The 2024 Benefits Paradox: Strategies for Consultants to Bridge the Gap Between Costs and Coverage

Financial stress narrows people's focus when choosing benefits. They prioritize lower monthly premiums, concentrating mainly on their immediate paycheck impact rather than their total annual cost of care. And, as we head towards open enrollment season in an economy with higher inflation, recent studies on employee spending have uncovered a concerning trend.According to LIMRA's (Life Insurance Marketing and Research Association) 2024 BEAT Study: Benefits and Employee Attitude Tracker, the projected monthly median expenditure on benefits by employees in 2024 - excluding retirement contributions - is expected to decrease to $120, which is down $50 from the previous two years.

Employees are planning to spend less on benefits this year.

Why should this matter? Well, at the same time employees are planning to cut back, health care costs are expected to continue to increase, roughly 8% in 2025. If employees spend less, and the cost of their benefits increases in parallel, benefits education and communication become even more important to ensure employees are choosing the right plan for their needs. Brokers and benefits consultants should be thinking about these trends, and ways to arm their clients with the best resources possible.

This disconnect between employee spending and rising costs isn't just a numbers game, it represents a potential crisis in employee wellbeing and organizational health that benefits consultants must address head-on. The implications of this trend extend far beyond simple budget considerations, touching on issues of productivity, employee retention, and long-term financial stability for both individuals and companies. Let's dive into some of the specifics.

At the heart of this issue? The problem of misaligned insurance coverage - a situation where employees, in an effort to manage costs or mitigate risks, may opt for insurance plans that don't appropriately match their needs. This can manifest in two ways: underinsurance and overinsurance, both of which have far-reaching and often underestimated consequences.

Underinsurance occurs when employees, trying to cut costs, choose plans with inadequate coverage. This can lead to substantial out-of-pocket expenses when medical needs arise, potentially causing financial strain and delaying necessary care. On the other hand, overinsurance happens when employees, fearing large medical bills, select richer plans than they actually need. While this might provide peace of mind, it often results in unnecessarily high premiums for both the employee and the employer.

Both scenarios - underinsurance and overinsurance - can have significant impacts:

1. Financial strain: Underinsured individuals may face exorbitant medical bills, with deductibles, coinsurance, and out of pocket maximums all potentially higher in order to make lower premiums possible. Conversely, overinsured employees may be unnecessarily allocating a larger portion of their income to premiums, reducing their disposable income.
2. Employer costs: This one is a bit more complex. Fully insured employers bear the burden for both under and overinsured individuals. Underinsured employees might have higher absenteeism and lower presenteeism due to untreated health issues, while overinsurance inflates the company's benefit expenses without providing proportional value. With self-funded benefits programs however, this calculus shifts, as employers directly bear the costs of underinsured employees since the employer themself is responsible for ongoing claims costs. While overinsurance typically presents less economic risk to the self-funded employer, employees may feel like their benefits are too expensive. And, when benefits costs are perceived to be high, employees may pursue increased compensation to make up for it.
3. Healthcare utilization: Underinsured individuals might delay necessary care due to cost concerns, potentially leading to more severe health issues down the line. Overinsured employees, on the other hand, might overutilize healthcare services, driving up overall costs in the system.

4. Employee satisfaction and retention: Both scenarios can lead to dissatisfaction - either from inadequate coverage or from feeling that too much of their compensation is tied up in benefits they don't fully utilize.

For individuals, the financial strain of miscoverage may be immense. Uninsured or underinsured individuals often face exorbitant medical bills. Moreover, both underinsured and uninsured individuals face significant financial challenges. Nearly half (46%) of underinsured individuals reported skipping or delaying care due to costs, and 42% had trouble paying medical bills or were paying off medical debt. The impact goes beyond just numbers on a balance sheet. It forces people to make impossible choices between essential needs and medical care, creating a cycle of stress and financial instability that can take years to overcome. Again, these choices are magnified in today’s current economy.

The costs of underinsurance also don’t stop at the individual level. They ripple through the entire organization, affecting productivity, engagement, and ultimately, the bottom line. Employees preoccupied with financial worries can lose up to seven hours of productivity each week. When extrapolated across the U.S. workforce, this translates to a staggering $183 billion in annual losses for employers. Moreover, financially stressed employees often spend over 156 hours each year dealing with personal financial issues during work hours, further eroding productivity and engagement.

Perhaps most alarmingly, inadequate benefits and the resulting financial stress are key drivers of employee turnover. In an era where talent retention is crucial, 78% of leaders acknowledge that financial stress contributes to higher turnover rates. On the flip side, organizations that offer robust benefit packages, including comprehensive health insurance and retirement plans, tend to experience significantly lower turnover rates. A study by the Employee Benefit Research Institute (EBRI) found that companies offering comprehensive health benefits have a 26% lower turnover rate compared to those that do not.

Given these high stakes, what can benefit consultants do to help their clients navigate this landscape? The answer lies in a strategic, multifaceted approach that goes beyond simple cost-cutting measures.

The key to addressing both of these scenarios lies in strategic benefit design and effective communication. Employers need to offer a range of plans that cater to diverse employee needs. But, the important piece here is that this range needs to be coupled with robust education efforts to help employees make informed decisions. For example, tools like health savings accounts (HSAs) can provide flexibility, allowing employees to better manage their healthcare spending while providing tax advantages, but the correct education needs to be in place to complement them or employees will easily become confused.

First and foremost, consultants must help employers understand and quantify the risks of underinsurance within their workforce. This involves more than just looking at coverage levels. It requires a deep dive into utilization patterns, analyzing whether employees are delaying necessary care due to cost concerns, and assessing the potential long-term health and financial implications of such delays.

Next, consultants must help employers understand and quantify the risks of misaligned insurance coverage within their workforce. The most important piece here is making sure that employees choose the right plan for their needs. That can be done through: 

1. Effective benefits communications: Develop clear, engaging, and accessible materials that explain the nuances of different plan options. This might include infographics, video explainers, or interactive digital tools that break down complex information into digestible formats.
2. Decision support tools: Implement user-friendly digital platforms that allow employees to input their specific health needs, financial situation, and risk tolerance. These tools can then provide personalized recommendations, helping employees navigate their options more effectively. As an example, here’s what we offer at PlanYear.
3. One-on-one consultations: Offer individual sessions with benefits experts who can provide tailored advice. This personalized approach can be particularly valuable for employees with complex health needs or unique financial situations.
4. Diversified plan offerings: Ensure there's a meaningful spread between plan options, making it easier for employees to understand the trade-offs and make informed choices. When plans are too similar, it creates confusion and doesn't add value. The goal is to provide distinct options that cater to different needs and preferences.
5. Utilization analysis: Conduct regular reviews of how employees are using their benefits. This can help identify patterns of over- or under-utilization, allowing for targeted interventions and refinements to the benefits package.
6. Long-term impact assessment: Evaluate the potential long-term health and financial implications of employees' benefit choices. This might involve predictive modeling based on demographic data and historical claims information.

By implementing these strategies, consultants can help employers create a benefits ecosystem that not only mitigates the risks of under- or over-insurance but also empowers employees to make informed decisions that align with their individual needs, regardless of the current economy. This approach can lead to improved health outcomes, increased employee satisfaction, and more efficient use of healthcare resources - ultimately benefiting both the workforce and the organization's bottom line.

By leveraging data-driven insights, innovative communication strategies, and an understanding of the economic landscape, we can help our clients navigate higher healthcare costs. Effective benefit management is not just about cost containment—it's about creating value. By helping employers provide meaningful, well-communicated benefits, we contribute to healthier, more engaged workforces and more resilient organizations.

In the face of rising costs and economic uncertainties, investing in robust benefits packages and clear communication strategies isn't just good for employees—it's a smart business decision that can yield significant returns in the long run. Guiding clients towards strategies that will serve them well in both the short and long term.

Interested in seeing a demo of the PlanYear Benefits Platform? Reach out to sales@planyear.com.