Annual U.S. health care expenditures exceed $2 trillion, three times above the costs in 1990, according to a study by the Henry J. Kaiser Family Foundation. Skyrocketing prices and their impact on health insurance coverage are ongoing problems for every industry and business, including construction companies struggling to offer medical coverage to their employees.
Escalating insurance rates have led to a precipitous decline in participation. Many construction companies with fewer than 50 employees view coverage costs as prohibitive and do not even consider the possibility of offering health benefits. In addition, many companies have a large number of transient employees who are not eligible for coverage, or too few full-time persons to make premiums cost-effective.
Overshadowing everything is the recessionary economy and the possibility that company-provided health insurance easily could become one of its casualties. In such trying times, is health insurance still a wise business investment for construction companies?
The Current State of Coverage
A recent report from a construction cost management firm describes health care coverage as “the most volatile area of fringe benefits.” It’s generally accepted in the industry that uncontrolled health care costs have an inflationary effect on the costs of conducting business, especially when factored with another source of budgetary strain for contractors: higher material prices. As insurance rates climb, group participation decreases, especially for smaller construction companies that find the costs of premiums too prohibitive. Larger companies that still offer benefits have determined the most affordable plans contain substantial increases in deductibles and co-pays.
Regarding legacy costs, specifically retiree health care benefits, the construction industry is no different from other distressed businesses such as airlines and auto manufacturers that can no longer afford retiree agreements negotiated years ago.
In their scramble to find an affordable alternative, some employers have considered trading medical coverage for a minimal wage increase. But with premiums increasing annually, in some cases by more than 10 percent, many businesses view this exchange as too detrimental to the bottom line—a short-term decision with long-term ramifications, some of which portend trouble for human resources.
Companies with a considerable full-time staff have long recognized the need for a stable workforce. Without adequate insurance, many employees might leave for a rival firm that offers better medical coverage even if the wages are lower. Cost reductions are mandatory for all businesses, but limiting or eliminating a medical benefit is a gamble that could lead to a loss of competent employees.
Forecasting long-range budgetary outlays in health care coverage is problematic. Some construction executives may take a short-term approach through arbitrary cutbacks and assume they can take a second look at restoring the benefits when the economy recovers. This is not a wise choice.
It’s All About the Premium
The medical coverage quandary can be summed up in one word: premium. Executives recognize the importance of coverage, but only if it remains affordable. Sometimes, higher deductibles and co-pays just aren’t enough.
Coupled with these costs is the transient nature of the construction business. It is cost-effective for many employers, including larger companies, to maintain a substantial number of part-time employees who are not offered benefits. However, that also means too few full-timers for coverage to be affordable.
In their search for reduced expenditures for employee and employer, some businesses resort to self-funded plans—an approach that may contain unacceptable risks depending on the size of the company. Self-funded plans are limited only to the number of employees insured; that number should be at least 500 to limit the risk. Premiums certainly can be lower in the initial cash outlay, but if the plan is improperly designed, large sums of money could be needed during inopportune times. Nothing can be more damaging to liquidity than unexpected cash outlays, which can occur when several employees suffer catastrophic illnesses that translate into ongoing high medical payouts.
Wellness programs are creating some buzz, but their value is in helping employees maintain a healthy lifestyle, not reducing premiums. Wellness programs entail an added cost and most contractors would rather use that money to help reduce the price of premiums.
An emerging alternative combines raising deductibles and self-insurance in part through a health reimbursement account (HRA). HRAs, funded by employers, reimburse workers for costs not covered by the company’s standard insurance plan. There are two upsides for employers that start an HRA: their contributions are tax deductible, and they can continue or cancel an HRA at their discretion.
Employees recognize the risk, but are responding positively to this opportunity to ease their medical cost burden. Likewise, employers enjoy controlling the account, and the tax break that goes with it.
Other Health Coverage Positives
All health care premiums paid by the employer are tax deductible, which is the biggest reason for maintaining this important benefit. Other options also offer financial incentives. The premium-only plan (POP) allows employersto lower their income tax liabilities by using pre-tax income to pay for medical premiums. POPs (IRS Section 125) also lower payroll taxes—a substantial tax benefit that also reduces workers’ compensation costs.
HRAs and POPs can attract and retain good employees—the type who would be likely to leave should the employer decide against a medical benefit.
The Future of Construction Health Care Coverage
Many contractors recognize they can’t wait for Congress to resolve the issue of affordable health care. One prevalent alternative is the high-deductible health plan, which helps control premium costs, although some workers may chafe at the amount of the deductible. Expect these plans to become the norm should Congress fail to tackle health care reform.
When the country emerges from the recession and the construction industry finally recovers, employers will have to accept the necessity of providing health care benefits. To adopt the right balance, contractors must review current insurance and coverage limits and determine whether these meet the challenges of affordability and maintaining a steady and competent workforce.
Executives must understand the myriad of available plans and then weigh the impact on the bottom line and the company’s most valuable resource—its people.
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Friday, September 3, 2010