.

It also pays to be creative. While it is not worth changing plans every year simply to save marginal dollars from year to year, it is often worth offering creative benefits that respond to the particular needs of each of your employees.

So with these ideas in mind, where do you start?

Consider The Benefits You Do Offer

The Health Care Group's 2006 Staff Salary Survey provides a list of the typical employee benefits as reported by all medical practices (see box on page 55).

Certainly for the items italicized within the box, you should be no more or less generous than required to "meet your market." In most cases this means matching what your largest competitors are doing. This is particularly true if you provide a better work environment than those around you. Do not underestimate this last point. The workplace environment is of critical importance for a significant percentage of staff members.

Consider These Options

Next, you may want to consider which benefits you should offer through either a cafeteria plan under Internal Revenue Code section 125 or a Flexible Spending Arrangement (FSA). The goal here is to help the practice provide a range of necessary benefits to its employees and still help control its own rising costs. Regardless of whether you choose a cafeteria plan or an FSA, your employees need to be educated to understand the benefits of the funding of these tax-advantaged benefit plans.

Cafeteria plans and FSAs are a "win-win" situation for both the practice's employees and the practice. They allow employees to pay for qualified benefits with pre-tax dollars. At the same time, both the employee and the employer save the employment taxes on the amounts the employee contributes (by a salary reduction agreement) to the cafeteria plan or the FSA to pay for qualified benefits. Cafeteria plans and FSAs can be funded by the employee, the employer or both.

Until recently, employees lost any employer contributions or any money they contributed from their own salary to the cafeteria plan or FSA if they failed to spend the full amount of the contribution on qualified benefits by the end of the plan year. In most cases, any unspent employee funds at the end of the plan year end were forfeited to the practice. As a result, many employees have been reluctant to use cafeteria plans or FSAs or only used them minimally.

Fortunately, the IRS now permits employers to amend their cafeteria plans and FSAs to extend the deadline for employees to incur qualified benefits under the plan by 2.5 months after the close of the plan year. In effect, this creates a 14.5-month period of coverage for the employee for each plan year.

Cafeteria Plans. Generally the employer makes available a set dollar amount for each employee covered under the cafeteria plan and only the cash the employee actually elects in lieu of tax-free cafeteria plan benefits is included in the employee's taxable income. An employee may also elect to have his or her taxable earnings reduced to pay for additional tax-free benefits over and above the amount the employer contributes towards those benefits. And indeed, some cafeteria plans are designed to have the employees pay to cover the entire cost of tax-free benefits with the employer contributing nothing.

A cafeteria plan does not have to be limited to reimbursement of health/vision/dental care insurance and uninsured health/vision/dental care expenses. The plan may offer a broader menu of benefits such as dependent care assistance, group term life insurance, disability benefits, FSAs, 401(k) plan contributions, accident and health insurance, and adoption assistance.

There are certain rules applicable to cafeteria plans, however, that often limit the tax-free benefits available to key employees (i.e., practice owners). Your benefits consultant can explain these limitations. It may be best to design the cafeteria plan for the staff only instead of the key employees.

Flexible Spending Arrangements. An FSA is a limited type of cafeteria plan that enables employees to set aside a portion of their salary on a pretax basis to pay for certain out-of-pocket expenses. There are two different FSAs that you might want to establish for your employees. The first is for qualified healthcare expenses and the second is for qualified dependent care expenses.

A health FSA is used to pay for qualified healthcare expenses that are not paid for or reimbursed under the employer's health insurance coverage. The health FSA cannot be used for health insurance premiums, long-term care expenses or insurance premiums, or amounts covered under another health plan. There is no federally-mandated annual cap for a health FSA and an annual cap is usually set by the employer. The dependent-care FSA is used to pay for eligible dependent daycare expenses and it is federally capped at $5,000. Both types of FSAs can be used at the same time, and the cap on one does not affect the cap on the other.

Collective Arrangements

Health purchasing alliances, also called purchasing pools, are private, nonprofit organizations that bring small businesses together to buy health insurance as a group.

Because of their purchasing clout, pools are in a better position to negotiate premium rates with insurers. While some purchasing alliances allow individuals to join, most pools serve businesses with two to 50 employees.

As with all changes to your health insurance, do plenty of homework before joining a pool. Make sure more than one insurance company participates and that the program negotiates benefits and rates. Find out if the program will intervene on your behalf if you run into problems with your insurer. If the association has kept the same insurer for 10 years, find out why.

Amend Your Health Plan

You can consider trimming your practice's health insurance costs by amending your existing coverage.

Change co-pays, deductibles and coverages. A simple step is to increase co-pays and adopt higher deductibles within your present plan. Also consider changing the level of coverage for some benefits. For example, consider using a formulary schedule for drugs and prescriptions.

Choose less expensive plans. While traditional indemnity plans are favored for their flexibility, they are clearly the most expensive and uncommon today. Health maintenance organizations keep your costs down but with often rigid restrictions. Point of service plans and preferred provider organizations cost more than health maintenance organizations but offer employees more flexibility when choosing physicians. Always compare premium costs among at least three vendors.

Limit the number of employees covered. This option can be tricky and create employee morale problems but is worth at least considering. One variation is to encourage employees to opt to be covered on a spouse's plan instead of by the practice plan. To motivate this type of arrangement, the practice may offer to reimburse such employees for their co-payment or other out-of-pocket costs.

Increase employee contributions. There are variations of cost sharing. The practice could assign a flat employee contribution rate (e.g., 30% of the premium) across the board regardless of the types of plans or coverages made available. The employees could instead be charged for some coverage elements, such as spousal or family coverage.

Emphasize Health In the Office

Finally, consider starting a worksite wellness program in your office, including formation of a practice "wellness committee." Set goals and objectives, including physical activity, nutritional programs and educational information. Use a staff meeting to brainstorm activities and functions appropriate for your office.

The authors are principal consultants with The Health Care Group, Inc. and principal attorneys with Health Care Law Associates, P.C., both based in Plymouth Meeting, Pa. 610-828-3888 mkrop@healthcaregroup.com; sandram@healthcaregroup.com.