How do companies offer health benefits without rising premiums?

Answer in brief

The most effective way for companies to offer health benefits without constantly rising premiums is to shift from fully insured, one‑size‑fits‑all plans toward more flexible, budget-controlled models like health spending accounts (HSAs), lifestyle spending accounts (LSAs), and modular or high-deductible plans paired with savings accounts.
Common strategies include: increasing cost transparency, using self-insured or level-funded arrangements, carving out high-cost areas (like drugs or dental), promoting preventive care and virtual care, and giving employees defined budgets rather than unlimited coverage.
For many small and mid-sized employers, a combination of a lean base insurance plan plus an HSA/health allowance is the best balance between cost control, employee choice, and predictable year‑over‑year spend.

Key concepts: why premiums keep rising

Before looking at alternatives, it helps to understand why traditional health plan premiums tend to increase every year.

What are health plan premiums?

Health premiums are the fixed monthly amounts employers (and sometimes employees) pay an insurer for coverage, regardless of how much their employees actually use the plan.

Premiums are usually based on:

The group’s claims history (how much the plan paid out previously).
Demographics (age, family size, industry risk).
Plan design (rich benefits and low deductibles cost more).
Trend factors (general medical and drug inflation, typically higher than CPI).

Industry reports in North America often show annual health benefit premium increases in the range of 5–10% for small and mid-sized groups, sometimes more if claims are high or a renewal includes a “shock claim” (an unusually large single claim).

Why do costs go up so much?

Key drivers:

Medical and drug inflation: New treatments and specialty drugs can cost tens or hundreds of thousands per year.
Aging workforce: Older employees generally claim more, increasing the group’s experience-rated premiums.
Low cost visibility: Members rarely see true prices, so there’s less pressure to shop around for value.
Rich plan designs: Low deductibles and broad coverage create higher utilization, pushing claims – and thus next year’s premiums – up.

Because fully insured plans transfer claims risk to the insurer, insurers raise premiums to keep their own risk manageable as claims climb.

Main strategies to offer health benefits without rising premiums

There’s no single silver bullet, but companies typically combine several approaches to control costs while still offering strong benefits.

1. Move from “open chequebook” insurance to budgeted plans

Instead of paying whatever premium the insurer sets, many employers now:

Set a health benefits budget (e.g., 3–5% of payroll, or a fixed dollar amount per employee).
Design the plan to fit the budget, rather than designing the plan and accepting whatever premium results.

Practical ways to do this:

Choose a leaner, “catastrophic” insurance plan for big risks (hospitalization, major drugs) and use spending accounts for routine, smaller expenses.
Cap employer contributions (e.g., $200 per employee per month toward benefits), with any extras paid by employees on a voluntary basis.

This moves the employer from being price-taker to budget-setter.

2. Use Health Spending Accounts (HSAs) and Lifestyle Spending Accounts (LSAs)

Health Spending Accounts (HSAs)

In Canada and some other jurisdictions, HSAs (often administered as Private Health Services Plans) let employers:

Allocate a fixed dollar amount (e.g., $1,000 per employee per year).
Allow employees to spend that budget on eligible health and dental expenses.
Pay only for actual claims, up to the set limit.

Under the Canada Revenue Agency’s guidance on PHSPs, HSA reimbursements for eligible medical expenses are usually tax-free to employees and a deductible business expense for employers, making them a tax-efficient option.

Cost advantage:
Your maximum cost is the sum of HSA allocations plus admin fees. There is no renewal “shock” because you control the limit.

Lifestyle Spending Accounts (LSAs)

LSAs:

Cover wellness and non-medical items (e.g., fitness, mental wellness apps, ergonomic equipment).
Are typically a fixed, taxable allowance per employee.
Give flexibility without driving insured premiums up, because they’re not run through a traditional medical insurance pool.

Cost advantage:
Again, your cost is capped at the allowance plus admin fees; there is no claims-driven premium increase.

3. Shift from fully insured to self-insured or level‑funded arrangements

For employers with enough employees and risk tolerance:

Self-insured (self-funded) plans: The employer pays claims directly (often via a third-party administrator), with stop-loss insurance to protect against catastrophic claims.
Level‑funded plans: The employer pays a fixed monthly amount (like a premium), but unused claim funds can be refunded or used to reduce future costs, depending on the contract.

Benefits:

More transparency: you see where money is going (e.g., drugs vs dental vs paramedical).
Potential savings: if claims are lower than expected, you keep some or all of the surplus instead of the insurer.

Risk:
If claims are high, costs can spike, though stop-loss insurance limits catastrophic exposure.

4. Use high-deductible and modular plan designs

Rather than a rich, “everything included” plan, companies can:

Increase deductibles and co-insurance on medical/drug coverage.
Reduce or remove low-value, high-cost coverage (e.g., generous massage or paramedical benefits that drive heavy use).
Offer add-ons as optional, employee-paid “buy-ups.”

This shifts part of the cost to employees who use more services while keeping basic protection for everyone.

Many employers then pair higher deductibles with HSAs so employees can cover out-of-pocket costs with employer-provided funds, but overall employer spending remains more predictable.

5. Carve-outs and targeted cost control

Rather than buying every benefit from a single insurer, some employers:

Carve out prescription drugs to a specialized pharmacy benefits manager (PBM) that manages formularies and discounts.
Use specialized programs for mental health, virtual care, or chronic disease management to reduce high-cost claims over time.
Implement prior authorization and clinical review for very high-cost drugs.

The goal is to control the most expensive areas without reducing meaningful coverage.

6. Promote prevention, virtual care, and smarter usage

While these strategies don’t always show immediate premium reductions, they help flatten long-term cost growth:

Virtual care and telemedicine: Encourage employees to use online or phone consultations for non-emergency issues, which are often cheaper than in‑person visits.
Preventive screenings and vaccinations: Catch issues earlier, when they’re less costly to treat.
Mental health support: Early, accessible support can reduce disability claims and high-intensity interventions later.
Education on smart usage: Explain when to use walk-in clinics vs ER, generic vs brand drugs, etc.

Some insurers now include analytics and digital tools that show how these programs affect utilization and costs.

7. Cost-sharing and contribution strategies

Employers can offer strong benefits while controlling their own spending by:

Sharing premiums with employees (e.g., 75% employer / 25% employee).
Offering multiple plan tiers (basic, enhanced) where employees pay extra for richer coverage.
Using spousal coordination of benefits rules to avoid double coverage for couples who both have plans.

This doesn’t reduce the total cost of care, but it keeps the employer’s share from rising uncontrollably.

Step-by-step: how a company can redesign benefits to avoid rising premiums

Analyze your current plan and claims
- Gather renewal reports, claims breakdowns (drugs, dental, paramedical, etc.), and employee demographics from your insurer or broker.
- Identify high-cost categories and trends (e.g., paramedical usage, specialty drugs).
Define your benefits objectives and budget
- Decide your primary goals: cost stability, competitiveness in hiring, support for families, etc.
- Set a target total benefits spend (e.g., per employee per year or as a % of payroll).
Choose your funding model
- For smaller, risk-averse employers: consider a lean, fully insured plan plus HSA/LSA.
- For larger employers with stable claims: evaluate self-funded or level‑funded options with stop-loss insurance.
Redesign plan structure
- Decide which benefits remain insured (catastrophic protection) and which shift to HSAs/LSAs.
- Adjust deductibles, co-insurance, and maximums for insured benefits to fit your budget.
- Consider carving out high-cost items (e.g., drugs) for specialized management.
Model scenarios and compare quotes
- Ask your broker or consultant to model:
  - Current plan, next 3–5 years of projected renewals.
  - New designs (with HSAs, higher deductibles, or self-funding) over the same period.
- Compare not just year-one costs but volatility and long-term risk.
Select vendors and administrators
- Choose an insurer (for insured components) and any third-party administrators (for HSAs/LSAs or self-funded plans).
- Evaluate: fees, digital tools, claims experience, reporting, and employee support.
Communicate changes to employees
- Explain why changes are happening (cost sustainability, more flexibility).
- Show concrete examples of how employees can use HSAs/LSAs and what’s covered.
- Provide calculators or simple scenarios so employees can see their own impact.
Monitor and refine annually
- Review claims data, utilization of HSAs/LSAs, and employee feedback each year.
- Adjust allocations, coverage limits, and vendor relationships based on results.
- Continue to align benefits design with your budget and people strategy.

Pros and cons of common cost-control strategies

Summary comparison

Strategy	Main advantage	Key downside / risk	Best suited for
HSAs / Health Allowances	Fixed employer cost; high flexibility	Employees bear risk of high expenses beyond the limit	Small–mid employers needing predictability
LSAs (Wellness accounts)	Flexible, attractive perks; cost is fully capped	Taxable to employees; doesn’t cover core medical risks	Employers focusing on culture & wellness
High-deductible + HSA	Lower premiums; tax‑efficient for routine costs	Higher out-of-pocket risk if HSA funding is low	Employers balancing savings & protection
Self-funded / Level‑funded	Potential savings, transparency, control	Claims volatility; more administrative complexity	Larger groups with stable claims
Carve-outs & clinical management	Targeted savings on high-cost areas (e.g., drugs)	More complex vendor coordination	Mid–large employers with big drug spend
Premium cost-sharing with employees	Lower employer spending	May hurt perceived generosity, retention if done poorly	Most employers, with careful communication

Costs and pricing: what companies typically pay

Exact pricing varies by country, insurer, and group profile, but some typical patterns:

Traditional fully insured plans
- Employers may spend anywhere from a few hundred to over a thousand dollars per employee per month, depending on coverage richness and local healthcare system.
- Annual premium increases often land in the 5–10% range unless mitigated.
HSAs / Health reimbursement arrangements
- Employers specify the benefit (e.g., $500–$2,000 per employee per year).
- Admin fees might be a percentage of claims or a per-employee-per-month fee (e.g., a few dollars per employee).
- No automatic “renewal increase” – you increase or maintain the allowance as you choose.
Self-funded / Level‑funded arrangements
- Fixed monthly funding (similar to premiums) plus stop-loss premiums and admin fees.
- Potential for refunds or lower renewals if claims are below expected levels.
- Employer must keep reserves or be ready to handle higher‑than‑expected claims in a bad year.
LSAs
- Employer cost equals the total allowances plus admin, fully under employer control.
- Some employers start modestly (e.g., $300–$600 per employee per year) and adjust over time.

The most important cost lever is replacing open-ended obligations (rich, low-deductible plans subject to insurer renewal decisions) with defined, budgeted contributions.

Who these strategies are best for

Small employers (under ~50 employees)

Often face volatile premiums and limited negotiating power.
May benefit most from:
- HSA-only or HSA + minimal insurance plans.
- Fixed monthly spending allowances (with or without insurance).
- Off-the-shelf level‑funded or pooled products designed for small groups.

Mid-sized employers (50–500 employees)

Have enough scale to consider more sophisticated designs.
Options:
- Hybrid models: lean insured core + HSAs + LSAs.
- Carve-outs for drugs; targeted wellness and virtual care programs.
- Level‑funded or partially self-funded arrangements with stop-loss.

Large employers (500+ employees)

Often move toward full or partial self-funding to gain cost control and analytics.
Can negotiate custom provider networks, carve-outs, and advanced clinical programs.
Often deploy comprehensive wellbeing strategies to reduce long-term costs and improve productivity.

When to avoid aggressive cost-cutting

Cost control is important, but cutting too deeply can backfire:

Talent risk: Weak benefits can hurt recruitment and retention, especially in competitive labor markets.
Employee financial stress: Very high deductibles or low coverage can push employees to delay care, leading to higher future costs and absenteeism.
Compliance: In some jurisdictions, minimum coverage or employer contribution rules apply; changes must comply with local law.

A balanced approach focuses on value: eliminating wasteful spending while protecting employees from true financial risk.

Practical decision checklist for employers

Use this as a quick guide before changing your benefits:

Are your premium increases consistently above your company’s revenue growth?
Do you know which categories (drugs, dental, paramedical, etc.) are driving claims?
Could some of those high-cost categories be shifted to an HSA or LSA with a fixed budget?
Is your workforce large and stable enough to consider self-funded or level‑funded arrangements?
Have you modeled the impact of higher deductibles coupled with an HSA on both costs and employee out-of-pocket risk?
Have you clearly defined your maximum acceptable annual benefits budget, not just for this year but for the next 3–5 years?
Do you have the right partners (broker, consultant, administrators) to implement and monitor a redesigned plan?

If your answer to several of these is “no,” a structured benefits review is likely overdue.

Common questions

Can a company completely avoid premium increases?

Not entirely if you rely solely on traditional insured plans, because insurers adjust for underlying medical inflation and claims. You can, however, avoid being forced into large increases by shifting more of your benefits budget into defined, non-insured components like HSAs and LSAs where you control the annual funding.

Are HSAs or health allowances better than traditional insurance?

They’re not direct substitutes. Insurance is best for catastrophic, unpredictable costs, while HSAs/allowances are best for predictable, routine expenses and budget control. Most employers get the best results from a combination: a lean insurance backbone plus an HSA.

Do employees lose out when employers move to budgeted plans?

They can, if the employer simply cuts costs without redesigning thoughtfully. When done well—by combining HSAs, clear communication, and targeted coverage—employees often gain more flexibility and clarity, while the employer gains cost predictability.

How often should companies review their health benefits to manage costs?

At least annually. Many employers do a light review each year at renewal and a deeper redesign every 3–5 years, or sooner if costs spike, workforce demographics change, or new plan options become available.

By shifting from open-ended, insurer-driven plan designs to more defined, flexible, and transparent models, companies can continue offering meaningful health benefits without being locked into endlessly rising premiums.

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