Managing Health Care Costs a Growing Risk for Companies

The top financial risks reported by executives facing their own companies in the current economic environment are listed in order as:

  1.  Ability to maintain margins
  2.  Cost of healthcare
  3.  Ability to forecast results
  4.   Attracting and retaining qualified employees and maintaining morale/productivity
  5.  Working capital management
  6.  Balance sheet weakness
  7.  Supply chain risk

When asked about their concerns in the regulatory arena, healthcare again topped the list, with 62% of executives indicating they believe recently passed healthcare reforms will have the greatest impact on their organizations. Executives seem most concerned about the unknown variables still attached to healthcare, such as the extent of government intervention, implementation issues and the broad nature of reforms. In addition, unlike other pending regulations, healthcare reform has more of a direct impact on every business, regardless of size or industry. As a result of increased healthcare costs, a recent survey of more than 300 CFOs in large organizations found that:

  • 38% percent said their companies are assuming the higher costs – not changing their plan;
  • 34% said their companies are responding by increasing employees’ contributions to their premiums;
  • 20% percent said they’re reducing healthcare benefits in the face of higher costs; and 
  • 8 % said their companies are eliminating healthcare benefits altogether.

Companies that implemented pay cuts or freezes during the recession may be reluctant to pass the cost of higher premiums on to their employees. One private company CFO interviewed said his firm felt that it could – and should – bear the cost increase because employees had already been dealt across-the-board salary cuts and the elimination of bonuses and overtime pay. A different solution was voiced by the CFO of a publicly held consumer goods company who said his firm might have no choice but to pass costs through to the marketplace. Employees may not be able to shoulder the added expense and the company has to maintain profitability, but “somebody’s got to pay for it at the end of the day,” he said.

With healthcare costs continuing to climb at double-digit rates and with well over 50% of health care costs attributed to individual, modifiable behaviors, each employee’s engagement in their health and wellness can no longer be ignored. The health of a company’s workforce is now seen as playing a vital role in the profitability of their companies. A recent survey of executives conducted by the Integrated Benefits Institute (IBI) indicated the following as to the extent that they believe the health of their employees contributed to the financial performance of their companies:

  • 45% consider the health of employees to be one of the most important factors determining the financial performance of their company;
  • 30% consider health to be very important; and
  • 62% consider it to be moderately important.

Furthermore, many survey respondents agreed that offering employee wellness benefits is an important way to minimize turnover and increase the return on investment associated with their workforce. In fact investing in health may be one of the best ways for employers to increase the productivity of their workforce. Numerous studies have proven that employee wellness programs provide a significant return on investment. The group U.S. Corporate Wellness estimates that businesses can expect a return of $3 to $5 for every $1 invested in the health of its workforce.

When it comes to managing rising healthcare costs, there’s no easy answer. Harvest CFO Consulting can help your organization to determine the financial and organizational impact of different approaches to cost management/containment and enable you to make the decisions that will be value-added to your company.

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