Should Higher Pay Mean Higher Healthcare Premiums?

Instead of a traditional employer/employee premium split like 80/20 where all workers contribute the same amount no matter what they earn, a number of companies are moving from a fixed percentage to a contribution based on salary.

More Pay, More Responsibility

According to a recent survey by the National Business Group on Health, of approximately 600 mid- and large-sized employers, 23 percent structure health benefit premiums based on salary. Why?

As premiums have risen, wages haven’t necessarily kept pace. And if coverage costs an average of $450 a month per employee, and workers contribute 20%, then someone making $20,000 is paying about 5.5% of his or her salary towards healthcare, compared with just a little over 1.5% for someone making $70,000.

The question comes down to what’s best for the company, its specific population and organizational goals. Each employer has to consider the market, who it’s trying to attract, its overall benefits package and how to spread the costs.

Who’s Counting?

With premiums based on salary, higher paid workers assume more financial responsibility. Is it fair for employees who earn more pay more for the same benefits? That depends on who you ask.

Premiums are rising across all pay scales, but the relative brunt is falling on those who take home less. However, Cindy Butler, SPRH, President of the HR Consulting firm Butler & Associates, has never run into worker resistance.

“I’ve worked with three Rhode Island companies since the early 2000s who have adopted this approach, and I’ve never heard any negative feedback from their employees,” said Butler. “While some higher paid staff may think the structure’s not entirely fair, that feeling’s outweighed by the corporate values it communicates. A company that recognizes some of its employee population is struggling to make ends meet and looks for creative ways to lessen the impact of rising health costs can be perceived as a more humane organization that appreciates its employees. And that can go a long way in generating employee loyalty.”

More Tiers Mean More Work

While structuring your benefits package with more options may be a great way to appeal to worker needs, it will increase yours.

In addition to current variables like different rates for single workers versus families, as well as multiple coverage options, the pay-based premium approach add even more tiers. In addition to developing a cost structure, employers will need to set up the new deduction codes in payroll and address how they’re going to handle raises in pay scales that occur throughout the year.

So will pay-based premiums catch on? Adoption has been slow, but more and more companies may consider the option, particularly in the future when healthcare reform penalties can be assessed on employers if their workers' premium contributions exceed 9.5 percent of household income.

Amy Gallagher has over 19 years of healthcare industry experience.  As Vice President at Cornerstone Group, she advises large employers on long-term cost-containment strategies, consumer-driven solutions and results-driven wellness programs. Amy speaks regularly on a variety of healthcare-related topics, is a member of local organizations like the Rhode Island Business Group on Health, HRM-RI, SHRM, WELCOA, and the Rhode Island Business Healthcare Advisory Council, and participates in the Lieutenant Governor’s Health Benefits Exchange work group of the Health Care Reform Commission.

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