How to Reduce the Cost of Benefits for Employees in 2025: A Step-by-Step Guide

As businesses navigate the ever-changing landscape of employee benefits, managing the cost of benefits for employees remains a top priority. With healthcare expenses on the rise and competitive job markets demanding attractive packages, you need innovative strategies to balance employee satisfaction and financial sustainability. Understanding how to budget for employee benefits and implement effective cost containment measures is crucial for your company’s bottom line. In this guide, you’ll discover practical steps to reduce employee benefits costs while maintaining quality coverage. We’ll explore self-funding options, pharmacy benefit management strategies, and alternative funding models to optimize your benefits administration. By enhancing employee education and engagement, you’ll be well-equipped to navigate benefits renewal and create a more cost-effective benefits program for 2025 and beyond.

Evaluate Self-Funding Options

Self-funding your employee benefits plan can be a smart way to reduce the cost of benefits for employees. This approach allows you to take charge of your healthcare spending and potentially save money in the long run. Let’s explore how self-funding works and its potential advantages for your company.

Understand self-funded plans

Self-funded plans, also known as self-insured plans, empower you to assume financial responsibility for your employees’ healthcare benefits. Instead of paying fixed premiums to an insurance carrier, you set aside funds to cover medical expenses directly. This gives you more control over your benefit plan strategies and allows for greater flexibility in designing a plan that suits your workforce’s needs. With a self-funded plan, you pay a lower fixed monthly cost for administration and have a variable cost for medical and pharmacy claims. This transparency enables you to understand why you spend what you do on healthcare and take action to manage costs effectively. You also gain access to valuable data analytics, which can help you make informed decisions about your benefits administration and cost containment efforts.

Assess potential cost savings

One of the main reasons to consider self-funding is the potential for significant cost savings. By eliminating carrier profits and gaining a deeper understanding of your healthcare spending, you can save an average of 7 to 10% per year compared to fully-insured plans. This can have a substantial impact on your overall cost of benefits for employees. Self-funding also offers tax advantages. These plans are exempt from state health insurance premium taxes, which typically range from 2-3% of the premium’s dollar value. Additionally, self-insured plans qualify for tax deductions from federal and state governments, providing further savings for both employers and employees. Another cost-saving benefit is the potential for rebates. If your claims are lower than expected, you get to keep the unused funds or receive a rebate, unlike in fully-insured plans where the insurance company pockets any surplus.

Consider stop-loss insurance

While self-funding can lead to substantial savings, it’s crucial to protect your company from unexpectedly high medical costs. This is where stop-loss insurance comes into play. Stop-loss insurance acts as a financial safeguard, reimbursing you for claims that exceed a predetermined threshold. There are two types of stop-loss insurance to consider:

1. Specific stop-loss: This protects against high claims from a single individual.
2. Aggregate stop-loss: This covers the total claims of all covered members in a plan year.

By incorporating stop-loss insurance into your self-funded plan, you can minimize your financial risk while still enjoying the benefits of self-funding. This is particularly important for small and midsize businesses that may not have the financial reserves to absorb significant losses from unexpected claims. When evaluating self-funding options, it’s essential to work with experienced benefits consultants who can help you navigate the complexities of self-insurance and design a plan that aligns with your company’s goals and budget. They can also assist in implementing effective cost containment measures and guide you through the benefits renewal process.

Implement Pharmacy Benefit Management Strategies

Pharmacy Benefit Management (PBM) strategies play a crucial role in reducing the cost of benefits for employees. By implementing effective PBM strategies, you can better control medication costs and optimize your benefit plan strategies. Let’s explore some key approaches to manage pharmacy benefits more efficiently.

Negotiate better drug pricing

One of the most impactful ways to reduce employee benefits costs is by negotiating better drug pricing. PBMs act as intermediaries between health plans and pharmaceutical manufacturers, negotiating price discounts and rebates based on sales volumes. To maximize savings, consider partnering with PBMs that offer transparent or pass-through pricing models. This approach allows you to choose from various PBMs to find the most cost-effective option for your needs. When negotiating contracts, articulate what should be included in the drug formulary and what restrictions to impose. Look for ways to maximize rebates from drug manufacturers while ensuring that these savings are passed on to your company and employees. By insisting on transparency and informed contract terms with PBMs, you can bolster your ability to retain savings from formulary changes.

Implement step therapy programs

Step therapy programs can be an effective cost containment measure for your benefits administration. These programs require patients to try more affordable or appropriate medications before covering higher-cost options. While step therapy can help control costs, it’s essential to implement it thoughtfully to avoid potential delays in effective treatment. When designing step therapy programs, consider the following:

• Align step therapy restrictions with current clinical guidelines
• Ensure transparency in developing step therapy protocols
• Allow for exceptions in cases where delay could result in severe consequences
• Consider patients’ documented physical or mental characteristics

By implementing well-designed step therapy programs, you can balance cost savings with employee health outcomes.

Encourage generic drug usage

Promoting the use of generic medications is a powerful strategy to reduce the cost of benefits for employees. Generic drugs can cost up to 85 times less than brand-name medications while providing the same clinical benefits. To encourage generic drug usage:

• Educate employees about the safety and effectiveness of generic drugs
• Implement tiered copay structures that incentivize generic drug use
• Consider offering USD 0.00 or low-cost generics to enhance medication compliance
• Partner with mail-order pharmacies to provide easy, low-cost access to generic drugs

By encouraging generic drug usage, you can significantly reduce pharmacy spend while maintaining quality care for your employees. Implementing these pharmacy benefit management strategies can help you optimize your benefits administration and control the rising cost of benefits for employees. Remember to work closely with benefits consultants and use data analytics to inform your decisions and track the effectiveness of your PBM strategies over time.

Explore Alternative Funding Models

As you look for ways to reduce the cost of benefits for employees, exploring alternative funding models can be a game-changer. These innovative approaches offer flexibility and potential cost savings while maintaining quality coverage for your workforce.

Consider level-funding arrangements

Level-funding is a hybrid model that combines elements of both fully insured and self-funded plans. This approach can be particularly attractive for small to mid-sized businesses looking to gain more control over their employee benefits costs. With level-funding, you make fixed monthly payments to cover administrative costs, stop-loss insurance, and expected claims. One of the main advantages of level-funding is the potential for cost savings. If your actual claims are lower than anticipated, you may receive a refund at the end of the year. This arrangement allows you to benefit from the cost-effectiveness of self-funding while maintaining the predictability of a fully insured plan. However, it’s crucial to understand that level-funded plans are still considered self-insured for compliance purposes. This means you’ll need to handle additional responsibilities, such as ACA reporting and nondiscrimination testing.

Investigate captive insurance options

Captive insurance is another alternative funding model worth considering. In this arrangement, a group of companies with similar risk profiles come together to form their own insurance company. This approach allows you to have more control over your benefit plan strategies and potentially reduce costs. By joining a captive, you can enjoy benefits such as:

• Customized coverage tailored to your employees’ needs
• Greater transparency in how your healthcare dollars are spent
• Potential cost savings through risk sharing and economies of scale

Captive insurance can be particularly beneficial for companies with 50 to 800 employees. However, it requires a commitment to managing healthcare costs over the long term.

Evaluate professional employer organizations (PEOs)

Professional Employer Organizations (PEOs) offer another avenue for managing employee benefits costs. In a PEO arrangement, your company enters into a co-employment relationship with the PEO. This allows you to outsource many HR functions, including benefits administration. PEOs can help reduce the cost of benefits for employees by:

• Providing access to a larger pool of employees, potentially resulting in better rates
• Offering expertise in benefits administration and compliance
• Handling complex HR tasks, allowing you to focus on your core business

When considering a PEO, look for organizations that are accredited by the Employer Services Assurance Corporation (ESAC) or certified by the IRS. This ensures you’re partnering with a reputable provider. By exploring these alternative funding models, you can find innovative ways to manage your employee benefits costs while still offering competitive packages. Remember to work closely with benefits consultants to determine which approach aligns best with your company’s needs and goals.

Enhance Employee Education and Engagement

To effectively reduce the cost of benefits for employees, it’s crucial to enhance employee education and engagement. By implementing comprehensive strategies, you can help your workforce better understand and appreciate their benefits package, leading to more informed decisions and potentially lower costs for both employees and the company.

Develop comprehensive communication strategies

To keep your employees in the loop about their benefits package, you need to create a solid communication plan. This plan should include information about any scheduled changes to benefits, important deadlines, costs, coverage levels, and available options. Use a variety of internal channels like email, newsletters, social media, and even SMS/text messaging to ensure you connect with everyone effectively. Keep your language simple and clear, avoiding industry jargon or complex terminology that might confuse employees. Use visual aids like infographics, short engaging videos, and eye-catching illustrations to help employees assimilate and retain information more easily. Remember to maintain transparency by keeping employees informed about any changes or updates to their benefits, even if they’re not directly impacted.

Offer personalized benefits counseling

To better assist your staff in choosing their benefits wisely, team up with a benefits broker offering top-tier service. This high-quality support should come at no extra expense to your company. Your benefits broker should provide a dedicated email address and phone number exclusively for your employees to use at any time. This direct line of communication allows your staff to reach out whenever they have questions or concerns about their benefits package. Encourage one-on-one conversations between your employees and the benefits broker’s team of experts. These personalized benefits counseling sessions can be conducted in person or virtually, giving your employees the opportunity to discuss their specific needs and circumstances with knowledgeable professionals. The benefits broker’s team should be available to guide employees based on their personal situations and quickly provide detailed information when needed. This level of personalized service ensures that your employees receive prompt, accurate, and tailored advice regarding their benefits. By implementing this white glove approach, you can significantly enhance employee education and engagement concerning their benefits package. The increased understanding and personalized support can lead to more effective use of benefits, potentially reducing costs for both employees and your company while improving overall satisfaction with the benefits program. Remember, the key to success is providing your employees with easy access to expert advice and support. A dedicated benefits broker offering white glove service can make a substantial difference in how your employees perceive and utilize their benefits.

Conclusion

Navigating the complex world of employee benefits can be tricky, but with the right strategies, you can keep costs in check without sacrificing quality. By exploring self-funding options, implementing smart pharmacy benefit management, and considering alternative funding models, you’re setting your company up for success. What’s more, enhancing employee education and engagement helps everyone make smarter choices, leading to better outcomes all around. Remember, the key to an effective benefits program lies in striking a balance between cost management and employee satisfaction. By staying flexible, leveraging data, and keeping communication channels open, you’ll be well-positioned to tackle the challenges of 2025 and beyond. Looking to control costs during your 2025 employee benefits annual enrollment? Contact Merritt Business Solutions to help you put into action effective strategies that maximize value while keeping costs in check.