The rising tide of employer-sponsored healthcare benefit costs, projected to surge by 11.1% in 2027, is compelling Chief Financial Officers (CFOs) to move beyond traditional financial oversight and actively engage in managing these complex expenses. This significant projected increase, detailed in a recent analysis by global insurance broker and consulting firm WTW, signals a fundamental shift in how finance departments approach employee benefits. Historically, healthcare costs have been largely relegated to Human Resources departments, but the escalating financial implications are now drawing the direct attention of finance leaders.
"Finance is leaning in more and helping to manage healthcare costs," stated Tim Stawicki, Senior Managing Director of Health and Benefits at WTW, in a recent interview. He observed that this increased involvement from finance chiefs, who haven’t historically prioritized healthcare benefits as a core area of focus, is a direct response to the substantial financial pressures companies are facing. Stawicki emphasized the critical need for collaboration, noting, "If HR and finance can partner together, we can often come up with the best options." This synergy between HR and finance is becoming paramount as companies grapple with the dual challenge of controlling escalating healthcare expenditures while simultaneously ensuring competitive and comprehensive benefits packages that attract and retain top talent.
The challenge of reining in these escalating costs is multifaceted. Unlike many other operational expenses, healthcare benefits directly involve employees and their families, making cost-cutting measures a delicate balancing act. Companies are actively exploring strategies to redesign leaner healthcare plans for the upcoming years, specifically targeting 2027 and 2028. This strategic recalibration requires a careful consideration of employee needs, the financial capacity of the company, and the imperative to maintain a competitive edge in the labor market.
CFO Dive recently engaged in a comprehensive discussion with Tim Stawicki to delve into the evolving landscape of employee healthcare benefits, the legal frameworks governing employer obligations, and the critical considerations for CFOs as the window for implementing changes to 2027 and 2028 healthcare plans narrows. The following Q&A, edited for clarity and conciseness, provides an in-depth look at these pressing issues.
Navigating the Healthcare Plan Redesign Timeline
The timing for initiating changes to employee healthcare plans is a crucial factor, and it varies significantly based on the size of the employer. For larger corporations, the window for making substantial alterations to 2027 plans is likely already closed. These organizations typically finalize their pricing strategies, benefit designs, and communication materials well in advance of open enrollment periods.
"For larger employers, it’s probably too late for 2027 plans," Stawicki explained. "They’ve had conversations, figured out their pricing and strategy and are currently implementing that through communication materials through open enrollment."
Mid-market companies, however, are often in the midst of these strategic planning phases. For them, the current period represents a critical juncture for solidifying their benefit strategies and making final decisions regarding plan adjustments for the upcoming year. "For the midmarket, they’re probably in the midst of these strategies right now. Now would be the time they need to think about what the final changes are," Stawicki advised.
Understanding Employer Obligations Under the Affordable Care Act
The legal landscape surrounding employer-provided healthcare benefits is largely shaped by the Affordable Care Act (ACA) of 2010. The ACA introduced a mandate requiring businesses with 50 or more full-time equivalent employees to offer a certain level of health coverage to the majority of their staff or face financial penalties.
"The Affordable Care Act passed in 2010 did institute a requirement for businesses with 50 or more employees…to provide a certain level of coverage to most of their staff or face financial penalties," Stawicki noted. However, he also pointed out that the ACA’s influence extends beyond mere compliance. "The reality is many employers were offering comprehensive health insurance long before that mandate came into place because they needed to do it to be competitive." This pre-ACA trend highlights the strategic importance of robust health benefits as a talent attraction and retention tool, a factor that continues to hold true even with the legal requirement in place.
Defining Minimum Value and Actuarial Value
The ACA specifies a minimum standard for employer-sponsored health coverage, referred to as a "minimum value plan." This designation is tied to the plan’s actuarial value, which represents the percentage of total healthcare costs covered by the insurance plan.
"It’s called a minimum value plan. It essentially means it has to have a 60% actuarial value," Stawicki clarified. "Of the total health care dollar [cost], 60% needs to be covered by a plan, so the remaining 40% could be in the form of deductibles, copay, co-insurance that the members are paying out of their own pockets."
While 60% actuarial value represents the legal minimum, most employers offer plans that provide a significantly higher level of coverage. "Most employers offer plans that are closer to 80% or 85% actuarial value," he added. Consequently, a plan that barely meets the 60% threshold would likely feel "pretty lean" to employees, potentially involving substantial out-of-pocket expenses such as high deductibles. "You’d probably have a $5,000 deductible or something like that," he illustrated.
The Financial Ramifications of Non-Compliance
Failure to provide the minimum required health insurance coverage carries financial penalties for applicable employers. These penalties are designed to incentivize compliance and ensure that employees have access to essential healthcare services.
The penalty for not offering at least the minimum health insurance can be substantial. "It differs. It indexes around $3,500 per employee per year that an employer would have to pay," Stawicki stated. While this penalty might appear less than the actual cost of providing healthcare – which can range from $15,000 to $20,000 per employee annually – it represents a direct financial outlay with no tangible benefit. "If healthcare costs are anywhere between $15,000 and $20,000 per employee, that [penalty] is certainly less than that, but it’s a fee or a penalty that you’re paying that would have no intrinsic value," he explained. In contrast, the cost of providing healthcare directly supports the well-being and productivity of the workforce.
Strategies for Cost Containment in Healthcare Benefits
As projected cost increases loom, employers are exploring a range of strategies to manage their healthcare expenditures without unduly burdening their employees or compromising their ability to attract and retain talent. These strategies often focus on optimizing existing plans and vendor relationships rather than drastic reductions in coverage.
"What I see many employers doing is they’re looking for ways that they can make changes that won’t have as much impact on employees," Stawicki observed. These approaches include:
Vendor Optimization and Efficiency
A key area of focus for cost reduction involves scrutinizing the performance and contracts of existing vendor partners. This includes evaluating how claims are processed and paid, as well as identifying and mitigating instances of fraud, waste, and abuse within the healthcare system.
"Examples of which would be evaluating their vendor partners, looking into fraud waste and abuse and paying claims most effectively," Stawicki elaborated.
Steering Towards Value-Based Care
Another prevalent strategy is the implementation of alternative plan designs that actively guide employees towards providers offering higher quality care at a lower cost. This approach aligns with the broader industry trend towards value-based care models, which prioritize patient outcomes and cost-efficiency over the volume of services rendered.
"They’re looking into alternative plan designs that help steer members to lower cost and or higher quality providers," he noted.
Restricting Eligibility: A Nuanced Approach
While restricting eligibility for healthcare benefits might seem like a straightforward cost-cutting measure, it is often considered a less desirable option due to its potential impact on employee morale and retention. Stawicki provided a simplified model for understanding employer healthcare spending, outlining three primary levers: the richness of benefits offered, the cost-sharing arrangements between employer and employee, and the participation rate in the plan.
"If I have fewer people participating in my medical insurance, my total spend will be less. Restricting eligibility is probably one of the lesser options on an uptick," he explained.
Historically, employers have employed tactics such as spousal surcharges to manage participation. "For a long time, we’ve seen spousal surcharges. If you are a working spouse and have coverage elsewhere, [the company] is going to charge you extra to encourage you to take your own employer’s benefits."
Another method involves adjusting waiting periods for new employees to enroll in health insurance. "You can also look at things like waiting periods. Some employers provide coverage immediately, others have a waiting period of up to 90 days." This strategy can have a noticeable financial impact, particularly in industries with high employee turnover, as it delays the point at which the employer begins to incur premium costs for those employees.
Key Considerations for CFOs in Plan Redesign
For CFOs embarking on the process of redesigning healthcare plans, a clear understanding of where they have control and where they do not is essential. The healthcare landscape is complex, with many cost drivers outside of an individual employer’s direct influence.
"It’s helpful to know where there is and isn’t control," Stawicki advised. "Not every part of healthcare spend is something that any given employer can manage."
A significant portion of healthcare costs is determined by the negotiated rates between insurance carriers and healthcare providers. Employers typically select an insurance company to administer their benefits, and this carrier maintains a network of providers with whom they have established contracts and reimbursement rates.
"Many employers will pick an insurance company to help administer their benefits, that insurance company has a network of providers where they negotiate the rates and reimbursement and any individual employer largely has no influence over what those contracts looks like between insurance carrier and provider," Stawicki elaborated.
However, employers do retain influence in other critical areas. They have the agency to choose which vendors they partner with, and they can implement strategies to shape employee utilization of the provider network. "Where employers do have a say is which vendors they do work with. And they have some control on trying to influence the utilization of their network," he concluded. This dual understanding of limitations and opportunities empowers CFOs to make more informed and effective decisions in their pursuit of sustainable and competitive healthcare benefit programs.
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