December 7, 2011
At most companies, employee health insurance premiums vary only by family size and type of plan. At a small percentage of firms, however, another variable is taken into account: salary. At these companies, workers’ premiums are pegged to how much they earn. Workers who earn less, pay less.
Now, as employers look toward 2014 — when companies that don’t offer affordable coverage to their workers may begin to face penalties — experts say more are considering this strategy.
General Electric adopted this salary-based premium model more than 20 years ago. With employees in a wide variety of jobs on a wide pay scale, the company wanted to offer a single health plan that would appeal across the board, says Ginny Proestakes, GE’s director of health benefits. “It was a recognition that ability to pay made a difference,” she says.
The company divides its 140,000 U.S. employees into those paid by the hour and those on salary, then sets employee premium contributions based on seven salary ranges, with lower-wage employees paying relatively less than higher-wage employees. Hourly employees pay 24.5 percent of the premium, on average, while salaried employees pay an average of 35 percent, says Proestakes.
In one GE option, a worker making less than $25,000 a year pays $631 annually for individual coverage while someone who earned $150,000 or more would pay $2,151.
Only one in 10 employers with 500 or more employees uses a salary-based premium model, according to human resources consultant Mercer's 2011 national survey of employer-sponsored health plans. That figure has hardly budged since 2006, when 9 percent of such companies reported using that model. The practice is most common in the financial services industry.
But as companies begin to strategize for 2014, when the health insurance exchanges mandated by the 2010 health care overhaul start operating, more are beginning to consider this option, says Steve Raetzman, a partner in Mercer’s health and benefits consulting practice.
Under that law, employers with at least 50 employees must offer their workers affordable health coverage or pay penalties. A plan is considered affordable if the employee's share of the premium for individual coverage doesn't exceed 9.5 percent of his household income.
If the premium costs more than that, an employee can choose to buy subsidized coverage on his state's health insurance exchange. But the employer will be penalized — up to $3,000 for each employee who chooses the exchange.
Varying employee premium contributions by salary can keep lower-wage workers’ costs under that 9.5 percent threshold. It's a good solution for some companies, says Raetzman, but it may not be workable for firms that employ predominantly lower-wage employees, such as retailers, restaurants and grocery stores. “Ideally, you need enough higher-wage workers to pay a little bit more so they can make a meaningful dent in the contributions of lower-wage workers,” he says.
Getting Workers to Opt In
At Pitney Bowes, the majority of workers are hourly employees, many of them young men in their first office jobs, says Mary Bradley, director of health care planning. “It’s the type of workforce where you might expect they’d opt out of health insurance if they’re healthy,” she says. But that won’t be an option beginning in 2014 because of the new law.
For more than a decade the company has provided subsidies that make coverage more affordable for lower-wage workers. It seems to work: 78 percent of U.S. employees opt for health coverage at Pitney Bowes. Starting this year, the company took a step that ties health coverage costs even more closely to pay. In its consumer-directed health plan, the company sets the deductible, out-of-pocket maximum and company contribution based on salary. Hourly workers, for example, have a $1,500 deductible and $3,000 out-of-pocket maximum, while employees at the director level or higher have a $2,500 deductible and $5,000 out-of-pocket maximum.
“That $2,500 deductible, for someone making $25,000, is a big hit,” says Bradley, “whereas for someone earning $200,000 a year it’s not such a big deal.”
Individual employees may not realize that their health plan payment is different from that of the co-worker in the next cubicle. Adina Ba, 31, who oversees employee volunteer programs in the U.S. and abroad, described the company gym and on-site medical clinic as two health benefits she appreciated having access to at the company’s Stamford, Conn., headquarters. But until a reporter asked, she had no idea the company varied health insurance coverage based on what each person earns.
“I wasn’t aware of any difference until now,” she says.