BUS 681 Week 4 discussion 1 & 2

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10 Legally Required Bene�its

Learning Objectives

When you �inish studying this chapter, you should be able to:

10-1. Discuss the origins of legally required bene�its. 10-2. Summarize the four main categories of legally required bene�its.

10-3. Describe fee-for-service plans, traditional managed care approaches, and more recent consumer- driven approaches to providing health care coverage.

10-4. Summarize two additional key laws pertaining to legally required bene�its.

10-5. Discuss the main bene�its and costs of legally required bene�its.

CHAPTER WARM-UP!

If your professor has assigned this, go to the Assignments section of mymanagementlab.com (http://mymanagementlab.com) to complete the Chapter Warm-Up! and see what you already know. After reading the chapter, you’ll have a chance to take the Chapter Quiz! and see what you’ve learned.

Today, legally required bene�its represent a signi�icant cost to companies. In 2014, companies spent an annual average of $5,200 per employee to provide legally required bene�its.1

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end1) For the same period, these bene�its accounted for 7.9 percent of the employers’ total payroll costs. That percentage will rise substantially because the Patient Protection and Affordable Care Act of 2010 now requires employers to offer health insurance to their employees. Adding health insurance as a component of legally required bene�its propels the annual average cost to approximately $10,100 (based on recent data when health insurance was offered on a discretionary basis). This �igure amounts to more than 15.6 percent of total compensation cost. Given limited increases in compensation budgets, the costs of legally required bene�its slowly cut into an employer’s discretion in setting pay level and pay mix. Perhaps if these trends continue, some employers could be placed at a competitive disadvantage.

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10.1 ORIGINS OF LEGALLY REQUIRED BENEFITS

10-1 Discuss the origins of legally required bene�its.

Legally required bene�its historically provided a form of social insurance. Prompted largely by the rapid growth of industrialization in the United States in the early nineteenth century and the Great Depression of the 1930s, initial social insurance programs were designed to minimize the possibility that individuals who became unemployed or severely injured while working would become destitute. In addition, social insurance programs aimed to stabilize the well-being of dependent family members of injured or unemployed individuals. Furthermore, early social insurance programs were designed to enable retirees to maintain subsistence income levels. These intents of legally required bene�its remain intact today.

Workers’ compensation insurance came into existence during the early decades of the twentieth century, when industrial accidents were very common and workers suffered from occupational illnesses at alarming rates.2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end2) The �irst constitutionally acceptable workers’ compensation law was enacted in 1911. By 1920, all but six states had instituted workers’ compensation laws.3

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end3) State workers’ compensation laws are based on the principle of liability without fault4

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end4) (i.e., an employer is absolutely liable for providing bene�its to employees that result from occupational disabilities or injuries, regardless of fault). Another key principle of workers’ compensation laws is that employers should assume costs of occupational injuries and accidents. These expenses presumably represent costs of production that employers are able to recoup through setting higher prices.

Income discontinuity caused by the Great Depression led to the Social Security Act as a means to protect families from �inancial devastation in the event of unemployment. The Great Depression of the 1930s was a time when many businesses failed and masses of people became chronically unemployed. During this period, employers shifted their focus from maximizing pro�its to simply staying in business. Overall, ensuring the �inancial solvency of employees during periods of temporary unemployment and following work-related injuries promoted the well-being of the economy and contributed to some companies’ ability to remain in business. These subsistence payments speci�ically contributed to the viability of the economy by providing temporarily unemployed or injured individuals with the means to contribute to economic activity by making purchases that resulted in demand for products and services. The Social Security Act of 1935 also addresses retirement income and the health and welfare of employees and their families. Many employees could not meet their �inancial obligations (e.g., housing expenses and food) on a daily basis, and most employees could not retire because they were unable to save enough money to support themselves in retirement. Furthermore, employees’ poor �inancial situations left them unable to afford medical treatment for themselves and their families.

Until recently, employers offered health insurance on a discretionary basis. President Barack Obama maintained that every American should have health insurance. The Patient Protection and Affordable Care Act (PPACA), enacted on March 23, 2010, is a comprehensive law that requires employers to offer health insurance to employees (the employer mandate). As an aside, if individuals do not have insurance through employment, they are required to purchase their own insurance (the individual mandate). In either case,

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monetary penalties are assessed for failure to meet the law’s insurance mandates. Since the act’s passage, the employer requirements have been implemented in phases. The full implementation of all provisions will be complete by 2018. The federal government documents the features and implementations of the PPACA on a dedicated Web site (www.healthcare.gov (http://www.healthcare.gov) ).

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10.2 CATEGORIES OF LEGALLY REQUIRED BENEFITS

10-2 Summarize the four main categories of legally required bene�its.

There are four categories of legally required bene�its: Social Security programs (unemployment insurance, old age, survivor, disability insurance, and Medicare under the Social Security Act of 1935), workers’ compensation (various state compulsory disability laws), unpaid family and medical leave (Family and Medical Leave Act of 1993), and health insurance (Patient Protection and Affordable Care Act of 2010). All provide protection programs to employees and their dependents.

Social Security Programs

The Social Security Act established the following programs:

Unemployment insurance

Old Age, Survivor, and Disability Insurance (OASDI)

Medicare

Each of those programs will be reviewed in turn.

UNEMPLOYMENT INSURANCE

The Social Security Act founded a national federal–state unemployment insurance program for individuals who become unemployed through no fault of their own. Each state administers its own program and develops guidelines within parameters set by the federal government. States pay into a central unemployment tax fund administered by the federal government. The federal government invests these payments, and it disburses funds to states as needed. The unemployment insurance program applies to virtually all employees in the United States, with the exception of most agricultural and domestic workers (e.g., housekeepers).

Individuals must meet several criteria to qualify for unemployment bene�its. Unemployment itself does not necessarily qualify a person, although these criteria vary somewhat by state. Those applying for unemployment insurance bene�its must have been employed for a minimum period of time. This base period (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss22) tends to be the �irst four of the last �ive completed calendar quarters immediately prior to becoming unemployed. In addition, all states require suf�icient previous earnings during the base period, which is determined by each state. Other criteria are listed in Table 10-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#ch10tab01) .

Individuals who meet the eligibility criteria receive weekly bene�its. Because the federal government places no limits on a maximum allowable amount, the bene�its amount varies widely from state to state. Most states calculate the weekly bene�its as a speci�ied fraction of an employee’s average wages during the highest calendar quarter of the base period. Unemployed individuals usually collect unemployment insurance bene�its for several weeks. The average duration of bene�its has ranged between 12 and 18

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weeks. The average duration refers to the mean number of weeks for which unemployment insurance claimants collect bene�its under regular state programs. Provisions are in place to provide extended bene�its during periods of high unemployment, which was the case during and following the 2007–2009 recession.

Unemployment insurance bene�its are �inanced by federal and state taxes levied on employers under the Federal Unemployment Tax Act (FUTA) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss157) . State and local governments as well as not-for-pro�it companies (e.g., American Cancer Association) are generally exempt from FUTA, although some states have elected to participate in this program. Employer contributions amount to 6.2 percent of the �irst $7,000 earned by each employee (i.e., the taxable wage base). FUTA speci�ies $7,000 as the minimum allowable taxable wage base. Relatively few states’ taxable wage base is as low as the FUTA-speci�ied minimum. In 2015, states’ taxable wage bases ranged from $7,000 in Louisiana to $40,900 in Hawaii. Some states do require employee contributions.

OLD AGE, SURVIVOR, AND DISABILITY INSURANCE

OASDI contains a number of bene�its that were amended to the Social Security Act following its enactment in 1935. Besides providing retirement income, the amendments include survivors’ insurance (1939), and both disability insurance and Medicare (1965). The phrase old age in the title refers to retirement bene�its. Virtually all U.S. workers are eligible for protections under the OASDI and Medicare programs.

TABLE 10-1 Eligibility Criteria for Unemployment Insurance Bene�its

To be eligible for unemployment insurance bene�its, an individual must: Not have left a job voluntarily Be able and available for work Be actively seeking work Not have refused an offer of suitable employment Not be unemployed because of a labor dispute (exception in a few states) Not have had employment terminated because of gross violations of conduct within the workplace

OLD AGE BENEFITS

Individuals may receive various bene�it levels upon retirement, or under survivors’ and disability programs, based on how much credit they have earned through eligible payroll contributions. They earn credit based on quarters of coverage (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss363) , which each equal three consecutive months during the calendar year. In 2015, a worker earned credit for one quarter of coverage for each quarter in which she made at least $1,220 of Social Security taxable income. This �igure is based on the average total wages of all workers as determined by the Social Security Administration (SSA). Workers may earn up to four quarters of coverage credit each year. Individuals become fully insured (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss170) when they earn credit for 40 quarters of coverage, or 10 years of employment, and remain fully insured during their lifetime.

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An individual who has become fully insured must meet additional requirements before receiving bene�its under the particular programs. Under the retirement program, fully insured individuals may choose to receive bene�its as early as age 62, although their bene�it amounts will be permanently reduced if elected prior to full retirement age. Congress instituted changes in the minimum age for receiving full bene�its. It increased the full retirement age from age 65 for people born in 1938 or later because of higher life expectancies. The age for collecting full Social Security retirement bene�its is gradually increasing to age 67 in 2022. The average monthly bene�it for all retired workers was $1,328 in 2015.5

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end5)

SURVIVOR BENEFITS

The SSA calculates survivors’ bene�its based on the insureds’ employment status and the survivors’ relationship to the deceased. Dependent, unmarried children of the deceased and a spouse of the deceased who is caring for a child or children may receive survivors’ bene�its if the deceased worker was fully insured. A widow or widower at least age 60 or a parent at least age 62 who was dependent on the deceased employee is entitled to survivors’ bene�its if the deceased worker was fully insured. In 2015, the average monthly bene�it was $1,253.6

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end6)

DISABILITY BENEFITS

The SSA pays bene�its to seriously disabled workers and family members. In particular, Social Security pays only for total disability. Disability under Social Security is based on a person’s inability to perform work done before becoming disabled and the inability to adjust to other work because of the medical condition. The disability must also last, or be expected to last, for at least 1 year or to result in death.

Disability bene�its are available to disabled workers who are unable to work as a result of a serious medical or mental impairment that lasts at least 12 months. Seriously disabled workers are eligible to receive disability bene�its as long as they meet two criteria. First, the worker must have accumulated at least 40 credits. Second, the worker must have earned at least 20 credits of the last 40 calendar quarters in the last 10 years ending with the year of disablement.

Younger workers need fewer quarters of coverage because they have fewer years to accumulate them. For example, workers ages 21–31 may qualify with half as many credits between age 21 and becoming disabled. Becoming disabled at age 29 requires credit for 4 years of employment (equivalent to 16 credits based on earning 4 credits per year) since the 8-year period beginning at age 21. The average monthly disability bene�it in 2015 was $1,146.7

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end7)

MEDICARE

The Medicare program serves nearly all U.S. citizens age 65 or older by providing insurance coverage for hospitalization, convalescent care, and major doctor bills. The Medicare program includes �ive separate features:

Medicare Part A—Hospital insurance

Medicare Part B—Medical insurance

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Medigap—Voluntary supplemental insurance to pay for services not covered in Parts A and B

Medicare Part C: Medicare Advantage—Choices in health care providers, such as through HMOs and PPOs

Medicare Part D: Medicare Prescription Drug Bene�it—Prescription drug coverage

Most individuals who are eligible to receive protection under Medicare may choose to receive coverage in one of two ways. A person may receive coverage under the original Medicare Plan or Medicare Advantage Plans as illustrated in Figure 10-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#ch10�ig01) .

FIGURE 10-1 Options for Receiving Medicare Bene�its Source: Based on U.S. Department of Health and Human Services. (2011). Medicare & You. Available: www.medicare.gov (http://www.medicare.gov) , accessed February 14, 2011.

The original Medicare Plan is a fee-for-service plan that is managed by the federal government. We will discuss the features of fee-for-service plans later in this chapter. Participants in fee-for-service plans possess the choice to receive care from virtually any licensed health care provider or facility. On the other hand, Medicare Advantage Plans offer a variety of insurance options, including health maintenance organizations, preferred provider organizations, Medicare special needs plans, and Medicare medical savings account plans (MSA). Medicare Advantage Plans are run by private companies subject to strict regulations speci�ied in the Medicare program. Restrictions pertain to pricing of the different plans.

MEDICARE PART A COVERAGE

This compulsory hospitalization insurance covers both inpatient and outpatient hospital care and services. Social Security bene�iciaries, retirees, voluntary enrollees, and disabled individuals are all entitled. Both employers and employees �inance Medicare Part A

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(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss276) bene�its through payroll taxes of 1.45 percent on all earnings, to be noted shortly.

Examples of Part A coverage include:

Inpatient hospital care in a semiprivate room, meals, general nursing, and other hospital supplies and services.

Skilled nursing facility care, including semiprivate room, meals, skilled nursing and rehabilitative services, and supplies for up to 100 days per year. Examples of skilled nursing care include physical therapy after a stroke or serious accident.

Individuals who meet the eligibility criteria do not pay a premium for Part A coverage; however, those who do not meet the eligibility criteria paid a monthly premium up to $407 in 2015.

MEDICARE PART B COVERAGE

This voluntary supplementary medical insurance covers 80 percent of medical services and supplies after the enrolled individual pays an annual deductible for services furnished under this plan. Part B helps pay for physicians’ services and for some medical services and supplies not covered under Part A. Medicare Part B (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss277) pays for medical care such as doctors’ services, outpatient care, clinical laboratory services (e.g., blood tests and urinalysis) and some preventive health services (e.g., cardiovascular screenings and bone mass measurement). Part B also provides ambulance services to a hospital or skilled nursing facility when transportation in any other vehicle would endanger a person’s health.

Part A coverage automatically quali�ies an individual to enroll in Part B coverage for a monthly premium. The premium amounts will be revised annually. In 2015, monthly Part B premiums ranged from $104.90 to $335.70, based on income level.

MEDIGAP INSURANCE

Medigap (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss281) insurance supplements Part A and Part B coverage and is available to Medicare recipients in most states from private insurance companies for an extra fee. Most Medigap plans help cover the costs of coinsurance, copayments, and deductibles. Federal and state laws limit the sale of these plans to up to 10 different standardized choices that vary in terms of the level of protection. For example, some policies cover costs not covered by the original Medicare plan.

Some insurers offer Medicare Select plans. Medicare Select plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss279) are Medigap policies that offer lower premiums in exchange for limiting the choice of health care providers. Three states (Massachusetts, Minnesota, and Wisconsin) do not subscribe to this system for offering Medigap insurance. Separate rules apply in these states.

MEDICARE PART C COVERAGE—MEDICARE ADVANTAGE

The Balanced Budget Act of 1997 established Medicare+Choice—renamed to Medicare Advantage (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss275) in 2004 as a third Medicare program—as an alternative to the original program (Parts A and B). The Medicare Advantage program, informally referred to as Part C, provides bene�iciaries the opportunity to receive health care

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from a variety of options, including private fee-for-service plans, managed care plans, or medical savings accounts. Fee-for-service plans provide protection against health care expenses in the form of cash bene�its paid to the insured or directly to the health care provider after receiving health care services. These plans pay bene�its on a reimbursement basis. Medicare Parts A and B are based on fee-for-service arrangements. As we will discuss later in this chapter, managed care plans often pay a higher level of bene�its if health care is received from approved providers.

MEDICARE PRESCRIPTION DRUG BENEFIT

The passage of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (also known as the Medicare Modernization Act of 2003 for short) instituted a prescription drug bene�it for Medicare program participants. Commonly referred to as Part D, the drug bene�it was �irst offered in 2006. Medicare covers a percentage of prescription drug costs after a calendar year deductible of $320 in 2015, up to $2,960. After that, expenditures up to $4,750 are not covered by Medicare. This coverage gap is known as the “donut hole” because Medicare contributes to the payment of approved prescription medications for amounts outside the $2,960–$4,750 range less the annual deductible. While in the “donut hole,” the insured pays more for prescription medications. The amount for which the insured is responsible while in the donut hole range is decreasing each year until it reaches no more than 25 percent of the medication cost. This reduction is one of the many mandates set forth in the PPACA.

FINANCING OASDI AND MEDICARE PROGRAMS

Funding for OASDI and Medicare programs requires equal employer and employee contributions under the Federal Insurance Contributions Act (FICA) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss156) .8

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end8) FICA requires that employers pay a tax based on their payroll; employees contribute a tax based on earnings, which is withheld from each paycheck. The Self-Employment Contributions Act (SECA) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss400) 9

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end9) requires that self-employed individuals contribute to the OASDI and Medicare programs, but at a higher tax rate. In either case, the tax rate is subject to an increase each year in order to fund OASDI programs suf�iciently.

OASDI PROGRAMS

The largest share of the FICA tax funds OASDI programs. In 2015, of the total 7.65 percent FICA tax, 6.20 percent was set aside. Self-employed individuals contributed 15.30 percent, of which 12.40 percent was set aside for the OASDI program. OASDI taxes are subject to a taxable wage base (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss442) . Taxable wage bases limit the amount of annual wages or payroll cost per employee subject to taxation. The taxable wage base may also increase over time to account for increases in the cost of living. In 2015, the taxable wage base was $118,500 for the OASDI portion of the FICA tax. Annual wages, payroll costs per employee, and self-employed earnings above the taxable wage base are not taxed.

MEDICARE PROGRAMS

The Medicare tax (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss280) , or hospital insurance tax (HI)

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(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss199) a portion of FICA, supports the Medicare Part A program. Employers, employees, and self-employed individuals contribute 1.45 percent. Self-employed individuals contribute double the amount, or 2.9 percent. The Medicare tax is not subject to a taxable wage base. All payroll amounts and wages are taxed.

According to the Social Security Administration, many people believe that the Social Security taxes they pay are held in interest-bearing accounts set aside by the federal government to meet their own future retirement income needs. To the contrary, the Social Security system represents a pay-as-you-go retirement system. In other words, Social Security taxes paid by today’s workers and their employers are used to pay the bene�its for today’s retirees and other bene�iciaries. There is ongoing debate within the U.S. Congress regarding how to shore up these programs for future generations.

Workers’ Compensation

Workers’ compensation insurance programs, run by states individually, are designed to cover expenses incurred in employees’ work-related accidents. Maritime workers within U.S. borders and federal civilian employees are covered by their own workers’ compensation programs. The maritime workers’ compensation program is mandated by the Longshore and Harborworkers’ Compensation Act (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss255) , and federal civilian employees receive workers’ compensation protection under the Federal Employees’ Compensation Act (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss154) . Thus, workers’ compensation laws cover virtually all employees in the United States, except for domestic workers, some agricultural workers, and small businesses with fewer than a dozen regular employees.10

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end10)

WORKERS’ COMPENSATION OBJECTIVES AND OBLIGATIONS TO THE PUBLIC

Six basic objectives underlie workers’ compensation laws:11

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end11)

Provide sure, prompt, and reasonable income and medical bene�its to work-accident victims or income bene�its to their dependents, regardless of fault.

Provide a single remedy and reduce court delays, costs, and workloads arising out of personal injury litigation.

Relieve public and private charities of �inancial drains.

Eliminate payment of fees to lawyers and witnesses as well as time-consuming trials and appeals.

Encourage maximum employer interest in safety and rehabilitation through appropriate experience-rating mechanisms.

Promote frank study of causes of accidents (rather than concealment of fault), reducing preventable accidents and human suffering.

Employers must fund workers’ compensation programs according to state guidelines. Participation in workers’ compensation programs is compulsory in all states with the exception of Texas, where employers

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are not required to provide workers’ compensation insurance (with limited exceptions such as businesses that hold construction contracts with the government). Self-insurance, another funding option allowed in the majority of states, requires companies to deposit a surety bond, enabling them to pay their own workers’ claims directly.12 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end12) Many companies select self-insurance because it gives employers more discretion in administering their own risks. Nevertheless, self-insured companies must pay their workers the same bene�its as those paid by state funds or private insurance carriers.

The following Watch It! video describes the California Healthcare Foundation’s approach to ensuring workplace safety. Efforts to promote workforce safety, by making it everyone’s responsibility, may lead to fewer workers’ compensation claims. In addition, an employer’s use of wellness programs, many of which we discussed in Chapter 9 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch09#ch09) , can play an instrumental role in promoting workplace safety.

WATCH IT!

If your professor has assigned this, go to the Assignments section of mymanagementlab.com (http://mymanagementlab.com) to complete the video exercise titled The California Healthcare Foundation: Safety.

HOW WORKERS’ COMPENSATION COMPARES TO SOCIAL SECURITY BENEFITS

Workers’ compensation differs from Social Security disability insurance and Medicare in important ways. Workers’ compensation pays for medical care for work-related injuries beginning immediately after the injury occurs; it pays temporary disability bene�its after a waiting period of 3–7 days; it pays permanent partial and permanent total disability bene�its to workers who have lasting consequences of disabilities caused on the job; in most states, it pays rehabilitation and training bene�its for those unable to return to pre-injury careers; and it pays bene�its to survivors of workers who die of work-related causes. Social Security, in contrast, pays bene�its to workers with long-term disabilities from any cause, but only when the disabilities preclude work. Social Security also pays for rehabilitation services and for survivor bene�its to families of deceased workers. Social Security begins after a 5-month waiting period and Medicare begins 29 months after the onset of medically veri�ied inability to work.

RECENT TRENDS IN WORKERS’ COMPENSATION

In recent years, workers’ compensation claims have risen dramatically in terms of both numbers of claims and claims amounts. The increased prevalence of repetitive strain injuries resulting from the use of keyboards has contributed to this trend. In September 2014, workers’ compensation cost nearly 18 percent of all legally required bene�its.13

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end13) The proportion in industries that generally pose substantial worker hazards spent a greater proportion of their legally required bene�its dollars to provide workers’ compensation insurance. For example, this proportion was approximately 34 percent in the construction industry.

FINANCING WORKERS’ COMPENSATION PROGRAMS

Workers’ compensation laws specify the permissible methods of funding. Employers generally subscribe to workers’ compensation insurance through private carriers or, in some instances, through state funds. A third funding option, self-insurance, requires companies to deposit a surety bond, enabling them to pay

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their own workers’ claims directly.14

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end14) Many employers select self- insurance when available because it gives them greater discretion in administering their own risks. Nevertheless, self-insured companies must pay their workers the same bene�its paid by state funds or private insurance carriers. In most states, the insurance commissioner sets the maximum allowable workers’ compensation insurance premium rates for private insurance carriers.

Family and Medical Leave

The Family and Medical Leave Act of 1993 (FMLA) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss150) aims to provide employees with job protection in cases of family or medical emergency. The basic thrust of the act is guaranteed leave, and a key element of that guarantee is the right of the employee to return either to the position he or she left when the leave began or to an equivalent position with the same bene�its, pay, and other terms and conditions of employment. The passage of the FMLA re�lects a growing recognition that many employees’ parents are becoming elderly, rendering them susceptible to a serious illness or medical condition. These elderly parents are likely to require frequent (if not constant) attention for an extended period while ill, which places a burden on their adult children.

The passage of the FMLA also recognizes the increasing prevalence of two-income families and the changing roles of men regarding child care. Both partners are now more likely to work full time and share family responsibilities, including child rearing. Much like elderly parents, children can also become seriously ill, requiring parents’ attention. The FMLA also enables fathers to take paternity leave to care for their newborn babies. Until the passage of the FMLA, men did not have protection comparable to what women receive under the Pregnancy Discrimination Act.

Title I of the FMLA states:

An eligible employee is entitled to 12 unpaid work weeks of leave during any 12-month period for three reasons: because of the birth or placement for adoption or foster care of a child; because of the serious health condition of a spouse, child, or parent; or because of the employee’s own serious health condition. Leave may be taken for birth or placement of a child only within 12 months of that birth or placement.

… family leave provisions apply equally to male and female employees: “A father, as well as a mother, can take family leave because of the birth or serious health condition of his child; a son as well as a daughter is eligible for leave to care for a parent.”

The minimum criteria for eligibility under this act include the following: Eligible workers must be employed by a private employer or by a civilian unit of the federal government. Eligible workers must also have been employed for at least 12 months by a given employer. Finally, eligible workers have provided at least 1,250 hours of service during the 12 months prior to making a request for a leave. Employees who do not meet these criteria are excluded, as are those who work for an employer with fewer than 50 employees within a 75-mile radius of the employee’s home. The FMLA does not explicitly de�ine “hours of service.” As a result, many disgruntled employees have �iled lawsuits against employers’ de�initions of hours of service.

Employers may require employees to use paid personal, sick, or vacation leave �irst as part of the 12-week period. If an employee’s paid leave falls short of the 12-week mandated period, then the employer must provide further leave—unpaid—to total 12 weeks. While on leave, employees retain all previously earned seniority or employment bene�its, though employees do not have the right to add such bene�its while on

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leave. Furthermore, while on leave, employees are entitled to receive health insurance bene�its. Finally, employees may be entitled to receive health bene�its if they do not return from leave because of a serious health condition or some other factor beyond their control.

The �irst major revisions to the FMLA were instituted in January 2009. The changes created leave opportunities for military families and required employees to adhere to stricter guidelines for taking leave. Relatives of seriously injured members of the military may take up to 26 weeks off from work to care for their injured military family members. In addition, relatives of members of the National Guard or reserves who are called to activity duty may receive up to 12 weeks of leave to attend military programs (of�icial send-off of the family member’s troop), arrange child care, or make �inancial arrangements. Nonmilitary workers who claim to have chronic health conditions (e.g., ongoing back pain) must see their doctor at least twice per year for documentation. Additional revisions to the FMLA may be on the horizon. For example, President Barack Obama may ask Congress to extend coverage by including companies that employ at least 25 workers. As noted, the current law applies to companies that employ at least 50 workers.

A more recent revision effective March 27, 2015, incorporates a broader de�inition of spouse. Eligible employees in legal same-sex marriages will be able to take FMLA leave to care for their spouse or family member, regardless of where they live. This will ensure that the FMLA will give spouses in same-sex marriages the same ability as all spouses to fully exercise their FMLA rights.

One �inal comment about family and medical leave warrants mention. As discussed, the FMLA provides unpaid leave. On September 23, 2002, the California governor signed legislation that allows employees to take partially paid family leave beginning after July 1, 2004. This paid family leave program allows workers to take up to 6 weeks off to care for a newborn, a newly adopted child, or an ill family member. Under this law, employees are eligible to receive 55 percent of their wages during their absence.

Health Insurance

Health insurance (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss188) covers the costs of a variety of services that promote sound physical and mental health, including physical examinations, diagnostic testing, surgery, hospitalization, psychotherapy, dental treatments, and corrective prescription lenses for vision de�iciencies. The Patient Protection and Affordable Care Act of 2010 (PPACA) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss318) is a comprehensive law that mandates health insurance coverage and sets minimum standards for insurance. (We will discuss health insurance design alternatives in the next section of this chapter.) Individuals who can afford to purchase health insurance must do so either by participating in an employer-sponsored plan or purchasing health insurance coverage independently. Starting in 2016, companies with at least 50 employees are required to offer affordable health insurance under the law. These requirements are known as the individual mandate and employer mandate, respectively.

Employers and individuals are subject to monetary penalties for failure to provide or carry insurance coverage. Individuals who do not receive coverage through employment or are unemployed pay a penalty; oftentimes, some refer to this as a tax rather than as a penalty. Without this mandate, many individuals would likely put off purchasing health insurance until they need it, that is, at the onset of a serious medical condition, when premium rates are highest (as compared to purchasing health insurance when healthy). This practice would also cause insurance premiums to rise for those who maintain coverage, including the cost of health insurance premiums to employers: Insurance companies may spread rate increases to protect pro�its.

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Many provisions of the law will have a broad impact on employment-sponsored health insurance plans that do not have grandfathered status. PPACA distinguishes between health plans that existed prior to the March 23, 2010, enactment date and those that come into existence afterward. Individual and group health plans already in existence prior to enactment are referred to as grandfathered plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss179) . New health plans (or preexisting plans that have been substantially modi�ied after March 23, 2010) are referred to as non-grandfathered plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss295) . Grandfathered plans could lose this status if at least one of the following modi�ications were made:

Elimination of all or substantially all bene�its to diagnose or treat a particular condition.

Increase in a percentage cost-sharing requirement (e.g., raising an individual’s coinsurance requirement from 20 percent to 25 percent).

Increase in a deductible or out-of-pocket maximum by an amount that exceeds medical in�lation plus 15 percentage points.

Increase in a copayment by an amount that exceeds medical in�lation plus 15 percentage points (or, if greater, $5 plus medical in�lation).

Decrease in an employer’s contribution rate towards the cost of coverage by more than 5 percentage points.

Imposition of annual limits on the dollar value of all bene�its below speci�ied amounts.15

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end15)

Reducing or eliminating coverage for one or more “essential bene�its” will cause a grandfathered plan to lose this status. Essential health bene�its must include items and services within at least the following 10 categories:

Ambulatory patient services

Emergency services

Hospitalization

Maternity and newborn care

Mental health and substance use disorder services, including behavioral health treatment

Prescription drugs

Rehabilitative services and devices

Laboratory services

Preventive and wellness services and chronic disease management

Pediatric services, including oral and vision care

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Companies that fail to offer health insurance are also subject to a penalty. If a company owes the penalty because it didn’t cover workers, it must pay approximately $2,000 per full-time employee (excluding �irst 30 employees). The fee is assessed on a monthly basis per employee. In other words, the per-employee penalty is divided by 12 months and paid for each month the insurance requirement is not met. Starting in 2016, the penalty amount in health insurance has increased. The formula is complex and is subject to change based on possible legislative rule changes and experience.

The PPACA instituted requirements that health plans remove annual dollar limits on most health bene�its as well as eliminated preexisting condition clauses altogether. Starting in 2018, the Cadillac tax (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss34) will apply to high- cost employer-sponsored health plans. Plans that cost more than $10,200 annually for individual coverage and $27,500 for family coverage are subject to the Cadillac tax. The tax equals 40 percent of the amount that exceeds those limits. For example, if an individual plan costs $14,000, the employer would pay 40 percent of $3,800 ($14,000 minus $10,200), or $1,520 for each covered individual. The tax was intended to be a disincentive for employers to provide overly rich health bene�its, and the cost of the health plan is one way to assess the level of bene�its. It is expected that these limits will increase from time to time.

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10.3 HEALTH INSURANCE PROGRAM DESIGN ALTERNATIVES

10-3 Describe fee-for-service plans, traditional managed care approaches, and more recent consumer- driven approaches to providing health care coverage.

Employers usually enter into a contractual relationship with one or more insurance companies to provide health-related services for their employees and, if speci�ied, employees’ dependents. An insurance policy (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss220) refers to a contractual relationship between the insurance company and the bene�iciary. The insurance policy speci�ies the amount of money the insurance company will pay, for such particular services as physical examinations. Employers pay insurance companies a negotiated amount, or premium (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss351) , to establish and maintain insurance policies. In this chapter, the term insured refers to employees covered by the insurance policy.

Companies can choose from the following ways to provide health insurance coverage. These include fee- for-service plans, as well as alternative managed care plans, and plans associated with the consumer- driven approach.

Fee-For-Service Plans

Fee-for-service plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss158) provide protection against health care expenses in the form of a cash bene�it paid to the insured or directly to the health care provider after the employee has received health care services. These plans pay bene�its on a reimbursement basis. Three types of eligible health expenses are hospital expenses, surgical expenses, and physician charges. Under fee-for-service plans, the insured may generally select any licensed physician, surgeon, or medical facility for treatment, and the insurer reimburses the insured after medical services are rendered.

There are two types of fee-for-service plans. The �irst type, indemnity plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss215) , is based on a contract between the employer and an insurance company. The contract speci�ies the expenses and rate that are covered. The second type, self-funded plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss401) , operates in the same fashion as indemnity plans.

The main difference between insurance plans offered by insurance companies and self-funded insurance plans centers on how bene�its are �inanced. When companies elect indemnity plans, they establish a contract with an independent insurance company. Insurance companies pay bene�its from their �inancial reserves, which are based on the premiums companies and employees pay to receive insurance. Companies may instead choose to self-fund employee insurance. Such companies pay bene�its directly from their own assets with either current cash �low or funds set aside in advance for potential future claims. The decision to self-fund is based on �inancial consideration. Self-funding (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss402) makes sense when a company’s �inancial burden of covering employee medical expenses is less than the cost to

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subscribe to an insurance company for coverage. By not paying premiums in advance to an independent carrier, a company retains these funds for current cash �low.

Fee-for-service plans provide three types of medical bene�its under a speci�ied policy: hospital expense bene�its, surgical expense bene�its, and physician expense bene�its. Companies sometimes select major medical plans to provide comprehensive medical coverage instead of limiting coverage to the three speci�ic kinds just noted, or to supplement these speci�ic bene�its.

Fee-for-service plans contain a variety of stipulations designed to control costs and to limit a covered individual’s �inancial liability. Common fee-for-service stipulations include deductibles, coinsurance, out-of- pocket maximums, preexisting condition clauses, and maximum bene�its limits.

DEDUCTIBLE

A common feature of fee-for-service plans is the deductible (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss95) . Over a designated period, employees must pay for services (i.e., meet a deductible) before insurance bene�its become active. The deductible amount can vary widely based on the plan speci�ics, ranging anywhere between a few hundred dollars to a few thousand dollars. Deductible amounts may also depend on annual earnings, expressed either as a �ixed amount for a range of earnings or as a percentage of income.

COINSURANCE

Insurance plans feature coinsurance, which becomes relevant after the insured pays the annual deductible. Coinsurance (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss48) refers to the percentage of covered expenses paid by the insured. Most indemnity plans stipulate 20 percent coinsurance. This means that the plan will pay 80 percent of covered expenses, whereas the insured is responsible for the difference, in this case, 20 percent.

Coinsurance amounts vary according to the type of expense. Insurance plans most commonly apply no coinsurance for diagnostic testing and 20 percent for other medical services. Many insurance plans provide bene�its for mental health services. Coinsurance rates for these services tend to be the highest, often as much as 50 percent.

OUT-OF-POCKET MAXIMUM

Health care costs are on the rise. Despite generous coinsurance rates, the expense amounts for which individuals are responsible can be staggering. These amounts are often beyond the �inancial means of most individuals. Thus, most plans specify the maximum amount the insured must pay per calendar year or plan year, known as the out-of-pocket maximum (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss312) provision.

The purpose of the out-of-pocket maximum provision is to protect individuals from catastrophic medical expenses or expenses associated with recurring episodes of the same illness. Out-of-pocket maximums are usually stated as a �ixed dollar amount and apply to expenses beyond the deductible amount. Individuals often have lower annual out-of-pocket maximums than family coverage. For example, the out-of-pocket maximum might be limited to $1,000 for individual coverage and $2,500 for family coverage. As an illustration, an insurance plan speci�ies a $200 deductible. An individual is responsible for the �irst $200 of expenses plus additional expenses up to $800 per year (i.e., the out-of-pocket maximum) for a total of $1,000.

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PREEXISTING CONDITION CLAUSES

A preexisting condition (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss348) is a condition for which medical advice, diagnosis, care, or treatment was received or recommended during a designated period preceding the beginning of coverage. Prior to the Patient Protection and Affordable Care Act, insurance plans oftentimes excluded preexisting conditions from coverage. Insurance companies chose to impose preexisting conditions to limit their liabilities for serious medical conditions that predate an individual’s coverage. The Patient Protection and Affordable Care Act has eliminated preexisting condition clauses altogether.

MAXIMUM BENEFIT LIMITS

Insurance companies specify maximum bene�it limits (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss271) , expressed as a dollar amount over the course of 1 year or over an insured’s lifetime. In many cases, insurance policies speci�ied both annual maximums and lifetime maximums. Until the passage of the PPACA, employers could purchase health insurance plans with lower maximum bene�it limits at correspondingly lower costs. The Patient Protection and Affordable Care Act prohibits limits on most bene�its.

Managed Care Approach

The managed care approach emphasizes cost control by limiting an employee’s choice of doctors and hospitals. Three common managed care plans are health maintenance organizations (HMOs) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss190) , preferred provider organizations (PPOs), and point-of-service (POS) plans.

HEALTH MAINTENANCE ORGANIZATIONS

HMOs are sometimes described as providing prepaid medical services (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss352) because �ixed periodic enrollment fees cover HMO members for all medically necessary services only if the services are delivered or approved by the HMO. HMOs generally provide inpatient and outpatient care as well as services from physicians, surgeons, and other health care professionals. Most medical services are either fully covered or, in the case of some HMOs, participants are required to make nominal copayments (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss81) . Copayments represent nominal payments an individual makes as a condition of receiving services. HMOs express copayments as �ixed amounts for different services (e.g., of�ice visits, prescription drugs, and emergency room treatment). It should be noted that the ranges of �igures that follow are simply approximations. Common copayment amounts vary between $15 and $50 for each doctor’s of�ice visit and between $10 and $70 per prescription drug. We address the reason for the wide variation in prescription drug copayment amounts later in this chapter.

HMO plans share several features in common with fee-for-service plans, including out-of-pocket maximums. HMOs differ from fee-for-service plans in three important ways. First, HMOs offer prepaid services, whereas fee-for-service plans operate on a reimbursement basis. Second, HMOs include the use of primary care physicians as a cost-control measure. Third, coinsurance rates are generally lower in HMO plans than in fee-for-service plans.

PRIMARY CARE PHYSICIANS

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HMOs designate some of their physicians, usually general or family practitioners, as primary care physicians. HMOs assign each member to a primary care physician or require each member to choose one. Primary care physicians (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss355) determine when patients need the care of specialists. HMOs use primary care physicians to control costs by signi�icantly reducing the number of unnecessary visits to specialists. As primary care physicians, doctors perform several duties. The most important duty is perhaps to diagnose the nature and seriousness of an illness promptly and accurately, after which the primary care physician refers the patient to the appropriate specialist.

COPAYMENTS

The most common HMO copayments apply to physician of�ice visits, hospital admissions, prescription drugs, and emergency room services. Of�ice visits are nominal amounts, ranging from $15 to $50 per visit. Hospital admissions and emergency room services are higher, ranging between $50 and $500 for each occurrence. Mental health services and substance abuse treatment require copayments as well. Inpatient services require copayments that are similar in amount to those for hospital admissions for medical treatment; however, copayments for outpatient services (e.g., psychotherapy, consultation with a psychiatrist, or treatment at a substance abuse facility) are generally expressed as a �ixed percentage of the fee for each visit or treatment. HMOs usually charge a copayment ranging between 15 and 25 percent.

PREFERRED PROVIDER ORGANIZATIONS

Under a preferred provider organization (PPO) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss349) , a select group of health care providers agrees to furnish health care services to a given population at a higher level of reimbursement than under fee-for-service plans. Physicians qualify as preferred providers by meeting quality standards, agreeing to follow cost-containment procedures implemented by the PPO, and accepting the PPO’s reimbursement structure. In return, the employer, insurance company, or third-party administrator helps guarantee the provider the physician’s minimum patient loads by furnishing employees with �inancial incentives to use the preferred providers.

PPO plans include features that resemble fee-for-service plans or HMO plans. Features most similar to fee- for-service plans are out-of-pocket maximums and coinsurance, and those most similar to HMOs include the use of nominal copayments. PPOs contain deductible and coinsurance provisions that differ somewhat from other plans.

DEDUCTIBLES

PPOs include deductible features. The structure and amount of deductibles under PPO plans most closely resemble practices commonly used in fee-for-service plans. Unlike fee-for-service plans, PPOs often apply different deductible amounts for services rendered within and outside the approved network. Higher deductibles are set for services rendered by non-network providers to discourage participants from using services outside the network.

COINSURANCE

Coinsurance is a feature of PPO plans—its structure is most similar to fee-for-service plans. PPOs calculate coinsurance as a percentage of fees for covered services. PPOs also use two sets of coinsurance payments: The �irst set applies to services rendered within the network of care providers and the second applies to

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services rendered outside the network. Coinsurance rates for network services are substantially lower than they are for non-network services. Coinsurance rates for network services range between 10 and 20 percent. Non-network coinsurance rates run between 60 and 90 percent.

POINT-OF-SERVICE PLANS

A point-of-service plan (POS) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss342) combines features of fee-for-service systems and HMOs. Employees pay a nominal copayment for each visit to a designated network of physicians. In this regard, POS plans are similar to HMOs. Unlike HMOs, however, employees possess the option to receive care from health care providers outside the designated network of physicians, but they pay somewhat more for this choice. This choice feature is common to fee-for- service plans.

Specialized Insurance Bene�its

Employers often use separate insurance plans to provide speci�ic kinds of bene�its. Bene�its professionals sometimes refer to these plans as carve-out plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss39) . Carve-out plans are set up to cover dental care, vision care, prescription drugs, mental health and substance abuse, and maternity care. Specialty HMOs or PPOs usually manage carve-out plans based on the expectation that single-specialty practices may control costs more effectively than multispecialty medical practices. We will focus on prescription drug plans and mental health and substance abuse plans because of the rampant in�lation in prescription drug costs and the increased recognition that mental health disorders may hinder worker productivity.

PRESCRIPTION DRUG PLANS

Prescription drug plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss354) cover the costs of drugs. These plans apply exclusively to drugs that state or federal laws require to be dispensed by licensed pharmacists. Prescription drugs dispensed to individuals during hospitalization or treatment in a long- term care facility are not covered by prescription drug plans. Insurers specify which prescription drugs are covered, how much they will pay, and the basis for paying for drugs.

Three kinds of prescription drug programs are currently available to companies who choose to provide these bene�its to employees. The �irst, medical reimbursement plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss274) reimburses employees for some or all of the cost of prescription drugs. These programs are usually associated with self-funded or independent indemnity plans. The second kind of plan, often referred to as a prescription card program (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss353) , operates similarly to managed care programs because it offers prepaid bene�its with nominal copayments. The name arose from the common practice of pharmacies requiring the presentation of an identi�ication card. Prescription card programs limit bene�its to prescriptions �illed at participating pharmacies, similar to managed care arrangements for medical treatment.

The third type of plan, a mail order prescription drug program (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss260) , dispenses expensive medications used to treat chronic health conditions such as human immunode�iciency virus (HIV) or such neurological disorders as Parkinson’s disease. Health insurers specify whether participants

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must receive prescription drugs through mail order programs or locally approved pharmacies. Cost is the driving factor for this decision. Mail order programs offer a cost advantage because they purchase medications at discounted prices in large volumes.

MENTAL HEALTH AND SUBSTANCE ABUSE

Approximately 20 percent of Americans experience some form of mental illness (e.g., clinical depression) at least once during their lifetimes.16

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end16) Nearly 20 percent develop a substance abuse problem. As a result, insurance plans provide mental health and substance abuse bene�its designed to cover treatment of mental illness and chemical dependence on alcohol and legal and illegal drugs. Delivery methods include fee-for-service plans and managed care options. Employee assistance programs (EAPs) represent a portal to taking advantage of employer-sponsored mental health and substance abuse treatment options. EAPs help employees cope with personal problems that may impair their personal lives or job performance, including alcohol or drug abuse, domestic violence, the emotional impact of AIDS and other diseases, clinical depression, and eating disorders. EAPs also assist employers in helping troubled employees identify and solve problems that may be interfering with their job or personal life.

Mental health and substance abuse plans cover the costs of a variety of treatments, including prescription psychiatric drugs (e.g., antidepressant medication), psychological testing, inpatient hospital care, and outpatient care (e.g., individual or group therapy). Mental health bene�its amounts vary by the type of disorder. Psychiatrists and psychologists rely on the Diagnostic and Statistical Manual of Mental Disorders (DSM-5) to diagnose mental disorders based on symptoms, and both fee-for-service and managed care plans rely on the DSM-5 to authorize payment of bene�its.

Consumer-Driven Health Care

Managed care plans became popular alternatives to fee-for-service plans mainly to help employers and insurance companies more effectively manage the costs of health care. As discussed, managed care plans by design imposed substantial restrictions on an employee’s ability to make choices about from whom they could receive medical treatment, the gatekeeper role of primary care physicians, and the level of bene�its they could receive based on designated in- and out-of-network providers.

Despite the cost control objectives of managed care, health care costs have continued to rise dramatically over the years while restricting employee choice. Consumer-driven health care (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss75) refers to the objective of helping companies maintain control over costs while also enabling employees to make smarter choices about health care. This approach may enable employers to lower the cost of insurance premiums by selecting fee-for-service plans or managed care plans with higher employee deductibles. The most popular consumer-driven approaches couple health plan �lexible spending accounts and health reimbursement accounts. These accounts provide employees with resources to pay for medical and related expenses not covered by higher deductible insurance plans at substantially lower costs to employers.

Flexible spending accounts (FSAs) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss163) permit employees to pay for speci�ied health care costs that are not covered by an employer’s insurance plan. Prior to each plan year, employees elect the amount of pay they wish to allocate to this kind of plan.

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Employers then use this money to reimburse employees for medical expenses incurred during the plan year that qualify for repayment.

A signi�icant advantage to employees is the ability to make contributions to their FSAs on a pretax basis; however, a noteworthy drawback is the “use it or lose it” provision of FSAs. FSAs require employees to estimate the amount of money they think they will need for eligible medical expenses. Of course, it is dif�icult to predict many medical needs and to estimate the costs of anticipated medical needs. Employees lose contributions to their FSAs when they overestimate the cost of medical needs because employers neither allow employees to carry balances nor do employers reimburse employees for balances remaining at the end of the year.

On the other hand, employers may establish health reimbursement accounts (HRAs) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss191) . The purposes of HRAs and FSAs are similar with three important differences. First, employers make the contributions to each employee’s HRA, whereas employees fund FSAs with pretax contributions deducted from their pay. Employees do not contribute to HRAs. HRA arrangements are particularly appealing to employees with relatively low salaries or hourly wage rates because they do not contribute to them. Second, HRAs permit employees to carry over unused account balances from year to year, whereas employees forfeit unused FSA account balances present at the end of the year. Third, employers may offer employees HRAs as well as FSAs, and the use of these accounts is not limited to participation in high-deductible health care plans, which is the case for HSAs.

The idea of consumer-driven health care has most recently received substantially greater attention than before because of the Bush administration (President George W. Bush) and the Republican-led Congress, who favor greater employee involvement in their medical care and reducing the cost burden for companies to help maintain competitiveness in the global market. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss278) 17

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end17) added Section 223 to the IRC, effective January 1, 2004, to permit eligible individuals to establish health savings accounts (HSAs) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss192) to help employees pay for medical expenses. In 2015, an employer, an employee, or both may contribute as much as $3,350 annually for unmarried employees without dependent children or as much as $6,550 for married or unmarried employees with dependent children. Employers may require employees to contribute toward these limits. Employee contributions would be withheld from an employee’s pay on a pretax basis. Employers offer HSAs along with a high deductible insurance policy, established for employees. High-deductible health insurance plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss193) require substantial deductibles and low out-of-pocket maximums. For individual coverage, the minimum annual deductible was $1,300 with a maximum out-of-pocket limit at or below $6,450 in 2015. For family coverage, the deductible was $2,600 with maximum out-of-pocket limits at or below $12,900.

HSAs offer four main advantages to employees relative to FSAs and HRAs. First, HSAs are portable, which means that the employee owns the account balance after the employment relationship ends. Second, HSAs are subject to in�lation-adjusted funding limits. Third, employees may receive medical services from doctors, hospitals, and other health care providers of their choice, and they may choose the type of medical services they purchase, including such items as long-term care, eye care, and prescription drug coverage. FSAs and HRAs substantially limit employee choice. Fourth, HSA assets must be held in trust and cannot be subject to forfeiture. That is, any unspent balances in the HSA can be rolled over annually and

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accumulate tax-free until the participant’s death. FSAs and HRAs have no legal vesting requirement, which means employees do not possess the right to claim unused balances when they terminate employment.

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10.4 ADDITIONAL HEALTH CARE LEGISLATION

10-4 Summarize two additional key laws pertaining to legally required bene�its.

Besides PPACA, a variety of laws in�luence employer-sponsored health care offerings. We review two of the key laws in chronological order: the Consolidated Omnibus Budget Reconciliation Act of 1985 and the Health Insurance Portability and Accountability Act of 1996.

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss73) was enacted to provide employees with the opportunity to continue receiving their employer-sponsored medical care insurance temporarily under their employer’s plan if their coverage otherwise would cease because of termination, layoff, or other change in employment status. COBRA applies to a wide variety of employers, with exemptions available only for companies that normally employ fewer than 20 workers, church plans, and plans maintained by the U.S. government. COBRA is an amendment to the Employee Retirement Income Security Act of 1974.

Under COBRA, individuals may continue their coverage, as well as coverage for their spouses and dependents, for up to 18 months. Coverage may extend for up to 36 months for spouses and dependents facing a loss of employer-provided coverage because of an employee’s death, a divorce or legal separation, or certain other qualifying events, which include employee termination, retirement, and layoff. Table 10-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec4#ch10tab02) displays the maximum continuation period for particular qualifying events.

Companies are permitted to charge COBRA bene�iciaries a premium for continuation coverage of up to 102 percent of the cost of the coverage to the plan. The 2 percent markup re�lects a charge for administering COBRA. Employers that violate the COBRA requirements are subject to an excise tax per affected employee for each day that the violation continues. In addition, plan administrators who fail to provide required COBRA notices to employees may be personally liable for a civil penalty for each day the notice is not provided.

TABLE 10-2 COBRA Continuation Requirements

Qualifying Events Maximum Continuation Period

Employee

a. Termination of employment for any reason, including termination of disability bene�its and layoff (except for gross misconduct)

18 monthsa

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec4#ch10fn2)

aThis 18-month period may be extended for all quali�ied bene�iciaries if certain conditions are met in cases where a quali�ied bene�iciary is determined to be disabled for purposes of COBRA.

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Qualifying Events Maximum Continuation Period

b. Loss of eligibility due to reduction in work hours

18 months

c. Determination by the Social Security Administration (SSA) of disability that existed at time of qualifying event

18 months

Dependent

a. Loss of dependent child status

36 months

b. Employee’s death, divorce, or legal separation

36 months

Spouse (entitled to Medicare) 36 months aThis 18-month period may be extended for all quali�ied bene�iciaries if certain conditions are met in cases where a quali�ied bene�iciary is determined to be disabled for purposes of COBRA.

Health Insurance Portability and Accountability Act of 1996 (HIPAA)

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) contains three main provisions. The �irst provision is intended to guarantee that employees and their dependents that leave their employer’s group health plan will have ready access to coverage under a subsequent employer’s health plan, regardless of their health or claims experience. The second provision sets limits on the length of time that health plans and health insurance issuers may impose preexisting health conditions and identify conditions to which no preexisting condition may apply. As noted previously, since the passage of the Patient Protection and Affordable Care Act, preexisting condition clauses were eliminated. The third provision protects the transfer, disclosure, and use of health care information.

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10.5 THE BENEFITS AND COSTS OF LEGALLY REQUIRED BENEFITS

10-5 Discuss the main bene�its and costs of legally required bene�its.

Employee bene�its are unlike most bases for monetary compensation (e.g., merit, pay-for-knowledge, and incentives). Under these programs, the amount of compensation employees receive varies with their level of contributions to the company. Instead, bene�its tend to emphasize social adequacy. Under the principle of social adequacy, bene�its are designed to provide subsistence income to all bene�iciaries regardless of their performance in the workplace.18

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end18) Thus, although humanitarian, legally required bene�its do not directly meet the imperatives of competitive strategy. Legally required bene�its, however, may contribute indirectly to competitive advantage by enabling individuals to remain participants in the economy.

Nevertheless, legally required bene�its may be a hindrance to companies in the short term because these offerings require substantial employer expenditures (e.g., contributions mandated by the Social Security Act and various state workers’ compensation laws). Without these mandated expenditures on compensation, companies could choose to invest these funds in direct compensation programs designed to boost productivity and product or service quality.

How can HR managers and other business professionals minimize the cost burden associated with legally required bene�its? Let’s consider this issue for both workers’ compensation and unemployment insurance bene�its. In the case of workers’ compensation, employers can respond in two ways. The �irst response is to reduce the likelihood of workers’ compensation claims. The implementation of workplace safety programs is one strategy for reducing workers’ compensation claims. Effective safety programs include teaching safe work procedures and safety awareness to employees and supervisors. Another strategy for reducing workers’ compensation claims is health promotion programs that include inspections of the workplace to identify health risks (e.g., high levels of exposure to toxic substances) and then to eliminate those risks.

The second employer response is to integrate workers’ compensation bene�its into the rest of the bene�its program. Because of the rampant cost increases associated with workers’ compensation, several state legislatures have considered integrating employer-sponsored medical insurance and workers’ compensation programs. This “24-hour” coverage would speci�ically roll the medical component of workers’ compensation into traditional employer-provided health insurance. Some companies have already experimented with 24-hour coverage. For instance, Polaroid Corporation found cost advantages associated with integrating medical insurance and workers’ compensation: reduced administrative expense through integration of the coverages, better access to all employee medical records, and a decrease in litigation.19 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end19)

Use of 24-hour coverage is not widespread for a number of reasons.20

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec10#ch10end20) Many insurance companies view this approach as complicated. In addition, some companies are concerned that this coverage would cost them in unanticipated ways.

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Employers also can contain their costs for unemployment insurance. As discussed earlier, the amount of tax employers contribute to providing unemployment insurance depends partly on their experience rating. Thus, employers can contain costs by systematically monitoring the reasons they terminate workers’ employment and avoiding terminations that lead to unemployment insurance claims whenever possible. For example, it is not uncommon for companies to employ workers on a full-time basis when they experience increased demand for their products or services. Adding full-time workers is reasonable when companies expect that the higher demand will last for an extended period (e.g., more than 2 years); however, when demand is lower in the short term, companies usually reduce their workforce through layoffs. Unless the laid-off employees immediately �ind employment, they will �ile claims with their local employment security of�ice for unemployment insurance. Their claims contribute to the companies’ unemployment experience rating and, thus, their cost expenditures.

COMPENSATION IN ACTION

To both employees and employers, legally required bene�its can, at �irst glance, appear to be a burden. These costs mean that less capital will be devoted to investments or available for expenditures in other areas. However, by thoroughly understanding the principles behind the establishment of these laws, they will be viewed as less of a burden and more of a bene�it. As HR and line managers, you will have the responsibility of educating employees about the broader array of bene�its options, as well as protecting the company from liabilities associated with a failure to comply with certain legally mandated bene�its.

Action checklist for line managers and HR—protecting the company and educating employees

HR takes the lead

Benchmark other companies to see how �lexible bene�it plans are chosen and administered. This �lexibility will empower employees and will likely lead to positive work-related outcomes (e.g., reduced absenteeism and low turnover).

Involve employees in the discussion as the bene�its plan is adjusted to better align the cost of the bene�its plan and its attractiveness to employees.

Make recommendations on wellness programs and other bene�its that support and enhance legally required bene�its (which could also decrease overall cost for the company; e.g., health care). Assess the cost up front and provide justi�ication for the cost by comparing it to potential future costs.

Line managers take the lead

Ensure that all employees are properly trained on equipment and that the work environment is safe. This will serve as a preventative measure against certain bene�its that have a cost to employee and employer (e.g., workers’ compensation).

Seek education on certain legally required bene�its that are likely to be encountered (e.g., FMLA). Become comfortable with talking about these issues; dealing sensitively with these issues when they are brought up by employees may mitigate the risk of employees �iling a

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grievance on how their legally granted right was compromised (akin to “bedside manners” with hospitals).

Work with HR to create a communication plan that clearly demonstrates the bene�its of the plan, describes how to take full advantage of its bene�its, and increases awareness and appreciation.

END OF CHAPTER REVIEW

MyManagementLab Go to mymanagementlab.com (http://mymanagementlab.com) to complete the problems marked with this icon .

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Summary

Learning Objective 1: Legally required bene�its provide a form of social insurance. Various bene�its arose out of particular undesirable social, work, and economic conditions as well as President Barack Obama’s call for all Americans to possess health insurance protection.

Learning Objective 2: There are four main categories of legally required bene�its: Social Security programs (retirement, survivor and disability insurance, and Medicare under the Social Security Act of 1935), workers’ compensation (various state compulsory disability laws), unpaid family and medical leave (Family and Medical Leave Act of 1993), and health insurance (Patient Protection and Affordable Care Act).

Learning Objective 3: Alternative health insurance design options include fee-for-service plans, various managed care plans, and consumer-driven health care.

Learning Objective 4: Additional legislation in�luences legally required bene�it practices, including the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) and the Health Insurance Portability and Accountability Act of 1994.

Learning Objective 5: Legally required bene�its are costly to employers; however, they do provide advantages. Legally required bene�its such as health insurance can promote a productive workforce. From a societal perspective, these bene�its provide a form of social insurance and contribute to work–life balance.

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Key Terms base period 229

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_229) Federal Unemployment Tax Act (FUTA) 229

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_229) quarters of coverage 229

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_229) fully insured 230

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_230) Medicare Part A 231

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_231) Medicare Part B 232

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_232) Medigap 232 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_232) Medicare Select plans 232

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_232) Medicare Advantage 232

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_232) Federal Insurance Contributions Act (FICA) 232

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_232) Self-Employment Contributions Act (SECA) 232

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_232) taxable wage base 233

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_233) Medicare tax 233

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_233) hospital insurance tax (HI) 233

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_233) Longshore and Harborworkers’ Compensation Act 233

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_233) Federal Employees’ Compensation Act 233

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_233) Family and Medical Leave Act of 1993 (FMLA) 234

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_234) health insurance 236

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_236) Patient Protection and Affordable Care Act of 2010 (PPACA) 236

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_236) grandfathered plans 236

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_236) non-grandfathered plans 236

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_236) Cadillac tax 237

(http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_237)

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insurance policy 237 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_237)

premium 237 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_237)

fee-for-service plans 237 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec2#page_237)

indemnity plans 238 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_238)

self-funded plans 238 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_238)

self-funding 238 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_238)

deductible 238 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_238)

coinsurance 238 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_238)

out-of-pocket maximum 238 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_238)

preexisting condition 239 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_239)

maximum bene�it limits 239 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_239)

managed care plans 239 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_239)

prepaid medical services 239 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_239)

copayments 239 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_239)

primary care physicians 239 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_239)

preferred provider organization (PPO) 240 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_240)

point-of-service plan (POS) 240 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_240)

carve-out plans 240 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_240)

prescription drug plans 240 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_240)

medical reimbursement plans 241 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_241)

prescription card program 241 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_241)

mail order prescription drug program 241 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_241)

consumer-driven health care 241 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_241)

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�lexible spending accounts (FSAs) 242 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_242)

health reimbursement accounts (HRAs) 242 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_242)

Medicare Prescription Drug, Improvement and Modernization Act of 2003 242 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_242)

health savings accounts (HSAs) 242 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_242)

high-deductible health insurance plans 242 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_242)

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) 243 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_243)

Health Insurance Portability and Accountability Act of 1996 (HIPAA) 243 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch10lev1sec3#page_243)

MyManagementLab CHAPTER QUIZ! If your professor has assigned this, go to the Assignments section of mymanagementlab.com (http://mymanagementlab.com) to complete the Chapter Quiz! and see what you’ve learned.

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Discussion Questions 10-1. Except for the Patient Protection and Affordable Care Act, the remaining legally required bene�its

were conceived more than a decade ago. What changes in the business environment and society might affect the relevance or perhaps the viability of any of these bene�its? Discuss your ideas.

10-2. Describe the principles of fee-for-service plans and managed care plans. What are the similarities and differences?

10-3. Discuss some of the choices an employer may make to help control health care costs.

10-4. In what ways may legally required bene�its have contributed to an employee entitlement mentality regarding discretionary bene�it offerings? Explain your rationale.

10-5. Conduct some research on the future of the Social Security programs (see the Web site www.ssa.gov (http://www.ssa.gov) ). Based on your research, prepare a statement, not to exceed 250 words, that describes your view of the Social Security programs (e.g., whether they are necessary, their viability, or whether there should be changes in how the programs are funded). How has this research in�luenced your views?

CASE A Health Savings Account at Frontline PR

An additional Supplemental Case can be found on MyManagementLab.

Susan Berry just returned from a national conference on compensation and bene�its where she attended a session on health savings accounts (HSAs). Susan is the human resources director at Frontline PR, and the company has been struggling with the cost of health care insurance. After speaking with several experts at the conference, Susan now thinks an HSA might be a viable option for the company.

Frontline PR is a public relations �irm located in the Northeast that employs close to 150 people in four different of�ices. Public relations professionals make up most of the staff, but the company also employs a complete administrative and operations staff. All of Frontline’s employees work full-time schedules and are eligible to participate in its health care insurance plan. Frontline currently offers a standard fee-for- services health care insurance option. The plan has a modest deductible of $300 per year and a 20 percent coinsurance requirement. In addition, the company offers a �lexible spending account (FSA) that allows employees to set aside pretax earnings to pay for the deductible, coinsurance, and other medical expenses.

Susan is considering offering an HSA along with a high-deductible health insurance plan instead of the current insurance plan and FSA. At the conference, Susan learned that making such a change could result in signi�icant cost savings for a company. The high-deductible health insurance plan would cost a lot less for the company than the standard fee-for-services plan that Frontline currently offers. While Susan suggests that Frontline make contributions to each employee’s HSA, the overall costs for the health care bene�it would still be less than its current option. Beyond cost savings on premiums, many believe that consumer-driven health care tends to reduce overall health care costs. Some of the experts Susan spoke to

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at the conference stated that when employees have a greater say in their health care decisions, they make wiser decisions and do not spend as much on health care.

Susan has discussed the HSA option with Frontline’s director of �inance, Allison Jones. From the �inancial perspective, Allison agrees that the option would be a good step to start controlling health care costs. However, as an employee who would use the bene�it, Allison isn’t so sure that an HSA with a high- deductible health insurance plan is the right option for the company. Based on Susan’s initial explanation, Allison didn’t really understand how the HSA worked. Further, she was concerned that she would have to spend more out of pocket on her own health care.

Susan is convinced that the HSA option would offer a signi�icant cost savings to Frontline. However, after her discussion with Allison, Susan is still unsure if it is the right path to recommend for her company.

Questions:

10-6. What are some advantages of implementing the HSA option? 10-7. What are some potential disadvantages of the HSA option? 10-8. What do you recommend? Why?

Crunch the Numbers! Calculating Taxes under the Patient Protection and Affordable Care Act

An additional Crunch the Numbers! exercise can be found on mymanagementlab.com (http://mymanagementlab.com) .

The PPACA imposes taxes on employers who choose not to provide health insurance bene�its or who choose to offer highly expensive health insurance plans. Let’s assume that a company has 500 workers. Calculate the costs of the following scenarios.

Questions:

10-9. The company chooses not to provide health insurance. How much will the penalty be based on the formula presented in this chapter?

10-10. The company prices health insurance for its workforce, and determines that the annual cost is $2,500,000. Based on your answer to question 10-9, how much money would it save by not offering health insurance?

10-11. The company is considering the purchase of a high-priced health insurance option. The cost is equal to $16,000 per employee for individual coverage and $30,000 per employee for family coverage. Half of the employees subscribe to individual coverage. Based on the guidelines presented in this chapter, calculate the Cadillac tax.

MyManagementLab Go to mymanagementlab.com (http://mymanagementlab.com) for Auto-graded writing questions as well as the following Assisted-graded writing questions:

10-12. How does a state determine if an individual is eligible for unemployment insurance bene�its?

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10-13. De�ine health insurance concepts such as insurance policy and premium, and explain the different types of health insurance programs. What are the main differences among these programs?

10-14. MyManagementLab Only—comprehensive writing assignment for this chapter.

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Endnotes 1. U.S. Department of Labor. (March 11, 2015). Employer costs for employee compensation, December 2014 (USDL: 15-0386). Available: www.bls.gov (http://www.bls.gov) , accessed March 15, 2015.

2. Dulles, F. R., & Dubofsky, M. (1993). Labor in America: A History. Arlington Heights, IL: Harlan Davidson. 3. Rejda, G. E. (1994). Social Insurance and Economic Security. Upper Saddle River, NJ: Prentice Hall. 4. U.S. Chamber of Commerce. (2013). 2013 Analysis of Workers’ Compensation Laws. Washington, DC: Author.

5. U.S. Social Security Administration. (2015). Fact Sheet: Social Security Changes. Available: www.ssa.gov (http://www.ssa.gov) , accessed March 14, 2015.

6. Ibid. 7. Ibid. 8. 26 U.S.C. §§3101–3125. 9. 26 U.S.C. §§1401–1403.

10. Ibid. 11. Nackley, J. V. (1987). Primer on Workers’ Compensation. Washington, DC: Bureau of National Affairs. 12. Ibid. 13. U.S. Department of Labor. (March 11, 2015). Employer costs for employee compensation, December

2014 (USDL: 15-0386). Available: www.bls.gov (http://www.bls.gov) , accessed March 15, 2015. 14. Nackley, Primer on Workers’ Compensation. 15. U.S. Department of Labor (2015). FAQs about the Affordable Care Act Implementation: Part II. Available:

http://www.dol.gov (http://www.dol.gov) , accessed July 1, 2015. 16. U.S. Surgeon General. (2011). Epidemiology of Mental Illness. Available:

http://www.surgeongeneral.gov/library/mentalhealth/chapter2/sec2_1.html (http://www.surgeongeneral.gov/library/mentalhealth/chapter2/sec2_1.html) , accessed February 22, 2011.

17. Public L. No. 108–173. 18. Martocchio, J. J. (2014). Employee Bene�its: A Primer for Human Resource Professionals (5th ed.). Burr

Ridge, IL: Irwin/McGraw-Hill. 19. Tompkins, N. C. (1992). Around-the-clock medical coverage. HR Magazine (June), pp. 66–72. 20. Baker, L. C., & Krueger, A. B. (1993). Twenty-Four-Hour Coverage and Workers’ Compensation Insurance.

Working paper, Princeton University Industrial Relations Section.