Most CFOs know the line-item price tag of their medical plan, but few know its actual cost. When you examine the impact your benefits package has on the health of your employees (Physical and Financial) and your company overall, it could cost much more than the price tag suggests because of hidden expenses that appear over time. Failing your fiduciary duty to actively manage these costs directly impacts your P&L sheet and your Selling, General, and Administrative (SG&A) expenses. When you manage your plan properly and eliminate waste and other unnecessary costs, the outcome is similar to hiring a rockstar salesperson to generate new revenue for your business. 

The Difference Between Price and Cost

Price is what you pay for goods or services you acquire; Cost is the amount of inputs incurred in producing a product and value is what goods or services pay you. The Price to hire a new employee at $12.50 per hour is a component of your labor expense. The Cost to hire a new employee is amplified with taxes, benefits, Worker’s Comp, Unemployment Insurance, and other overhead expenses. In many cases, that $12.50 balloons to $25.00 or more.

Your health plan includes similar costs. When your plan is poorly managed, you never see the hidden costs generated by numerous external factors, including: 

  • Missed opportunities for better health care outcomes for employees. Your medical plan should serve your employees by delivering the best care possible at the lowest price possible. We frequently see below-average facilities charge more overall for services because the quality of care they offer regularly leads to costly complications, readmissions, and other risk factors. 
  • Missed opportunities for employee financial well-being (and increased retention). Hiring new employees is an expensive process. An employee-friendly benefits plan can increase employee retention rates.
  • Missed EBITDA and opportunities for investments. When you actively control your benefits expenses, you leave more money on the table for your company to invest in other projects. 

Recognizing these factors and scrutinizing the decisions made to build the medical plan can lead to direct bottom-line results. Anytime you reduce your SG&A (Selling, General, and Administrative Expenses), your company profits. If your company operates at a 10% profit margin, saving $100,000 on health care is the equivalent of capturing $1 million in gross revenue with the stroke of a pen.

These results are possible with the right strategy.

Supply Chain Management Delivers a Competitive Advantage: Improved Morale, Reduced SG&A Expense, and Generated Real Revenue

M&M Services is a specialty construction contractor in northeastern Kentucky. Since many of their projects are based on bids, they win new business when they can promise a better price per spec than their competition. Part of a great bid strategy is knowing you can deliver a project at a lower cost—a strategy that only works when a smaller bid can still cover a project’s operational expenses. 

The company’s bidding model fell under attack when the annual price of their medical plan jumped from $228,765 to $303,746 (a 33% increase) in one year. With higher operational expenses, M&M Services struggled to compete for projects on price. With the entire business at stake, leadership opted to explore new options for their medical plan. 

M&M Services customized their medical plan to manage the healthcare supply chain with a partially self-funded plan. This strategy granted them greater control over their medical care and claims costs by unlocking detailed plan data. With better insight into the plan, we slashed costs by opting for low-cost, high-quality medical facilities and actively managing the company’s Prescription Drug Program. As a bonus, we dropped the employee deductible to $0 and capped out-of-pocket expenses at $2,000. Thanks to the new plan format, we reduced annual medical plan costs to $217,791. More recently, the company received a medical plan reserves refund check of nearly $70,000!

M&M Services

With operational expenses under control, M&M Services can bid on more projects and build more competitive pricing into their bidding practices. Optimizing the medical plan was a win-win-win: M&M Services employees have better healthcare and greater financial security, and the company reduced its SG&A expenses. Ultimately, their customers receive better quality construction projects at lower costs.  

Find New SG&A Opportunities Through Your Medical Benefits Package

Many companies have medical plans that are bloated and ineffective. By applying supply chain management to these plans and cutting unnecessary expenses, companies can generate significant savings for their bottom line. When you reduce your medical benefits-related SG&A expenses and boost your EBITDA, your P&L sheet shines.