The hidden cost of employee benefits: 7 ways healthcare spending can reduce business profitability
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By Jennifer Schaefer, MBA, ChFC, CLU, RHU, REBC, SHRM-SCP
Founder & CEO, JS Benefits Group
Employee benefits are often treated as another line item on a company’s budget. But for many businesses, healthcare spending can influence far more than the monthly insurance premium. It can affect operating expenses, employee retention, recruiting, productivity, and ultimately the bottom line.
For employers reviewing their healthcare strategy, employee benefits solutions can provide a starting point for evaluating plan design, funding options, healthcare costs, and the overall value of the benefits being offered to employees.
The key is to look beyond the renewal rate and understand what is actually driving the company’s healthcare spending.
1. Rising health insurance costs can put pressure on profitability
Health insurance can represent one of the largest employee-related expenses for a business.
When premiums increase, employers may absorb the additional cost, adjust employee contributions, modify the plan, or investigate alternative approaches to funding healthcare.
The challenge is that simply accepting a renewal increase doesn’t necessarily address the reason costs are rising.
A closer review can help employers identify opportunities to manage spending while continuing to offer a competitive benefits package.
2. Plan design can have a significant financial impact
The lowest-premium health plan isn’t always the most cost-effective option.
Deductibles, copays, coinsurance, provider networks, employee contributions, and other plan features can all affect how employees use their benefits and how much the employer ultimately spends.
A well-designed plan should balance affordability for the company with meaningful value for employees.
That balance becomes particularly important when healthcare costs continue to rise.
3. Pharmacy costs deserve more attention
Prescription drug spending has become an important part of the employer healthcare conversation.
High-cost specialty medications and changes in prescription utilization can have a meaningful effect on a health plan’s overall expenses.
Employers should understand how pharmacy benefits fit into their total healthcare strategy rather than looking at medical and pharmacy costs as completely separate issues.
4. Employee turnover can add another layer of cost
Healthcare benefits can also have an indirect financial impact through employee retention.
When an employee leaves, the company may have to spend money recruiting a replacement, training that employee, and managing the productivity gap during the transition.
Competitive benefits don’t eliminate turnover, but they can be an important part of an employer’s overall compensation and retention strategy.
This makes benefits worth evaluating from both a cost perspective and a workforce perspective.
5. The funding strategy matters
Not every employer needs to approach health insurance in exactly the same way.
Depending on the size and circumstances of the organization, employers may consider fully insured, level-funded, or self-funded health plans.
Each approach has different financial considerations and risk characteristics.
The important question is not simply whether a plan has a lower premium.
The question is whether the funding strategy makes sense for the company’s financial position, workforce, risk tolerance, and long-term objectives.
6. Waiting until renewal can limit your options
One of the most common challenges employers face is waiting until renewal to start evaluating their benefits strategy.
By that point, there may be limited time to investigate alternatives.
Reviewing healthcare costs throughout the year can give employers a better understanding of claims trends, participation, pharmacy spending, plan utilization, and potential alternatives before renewal negotiations begin.
Preparation can give business owners more information when important financial decisions need to be made.
7. Employee benefits should be part of the financial conversation
Employee benefits shouldn’t be managed independently from the rest of the company’s financial strategy.
Healthcare spending can affect operating costs, compensation, recruiting, retention, and the company’s ability to invest in other areas of the business.
For that reason, business owners and financial leaders should periodically ask whether their benefits strategy is still aligned with the company’s goals.
That may involve reviewing plan design, benchmarking costs, examining funding options, evaluating pharmacy expenses, or looking for opportunities to improve the overall value of the benefits program.
Looking beyond the premium
Reducing healthcare costs doesn’t necessarily mean offering employees less.
In many cases, the bigger opportunity is understanding where the money is being spent and whether the current strategy is producing the desired results.
A thoughtful benefits strategy can help employers balance three important objectives:
- Managing healthcare costs
- Providing meaningful employee benefits
- Supporting the financial health of the business
The companies that take a broader view of employee benefits are better positioned to make informed decisions when healthcare costs, employee expectations, and business conditions change.
Final thoughts
Healthcare is too significant an expense to simply review once a year and accept whatever renewal comes back.
Business owners should understand what is driving their healthcare costs, how their plan is performing, and whether their current strategy continues to make financial sense.
Employee benefits are not just an expense. They are also part of the company’s approach to attracting employees, retaining talent, managing costs, and building a sustainable business.
About the author
Jennifer Schaefer, MBA, ChFC, CLU, RHU, REBC, SHRM-SCP is Founder & CEO of JS Benefits Group, a leading employee benefits consulting firm. She helps employers develop strategic benefits programs focused on healthcare cost management, plan design, funding options, employee retention, and long-term business objectives.
Jennifer is a Forbes Business Council Contributor and co-host of Executive Leaders Radio, where she shares insights on employee benefits, healthcare strategy, HR, and the future of work.