What is a dollar saved on benefits actually worth to my business?

As a consultant, one of the most important things to me is understanding a company's short and long term goals and lining up the benefits strategy to support them. Often that's financial: an employer on razor thin margins trying to keep healthcare costs stable, a company preparing to sell that wants to increase EBITDA, or a business that just wants to run as efficiently as possible.

Savings on benefits go right to the bottom line. What gets left out of the conversation is the revenue equivalent. Divide a dollar of savings by your net margin and you get the sales it would take to produce the same profit. For a food distribution company, every dollar saved on benefits is equivalent to about $85 in sales they now don't have to make.

Then add the future. Containing claims doesn't just save money in year one. It produces lower renewals in year two, three, and four, because each year's increase is applied to a smaller base. Over a multi-year span, the financial impact is substantial, with much less revenue needed to be just as profitable.

That's why I push employers not to wait until they get slammed with a big increase to start thinking about strategy. The most stable option, not the cheapest one in year one, is usually the one that saves the most over three to five years. A well underwritten, well structured plan is rarely the lowest number on the spreadsheet out of the gate. Looked at over the long haul, it's the one that makes budget conversations easier.

Questions to ask

What is our net margin, and what is the revenue equivalent of our last renewal increase?
What did our plan cost per employee three years ago, and what will it cost in three more at our current trend?
Are we choosing plans on year-one price or on underwriting quality, cost containment, and funding?

How do underwriters actually price our renewal?

Your renewal is a number the carrier decides, not one it simply calculates. The underwriter projects your claims, adds trend, blends in a manual rate based on credibility, applies pooling charges for large claims, then adds retention for admin, taxes, commissions, risk, and profit. Every one of those inputs has a range, which is why two carriers can look at the same data and come back 15 percent apart.

When should we start working on our health plan renewal?

Five months or more before the effective date. Requests for quotes typically go out three to four months before renewal for fully insured groups and four to five months out for self-funded and captive groups, because stop loss quotes and lasers depend on current large claim detail. Most renewals fail because they start 60 days out.

Why did our renewal go up when our claims were good?

If you are fully insured, very little of your renewal is based on your own claims. It is driven by a large, generally unhealthy risk pool, and when your claims come in under what the carrier priced, the carrier keeps the difference. Changing how the plan is funded, even with the same carrier and plan, is often what fixes it.