In the midst of an anemic economic recovery, financial executives are evaluating every budget item closely, and employee benefits are no exception. As the cost of employee medical insurance continues to increase, companies are making tough financial tradeoffs as they try to control costs with minimum disruption to the business.
According to a survey of 156 financial executives, conducted from Feb. 25 to May 31, the vast majority of companies--in order to manage over the past five years--have increased employee cost-sharing, co-pays and/or deductibles, while many have shifted to a high deductible plan. The report, Trends & Tradeoffs in Employee Medical Benefits, was produced as a result of the study conducted by Corporate Synergies Group LLC and Financial Executives Research Foundation.
Furthermore, 38 percent of the respondent companies in the survey have made the tough decision to actually reduce health benefits, such as coverage levels, while just 9 percent have reduced non-medical benefits. But, most surprisingly, one-fifth of companies have reduced or eliminated salary increases and/or bonuses in order to continue offering employee medical benefits.
These numbers suggest that an important component of employee benefits decisions--most commonly made by the executive team, board of directors, human resources department or a senior financial executive--is weighing necessary tradeoffs in an effort to maintain profitability and appropriate levels of staffing.
Options are typically evaluated on how the cuts might affect the company's competitiveness in the marketplace, attraction and retention of employees and workplace morale.
Yet it's also clear that these decisions are hitting employees hard; increased health care costs, coupled with limited raises and bonuses, have essentially reduced employees' take-home pay. And in an economy where wallets are thinner than usual, it's important for company management to understand how their decisions impact their workers--and how, in turn, employee productivity and retention may be affected.
While 60 percent of financial executives say that they have seen their employees switch to higher deductible plans and 16 percent say they have seen a drop in overall coverage as a result of increased cost-sharing over the last five years, one-quarter report that they haven't seen any specific action as a result. This may indicate that many employees have simply accepted responsibility for more of their medical insurance costs than ever before.
Long-Term, Company-Specific Strategy Needed
It's common for companies to reference benchmarks and to try to maintain the level of benefits that are standard in their industry. While that can be useful, what's missing is a long-term, company-specific strategy. Employee medical benefits are a significant line item on a balance sheet.
Indeed, 47 percent of companies say that providing employee medical benefits for the most recent fiscal year cost more than 10 percent of their total compensation costs, yet often employers lack a long-term strategy.
Many employers are in a routine of looking at their benefits plans at renewal each year and making small changes to the plans without fully stopping to realize the cumulative impact that these modifications will have on their plans and their employees. Other business decisions--such as how many employees the company hires, new market opportunities and office locations--are not often made by simply maintaining the same benefits as competitors. Employee benefits deserve, and warrant, the same consideration.
Financial executives can gain an advantage in the marketplace by viewing employee benefits as a long-term investment and planning with a distinct goal in mind,
For example, instead of deciding each year to make small changes to benefits plans to lower the cost (cutting pharmacy benefits, increasing deductibles, etc.), executives can plan to rein in medical insurance costs over the long term by instituting long-term strategies such as wellness programs and high-deductible plans coupled with Health Savings Accounts (HSA) or voluntary benefits.
LONG-TERM STRATEGY: Wellness Programs
Currently; many employers are not embracing long-term cost-saving strategies. According to the survey, one-third of financial executives have chosen not to offer any cost-reduction programs with their employee benefits. Of those that have, wellness programs are the most popular. Wellness programs work to make entire employee populations healthier by encouraging positive behaviors, under the assumption that healthier employees are less likely to incur high health care costs.
For the employer, this means long-term mitigation of the risk of their employees developing a health condition associated with high health care costs. Sixty-five percent of the companies in the survey have offered wellness programs for smoking cessation, nutritional seminars and weight-loss programs, as well as offering on-site gyms.
However, there are many financial executives who feel that the value of wellness programs is unproven--with almost one-quarter saying that they have not offered wellness initiatives because they don't want to spend the money up front to implement the program.
Of those who have offered programs, half of the companies say that they have not yet seen a return on their investment.
Yet, with wellness programs, the return on investment will be seen gradually, not overnight. Often it takes companies more than three years to see a return on investment. Should costs continue to rise, these types of investments will be one of the only ways for employers to stay ahead of the curve.
When developing a wellness program, it's key to have long-term support from the management team. These initiatives are most successful when executives are vocal stewards and active participants, as it encourages employee involvement.
In addition, employers should determine distinct goals for the program and develop a multi-year employee communication plan that offers resources, incentives and celebration of meeting those goals.
LONG-TERM STRATEGY: High-Deductible Plans and HSAs
Many companies currently offer high-deductible plans with HSAs, and others are eyeing them for potential cost savings. These plans are focused on consumer control, and offer a variety of benefits, including tax deductible contributions, the employees' ability to decide how to spend their health care dollars and workers having more control over individual health care decisions.
Many financial executives remain skeptical of high-deductible plans and HSAs, citing the need for more education about the options.
For those employers considering instituting a high-deductible plan coupled with an HSA, it's important to take into account employee demographics (these plans can be most appealing to higher-income and healthier employees), ensure that the plan structure and pricing make the option attractive to employees and place an emphasis on employee communications, both well before the plan rollout and continuing as employees begin to use the plan.
For the company to save money through these plans, enough employees need to opt in--and without careful planning and the right plan structure and education, employees may not make the leap.
LONG-TERM STRATEGY: Voluntary Benefits
Voluntary benefits, or employer-sponsored benefits, can be another option to reduce the expense of benefits to employers over the long-term, while maintaining quality coverage and often expanding available offerings. Often, employers choose to offer ancillary products through a voluntary program, such as dental, critical illness and disability insurance.
According to the survey cited earlier, 31 percent of employers have increased their voluntary benefits offerings as a way to offer a wider variety of options to employees while keeping costs down, and 12 percent have moved some products that were previously employer-paid to the voluntary benefits program.
These benefits offer several advantages, both to the company and its employees. Though employees pay the total cost of the coverage, access to group rates and ease of paying through payroll deduction make voluntary benefits very attractive to workers. It also means that they will be able to select which coverage is right for their family, and spend their money where they believe it will matter most.
And for companies, these benefits can be a win-win--employers simply offer the benefits (often at no additional or a very minimal expense), but can give their employees access to a wide range of protection products without impacting the company's bottom line.
For employers thinking of adding voluntary products to their benefits programs, it's important to again consider employee demographics and choose products that correspond with employees needs and wants.
In addition, be sure to consider the price tags associated with each benefit before choosing your company's menu of voluntary benefits to ensure that the products fall in a range that the employees would be willing to pay. Rollout and communication is also critical. For each enrollment period, it's best to add no more than two new products at a time, and communicate the modifications early and often to employees.
Most companies want to offer an attractive benefits package for their employees, but that's no easy feat as budgets tighten and heath care costs continue to rise. Financial executives' hands are tied, and almost all of them are forced to make tough financial tradeoffs as they try to control costs.
But as companies look out over the next five to 10 years, developing a long-term benefits strategy that works to control costs can help to temper the need to make tough choices in the future.
John Turner (john.turner@corpsyn.com) is president and CEO of Corporate Synergies Croup LLC, a privately held employee benefits broker and consulting firm headquartered in Mt Laurel, N.J.
