Many companies are undertaking fundamental reviews of the role and structure of their employee benefits, including health care coverage. Employers are re-examining the impact of their benefits on employee recruitment and retention. Benefits philosophies in general are seen as becoming less paternalistic and more sensitive to marketplace competition. This shift has led many companies to challenge how to apportion total compensation between wage and non-wage benefits to align compensation with corporate performance goals. This realignment also reflects the extent to which companies are themselves changing in terms of business lines, mergers and acquisitions, and workforce composition. The need to differentiate benefits relevant to recruitment from those related to retention is becoming more apparent as many employers see growing variability between new hires and their long-term workforces. Cultural and generational differences between younger and older workers also bring these concerns into sharper focus. Because worker interests in benefits change over time, employers are finding they have to adjust their programs to respond to this evolution in employee careabouts. Company views in almost all instances are much broader than health care coverage, as health benefits are seen as just one additional consideration to weigh in apportioning the compensation dollar.
Customization of benefits is taking on added importance in the current labor shortage. Participants noted that they feel a growing need to introduce more flexibility into their benefit packages to respond to a broadening spectrum of worker and prospective worker wants. The current labor shortage across the entire skill range of workers highlights the need to customize what can be offered to workers in order for companies to meet their manpower requirements. While employers still have to be attentive to both local and industry benchmarks, they may be able to achieve some competitive advantage by different configurations of benefits or benefits that are explicitly targeted to a specific labor pool critical to them (e.g. tuition reimbursement for companies seeking college age workers). The dichotomy between new workers who value benefit portability or cash-oriented compensation vs. older workers interested in long-term disability or retirement illustrates the challenge that employers face in customization. Health care coverage is one area where these concerns are particularly evident. Employers that once were strongly committed to promoting the pooling of employees interests in health benefits are finding that such a philosophy may constrain them from customizing the options employees are seeking. In some cases this may mean more health coverage product options from which employees can choose. But it can also mean allowing workers to trade off health benefits for other benefits or even cash compensation. Some employers worry that giving employees more control over and responsibility for where their benefits dollars will go may ultimately raise new concerns about uniformity and equity.
Relative importance of health benefits varies greatly across employers and employees. The participants emphasized that health insurance is not the most important consideration for their companies; and that they consider it literally to be a fringe benefit. It was when health care costs soared that many of their companies had to devote considerable resources to this area to try to regain control. They made this point to underscore that health benefits compete for attention and resources with several other human resource concerns pertinent to their companies success. Moreover, the salience of health benefits for individual workers also varies greatly, with it being of little concerns to the immortals young, healthy workers who rarely even inquire about the nature of the health benefits at the time of hiring, other than to ask if it is available. Obviously, health benefits become more significant for workers who have health problems or those who become long term employees and increase the likelihood that they will use these benefits. This variation in importance necessitates customization and tradeoffs among benefit options. Access to care is seen as what employees in general want; but how they choose to obtain such access varies across many dimensions. Participants did not see health insurance as playing a significant role as a recruitment device or even motivator, but it can be a source of employee dissatisfaction. In fact, the major metrics for monitoring health benefits typically have been costs and complaints. Changes in health benefits and plans are relatively uneventful if they do not represent significant disruptions in provider relationships or additional cost participation.
Educating, informing and supporting workers is becoming more important. The trend toward customization and benefit flexibility has converged with such socio-demographic trends such as greater workforce diversity to make worker communication a much more significant task for employers. As companies move toward promoting more worker responsibility for individualizing benefits including cashing out some of them, the consequences of employee decisions will become more momentous. Electronic communication advances have helped in this area, but employers struggle with ensuring that their employees understand the range of choices and rationales for the options they are making available to workers. For companies in industries and/or locations where there are large numbers of workers with limited education or with ethnical and linguistic diversity, simply preparing and disseminating information is becoming more costly and complex to achieve. The problem is exacerbated as many companies downsize benefits staff to streamline administrative operations. The problem can be especially troublesome in health benefits given the complicated range of options being made available, and the difficulties in understanding some of the complexities of managed care products. Promoting greater cost consciousness through cost sharing with workers was seen as an important feature for successfully managing health benefits costs. Companies are also trying to create more awareness among their employees of the extent of company contribution for their health benefit costs.
Decision processes reflect company structures, cultures, and priorities. The companies represented on the panel use different processes for establishing a compensation philosophy, modifying benefit designs, or evaluating new benefit initiatives. Worker input into the process varies depending to a large extent on the degree of unionization, but most companies are monitoring employee interests and satisfaction systematically, including both regular and special surveys and tracking responses to employee complaints related to benefits. A companys general compensation philosophy is based on direction from executive management and on company culture and tradition, subject to industry and local market considerations and constraints. This philosophy may be modified if new priorities emerge in terms of recruiting in new talent pools or broader strategic aims shift the focus of recruitment or retention. Human resource units typically play a role in this repositioning. In terms of health care coverage, employee benefit managers may identify new benefits or benefit modifications and make proposals related to them. They conduct cost benefit, cost offset, or payback analyses to accompany their recommendations. A number of the participating companies have a senior management team that reviews and approves such proposals. Small companies may have a less formal and participatory process, in part because they have few specialized benefit personnel. Decisions are more likely made by the chief financial and/or chief executive officer. Consultants, as noted below, may play a role in the process as well either as a source of ideas, data for costing or comparing scenarios, or external review. Health benefits decision processes are seen as similar to other decisions, such as pension programs, that affect nearly all workers.
Merger and acquisition activity has important implications for health benefits. Several of the participating companies commented on the relationship between merger and acquisition activity and health benefits because it has become an issue of considerable attention for them. Mergers represent growth and consolidation for some companies, as well as diversification for some others. From a benefits standpoint, employers that acquire companies with different benefit packages, products, or premium contribution strategies have to determine the extent to which these benefits will be maintained separately or blended into those of the acquiring firm. When a company diversifies into another industry, it must appraise whether the benefit structure of the new industry is different enough to justify not consolidating benefits. In some instances, the differences in benefits may be maintained permanently, as in the case of a highly diversified corporation with very different workforces across a portfolio of subsidiaries. Moving to uniform benefits could adversely affect profitability of the sub-units, or even raise doubts about the feasibility of the acquisition in the first place. In other cases, not standardizing benefits may impede integration efforts, and undermine expected synergies associated with a merger or acquisition. Companies that are highly active in mergers and acquisitions may devise a specific benefits strategy that is used by the teams charged with evaluating and implementing mergers or acquisitions.
Use of consultants, brokers, and agents is significant, albeit varied across companies. The participants discussed the roles played by benefits consultants and insurance brokers and agents. Large firms use benefits consulting firms to varying degrees and for a variety of purposes. Downsizing of benefits personnel units has forced a number of firms to rely on outside consultants for tasks that they are unable or unwilling to hire permanent staff to handle. Consultants also play useful roles in technical areas like actuarial services, simulation models to assess options, or in providing companies with data for use in evaluating or benchmarking of a companys benefits experience. Some employers use them to help with design or assessment of new initiatives, but others are under pressure to control spending on outside consultants and use them very sparingly. Smaller employers are more likely to rely quite extensively on brokers and/or agents to aid them in designing benefits programs; soliciting proposals and bids; negotiating with bidders; and building in performance guarantees with contractors. In this capacity, the brokers provide manpower and expertise that is not available within the company. Some of the panel participants cautioned about whether the value of broker services may be overstated and/or overpriced.
The decision to self-insure is very common among large employers and influenced by several factors. Self-insurance was extensive among the large employers on the panel with this form of coverage ranging from 50 to 100 percent of their workforce. The smaller companies (under 1000 employees) bought only fully-insured products. The rationales for self-insurance included 1) maximizing the benefit dollar by improving efficiency and eliminating insurance company profits and administrative expenses; 2) ensuring uniformity of benefit package by avoiding state level benefit mandates; and 3) availing themselves of the protection against liability. Most panelists shared these views, and particularly emphasized the importance of the ERISA preemption to the latter two rationales. The large companies that are not fully self-insured are still buying insured products from HMOs, in most instances, though there was a general belief that more and more companies will shift their HMO contracts from fully-insured to ASO (administrative services only) arrangements in the future. These products get benefits of network negotiated rates, but companies can avoid some of the costs layered on fully insured products by the managed care companies. This is likely to be the case as HMOs increasingly become a regulatory and liability target and as employers, who seem to be increasingly disenchanted with them, distance themselves from buying their standard products. Smaller employers are also likely to seek options for self-insurance in the future, though those represented on the panel said that they still felt more comfortable with fully-insured products given the risks and responsibilities of self-insurance.
There is significant disenchantment with conventional managed care products. There was a high level of dissatisfaction with the performance of the managed care industry, especially HMOs, on the panel. Some of the represented companies have historically been strong supporters of managed care, aggressive promoters of HMOs, and active participants in NCQA and related industry-employer initiatives. Others have been less supportive of the economic model of the HMO and have pursued PPO products including developing their own. Still others have had managed care strategies that have used a combination of HMO and PPO products. Several expressed the view that HMOs have lost their way in terms of becoming too concerned about their own profitability and performance relative to their investors rather than to their purchaser-customers. As one participant put it, we do not appreciate the fact that the HMO companies are raising their rates when their profit margins are already exceeding our own margins. Some panelists contended HMOs have created inappropriate barriers to care and brought much of the current backlash on themselves. The fractious relationships with providers has been disappointing and frustrating, and panelists expressed a desire to see physicians regain more control over decision-making, as represented, some participants suggested, by the recent decision of United Healthcare to discontinue certain intrusive utilization management practices.
Quality measurement and promotion issues still seen as important, but degree of investment in it is limited. The members of the panel contended that their disappointment with the managed care industry did not indicate they had lost interest in or support for activities like measuring quality and promoting quality improvement as manifested by NCQA accreditation and HEDIS reporting. But some did acknowledge they are less convinced that investment in report cards and other consumer choice oriented initiatives are worth substantial investment. In part, this change of heart reflects competition for limited benefits resources. But it also seemed to suggest that employers simply are not convinced that employees will used these sort of data, in their current form, to make meaningful decisions. One panelists suggested that they may have overestimated the appetite for data of their employees when, in fact, continuity with their current physician is still by far the most important consideration in plan selection. For panelists that have experience with performance reporting initiatives, there was a strong sentiment that plan-level information is not meaningful given the nature of the choices consumers are making. Consequently they are investing and/or participating in initiatives that anchor the data close to the service provider level which consumers/employees are more likely to relate to at the point at which they are seeking care.
The potential for expanded employer liability puts the social contract notion of employer-sponsored health insurance at risk.The discussion of self-insurance and the significance of the ERISA preemption triggered an extended and impassioned discussion of the potential impact of pending legislation that could increase employer exposure for liability. The panel uniformly painted a bleak scenario if employer exposure is expanded by virtue of such measures as some form of the Patient Bill of Rights proposal. They contended that this could have a rapid and dramatic negative effect on employer support for tax-preferred benefits. More specifically, employers fear that class action lawsuits will cascade down on them and fundamentally reduce the value of the tax preference to the point where most employers will conclude the risks exceed the benefits of offering health benefits in their current form. Thus, the social contract whereby employers provide health benefits to their workers will become unsustainable and new models and methods will have to be devised. Employers see the potential for serious adversarial relationships between employers and employees that will impede employers from being advocates for their workers. Moreover, companies are not prepared to invest substantially more resources in managing of their health benefits and they simply cannot assume additional accountability in this area. They will either drop benefits or, more likely convert from current defined benefits approaches to some kind of defined contribution strategy. There is precedence for this move in the pension area, triggered in part by FASB 106, but the impact on health benefits may be more complex and adverse for employees.
Future trends are uncertain, but defined contribution strategy is a real possibility. In the absence of a change in liability status for employers, future trends suggest that changes will not be dramatic as long as employers retain reasonable control over costs. Cost participation by workers is likely to grow, including more use of graduated cost sharing based on the cost of services to promote greater employee cost consciousness in such areas as prescription drugs. Participants did not seem nearly as concerned about rising costs as expanded liability. They also noted that the pace of change in benefits is typically relatively slow as industry-level changes take time to spread and for individual firms to adapt to them. Employers clearly would prefer to keep health insurance as a fringe benefit/issue and generally not try to shape the health care system. A number of panelists shared the view that policy makers tend to overestimate the relative importance of health care issues to the typical employer.
If the liability exposure does increase, then this will almost certainly accelerate a shift to defined contribution strategies. There are many uncertainties associated with this scenario since it is unclear what kind of benefit packages employees will have access to; how much involvement employers will wish to or have to maintain to influence the market to make products available; and what the actual market for insurance for workers might be. Some observers, familiar with serious difficulties in the individual or small group insurance markets, see major problems if that is the shape of the market that ensues. The threat of a badly bifurcated market of sick and well consumers presents additional cause for concern. In a defined contribution environment, employees could lose their employer as a cost-control advocate as well as a promoter of quality and measurement data. This might mean diminished purchasing power for the defined contribution that could lead to employees losing access to care. This would lead to growing employee disgruntlement and, in a tight labor market, this would mean employers might have to increase their contributions to sustain benefit levels. Ultimately, then, this will force employers to more fully commit to total compensation packages that compels workers to tradeoff health coverage contributions against other benefits and cash compensation.