People, Premiums and Purpose: Framework for Nonprofits

Nonprofit employers are driven by purpose, not earnings. However, they are faced with the same financial obligations as their for-profit counterparts. Attracting and retaining the industry’s top people is expensive in today’s multicultural and multigenerational workforce. Nonprofit employers must create a value proposition for current and prospective employees that clearly outlines the advantages of employment with their organization over another.

Employee benefits are an irreplaceable part of that value proposition. The manner in which many nonprofit organizations are advised to purchase these benefits is inefficient, due to the misaligned financial incentives of health care providers, insurance companies and brokers. Annually rising premiums, coupled with a lack of pricing transparency, detracts from nonprofit employers’ ability to adequately fund their organizational purposes.

This article provides a framework of the evolving nonprofit landscape, outlines best practices for creating an engaged workforce and highlights how nonprofit employers can increase their overall funding by changing the way they purchase employee benefits.

The Nonprofit Sector Is Growing and Powerful

Nonprofit employers are one of the fastest growing workforce segments in the U.S. Approximately 1,560,000 nonprofits are registered with the IRS, contributing just under $1 trillion to the U.S. economy. This represents 5.4% of our gross domestic product. Nonprofits grow their revenue base through state and federal sources, fundraising events, grants, donations and other channels. Capital and people are the drivers of their mission. Too often, however, many nonprofits operate less efficiently and are less fiscally focused than their for-profit counterparts.

Two noticeable differences between for-profit and nonprofit organizations are how they attract, develop and retain talent, and the way they purchase employee benefits. Why is this significant? Because the two largest expense items on most P&L statements are people and premiums, which form the foundation of any employee value proposition. Nonprofits must be mindful of the old adage, “Nonprofit is a tax status, not a business strategy.”

The 3 Ps Are Critical To Your Success

For-profit businesses focus on the end result, which for them of course is profit. The end result for a nonprofit, however, is the ultimate mission of the organization, which receives funding only after the bills are paid. Regardless of whether an nonprofits cause is poverty, environmental, arts, housing or education, the organization must understand the impact of the three Ps: people, premiums and purpose.

People represent the most crucial component of any organization, and the largest line item expense for employers. Today, more than ever, the nonprofit sector is characterized by a multigenerational, multicultural workforce. This diversity brings challenges to employers on many fronts. Finding ways to attract and retain the best people with desirable benefits at an affordable cost structure that fits within the nonprofit’s budget is critical.

Premiums, the second of the three Ps, typically represent the second or third largest expenditure incurred by nonprofits. Health insurance premium trends show no sign of slowing down either. The national average premium for an individual employee is approximately more than $8,000 annually and can reach as high as $27,000 per year for family coverage. These costs do not include dental, vision, disability, life, retirement, workers’ compensation or liability coverages. Additionally, employees underestimate the full cost of these premiums, because they only acknowledge the portion that comes out of their paycheck and overlook the larger portion that is funded by their employer.

Expenditures on people and premiums determine what funding is left over for the third and most fundamental P, which is purpose. Without a purpose or mission, there would be no need for the nonprofit, no need to employ the people who are working toward the cause and no need for the insurance premiums that help retain those people. Because a nonprofit employer is driven by its purpose and can only meet its objectives with adequate funding, it is imperative to pay careful attention to the costly expenditures of people and premiums. The three Ps are interconnected and dependent on one another. The purpose won’t be achieved without the people who ultimately won’t remain in employment without the premiums.

Your Employee Value Proposition Cannot Be Overlooked

To ensure that the three Ps are functioning properly, a unique Employee Value Proposition (EVP) must exist within every nonprofit organization. An EVP is a defined and measurable offer made to employees that articulates the benefit of employment with that organization on a long-term basis. To attract and retain top talent, nonprofits must thoughtfully develop their own EVP. In general, employees will spend more time working for their employers than they spend with their own families. They must be able to clearly identify “what’s in it for them.”

Most nonprofits offer competitive pay and benefits; an effective EVP must be much bigger than that. The goal of every nonprofit should be to create an enjoyable and productive work environment where opportunities for advancement and growth are present, and where employees can make a significant contribution to a cause that is deeply and personally meaningful to them. When this type of culture exists, nonprofits find that their current employees become their best recruiters for new potential talent.

Nonprofit employers must demonstrate that they value the varying needs among their diverse workforce. In addition to creating a culture of inclusion and gratification, they must also offer a benefits package or “menu” that allows employees to choose what fits their individual needs and circumstances.

There are five generations present in today’s workforce, so one size does not fit all anymore. Each generational group has completely different needs and expects their individual benefit package to directly address those needs. Employers who have not strategically developed their EVP are at risk of losing out on the best available talent. The EVP must be communicated effectively and consistently, and it must be measurable. Without measurability, organizations may succeed in attracting good people, but will struggle to retain them.

A Dollar Isn’t Always a Dollar

Even if a nonprofit is mostly supported by State and Federal funding, a portion of its revenue will be generated through fundraising initiatives. For larger NFPs, a team of full-time development and fundraising staff and grant writers may be working to secure funds for the mission. Smaller NFPs may hold an annual gala or golf tournament to raise money, or could be financed by a group of loyal, generous donors. Regardless of the strategy used to get revenue in the door, the fact remains: it costs money to raise money.

The time, effort and hours dedicated to fundraising all have specific dollar amounts tied to them. The average NFP spends 30 cents fundraising every dollar. Using this measurement, a dollar earned by the NFP is only worth 70 cents. Given the unavoidable cost of fundraising initiatives and the uncertainty of government funds, it is critical that NFP employers pay careful attention to the relationship between their total revenues and the funds spent to earn them.

Forward-thinking organizations work diligently to increase the money coming in and are laser-focused on decreasing the money going out. Two critical ways to minimize the exodus of funds is to effectively manage employee turnover and rising insurance costs.

Reducing workforce turnover ties directly to the development of a pervasive EVP. Nonprofit employers with low turnover abide by the following paradigm: identify, attract, onboard, engage, develop and retain talent. Each phase in the lifecycle of an employee’s tenure must be monitored and measured economically to understand the true cost of workforce turnover. A precise dollar amount must be tied to each individual initiative. The engagement and retention phases require nonprofits to make good on their EVPs. If the organization publicizes that it has created a superior culture of inclusivity and advancement, then current employees must believe and experience that culture to ensure that they stay on board.

Successfully managing inflated insurance costs can be extremely impactful to the bottom line. If premium dollars are unsupervised, they will continue to rise exponentially. Proactively and strategically managing inflated insurance costs with a multi-faceted approach will yield significant savings that can ultimately be used towards the NFP mission. It boils down to this: a dollar saved is more valuable than a dollar earned. Remember, the average NFP spends 30 cents on fundraising initiatives to raise a dollar, valuating the earned dollar at 70 cents. If that NFP saves a dollar on the cost of retaining and insuring employees, the entire amount can be applied to the Purpose.

A Transaction Is Not A Plan

The insurance industry has taken a medieval approach to annual employee benefit plan renewals. In fact, the renewal process is consistently ranked by American employers as one of the most frustrating and stressful times of the year. This holds true both for nonprofits and their for-profit counterparts. Renewals and open enrollment have become a painstaking process met with disdain from internal human resource and finance personnel. All too often, nonprofit organizations find themselves trapped in a highly transactional buying process with ongoing negotiation and minimal transparency.

Simply hoping for the best at renewal time can be dangerous and expensive. Take the typical case of ABC Nonprofit. At renewal time, ABC receives a proposal with what their broker says is “good news” — only a 6% rate increase. For a nonprofit, a 6% rate increase is not good news and, accordingly, the increase would significantly impact ABC’s operations. After some back and forth with the incumbent carrier, the broker markets the program to competing carriers to find a less expensive option without significantly altering the current benefits or provider network. The broker finds a carrier that is less expensive, but the disruption it would cause ABC’s workforce is deemed not worth the change. As a last-ditch effort, the broker goes back to the current carrier and leverages the less expensive option against the renewal. It works! The carrier knocks two points off, and ABC heads into open enrollment with a 4% increase. The ABC leadership team is thankful to have the stressful process behind them and crosses their fingers that next year’s renewal will be better.

For many nonprofits, this process has become a transaction that occurs year after year. Rates, employee payroll deductions, deductibles and copays climb, while profits for the insurance carriers and the pharmacy benefit managers appear to increase.

Strategic nonprofits instead approach the health insurance renewal process as a financial business plan in alignment with what’s best for their purpose and their people. They look for a business partner who can develop a comprehensive renewal strategy, not just a broker who can execute a renewal transaction. A successful nonprofit takes control of the process, engaging someone who understands their mission, budget, goals and challenges over a 12-, 24- and 36-month period and is capable of formulating and implementing a multi-year benefits strategy aligned directly with their objectives. They understand that the strategic business partner does not look at the renewal as an annual event or transaction, but rather as a continual process of managing the carriers, optimizing the benefit spend and maintaining the EVP to drive results.

The System Is Broken-Be Vigilant of Misaligned Incentives

The transaction-based insurance purchasing process is not the only part of the system that is broken. The insurance and health care industries are jointly characterized by prohibitive costs and a lack of transparency. To accurately explain how nonprofit employers suffer as a result of this process, it is necessary to understand the misaligned financial incentives of the various players.

Health care consolidation has created a dangerous environment for employees and employers. Physician practices, patient facilities, labs, hospitals and other providers are increasingly owned by large corporations or private equity firms, focused on market share, growth and profitability, and not necessarily on the interests of their patients.

These conglomerated health systems contract with insurance companies to leverage their networks and steer patients toward specific providers, significantly growing their customer base. This is especially true in the case of pharmacy benefits, where insurance companies contract with “third-party” Pharmacy Benefit Managers (PBMs) who administer prescription drug programs for employer health plans and often have direct contracts with the drug manufacturers. The primary goal of each individual entity is profit. At every turn the contracted partnerships between these entities creates ever-higher costs for employers and their employees with minimal pricing transparency.

True change in the health care and insurance space for nonprofits will not be realized without a total realignment of the financial incentives for each entity in the chain. As it stands now, compensation for health care providers, insurance companies, PBMs, drug manufacturers and brokers all increase in tandem with rising healthcare and benefit costs.

Many brokers lack the knowledge and expertise to challenge the status quo to create competitively priced renewals without all the inflated charges or the need to switch carriers every other year. Nonprofit organizations must fight back. They must partner with insurance consultants who understand the compromised system and will protect the NFP’s financial interests without sacrificing the quality of care for employees.

A valuable partner will ask the tough questions and aggressively seek the answers needed to develop a comprehensive and strategic plan to proactively enhance services and manage costs. Nonprofits must refuse to be satisfied with business as usual. Instead, they must protect every dollar possible, knowing that it will better serve the important purpose of their organization.