As a CFO I particularly enjoy this question, as it ultimately speaks to the root of a company’s mission, while acknowledging market forces larger than the company or industry one
participates in. Starting with the last 30 years of data, one should assume healthcare costs will continue to outpace inflation by a factor of 2-3x. And, as a result, a company’s healthcare premiums are likely to outpace top line revenue growth. This means well meaning CFO’s and CHRO’s have a problem – the former because he or she needs to grow a company’s earnings margin, the latter because he or she wants to also pay wages at rates equal or above inflation to attract and retain talent.
Further, because the rise in health care costs have been slowly gaining share of a company’s budget – former Secretary of Defense Robert Gates said it well: “Health care costs are eating the Defense Department Alive” – the number is both too large to ignore and too visible to employees to shift the full inflation amount onto participants themselves. Instead, many organizations are introducing High Deductible Health Plans (HDHPs) which, while the evidence is still early, appear to provide not only a better value to participants, but also experience lower than average annual premium increases when compared to traditional plans.
However, best in class rollout strategy for these Consumer Driven Health Plans is for the employer to make seed contributions to a participant’s Health Savings Account, as well as match contributions for payroll deductions. This “eases the pain” of early adopters and encourages participation in a new thing. Health benefits are often some of the most emotional topics for employees, so providing a glide path, of sorts, is generally the recommended approach.
What does the CFO get for this investment? Greater participation in CDHPs means lower premiums for a company’s workers, a lower inflation trajectory, and for those participants who contribute to their Health Savings Accounts, the CFO receives a payroll tax “gift” via reduced payroll tax employer contributions on those amounts (7.65% of a participant’s contributions directly reduce a CFO’s obligations to the IRS, so for every $1,000 an employee contributes, the company pays $76.50 less back to DC). Importantly, this is where the experts predict the health market is heading, so delay only, ultimately, costs organizations more.