Best Practices 2024: Controlling Costs

PUBLISHED JANUARY 2024

After a big run-up in salaries during the inflation spike of 2022-23, the curve is flattening on payroll costs in many industries. The same can’t be said for benefits costs, irrespective of sector. What should be top of mind for employers this year?

In broad terms, it will be incumbent on executives and HR managers to be more selective in their use of dollars across the enterprise, but that starts with human capital. Heading into this year, private-sector employers were laying out nearly 10 percent more for payroll than they were at the end of 2021, following average increases of 5.2 percent in 2022 and 4.4 percent last year, according to data compiled by the Bureau of Labor Services.

At the same time, health insurance premiums surged again in 2023, up 7 percent over 2022, a year when increases actually came in lower than the inflation rate. But again, that’s a cumulative increase of 9.5 percent in just 24 months. 

As a result, say executives in the consulting and benefits spaces, employers are retrenching in 2024 as they seek solutions to some nagging cost-side issues.

“Our clients are looking for the best ways to address wage inflation and tax minimization,” says Jeff Carlstedt, senior managing director for the Kansas City office of CBIZ. “They come to us looking for a depth of expertise to maximize their available tax planning opportunities. From entity structuring to international tax, our clients are seeking a full spectrum of tax solutions while staying in compliance with reporting regulations.”

It’s important, he said, to recognize different industries benefit from different tax strategies. “For industries like commercial real estate, 2024 is set to be a defining year,” Carlstedt said. “All types of commercial properties can achieve tax advantages, such as tax deductions for energy-efficient buildings or bonus depreciation which allows businesses to accelerate the depreciation of qualifying assets. For the manufacturing and distribution industry, we counsel our clients on many opportunities, including tax credits aimed at strengthening domestic clean energy, companies producing goods used outside the U.S., and bonus depreciation, which allows businesses to accelerate the depreciation of qualifying assets.”

Operationally, said Carlstedt, clients are focused on cash maximization, a large part of which involves effective tax planning.

“The Employee Retention Tax Credit has been one of the most popular tax credits claimed by businesses affected by COVID-19,” he said. “For those looking to claim the 2020 tax year credit, companies must file by April 15, 2024, so there is some sense of urgency now.” Those clients have been looking for help with assessing their ERTC claim qualifications and risk, calculating estimated credits, and providing education and guidance on the ERTC claims process, timing, and expectations, he said. 

Benefits Trends

At Bukaty & Co., managing director Mary Amundsen says health insurance costs remain a priority for employers. “Especially the rising cost of prescription drugs, where prices are increasing at a rate above annual inflation,” she said. “Clients need guidance on the best way to manage their pharmacy benefit manager. We examine the complex PBM contract language to ensure plan sponsors and their employees receive the optimal benefit. Clients also have an increased need for compliance expertise. They need support to comply with the growing number of disclosures, fees and reporting requirements placed on plan sponsors.”

Polly Thomas, Calrstedt’s CBIZ counterpart on the benefits side, said pharmacy cost-containment programs are also universally low-hanging fruit if those programs haven’t yet been implemented. They include things like copay assistance programs, specialty carve out, and gene therapy programs, she said.

“Some employers are providing in-depth education to Medicare-eligible employees who are still working and eligible for the employer’s health plan,” Thomas said. “Oftentimes, there are more affordable options available to Medicare-eligible employees with robust benefits for the member. As employees are educated on all the options available, they often elect an alternative option which is less costly for both the employer and the employee.”

Controlling costs across the board, she says, allows employers to preserve benefits for things like pharmacy and medication costs. 

So where are they finding solutions?

Amundsen says one way is to ensure that clients have the best network discounts and good plan designs—including better efforts to promote preventive care and disease management. 

“The new frontier for significant cost savings is controlling drug spend, especially specialty drugs,” she says. “These drugs are used to treat chronic conditions, and their costs are exorbitant. Expensive injectable drugs traditionally used to treat diabetes are now being used for weight loss. Left unchecked, this drug could bankrupt a plan. So prior authorization and step-therapy requirements can be put in place to be sure medications are being used as the plan sponsor intended.”

Bukaty also performs medication reviews to ensure that the most affordable treatment option is being used and that patients are compliant with their medication, she said. She noted that a recent analysis had revealed that a member was using a drug costing $10,000 annually when a generic alternative was available, costing the member less than $100 a year.”

At FORVIS, managing director Rachel Dwiggins said one significant trend has been towards more personalized or customized perks or benefits offerings. 

“Things like lifestyle spending accounts, where employees can choose to be reimbursed for a variety of expenses most useful to them based on their stage in life,” she said.  “Other benefits such as discount programs, incentivized wellness programs, and personalized recognition programs can be implemented at a lower cost but have a great ROI.”

Thomas said employees were having success tweaking health coverage in new ways.

“We have several clients who have implemented reference-based pricing plans, which base hospital reimbursement on a percentage of allowable Medicare pricing,” she said. “This has driven sizable cost savings. Other clients have had success with cost control by implementing onsite health centers or primary care medical home models through their health insurance carrier. These models encourage primary care and overall care management, including mental-health resources and chronic condition management, which help to reduce high-cost medical claims through earlier treatment and intervention.

Mary Amundsen put her finger on a prominent disconnect with benefits planning.

“The most cost-effective care is preventive care, yet only 8 percent of Americans receive routine preventive screening, and many people don’t comply with their medication requirements,” she said. “While it’s important to focus on strategies to control high-cost claims, we’re focusing attention on designing plans that educate and incent employees to seek preventive care and cost-effective, routine care at centers of excellence. We also ensure employees have access to affordable maintenance medications. It’s not as much innovative as it is common sense.”

For large employers, said Polly Thomas, some gold-plated benefits amount to table stakes in the quest for top-tier talent. Among them: “Phase-of-life benefits, such as fertility and paid parental leave programs as well as caregiver support programs make employers stand out in the current competitive labor market, although they can be costly to implement,” she said.

In that same vein, said Amundsen, student-loan repayment programs have been getting attention in recent years, as has elder-care assistance and programs. “But those programs are not something the average small to mid-size employer can afford,” she said.

Dwiggins said that benefits like bonus structures, 401(k) profit sharing and HSA employer matches can require significant cash outflow at one time, which may make it harder for some companies to absorb. “Subsidized health-care premiums,” she said, “are also a big expense that can vary greatly depending on how much an organization can afford to take on coupled with the impact of rising costs.”

The Spend for Talent

Amundsen says Bukaty includes a recruiting practice within its HR Consulting division. There, she says, “a tight labor market puts pressure on employers to increase wages. Last summer, wages were up around 4 percent, just eclipsing inflation. If inflation falls in 2024 like it’s predicted, I would expect wages will continue to increase, but at a more stable rate.”

Carlstedt concurred. “We’re on the back end of exuberant compensation expectations,” he said. “The labor market is softening, and this gives employers more options to secure the talent they need. In industries like manufacturing, there are some exceptions as jobs remain unfilled. To address this issue, short-term strategies, such as increased wages, are showing results but are exceptions and not the rule.”  

Companies, he said, “continue to expand their efforts to upskill and reskill their current workforce—especially for more technical roles. They are also investing in growing the skilled workforce by collaborating on educational programs with high schools and colleges.”

Employers, Amundsen says, are using a mix of strategies such as referral programs, traditional outreach efforts, and social media channels to keep their talent pipeline filled. “Online platforms like LinkedIn and InDeed can reach a wider candidate pool, which can be cost-effective for certain positions,” she said.  

With office attendance about 30 percent lower overall than pre-pandemic rates, Carlstedt said, professional services firms are at the forefront of defining hybrid work culture. “Firms are looking to strike the right balance between in-person and remote work,” he said. “Employee recruiting and retention are also key factors.”

The good news for the industry, he said, is that job openings and turnover rates have been relatively steady in recent years. “Still, as roles and skill requirements evolve, firms often find positions difficult to fill,” Carlstedt said. “Looking ahead, firms can leverage the industry’s hybrid work strategies and flexible work schedules to attract talent with the skills they need. Equally important is an increased investment in employee retention.”

Spot on, said Dwiggins. 

“Retention is the best form of recruitment,” she said. “Not only is it more cost-effective to keep an employee than onboard a new one, but people choosing to stay at a company also amplifies the recruiting message with authenticity.”

Elsewhere in the workplace, Carlstedt said artificial intelligence would continue to impact a broad swath of industries because that emerging tech has “the power and potential to transform how firms operate, from data analytics and predictive modeling through enhanced collaboration and automation of routine tasks. In a world where data assembly and analysis are paramount, AI offers an unprecedented opportunity to enhance internal and external efficiencies. Our clients are seeing that by integrating the right tools, they can generate efficiencies and cost savings in the short term and accelerate innovation in the longer term.” 

That goes for benefits as well as operations, Thomas said.

“Clients who are taking a data-driven approach to managing their benefit programs are seeing the highest return on investment,” she said. “They are studying their claims data before they determine which types of programs work best for their members.”

It is not just a tech movement for large companies with deep pockets, Amundsen says: “We’re seeing larger and smaller companies adopting new technologies to automate routine workflows, streamline customer interactions, and improve productivity.” In addition, she noted, “employers are using more third-party online systems for onboarding, IT security training and other compliance training.”