Health Insurance and Hiring

If you run a business, one of the big impediments to hiring is the cost of benefits and in particular the cost of health insurance and until recently, pensions. This country had evolved a system where the primary responsibility for the providing of health insurance for most has become the responsibility of the employer. Over the years we have seen skyrocketing increases in this cost and while many employees have attempted to reduce cost via HMOs and other changes such as higher deductibles, the incremental cost of hiring an employee now includes an ever growing tab for health insurance. Add to that the uncertainty related to what the Government is going to require and even further what the economy is going to look like and you would have to be very confident in your future business to hire anything other than temporary or contract workers.

Until recently and in some cases still, the growth in pension liabilities was becoming a great strain on employment. However, very few small businesses attempt to offer pensions any more outside of a 401 plan. This type of benefit is a defined contribution plan and defines the costs you as an employer are responsible for in a pre-determined way. When I first reviewed compensation plans, most companies offered defined benefit plans that required them to pay a certain level of benefit for the employees retired life. This puts all the risk on the employer. A defined contribution plan switches the risk to the employee largely since the 401 plan will only provide income until it is gone. Of course most employees also have social security to fall back on and employers face some risk in that area if the rates go up, but nothing like the risk of a defined benefit plan.

It would seem we could learn a lot from this pension change. If the costs of health insurance could be defined to the same extent that the pension cost have been, employers would be more likely to risk hiring. One way to do this would be for everyone to effectively fall under a Government plan funded by taxes and where the variable cost of hiring an employee no longer included a health insurance risk. This solution is politically difficult with many arguing that the Government is unable to run anything well. I personally don't agree with that but it is not a viable option at this time. The other option would be to have a defined contribution health benefit for employees where the cost to the employee was defined, similar to a defined contribution pension plan. There has been some movement in this area via the use of savings funds, but I am not aware that there is any widespread movement in this direction. To some extent this is the way the federal employee plans work although the contribution amount is determined by a formula related to the average cost of all the health plans included. Employees pick up a variable cost depending on the plan they choose and the more expensive plans actually cost the employees more. The net result of this has been some cost containment as a certain number of employees switch to more affordable plans every year, reducing the average cost below what it would have been and therefore reducing the Government contribution below what it would have been otherwise. The Government pays the lower amount of the following

a) 72 percent of the overall weighted average; or
b) 75 percent of the total premium for the plan you select.

What you will note from this is that if you pick a plan that has higher than average costs, the Government contribution for you is less. The formula has a built in incentive to control costs.

Now, the size of the Government workforce gives them significant influence and most companies only have one health insurance provider. However, even in the absence of a public option, we could and should have a benefit pool that employers could join where the benefits from many insurers were available to that companies employees and where the employers could define the amount they would contribute, either as a percentage of the average or a set amount. The difference would become the employee's responsibility but the employee would get the benefit of being part of a large pool with many choices.

This blog for today has gotten a bit longer than I like so I'll return to this subject and explore more options tomorrow.