The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 1

#LetsDoSomething

Nine strategies to help you get benefits costs under control

The Employee Benefits Cost Management Challenge

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 2

Employee Benefits Cost Management Challenge 3

It Starts with a Multi-Year Plan 4

Consumerism, Choice or Control 5

Fund It Yourself 6

Sign Up for Voluntary Benefits 7

Optimize the Deductible 8

Make a Defined Contribution 9

Get on the Plan Spectrum 10

Narrow Your Provider Network 11

Carve Out Your Pharmacy Benefits 12

Check Referenced-Based Pricing 13

Call on Telemedicine 14

Change Leads to Opportunity 15

The Employee Benefits Cost Management Challenge

Let’s find the cost management strategies that will help you achieve your goals.

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 3

Nine strategies to help you get benefits costs under control

It’s another challenging year on the employee benefits front. Employers are walking a fine line between managing health care costs that are increasing five to 10 percent annually, and continuing to offer market competitive benefits programs that help attract and retain top talent.

What makes the walk all the more precarious is the fact that five years after its passage, the Affordable Care Act (ACA) has taken root, adding administrative complexities and potential financial burdens to delivering benefits to a larger population of employees. This is the year when ACA reporting enforcement begins and the risk of penalties for non-compliance is high — one more element to wreak havoc on the budget and balance sheet.

Today’s dynamic environment is forcing finance, HR and benefits managers to take a closer look at their benefits program framework as well as specific strategies. The reality is that only a multi-year strategy can truly manage trending costs and their root causes as year-to-year changes are minimally effective, often a one-time correction, and short term in nature.

The imperative? Redefine your benefits to ensure better and long-lasting cost efficiencies while still responding to the needs of the corporate culture and total employee population.

The Employee Benefits Cost Management Challenge

The imperative: Redefine your

benefits to ensure better and long-

lasting cost efficiencies while still responding to the needs of the corporate culture

and total employee population.

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 4

It Starts with a Multi-Year Plan

Employee benefits represent about 20 percent of the cost of running a business, the second biggest expense after payroll. Building a strategic multi-year plan to get control of rising benefits costs requires the same discipline and the same techniques used to build the strategic plans for any other part of a business.

Reining in One of Your Top Five

Business Expenses

If you haven’t already embarked on a multi-year strategic benefits planning session, do it now to ensure that you’re in the best possible position to manage rising benefits costs.

“In a broad context, it takes an overview that scans and plans for who employers are, what they have today and what their goals are,” says Shannon Taylor, President, West Region, Employee Benefits. “It begins with a look at the culture, drivers, costs, funding and moves from there to an evaluation of solutions and contribution strategies.”

Product and plan design

Plan administration

Funding strategies

Contribution strategy options

Health management strategies

Communication strategies

ACA compliance management

The following key elements of a long-term strategic benefits plan should be evaluated for their financial impact:

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 5

Consumerism, Choice or Control — What’s Driving Your Cost Management Strategies?

Voluntary benefits, high deductible plans with consumer options, defined medical benefits, multiple benefit plan options, narrow networks — these are among the options to be considered as a part of a multi-year plan to re-imagine employee benefits with an eye toward aggressive cost management. And the context within which they are offered — as a self-funded or fully-insured plan — is an important consideration.

“The majority of cost savings strategies can be put into play regardless of whether you are a fully-insured or a self-funded entity,” says Linda Keller, Employee Benefits Practice Leader. “It’s really more about the culture of your organization. The demographics and needs of your employees and your appetite for risk will determine which strategies are right for you.”

Needs, goals and the appetite for risk are the things that drive an employee benefits strategy and the cost management strategies that will make the most sense for an organization. Organizations need to ask what they are trying to achieve and which strategies will enable them to achieve it.

1) Do you want to create more choices for existing and potential employees in order to attract and retain talent, without increasing your bottom line benefits costs?

2) Do you want to create an environment of consumerism so your employees make better choices to bring down the costs of benefits?

3) Do you want to maximize cost savings in your benefits program?

“The majority of cost savings strategies can

be put into play regardless of your organization’s size or whether you are a fully-insured or a self-funded entity.

It’s really more about the culture of your organization. The demographics and needs of your

employees and your appetite for risk will

determine which strategies are right for you.”

Linda Keller

Practice Leader

Employee Benefits

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 6

Fund It Yourself

There is a strong trend toward self-funding as a cost management strategy. What was once viewed as an approach for larger businesses is growing increasingly popular among smaller, fully-insured organizations for the flexibility it gives them to tailor more cost-efficient employee benefit programs. More telling of the demand: In 2014, United Healthcare offered the option to companies with as few as 10 employees. The cutoff had previously been 100 employees.

The attraction relates to several factors. For one, the ACA exempts self-funded plans from enough of its reforms to make the added risks of being self-funded more palatable. Further, the paternalism that once characterized smaller organizations has taken the back seat to the need to more aggressively control rising health care costs.

“The national trend among self-funded organizations is for savings of 8 to 9 percent on average in premiums,” says Steve Purkapile, Regional Director of Financial Analytics, Employee Benefits. Your cost in premiums won’t change as fast, on average, when fully-insured, and you’ll also gain better transparency and control over plan management with a self-funded strategy.

Whether the organization opts for a self-funded or fully-insured environment, however, it will find a variety of plan design options available with positive financial and HR implications.

Self-Funding: Once viewed as an approach for

larger businesses is growing

increasingly popular

among smaller, fully-insured organizations

with as few as 10 employees.

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 7

Sign Up for Voluntary Benefits

“It used to be that the typical benefits plan had major benefits on one side and voluntary benefits on the other,” says Joe Torella, President, East Region, Employee Benefits. “Increasingly, though, the lines between them have dissolved, and instead, they are working together as a portfolio of benefits.”

Voluntary benefits supplement fixed plan options and can include hospital-stay expense coverage, fixed sum payouts in the event of a serious disease diagnosis such as cancer, and other lifestyle or financial wellness and protection options including accident, dental, vision, disability and life insurance.

Ciro Giuè, Vice President, Voluntary and Worksite Benefits, East Region, Employee Benefits, points to financial wellness as the next big growth area in voluntary benefits — services and solutions that reduce or remove financial stress and anxiety from employees’ lives that might affect their performance and reduce productivity.

“This can take the form of savings plans for retirement or college tuition or bringing in qualified counselors to help employees through the college planning process,” says Giuè. “Especially for smaller organizations with fewer than 100 plan members, these are Fortune 500-caliber benefits that serve them well on the recruitment and retention fronts without adding cost to their budgets.”

This boom in voluntary benefits has been accompanied by innovation as well. More and more options, like mortgages and employee short-term unsecured loans, for example, are surfacing as companies add voluntary benefits to the mix. These kinds of solutions can help keep employees from having to use payday loan facilities, asking for a paycheck advance, running up balances on credit cards or borrowing from their 401(k) accounts.

The cost benefit for voluntary benefits can be great. Torella has seen some organizations reduce premium renewal increases from as high as eight percent down to zero by putting voluntary benefits into play.

An Array of Voluntary Benefits

There is a growing menu of voluntary benefits that are working well for both employers and employees.

Health Care “Gap” Benefits

∙ Telemedicine

∙ Hospitalization

confinement /

medical bridge

∙ Accident

∙ Specific disease plans

(Critical Illness & Cancer)

Personal Protection

∙ Auto & homeowners /

renters

∙ Group excess personal

liability umbrella

∙ Group legal plans

∙ Identity theft protection

∙ Pet care (now the third

most popular voluntary

benefit in the workplace)

Lifestyle / Wellness

∙ Life insurance plans with

riders for long-term

care and critical illness

∙ Mortgages

∙ Short-term

unsecured loans

∙ Buying programs /

Vacation programs

∙ College savings /

assistance

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 8

Optimize the Deductible

In today’s high cost health care environment, it is imperative to create smarter, more price-conscious consumers who will put pressure on providers in order to protect their own wallets. High deductible plans are a key step in creating a culture of consumerism among employees — driving them to ask more questions and do more research into their provider choices.

By pushing greater enrollment in high deductible health plans, employers can reduce their costs while also empowering employees to have more “skin in the game” before the employer covers a higher percentage of cost. The more employees have to pay, the more likely they are to shop aggressively for better “deals” — like choosing the MRI scan at an independent service provider rather than the hospital, or the generic prescription drug that’s almost identical to the name brand one but half the cost.

The trend toward high deductible plans is taking two routes. In one direction, some employers are getting rid of their traditional plans and offering only high deductible options. Others are tweaking their contribution strategies and incentivizing increased participation in higher deductible plans through lower premiums and contributions to health spending accounts.

Considering that most of the employers’ health plan costs come from claims of less than $3,000, it’s critical for employers to find ways to increase participation in high deductible alternatives. If people don’t share the financial burden, consumerism shrinks. That’s why deductibles continue to escalate. The hope is to push through a behavior change that’s more consistent. The benefit is a reduction in premium increases that tends to be two percent lower on average than PPO plans.

Turn your employees into

healthcare bargain hunters

If you haven’t looked at Health Savings Accounts (HSA) for your employees, now is the time. An HSA is a great way to support health care consumerism, promote employee engagement, and drive accountability for healthcare consumption.

“Great tax features and flexibility make HSA an easy way to change the way people think about benefits,” says Joe Torella, President, East Region, Employee Benefits.

The IRS says the use of HSAs has grown 15 percent annually since 2011. They are funded with pre-tax contributions, interest accumulates tax-free and withdrawals for qualified medical expenses are not taxed.

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 9

Make a Defined Contribution

“Defined contributions is not a new concept,” according to Keller. “It’s been around for a very long time but the difference in defined contributions today versus the conversations we used to have is the pairing of a technology solution to enable employers to far better manage this strategy and really get the cost savings.”

With a defined medical contribution structure, employees are given a fixed amount of money, or an allowance, that they can use on the benefits of their choice — typically medical, dental and vision, but with options also including disability and life.

“The employer gets to set how much they are going to pay for all benefits, not just health care,” explains Taylor. “By doing so, they can limit their cost to a very specific amount on a per-employee basis regardless which coverages employees choose. CFOs love it, it enables them to budget a lot better and to specifically target how much they’re willing to increase year over year.”

There are two key reasons that defined contributions appeal to employers:

1) Manage Cost Directly — By setting a contribution at a particular rate every year at renewals, employers can control how much they want to increase overall costs by how much they are going to increase the defined contribution. There may be a point in time if employers shift significant increases to employees that the plan may diminish in return or jeopardize ACA affordability.

2) Encourage Employee Ownership — One of the other reasons why employers may turn to a defined contribution is that it engages the consumerism in employees. Employees are given money to go shopping with and thus will choose the benefits that are right for them — which could mean choosing a medical plan that better fits their lifestyle or phase of life, increasing life insurance, or opting to buy more disability insurance.

Whether coupled with an employer exchange shopping technology solution or steering employees toward a public exchange environment, defined contributions are all about choice and cost savings. If done right, it can nearly eliminate the five to 10 percent annual premium increase.

With the defined contribution

strategy, employers decide how much they are going to

pay for all benefits, not just healthcare, and limit their cost to a very specific amount on a per employee basis regardless of the

coverage employees may choose.

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 10

Get on the Plan Spectrum

Multi-plan benefits options or a metallic spectrum of plans — silver, gold, platinum — have been championed by the public exchanges as a means of serving a range of health care needs, budgets and concerns among consumers. An employer can use this approach to broaden their offerings and meet ACA affordability requirements. Employers are now charged with offering coverage to a larger employee population given new ACA employee classification and eligibility thresholds. Offering an affordable plan will ensure employers avoid the $3,000 per eligible employee penalty the IRS will levy on employers if they don’t have a compliant affordable plan option.

“Not all of your employees have the same health care needs,” Taylor says. “If you have few plan choices, some of your employees are going to be over-insured. Given today’s multi-generational workforce, some employees are healthier and more prepared to take on risk than others.”

In the metallic spectrum of plans, considerable planning with a benefit analyst goes into the coverage inclusions at each level. For example, at the highest level for the most expensive plan (platinum), if the expense is $100, the employee will be reimbursed for $90 of it and have the lowest level of copay. The percentage of reimbursement descends with each level of the spectrum — from platinum to gold, silver and bronze — while the copay goes up.

Taylor notes, “Baby Boomer senior executives in their 50s or 60s, for example, will typically need a much higher value plan than a newly hired Millennial 20-something employee who is feeling invincible and doesn’t want to spend on medical insurance.”

A multi-plan option also serves as a strategic and personalized plan design that provides opportunities for savings when employees select a plan that does not allow them to be over-insured.

“Not all of your employees have the

same healthcare needs. If you don’t offer plan choices,

some of your employees are going to be over-insured.

Given today’s multi-generational workforce, some employees are

healthier and better able to take on risk

than others.”

Shannon Taylor

President,

West Region,

Employee Benefits

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 11

Narrow Your Provider Network

While the metallic spectrum or multi-plan benefit offers more options, the “narrow network” tailors them in a different respect. Narrow networks are gaining momentum, a smaller subset of the original HMO concept, and disrupting the health care environment.

Narrow networks, says Lerone Sidberry, President, Central Region, Employee Benefits, comprise hospitals and providers “who have track records for the highest quality of care and have proven over time to deliver it at a lower overall cost.”

Under narrow network plans, 99 percent of health care costs are covered when in-network providers are utilized. Unlike the HMO, which doesn’t have an out-of-network option, when employees go out of the narrow networks, 60 to 70 percent of the cost is paid.

This approach delivers the dual benefits of pushing employees to become better health care consumers while also delivering savings on health care costs — all without compromising quality.

Trends on Healthcare.gov are an indicator of the narrow network: In 2014, approximately 70 percent of plans sold on public exchanges featured a limited network, with premiums as much as 17 percent cheaper, according to a McKinsey & Co. study. Another study by Aetna showed the narrow network can save six to eight percent annually versus a total network of providers.

The narrow network strategy pushes

employees to become better

healthcare consumers while also delivering

savings on healthcare costs

— all without compromising

quality.

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 12

Carve Out Your Pharmacy Benefits

The lowest hanging fruit when it comes to managing health care costs is probably pharmacy contract renegotiation. Pharma prices have been a major contributor to the steep rise in health care costs in recent years. Prescription drug costs soared 12.6 percent in 2014 and another 7.6 percent in 2015.*

Many employers do not realize that there are savings opportunities to be had by carving their pharmacy contracts out of their benefits plan and managing drug benefits separately.

“Most organizations have not explored the ability to market or negotiate their pharmacy contracts,” says Sidberry. “In fact, because it is traditionally lumped in with medical, they may not even be aware that they have a pharmacy contract.”

An increasing number of employers are bringing in intermediaries who are specialists in pharmacy contract management. They compare each contract to what the market is bearing and negotiate new terms — better contract provisions, discounts and rebates. The savings can be significant — as much as 20 percent for an expense that typically comprises 20 percent of overall health care costs.

Given the alarming increases in pharma costs in recent years — they set a 10-year record in 2014 with a 12.6 percent increase to $374 billion — it is critical that you answer three key questions about your pharmacy benefits.

• Can you carve your pharmacy benefits out of your medical plan?

• Do you have a pharmacy contract that guarantees pricing terms and rebates?

• Can you confirm that specialty drugs are properly priced and managed?

Key Questions about Pharmacy

Benefits

* “NHE Projections 2014-2024”, Centers for Medicare & Medicaid Services (CMS)

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 13

Check Reference-Based Pricing

Reference-based pricing is a cost management strategy that promotes comparison shopping. Companies large and small and even employers with as few as 50 employees are using reference-based pricing to force changes in their employees’ health care consumption behaviors and influence the prices charged by hospitals and other health care services and products providers.

Reference-based pricing establishes caps on charges for selected services with wide-ranging prices. As a result, employees are exposed to more out-of-pocket cost if they choose a provider charging more than the reference price. More evolved versions of this strategy are managed with the assistance of service providers who audit employers’ claims and step in to dispute and negotiate when the provider pricing is too high based on market data that establishes what’s reasonable and fair. The goal is to eliminate balance billing from the provider and protect the employee from litigation.

This is an ideal strategy for employers struggling to grow a culture of health care consumerism and, at the same time, put the pressure on health care providers to charge reasonable prices. Although this strategy requires significant coordination dedication and good communication, it can achieve savings of up to 20 percent of total medical claims.

Reference-based pricing is an

ideal strategy for employers trying to

to grow a culture of health care

consumerism while putting pressure on health care

providers to charge reasonable prices.

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 14

Call on Telemedicine

Following broader trends toward the digitization of our society, telemedicine — especially via mobile channels — is transforming health care delivery. It’s a strategy that will only become more expansive and more entrenched over time. While the large carriers and bigger businesses have been among the first to adopt telemedicine tools, the arena is evolving fast, opening the benefit up to organizations of all sizes.

With capabilities growing — from Internet video-based interactions to cell phone “face time” sessions or texts between patients and providers — the trend is enabling faster service so patients can make better decisions with more convenience. They don’t have to leave home to access it. And employers of all sizes are buying in for the cost savings it creates (telemedicine sessions cost less than visits to a provider’s office).

“Telemedicine enables the delivery of care at far less expense than the traditional health care model,” says Purkapile. “And it also helps avert the need for some of the more costly emergency and urgent care services that people commonly utilize when they’re in doubt.”

The return on investment in avoiding such expensive health care services alone? According to Purkapile “I put it at 5-to-1, making it nothing to sneeze at when it comes to cost containment.”

Top 5 Reasons to Consider

Telemedicine

• Easy bundling with employer medical insurance or as a voluntary benefit

• Convenient 24-hour access to professional medical advice and fast access to board-certified physicians

• Reduced employee out-of- pocket expenses, lower cost than an emergency room visit

• Increased employee productivity, faster return-to-work • Avoidance of up to 70 percent of high cost emergency room visits

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 15

Change Leads to Opportunity

The forces of change in the health care and employee benefits environment will only grow stronger and more disruptive as we move through 2016 and beyond. But the disruption has also opened up a rich set of options to help employers respond to the needs of the workforce, promote the need for behavioral changes, and still generate financial benefits for everyone involved.

As Purkapile says, “We now have a legislative model for extending health care benefits to a bigger population. But now we need to take care of health care costs. We’ve got to be more diligent in finding solutions. It’s time to do something smarter and more creative.”

“We now have a legislative model

for extending healthcare benefits

to a bigger population.

But we need to take care of healthcare

costs. We’ve got to be more diligent in finding solutions.

It’s time to do something smarter and more creative.”

#LetsDoSomething

Contact a HUB Employee Benefits advisor today

Steve Purkapile

Regional Director of

Financial Analytics,

Employee Benefits

The Employee Benefits Cost Management Challenge | hubinternational.com/outlook2016 16

This information is provided for general information purposes only. HUB International makes no warranties, express, implied or statutory, as to the adequacy, timeliness, completeness or accuracy of information in this document. This document does not constitute advice and does not create a broker-client relationship. Please consult a HUB International advisor about your specific needs before taking any action. Statements concerning legal matters should be understood to be general observations and should not be relied upon as legal advice, which we are not authorized to provide.

#LetsDoSomething

About HUB International

HUB International is a global insurance brokerage providing property and casualty, life and health, employee benefits, investment and risk management products and services through over 300 locations across North America.

As a leading broker and advisor for employee benefits, HUB International is committed to delivering solutions with thoughtful strategic planning, valuable professional services and technology-based solutions that enhance our clients’ financial performance and position them as an employer of choice.

hubemployeebenefits.com