For many companies, employee health insurance is one of the largest recurring employee-related expenses. But how much should a business actually spend on health insurance?
There is no single dollar amount that works for every employer. The cost of employee health insurance depends on factors including the size and demographics of the workforce, plan design, location, claims experience, prescription drug spending, provider pricing, funding structure, and the level of benefits the company chooses to provide.
For CFOs, CEOs, HR leaders, business owners, and benefits managers, the more useful question is not simply “What is the average cost of health insurance?” It is:
“Are we getting appropriate value from what our company spends on healthcare?”
What Determines an Employer’s Health Insurance Cost?
The amount a company spends on employee health insurance can vary substantially from one employer to another.
Two businesses with similar numbers of employees can have very different healthcare costs because their workforces, plan structures, claims experience, and healthcare utilization are different.
Important factors include:
- Number of employees and dependents
- Employee demographics
- Geographic location
- Medical claims
- Prescription drug utilization
- High-cost claims
- Health plan design
- Provider networks
- Employer and employee premium contributions
- Funding arrangement
- Stop-loss coverage
- Administrative expenses
- Pharmacy benefit arrangements
This is why simply comparing one company’s premium to another company’s premium does not necessarily tell you whether a health plan is performing well.
Should Employers Focus on Premium or Total Healthcare Cost?
Premium is one of the easiest numbers for an employer to see, but it is not necessarily the most important number.
A fully insured employer may primarily see a monthly premium. A self-funded employer may have much greater visibility into claims, administrative expenses, stop-loss premiums, and other components of the plan.
A company can have what appears to be a competitive insurance premium while still paying significantly more than necessary through other parts of its healthcare arrangement.
For CFOs and business owners, looking at total healthcare cost provides a more complete picture.
That means asking what the company spends across the entire health plan—not simply what appears on the insurance invoice.
How Much Should Employers Contribute Toward Employee Health Insurance?
There is no universal percentage that every employer should contribute.
Companies make different decisions based on their compensation strategy, workforce, industry, recruiting needs, budget, and overall employee benefits philosophy.
An employer might pay a larger share of employee-only coverage while requiring employees to contribute more toward dependent coverage. Another company may choose a different contribution structure to remain competitive for talent.
The important consideration is whether the contribution strategy supports both the company’s financial objectives and its ability to attract and retain employees.
Reducing the employer contribution may lower the company’s immediate expense, but it can also increase employee costs and potentially make the benefits package less competitive.
What About Self-Funded and Level-Funded Health Plans?
For some mid-sized employers, the question should not be limited to which insurance carrier offers the best fully insured premium.
The company may also want to evaluate whether a different funding arrangement could make sense.
Depending on the employer’s circumstances, options can include fully insured, self-funded, and level-funded health plans.
With a self-funded plan, the employer assumes greater responsibility for healthcare claims while typically gaining greater visibility into claims activity and greater flexibility in plan design. Stop-loss insurance can be used to help manage certain levels of financial risk.
Level-funded plans combine elements of traditional insurance and self-funding and may provide another option for qualifying employers.
Neither approach is automatically better.
The appropriate funding strategy depends on the employer’s workforce, financial position, claims history, risk tolerance, and objectives. A qualified employee benefits consultant should evaluate the alternatives rather than recommending a funding model simply because it is popular.
Don’t Ignore Pharmacy Spending
Prescription drugs can represent a significant portion of an employer’s healthcare spending.
For this reason, a company evaluating its employee health insurance budget should also understand its pharmacy strategy.
CFOs and benefits managers should ask:
- What are the company’s largest pharmacy cost drivers?
- How are specialty medications affecting the plan?
- What is the structure of the pharmacy benefit?
- How is the pharmacy benefit manager compensated?
- Are the current arrangements transparent?
- Are there opportunities to improve the plan without simply shifting more costs to employees?
Looking only at medical insurance premiums can cause an employer to overlook an important part of its overall healthcare budget.
What Should CFOs Look at Before Accepting a Renewal?
When an employer receives its annual health insurance renewal, the first instinct may be to compare the new premium with last year’s premium.
That is only the beginning.
Before accepting a renewal, company leaders should ask:
- What caused the increase?
- Which areas of the plan are driving the change?
- What does the claims experience show?
- How are prescription costs affecting the plan?
- Are the current network and vendor arrangements competitive?
- Would another funding structure make sense?
- What alternatives has our benefits advisor evaluated?
- What can be changed without unnecessarily reducing employee benefits?
A renewal should be an opportunity to evaluate the entire healthcare strategy—not simply a deadline for signing another year’s insurance contract.
What Is a Reasonable Healthcare Budget for a Growing Company?
For a growing business, employee healthcare should be treated as a strategic operating expense rather than an unpredictable annual increase.
CFOs should consider establishing a multi-year view of healthcare spending and monitor the factors that can influence future costs.
That can include claims trends, pharmacy spending, workforce growth, employee contributions, plan design, provider pricing, and the company’s funding arrangement.
This approach allows management to budget for healthcare more intelligently and identify potential problems before the next renewal.
Your Health Insurance Broker Should Help You Understand the Numbers
A corporate health insurance broker or employee benefits consultant should be able to explain more than the premium.
Your advisor should help you understand the major drivers of healthcare spending and evaluate whether your current plan structure is appropriate for your company.
That may involve reviewing funding strategy, claims information, pharmacy benefits, provider networks, stop-loss coverage, plan design, employee contributions, and other components of the healthcare plan.
If your broker only provides a renewal proposal without explaining what is driving your costs or what alternatives exist, it may be time to ask for a more comprehensive analysis.
How BeneSmart Helps Employers Evaluate Healthcare Costs
BeneSmart works with CFOs, CEOs, HR leaders, business owners, and benefits managers who want greater control and transparency over employee healthcare spending.
Rather than focusing exclusively on finding another insurance carrier, BeneSmart’s Benefit Cost Containment Blueprint looks at the broader healthcare strategy, including funding strategy, pharmacy strategy, care access, vendor relationships, plan management, and other potential cost drivers.
BeneSmart works with employers in markets including Milwaukee, St. Louis, Kansas City, Springfield, Tampa, Orlando, Fort Myers, Naples, Dallas, Houston, Austin, Atlanta, and Augusta, with a particular focus on mid-sized and industrial employers.
For an employer preparing for renewal, reviewing its healthcare budget, or questioning whether its current health plan is delivering sufficient value, BeneSmart offers a Benefit Cost Containment Consult to evaluate the company’s current approach and identify areas that may deserve further attention.
The Right Healthcare Budget Is About Value, Not Just Cost
There is no universal number that tells every company how much it should spend on employee health insurance.
A company spending less is not necessarily managing benefits better. It may have higher employee contributions, reduced benefits, greater exposure to claims, or a less competitive package.
Likewise, spending more does not necessarily mean employees are receiving better value.
The goal is to understand what the company is spending, what employees are receiving, where the money is going, and whether the overall healthcare strategy is sustainable.