Magazine article Government Finance Review

Short-Term Strategies for Health-Care Savings

Magazine article Government Finance Review

Short-Term Strategies for Health-Care Savings

Article excerpt

Realistically, the only way employers can control health-care benefit costs over the long term is to change employee behavior and encourage healthier lifestyles. But that doesn't mean the government's hands are completely tied in the short run. To start saving on employee health-care benefits, consider the following short-term strategies.


One of the most popular cost-savings strategies government finance officers use today is the Section 125 plan. According to a 2011 Government Finance Officers Association membership survey, 77 percent of respondents use this strategy, and of that group, 86 percent would recommend these plans to others. (1)

Section 125 of the Internal Revenue Code makes it possible for employers to offer their employees the option of paying for qualified insurance coverage with before-tax dollars. Pre-taxing benefits makes coverage more affordable by reducing the taxable portion of employees' pay, thus lowering the amount of income taxes owed. Section 125 plans also allow employees to make before-tax contributions to personal spending accounts that can be used for qualifying health-care or child-care expenses. Because they reduce the employer's overall payroll, these plans also can reduce the employer's payroll taxes, including Federal Insurance Contributions Act, Social Security, and Medicare matching taxes.

Governments that already have a Section 125 plan in place and offer personal health care or dependent care spending accounts to employees need to make sure they are promoting the benefit and educating employees about how to take full advantage of this resource. Low participation rates in these spending accounts is often a direct result of poor communication and a lack of understanding on the part of employees.

Focused education and promotion will increase employees' understanding of the benefits flexible spending accounts provide. This, in turn, will spur participation, generating tax savings for both the employee and employer. For example, a North Carolina community college, which had approximately 1,000 employees, enhanced education and communication of its flexible spending account and increased participation by 68 percent, creating more than $100,000 in tax savings for employees and $26,000 in FICA savings for the college. (2)


Another way to reduce employee health benefit costs is through dependent verification. Providing insurance coverage for dependents who are no longer eligible drives up the costs for employers and diverts resources that would otherwise be available for other benefits. Dependent verification audits typically reveal that between 5 and 12 percent of the dependents enrolled in an employer's medical plan are actually ineligible to receive benefits. Ineligible dependents can include dependents who are now too old to participate, former employees, family members who aren't blood relatives, and spouses who are no longer eligible for coverage after a divorce.

While some of these cases are simply the result of a misunderstanding by employees who fail to remove these dependents from their plans, others may be less innocent. Federal investigators reportedly found and recovered more than $4 billion in health-care fraud in 2011 alone. (3)

Currently, 58 percent of government finance officers say they use dependent verification as a cost-savings strategy, and 75 percent of them would recommend this option to others. (4) Many local governments make dependent eligibility verification part of their annual benefits enrollment process; these jurisdictions consider the ongoing tracking and monitoring of dependent eligibility to be part of good stewardship.

The savings accrued from dependent verification can be significant. For example, the City of Montgomery, Alabama, realized a potential annual savings of more than $1.3 million when it discovered that nearly 9 percent of its covered dependents--288 people --were ineligible for benefits coverage. …

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