Nonprofits are facing difficult financial times. Demand for service is up, funding is down and increased operating expenses are placing additional burdens on nonprofit employers to reduce costs. As the second largest business expense next to salaries, employee benefit plans are often looked to as a potential source of much needed savings.  But, how can an organization effectively reduce spending on benefits when these are so highly valued by employees?

 There are no easy answers to this question, but, many cost-saving strategies are available from which to choose.  

Nonprofits should take a systematic approach to finding and implementing a range of tactics that best fit the organization’s unique circumstances.  In our experience, it is important to begin with a team including executive leadership, finance and human resources.  These stakeholders bring valuable and varied organizational perspectives to the problem.  Setting common goals at the front end will make the vetting process for available options significantly faster and more effective.  

Also, we strongly encourage the team to develop a working set of beliefs or guiding principles.  These allow any prospective cost saving option to be rapidly evaluated to determine its viability.  Organizational beliefs about employee health, employee financial means and a “user pays” philosophy can make decisions around employee contributions and plan design much easier to navigate.  For example, if an organization believes that 1) employees should be responsible for their own health, 2) those that earn more should contribute more and 3) those that use more health services should pay more, then implications for smokers vs. non-smokers, higher income earners vs. lower income earner, etc., start to come into focus.  

Another valuable tool is taking a fresh look at the makeup of your workforce to determine whether the benefit program’s goals continue to be appropriate. Today’s workforce is diverse.  Generation X, generation Y, baby boomers, singles and employees with families all have common needs, but also have unique concerns.  By looking at current and projected staffing needs and the demographics of mission critical employees, an employer can fine tune its benefit program in a manner that will appeal to its most important staff. Making benefit cuts in areas less important to whatever employee segment the organization deems important can help to mitigate morale issues.  

Finally, constructing a budgeting timeline that incorporates reporting on employee benefit costs also helps to improve the decision making process.  Benefit plan renewal dates may not align with the fiscal year or funding cycles.  Further, medical plan costs can often spike due to claim activity.  Establishing a reporting schedule that monitors and forecasts upcoming costs on a regular basis in advance of budget development can allow more time to consider changes that are both necessary and appropriate. Knowing how much money is available for benefits and how much benefits will cost given renewal increases is critical to the process.  This also allows an organization to model various scenarios and plan strategies in advance that will have the least employee impact should their funding projections change or their costs unexpectedly rise.  

Once these elements have been explored, it’s time to consider the actual opportunities an organization has to cut costs.  Many of them will not be appropriate for any given organization.  However, if the employer has established its budget, understands its employee base and given some thought to its guiding principles, the best options can be considered for implementation much more quickly and with consensus.  Basic questions to consider in determining your opportunities include:

•    Where are the risks under my program that I should not be covering?

•    Can the people covered by my plan obtain healthcare coverage elsewhere at a reasonable cost?

•    Am I paying the best possible unit cost for all of the services my employees receive?

•    How do I best manage the population that drives 80% of my costs?

•    What actions can I take to secure long-term pricing concessions?

•    How can I maximize the value of my existing benefits?

The answers to these questions involve five strategic cost control categories: eligibility management; unit cost management; fiscal alignment management; population risk management and existing benefits management. Each category offers multiple opportunities and we have identified over forty cost reduction tactics for consideration. Here is an illustration of several tactics that are presented in just one of these areas:

Eligibility Management

One of the best opportunities for cost savings comes in managing who is and who is not covered under your benefit program.  This opportunity is typically magnified for nonprofits, since many of these organizations have traditionally paid lower salaries but offered rich benefits with very low employee contributions.

First, there is the question of whom you wish to cover under your plan.  Since many nonprofit employees with families have working spouses, an inordinate amount of families are covered under the benefit programs of nonprofits.  In situations where an eligible dependent chooses coverage under their spouse’s nonprofit plan, even though coverage is available through their own for-profit employer, nonprofits might consider implementing a “Working Spouse Rule” which could require a higher contribution from the spouse or a buy-out program for waiving coverage.

Then there is the question of whether you are paying for people who aren’t actually eligible.  Covering ineligible dependents is a problem that affects organizations of all sizes.  It is estimated that 5-15% of a typical employer’s enrolled dependents are ineligible. When grappling with difficult cost control options such as freezing salaries or cutting programs, eliminating people that would not be covered under the program anyway becomes low hanging fruit.  

Who are these ineligible dependents?  They can include former spouses, married children, dependents not living with the employee, over-age students, non-documented students, extended family members and even unrelated individuals.  There are a number of reasons why this occurs. The employee may not know or understand the rules, may have a different view of what constitutes a “family” or may be looking to beat the system.

The consequences of not removing ineligible dependents from an employer’s plan go beyond financial costs.  Employers who fail to verify dependent eligibility also face regulatory risks, recruitment and retention risks and legal risks.

There are multiple approaches to validating dependent status that can fit in with different types of corporate cultures.  Many of these services can be implemented on a risk free basis if negotiated properly.  A recommended process relies on detailed, self-reported family information collected via a web-based survey. The goal is to be minimally intrusive to employees. Several keys to a successful dependent eligibility audit include:

•    A good communication campaign

•    The audit applies to all employees

•    There is mandatory compliance

•    Revised dependent eligibility procedures are implemented for all new dependents

The expected ROI from a dependent eligibility audit may be determined as follows:

•    A typical dependent costs an employer-sponsored healthcare plan $3,000 in annual medical claim costs

•    An average of 2 dependents per employee are enrolled in the plan

•    A typical audit identifies at least 5% of the currently enrolled dependents as ineligible

•    Employers can save 1% to 3% of total medical plan spending

•    Identification of only 1% of the currently enrolled dependents as ineligible usually pays for the cost of the audit

•    Cost savings continue year after year

There is no silver bullet that will singularly reduce employee benefit costs. But by working with a qualified benefits advisory firm and developing a systematic approach to employee benefits cost containment, nonprofit employers stand a better chance of achieving their goals while still remaining true to their organization’s mission and values.

Bill Jones is Director of Marketing for C & B Consulting, A Division of Gallagher Benefit Services, Inc. (www.candbconsulting.com)

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