New Regulations May Spur Big Changes to Employee Health Premiums

It used to be that health insurance premiums were pretty straightforward – varying only by family size and type of plan. But that may be changing, and in ways that could have interesting implications for the role that health benefit costs play in the overall rewards package.

New health care regulations, stemming from the 2010 Patient Protection and Affordable Care Act, will impose penalties on employers (with 50+ employees) that don’t offer their workers affordable health coverage. Affordable, in this case, means that the employee’s share of premium for individual coverage doesn’t exceed 9.5 percent of his/her household income.

In an effort to avoid penalties, many employers (according to Kaiser Health News) are considering varying employee premium contributions by salary level as a means of keeping lower earning workers’ costs under the 9.5 percent threshold.

A salary-based premium model?

Although salary-based health premium models are the exception today (Mercer reports that only 1 in 10 large employers follow such a model), this approach has been in place at some employers — like General Electric — for some time. As the Kaiser Health news story reports:

General Electric adopted this salary-based premium model more than 20 years ago. With employees in a wide variety of jobs on a wide pay scale, the company wanted to offer a single health plan that would appeal across the board, says Ginny Proestakes, GE’s director of health benefits. “It was a recognition that ability to pay made a difference,” she says.

The company divides its 140,000 U.S. employees into those paid by the hour and those on salary, then sets employee premium contributions based on seven salary ranges, with lower-wage employees paying relatively less than higher-wage employees. Hourly employees pay 24.5 percent of the premium, on average, while salaried employees pay an average of 35 percent, says Proestakes.”

Others, like Pitney Bowes, have taken steps to tie not only premiums, but also other health coverage costs like deductibles and out-of-pocket maximums, to salary.

Varying coverage for different employee groups

I think this has the potential to be a game changer. Once we cross the line into charging different premiums to different employee groups, health coverage costs become a variable element in the reward package. We may find that this opens up a whole new arena of play for not only reward management but talent strategy as well.

According to Mercer’s What’s Working survey among other studies, benefits play an increasingly important role in an employee’s decision to join and stay with an organization – and health insurance is undeniably the cornerstone of today’s benefit package. Once we take the step into selectively varying coverage costs for different employee groups, might we also be compelled to start thinking about doing that strategically – in a way that offers competitive advantage in attracting and retaining critical talent?

Should reward philosophies, going forward, consider how we allocate health care spending not only relative to affordability but also current and future talent needs?

What about communication? To what extent must employees’ premiums become private information, revealing as they may be of an employee’s income level? Couldn’t this present an interesting new twist to total reward statement design – and to reward communication overall?

And how about tying coverage costs to performance? Could be a path lined with regulatory and other landmines, but here’s betting some employers will be taking a closer look at it.

What else?

Come see Ann Bares talk about A Look at How We Reward the Work of Today — and Tomorrow at TLNT’s Transform conference in Austin, TX Feb. 26-28, 2012. Click here for more information on attending this event.

This was originally published on Ann Bares’ Compensation Force blog.