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On the Fringe of the Healthcare Crisis

The rising cost of healthcare threatens America's hospitals in ways they might not even suspect. A simple, yet often-missed analysis reveals an alarming trend in the cost of employee benefits and how the price of maintaining an in-house support services staff is becoming unsustainable.

The seeds of the problem were planted decades ago, when veterans returning to work from WWII found a booming job market. Healthcare being relatively inexpensive at the time, employers were willing to provide coverage as a way to attract employees while keeping salaries under control. Eventually, employer- provided healthcare became the norm, and as healthcare treatments became more costly, employers began to feel the pressure of forces wholly out of their control.

As employers, hospitals are not immune to the problem. As care givers, hospitals place a high value on the health and well-being of their employees and are usually quite generous with their employee benefit packages, often paying 70-80% of employees' and their dependents' health insurance premiums. While providing affordable health coverage to employees is important, so is quantifying the financial impact of the fringe benefit plan.

1. Find the average annual income of all hospital-paid employees.
2. Find the average annual health benefits cost.
3. Divide.

Under the Radar

So what's the problem? This calculation lumps all employees together into one big group, from a surgeon earning hundreds of thousands of dollars per year to a housekeeper earning nine dollars per hour. Taken in the aggregate, the fringe rate for the entire hospital looks manageable. However, most hospital administrators have not evaluated the true cost of fringe benefits for each hospital department separately. When each department is isolated for analysis, a much different picture emerges. A hospital administrator that believes the fringe rate (for a support services employee with family coverage) to be around 20% can find that it is actually closer to 80%.

Evans Pancoast, a principle at Managed Care Consultants, a Philadelphia-based firm, has seen this demonstrated first hand. "As an insurance consultant and broker, I have been in many meetings over the years reviewing an outsourcing project with a hospital CEO or CFO. Frequently, there is a large gap between their calculation of fringe costs, which is based on the overall hospital, and the actual fringe benefit costs for the support services department.

We help them understand this issue and how outsourcing can help them address it. We help them realize that there is a large potential for cost savings that has been under their radar for years."

Compounding the Problem

Accurately calculating the fringe rate for support services employees is a good first step in managing the costs. But the problem is compounded by the sharply increasing costs of healthcare. Nationally, healthcare premiums are rising at 8-12% per year. Assuming that payroll costs are only increasing at 2-4% annually, it becomes obvious that the cost of benefits will quickly overtake income as the largest portion of compensation. The analysis (below) was compiled by Managed Care Consultants to illustrate the trend.

The example shows that a support services employee with family coverage will have a fringe rate that grows from 80% to more than 100% of the employee's annual income in only 5 years. The risk may be too great for a hospital to assume. For this reason, the option to outsource support services is even more compelling.

Win-Win Solution

Crothall Services Group is prepared to assume responsibility for employee benefits in these departments. We offer flexible conversion plans suited to the needs of the employees, and we are able to offer several health plans from which they can choose. Crothall's large number of employees gives us buying power, forcing carriers to compete, which drives down healthcare costs for our employees. To ensure a smooth transition, Crothall can even grandfather existing employees with their current level of coverage to keep them whole.

Outsourcing support services to Crothall has many benefits: increased quality, higher productivity driven by specialist managers, and financial savings. In addition, it relieves hospitals of their second largest departmental budgeting issue-the cost of benefits-along with the risk it poses as healthcare costs continue to rise.

2007-11fringe-table

To read about how Crothall has delivered real value by taking over responsibility at Hahnemann University Hospital, click here.

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