Why Employers Should Look Beyond the Annual Health Insurance Renewal

Jennifer Schaefer, MBA, ChFC, CLU, RHU, REBC, SHRM-SCP
Founder & CEO, JS Benefits Group | Forbes Business Council Contributor | Co-Host, Executive Leaders Radio

For many employers, the annual health insurance renewal has become an expected part of running a business. The renewal arrives, the increase is reviewed, and the company decides whether to accept the proposal, make changes to the plan or look at other options. Then everyone moves on to the next issue.

That approach can miss the bigger picture. An employer’s employee benefits strategy should be about much more than responding to a renewal percentage. It should help the company understand where healthcare dollars are going, what employees actually need and whether the current plan continues to make sense for the business.

The renewal is important. But it shouldn’t be the entire strategy.

A Renewal Percentage Doesn’t Tell the Whole Story

One of the easiest ways to evaluate a health insurance renewal is to look at the percentage increase.

If the renewal is up 12%, the immediate reaction is usually, “How do we get that number down?”

That is understandable. Healthcare is a significant expense for many employers, and a large increase can put real pressure on a company’s budget.

But the renewal percentage is only one piece of the story.

Two companies could receive the same 12% increase and have completely different reasons for it. One may have a healthy employee population but be dealing with broader market trends. Another may have significant claims activity that is driving its costs.

Without understanding what is behind the number, it is difficult to determine what should actually change.

Employers need to look at the factors driving their healthcare costs rather than simply negotiating the final percentage.

The Current Plan May Not Be the Right Plan

A health plan that worked well several years ago may not necessarily be the right plan today.

Companies grow. Their workforces change. Employees get older, have families, move to different locations and develop different healthcare needs.

At the same time, the healthcare market changes.

Prescription costs increase. Provider contracts change. New treatments become available. Healthcare utilization changes. Employees’ expectations around benefits evolve.

Yet some employers continue renewing essentially the same plan year after year.

That can create a situation where the company is paying more without necessarily getting more value.

A benefits review should ask a basic question:

Is the current plan still the best fit for the company and its employees?

Sometimes the answer is yes.

Sometimes it isn’t.

Healthcare Costs Need to Be Examined at a Deeper Level

Looking only at premiums doesn’t provide enough information to make a good long-term decision.

Employers should be asking where their healthcare dollars are actually going.

Are prescription drugs driving a significant portion of the increase?

Are there recurring high-cost claims?

Is the plan design encouraging employees to use lower-cost, appropriate care?

Are employees paying so much out of pocket that the benefits are becoming less valuable?

Are there opportunities to improve the provider network or plan structure?

These questions can lead to better decisions than simply asking which insurance carrier has the lowest renewal.

The goal shouldn’t necessarily be to find the cheapest plan.

It should be to find a plan that provides appropriate coverage while managing the company’s long-term costs.

Pharmacy Benefits Deserve More Attention

Prescription drug costs have become an increasingly important part of the healthcare conversation.

Yet pharmacy benefits can sometimes receive less attention than the medical portion of the plan.

Employers should understand how their pharmacy benefits are structured and what is driving prescription spending.

That includes looking at specialty medications, generic utilization, formularies, rebates and the role of pharmacy benefit managers.

Employees also experience pharmacy costs very directly.

An employee who has to pay hundreds of dollars for a prescription isn’t thinking about the company’s overall healthcare budget. They are thinking about what that medication is costing their family.

That is why pharmacy strategy can affect both cost management and the employee experience.

Employee Cost-Sharing Can Change the Value of a Plan

When healthcare costs increase, one common response is to shift more of the cost to employees.

Higher deductibles. Higher copayments. Higher employee contributions.

Sometimes those changes are necessary.

But they should be evaluated carefully.

If employees see their paycheck deductions increase while also facing higher out-of-pocket costs when they use the plan, the benefits package can start to feel significantly less valuable.

That can become a workforce issue.

Employees may not know exactly how much the company pays toward their health insurance, but they certainly know what is coming out of their paycheck.

Employers need to balance financial sustainability with the employee experience.

Alternative Funding Should Be Considered

For some employers, the annual renewal may be the point where they begin exploring alternatives to traditional fully insured coverage.

One option that may be appropriate for certain employers is a level-funded health plan.

Level-funded arrangements can provide employers with a different approach to financing healthcare costs while maintaining a structured monthly payment and stop-loss protection.

But alternative funding isn’t automatically the right answer for every company.

Employers need to understand how the arrangement works, what protections are in place, how claims are handled and whether the company’s workforce and financial situation make the approach appropriate.

The important point is that employers shouldn’t assume the renewal proposal is the only option available.

The renewal should start the conversation, not end it.

Benefits Also Affect Recruitment and Retention

Healthcare benefits are also connected to the workforce strategy.

Employees increasingly evaluate the total employment package when considering whether to join or remain with an organization. Compensation matters, but so do health insurance, retirement benefits, paid time off, flexibility and other benefits.

A company may have a strong culture and competitive salaries, but if its benefits are significantly less attractive than those offered by competing employers, it can make recruitment more difficult.

The same applies to retention.

Employees who have been with a company for years may have built relationships, developed expertise and become important contributors to the organization. Losing them can create recruiting costs, training expenses and productivity challenges.

Benefits won’t prevent every employee from leaving.

But they are part of the overall employee experience, and employers should treat them that way.

Communication Is Part of the Strategy

Even a well-designed benefits plan isn’t very valuable if employees don’t understand it.

Benefits information is often delivered during a short open enrollment period, when employees are asked to make decisions about deductibles, networks, HSAs, FSAs and other options.

That can be overwhelming.

Employers can get more value from their benefits investment by communicating throughout the year.

Employees should understand what their benefits provide, how to use them and where they can go for help.

Education can also help employees make better healthcare decisions.

Understanding preventive care, telehealth, prescription options and provider choices can potentially help employees while also supporting the employer’s broader cost-management strategy.

The Right Time to Review Benefits Is Before Renewal

Waiting until the renewal arrives can leave employers with very little time to evaluate alternatives.

A better approach is to start the process well before the renewal date.

That gives the employer time to examine claims information, review plan performance, evaluate employee needs, consider alternative funding arrangements and compare options.

It also gives leadership time to make a decision based on information rather than pressure.

The renewal should be one milestone in an ongoing benefits strategy—not the moment when the company suddenly starts thinking about healthcare.

Benefits Decisions Should Be Connected to the Business

Healthcare benefits don’t exist separately from the rest of the business.

They affect the company’s expenses.

They affect employees.

They affect recruiting and retention.

They affect HR.

And they can influence how employees view their employer.

That makes benefits a business decision, not simply an insurance decision.

The most effective approach is to look at the entire picture.

What is the company spending? What is driving those costs? What do employees value? Where are the opportunities for improvement? Is the current plan sustainable? Are there alternative approaches worth considering?

Those questions are much more useful than simply asking whether the renewal increase is acceptable.

The Renewal Should Be the Beginning of the Conversation

Every employer wants to control healthcare costs. But cost management shouldn’t mean automatically choosing the least expensive option or shifting more costs onto employees.

The better approach is to understand what the company is paying for and whether the current benefits strategy is producing the right value.

Sometimes that means keeping the existing plan.

Sometimes it means changing the plan design.

Sometimes it means evaluating a different funding arrangement.

And sometimes the biggest opportunity isn’t changing the insurance plan at all. It may be improving employee education, addressing pharmacy costs or using better data to understand where healthcare dollars are being spent.

The annual renewal provides an opportunity to ask those questions.

Employers shouldn’t waste it by looking only at the percentage increase.

Healthcare is too significant an expense—and employee benefits are too important to the workforce—to treat the renewal as a routine transaction.

A thoughtful benefits strategy looks beyond the renewal and asks a much more important question:

Is the company getting the value it should from the money it is spending on employee healthcare?

That is where the real benefits conversation begins.

About the Author

Jennifer Schaefer, MBA, ChFC, CLU, RHU, REBC, SHRM-SCP is the Founder and CEO of JS Benefits Group, an employee benefits consulting firm that helps employers develop benefits strategies, manage healthcare costs and make informed decisions about employee benefits.

Jennifer works with employers on health plan strategy, cost containment, plan design, benefits technology, employee education and healthcare cost management. She is a Forbes Business Council Contributor and Co-Host of Executive Leaders Radio, where she discusses business, leadership and The Future of Work.