We all know prices have been consistently increasing over the past several months - but just how much have they actually increased and how is that affecting your employees? Here’s some perspective: Food prices have risen by 11% in the last year. For a family of 4 on a moderate budget, that translates to around an extra $125 per month in groceries! With inflation reaching levels we haven’t seen in over 40 years, everyone is thinking about ways to spend smarter and optimize their budgets.
This open enrollment period represents both a challenge and an opportunity for employees as they think about how to spend their hard-earned dollars. Should they take advantage of the opportunity to switch to lower cost plans and free up a little more cash, or with prices on the rise everywhere, is it even more important to make sure that they have a health plan that will pay for a larger share of any medical care that they might need?
This is a trade-off that employees must consider every year, and this year, more than ever, the stakes seem higher. Most of your employees could save money by making better benefits selections, but these are hard decisions to make. The choices that employees make around their benefits are often more emotional than rational. The emotional nature of these decisions can make it difficult for employees to choose benefits that increase the amount of risk that they are exposed to - whether those risks are real or perceived - and in times like this, employees may be even more sensitive to risk.
This is where benefits decision support can help. A well-designed benefits decision support solution can help shed light on the unknown risks and uncertain costs associated with employee benefits and give employees the clarity that they need to confidently choose the right benefits. And, for most employees, choosing the right benefits will save a lot of money.
Most Employees are “Over-Insured”
The choices that most employees make during open enrollment suggest that they place a premium - pun intended - on financial security, choosing more expensive plans than they need and overspending as a result. This type of mistake is what economists call “choice error”, and numerous studies have confirmed that, when it comes to health insurance choices, a large degree of choice error is the norm.
For example, one study looked at health plan selections at a large company and found less than 20% of employees made the financially optimal health plan selection. They estimated that because these employees lacked good information about the true costs and features of their benefit options, they were overspending by an average of about $1,700 per year compared to what they would have selected if they were fully informed.
Similarly, another study found that the majority of employees at a large employer were making the wrong health plan selections, and, in fact, about 60% of employees were choosing what is referred to as “dominated plans”.
When a plan is “dominated” by another option, that means there is no outcome under which the employee would be better off in that plan. It will always be more expensive than the dominant option. In this particular case, the study’s authors found that employees were spending about 25% more than they needed to on health care, and lower income employees were more likely to make these types of mistakes.
These numbers are consistent with internal research that we have conducted at Picwell. In a study of health plan choices among three different state exchanges, we estimated that only about 10% of people selected the best option and better plan selections would have reduced spending by $1,100 to $1,300 per year. We have seen very similar results across multiple employer clients.
How “Right-Sized” Insurance Can Help Reduce the Effects of Inflation
The evidence that employees over-insure is pretty clear and pretty overwhelming. When left to their own devices, employees are going to spend a lot of money on extra insurance where they will never benefit. Instead, if employees enrolled in the “right-sized” health plan, they could save hundreds, and in some cases, thousands of dollars.
To put these savings in context, by choosing the right health plan, a family of four could save enough money to offset inflation-related increases to their monthly grocery bill.
The “right-sized” health plan may appear to require employees to take on some additional risk, and they may be reluctant to do that if they are even more worried about high medical bills when inflation is high and budgets are tight. However, once we get past a surface level analysis, we find that the “right” health plan choice often does not appreciably increase the risk that employees face.
How does this actually work out? After accounting for premium savings, employer HSA contributions, and differences in cost sharing among various plan options, we see that a lot employers offer benefits where the lower cost option is “dominant”, meaning that all employees would always be better off in that plan, and many more employers offer benefits where the probability that employees would end up better off in the higher cost option is exceedingly low.
In these cases, employees may be taking on some risk by going with the low cost option, but that extra risk is so low that, even with extremely strong preferences for risk protection, they are still going to be better off in the lower cost option.
The real risk that employees should consider is the risk that they are throwing away money on something that they don’t need. When employees select a more expensive health plan, there is a 100% chance that they will spend more money on premiums, and, for most employees, there is an exceedingly low probability that they will ever need enough medical care to justify that expense. When budgets are tight, this type of spending just doesn’t make sense.
Benefits Decision Support Helps Employees Save
The challenge that employees face during open enrollment is that they have to make a high-stakes decision about a complicated product and they have very little information to go on to evaluate their choices.
Most employees don’t understand the basics of health insurance, they find the process of choosing benefits to be confusing and intimidating, and they don’t understand the true cost of medical care or the probability that they will need different types of medical care. Basically, when you look at every single factor that employees need to understand their health insurance needs, there is an extreme lack of information. Combine this with the fact that choosing benefits is often an emotional decision, and it's no wonder that people have a hard time picking the right health plan.
This is where benefits decision support can be a valuable part of an employee’s open enrollment experience. We know that employees are going to be looking for ways to optimize their budgets and save money during this open enrollment period, but we also must acknowledge that it isn’t sufficient to say that everyone should just pick a lower premium option. When employees select benefits, and health insurance in particular, they are making choices about how to protect themselves from risk, and this is not a purely mathematical or actuarial decision process. Employees must feel like they are getting the right amount of risk protection, but they also want to make sure that they are getting a good value. With inflation tightening employees’ budgets, finding value is more important than ever, but it is also more important than ever to address concerns about the risks associated with their benefits selections.
Picwell’s benefits decision support solution, Picwell DX, takes all of these factors into account. tThis highly personalized approach not only helps employees find much needed savings, but also gives them the information that they need to be confident that they are making the right choices based on their own unique needs and preferences.
Want to see how Picwell can help your employees? Request a demo today.