Assigment For Researcher_D
lammoralesIndirect Compensation
Employee Benefit Plans
Questions This Chapter Will Help Managers Answer
1. What strategic considerations should guide the design of benefits programs?
2. What options are available to help a business control the rapid escalation of health care costs?
3. Should companies offer a uniform “package” of benefits, or should they move to a flexible plan that allows employees to choose the benefits that are most meaningful to them, up to a certain dollar amount?
4. What cost-effective benefits options are available to a small business?
5. In view of the considerable sums of money that are spent each year on employee benefits, what is the best way to communicate this information to employees?
THE NEW WORLD OF EMPLOYEE BENEFITS
Sources: Byrnes, N. (2004, July 19). The benefits trap. BusinessWeek, pp. 64-72; 2004 Benefits survey. (2004, June). Alexandria, VA: Society for Human Resource Management; Leonard, B. (1995, Mar.). Perks give way to life-cycle benefits plans. HRMagazine, pp. 45-48.
Human Resource Management in Action
In the early 1990s, experts predicted that benefits packages would become ever more generous as companies competed for a shrinking pool of workers. Today, that forecast seems as outdated as the notion that computers would create a paperless society. Struggling to deal with benefits costs that seem to rise relentlessly, many firms are eliminating benefits or asking employees to pay more for them. Plans that allow employees to choose among alternative benefits choices, so-called flexible benefits, force employees to make trade-offs—and profoundly affect how they think about security, company loyalty, and employment itself. It wasn't always this way.
In the past, major corporations offered their employees a wide array of company-paid insurance and retirement benefits. Corporations decided what was best for their employees. Now, however, most employers are not only changing the range of benefit choices they offer but also changing the basic structure of their benefits. IBM is typical. In 1999 it capped how much retiree health care it would pay per year at $7,500 of each employee's annual medical insurance costs. In 2003 IBM said it would pay nothing toward health insurance for future hires when they retire.
Economics and demographics are driving these changes. Economically, most employers realize that the traditional blanket approach to benefits—total coverage for everyone—would subject them to unbearable expense. Benefits are no longer the “fringe” of compensation. Today they often comprise 40 percent or more of wages. As a result of unending increases in the price of medical care, for example, economists estimate that between 1999 and 2010 at least 31 percent of all the additional income we'll earn will pay for health care expenses.1 Increasing life expectancy has made pensions more costly as well. And the combination of increased longevity, rising health care costs, and an accounting standard that requires firms to report the cost of future retiree health care benefits on their balance sheets—thereby reducing profits—has led employers to rethink their entire approach to employee benefits dramatically.
Demographically, the United States now has a much more diverse work-force than it has had in the past. As a result, the “one-size-fits-all” approach to employee benefits doesn't work. Employees who have working spouses covered by health insurance have different insurance needs from those who are sole breadwinners. Single parents and childless couples place very different priorities on child care benefits. So rather than attempt to fashion a single approach that suits all of these interests, many employers determine a sum they'll spend on each employee, establish a menu of benefits, and then let each employee choose the benefits he or she wants or needs. At the same time such plans allow employers to trim benefits merely by raising the prices of the various options on the benefits menu. Such life-cycle benefits plans represent the next generation of full-blown flexible benefits.
These changes reflect more than demographic diversity, however. A fundamental change in philosophy is taking place as employees are forced to take more responsibility. Part of this is a movement toward employee self-management. Indeed, the new approach might well be described as one of “sharing costs, sharing risks.” The conclusion to this case will showcase four major areas that change has affected most profoundly.
Challenges
1. Do you think companies should provide a broader menu of “exotic” benefits (e.g., veterinary care, dietary counseling) or improve the menu of “core” benefits (e.g., health care, insurance, pensions)? Why?
2. How might your preference for various benefits change as you grow older or as your family situation changes?
3. Should employees share at least some of the costs and risks of benefits with their employers? Why or why not?
Benefits currently account for more than 40 percent of the total compensation costs for each employee. Yesterday's “fringes” have become today's (expected) benefits and services. Here are some reasons benefits have grown:
· The imposition of wage ceilings during World War II forced organizations to offer more benefits in place of wage increases to attract, retain, and motivate employees.
· The interest by unions in bargaining over benefits has grown, particularly because employers are pushing for more cost-sharing by employees.2
· The tax treatment of benefits makes them preferable to wages. Many benefits remain nontaxable to the employee and are deductible by the employer. With other benefits, taxes are deferred. Hence employees' disposable income increases because they are receiving benefits and services that they would otherwise have to purchase with after-tax dollars.
· Granting benefits (in a nonunionized firm) or bargaining over them (in a unionized firm) confers an aura of social responsibility on employers; they are “taking care” of their employees. This is important; evidence indicates that employees retain a strong sense of entitlement to benefits.3
STRATEGIC CONSIDERATIONS IN THE DESIGN OF BENEFITS PROGRAMS
As is the case with compensation systems in general, managers need to think carefully about what they wish to accomplish by means of their benefits programs. On average, firms spend $18,000 per employee on benefits in addition to wages. Of that amount, they spend nearly $6,300 for medically related benefits with another $5,000 toward payments for time not worked and $2,600 for retirement benefits.4 General Motors, for example, spends about $1,784 per vehicle just for retiree pension and health care costs. Compare that with Toyota's U.S. plan, which costs the company less than $200 per vehicle.5 It is no exaggeration to say that for most firms, benefits represent substantial annual expenditures. To leverage their impact, managers should be prepared to answer questions such as the following:
· Are the type and level of our benefits coverage consistent with our long-term strategic business plans?
· Given the characteristics of our workforce, are we meeting the needs of our employees?
· What legal requirements must we satisfy in the benefits we offer?
· Are our benefits competitive in cost, structure, and value to employees and their dependents?
· Is our benefits package consistent with the key objectives of our total compensation strategy, namely, adequacy, equity, cost control, and balance?
In the following sections, we discuss each of these points.
Long-Term Strategic Business Plans
Such plans outline the basic directions in which an organization wishes to move in the next three to five years. One strategic issue that should influence the design of benefits is an organization's stage of development. For example, a startup venture probably will offer low base pay and benefits but high incentives; a mature firm with well-established products and substantial market share will probably offer much more generous pay and benefits combined with moderate incentives.
Other strategic considerations include the projected rate of employment growth or downsizing, geographic redeployment, acquisitions, and expected changes in profitability.6 Each of these conditions suggests a change in the optimum “mix” of benefits in order to be most consistent with an organization's business plans.
COMPANY EXAMPLE: IBM
IBM's Workforce Solutions has becoming a model for other companies that are searching for ways to enhance the quality of services provided by their HR departments. Like most other companies, IBM searched for cost-effective ways to cut its annual cost of employee benefits (more than $1 billion per year). It found one that is consistent with its long-term business plan to make each of its independent units a profit center. Guess what IBM did? It spun off its huge HR operation into a separate company called Workforce Solutions, which is now saving IBM more than $45 million annually in the form of reduced staffing, consolidation of offices, and use of technology, such as the company's intranet. In fact, the overall HR staff has shrunk by about a third. The spin-off provides customized services to each of IBM's independent business units. Before, IBM took a one-size-fits-all approach to benefits. In addition, Workforce Solutions also handles business for other companies, such as the National Geographic Society, capitalizing on IBM's reputation for excellence and lots of practical experience in the benefits area. Each IBM unit is free to choose its own provider of benefits and HR functions. Hence, Workforce Solutions has to compete for that business. Its success shows that marketing internal operations to outsiders can turn benefits departments from drains on the bottom line to profit centers in their own right.
New Product—Employee Benefits7
Diversity in the Workforce Means Diversity in Benefits Preferences
Young employees who are just starting out are likely to be more concerned with direct pay (e.g., for a house purchase) than with a generous pension program. Older workers may desire the reverse. Unionized workers may prefer a uniform benefits package, while single parents, older workers, or workers with disabilities may place heavy emphasis on flexible work schedules. Employers that hire large numbers of temporary or part-time workers may offer entirely different benefits to these groups. Evidence indicates that the perceived value of benefits rises when employers introduce choice through a flexible benefits package.8
The government plays a central role in the design of any benefits package. While controlling the cost of benefits is a major concern of employers, the social and economic welfare of citizens is the major concern of government.9 As examples of such concern, consider the four income-maintenance laws shown in Table 12-1.
Table 12-1 Four Major Income-Maintenance Laws
Law |
Scope of coverage |
Funding |
Benefits |
Administrative agency |
Social Security Act (1935) |
Full coverage for retirees, dependent survivors, and disabled persons insured by 40 quarters of payroll taxes on their past earnings or earnings of heads of households. Federal government employees hired prior to January 1, 1984, and railroad workers are excluded. |
For 2005, payroll tax of 7.65% for employees and 7.65% for employers on the first $90,000 in earnings. Self-employed persons pay 15.3% of this wage base. Of the 7.65%, 6.2% is allocated for retirement, survivors, and disability insurance, and 1.45% for Medicare. The Omnibus Budget Reconciliation Act of 1993 extended the 1.45% Medicare payroll tax to all wages and self-employment income. |
Full retirement payments after age 65, or at reduced rates after 62, to worker and spouse. Size of payment depends on past earnings. Survivor benefits for the family of a deceased worker or retiree. At age 65 a widow or widower receives the full age 65 pension granted to the deceased. A widow or widower of any age with dependent children under 16, and each unmarried child under 18, receives a 75% benefit check. Disability benefits to totally disabled workers, after a 5-month waiting period, as well as to their spouses and children. Health insurance for persons over 65 (Medicare). All benefits are adjusted upward whenever the consumer price index (CPI) increases more than 3% in a calendar year and trust funds are at a specified level. Otherwise the adjustment is based on the lower of the CPI increase or the increase in average national wages (1983 amendments). |
Social Security Administration |
Federal Unemployment Tax Act (1935) |
All employees except some state and local government workers, domestic and farm workers, railroad workers, and some nonprofit employees. |
Payroll tax of 6.2% of first $7,000 of earnings paid by employer. (Employees also taxed in Alaska, Alabama, and New Jersey.) States may raise both the percentage and base earnings taxed through legislation. Employer contributions may be reduced if state experience ratings for them are low. |
Benefits average roughly 50% of average weekly earnings and are available for up to 26 weeks. Those eligible for benefits have been employed for some specified minimum period and have lost their jobs through no fault of their own. Most states exclude strikers. During periods of high unemployment, benefits may be extended for up to 52 weeks. |
U.S. Department of Labor, Employment and Training Administration and the several state employment security commissions |
Workers' compensation (state laws) |
Generally, employees of nonagricultural, private-sector firms are entitled to benefits for work-related accidents and illnesses leading to temporary or permanent disabilities. |
One of the following options, depending on state law: self-insurance, insurance through a private carrier, or payroll-based payments to a state insurance system. Premiums depend on the riskiness of the occupation and the experience rating of the insured. |
Benefits average about two-thirds of an employee's weekly wage and continue for the term of the disability. Supplemental payments are made for medical care and rehabilitative services. In case of a fatal accident, survivor benefits are payable. |
Various state commissions |
Employee Retirement Income Security Act (ERISA) (1974) |
Private-sector employees over age 21 enrolled in noncontributory (100% employerpaid) retirement plans who have 1 year's service. |
Employer contributions. |
The 1986 Tax Reform Act authorizes several formulas to provide vesting of retirement benefits after a certain length of service (5-7 years). Once an employee is “vested,” receipt of the pension is not contingent on future service. Authorizes tax-free transfer of vested benefits to another employer or to an individual retirement account (“portability”) if a vested employee changes jobs and if the present employer agrees. Employers must fund plans on an actuarially sound basis. Pension trustees (“fiduciaries”) must make prudent investments. Employers may insure vested benefits through the federal Pension Benefit Guaranty Corporation. |
Department of Labor, Internal Revenue Service, Pension Benefit Guaranty Corporation |
Income-maintenance laws were enacted to provide employees and their families with income security in case of death, disability, unemployment, or retirement. At a broad level, government tax policy has had, and will continue to have, a major impact on the design of benefits programs. Two principles have had the greatest impact on benefits.10 One is the doctrine of constructive receipt, which holds that an individual must pay taxes on benefits that have monetary value when the individual receives them. The other principle is the antidiscrimination rule, which holds that employers can obtain tax advantages only for those benefits that do not discriminate in favor of highly compensated employees.
These two tax policy principles define the conditions for the preferential tax treatment of benefits. Together they hold that if benefits discriminate in favor of highly paid or “key” employees, both the employer and the employee receiving those benefits may have to pay taxes on the benefits when they are transferred.
Social Security, which accounts for $1 of every $5 spent by the federal government, has had, and will continue to have, an effect on the growth, development, and design of employee benefits. National health policy increasingly is shifting costs to the private sector and emphasizing cost containment; such pressures will intensify. Finally, national policy on unfair discrimination, particularly through the civil rights laws, has caused firms to reexamine their benefit policies.
Competitiveness of the Benefits Offered
The issue of benefits program competitiveness is much more complicated than that of salary competitiveness.11 In the case of salary, both employees and management focus on the same item: direct pay (fixed plus variable). However, in determining the competitiveness of benefits, senior management tends to focus mainly on cost, while employees are more interested in value. The two may conflict. Thus, employees' perceptions of the value of their benefits as competitive may lead to excessive costs, in the view of top management. On the other hand, achieving cost competitiveness provides no assurance that employees will perceive the benefits program as valuable to them.
To attract and retain skilled workers, Nike enlists current employees to help enrich its benefits offerings. It starts by probing workers' fears, needs, and desires in focus groups and surveys, in which employees often express worries about not being able to buy a house, send their children to college, or care for elderly parents. Then Nike asks employee teams to design new benefits packages that offer more choices without raising costs. Some of the choices the teams come up with include company-matching funds for college tuition, subsidies for child care or elder care, paid time off for family leave, group discounts on auto or home insurance, discounted mortgages, legal services, and financial planning advice.
Matching People with Benefits12
Many of the new offerings are relatively cheap for the company. To contain costs further, Nike gives employees incentives to make health benefits trade-offs, such as pledging to stop smoking or using company-chosen physician networks. By tailoring its benefits to those that employees really need and care deeply about, Nike is maximizing the return on its “benefits bucks.”
The broad objective of the design of compensation programs (i.e., direct as well as indirect compensation) is to integrate salary and benefits into a package that will encourage the achievement of an organization's goals. For example, while a generous pension plan may help retain employees, it probably does little to motivate them to perform on a day-to-day basis. This is because the length of time between performance and reward is too great. On the other hand, a generous severance package offered to targeted segments of the employee population may facilitate an organization's objective of downsizing to a specified staffing level. In all cases, considerations of adequacy, equity, cost control, and balance should guide decision making in the context of a total compensation strategy.
With these considerations in mind, let us now examine some key components of the benefits package.
COMPONENTS OF THE BENEFITS PACKAGE
There are many ways to classify benefits, but we will follow the classification scheme used by the U.S. Chamber of Commerce. According to this system, benefits fall into three categories: security and health, payments for time not worked, and employee services. Within each of these categories there is a bewildering array of options. The following discussions consider only the most popular options and cover only those that have not been mentioned previously.
How much do benefits cost? In its 2004 benefits survey, the Society for Human Resource Management found that across organizations of all sizes in a variety of industries, the average percentage of salary reflecting the cost of mandatory benefits was 20 percent and voluntary benefits 22 percent. Small companies with fewer than 99 employees offered the lowest percentage of mandatory and voluntary benefits (17 and 18 percent, respectively), while companies with more than 500 employees offered the largest percentage of mandatory and voluntary benefits (24 and 23 percent, respectively).13 Thus, for a company that pays an average salary of $45,000 per year, its average cost of benefits per employee is $18,900.
These include the following:
· Life insurance.
· Workers' compensation.
· Disability insurance.
· Hospitalization, surgical, and maternity coverage.
· Health maintenance organizations (HMOs).
· Other medical coverage.
· Sick leave.
· Pension plans.
· Social Security.
· Unemployment insurance.
· Supplemental unemployment insurance.
· Severance pay.
Insurance is the basic building block of almost all benefits packages, because it protects employees against income loss caused by death, accident, or ill health. Most organizations provide group coverage for their employees. The plans may be contributory(in which employees share in the cost of the premiums) or noncontributory (in which the employer pays the full cost of the premiums).
It used to be that when a worker switched jobs, he or she lost health insurance coverage. The worker had to “go naked” for months until coverage began at a new employer. No longer. Under the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1986, companies with at least 20 employees must make medical coverage available at group insurance rates for as long as 18 months after the employee leaves—whether the worker left voluntarily, retired, or was dismissed. The law also provides that, following a worker's death or divorce, the employee's family has the right to buy group-rate health insurance for as long as three years. The rising costs of health insurance premiums (15.5 percent in 2003 for firms with fewer than 200 employees) cause serious financing problems for the unemployed, with only one of every four workers who get laid off being able to afford continued health insurance through COBRA.14
However, because some corporate medical plans do not cover preexisting conditions, some employees have found that when they changed jobs (and health plans), their benefits were reduced sharply. To alleviate that problem, Congress passed the Health Insurance Portability and Accountability Act (HIPAA) in 1996. HIPAA was enacted to make health insurance more “portable” from one employer to another. The law mandates procedures for both new hires and for existing employees who are leaving the company.
Employees who are new to a company can use evidence of previous health care coverage that is provided by their former employer to reduce or eliminate the new employer's preexisting condition requirements. Employees who are leaving a company must be provided a certificate of prior creditable health care coverage to use for this purpose.
Perhaps the most significant element of HIPAA began in 2002 (with small employers required to comply by April 2004) when stringent new privacy provisions took effect.15 An individual or group health plan that provides or pays the cost of medical care may not use or disclose protected health information (medical information that contains any of a number of patient identifiers, such as name or social security number), except with the consent or authorization of the individual in question.16 With this in mind, let us consider the major forms of security and health benefits commonly provided to employees.
This type of insurance is usually yearly renewable term insurance; that is, each employee is insured one year at a time. The actual amounts of coverage vary, but typical group term life insurance coverage is one to two times the employee's annual salary. This amount provides a reasonable financial cushion to the surviving spouse during the difficult transition to a different way of life. Thus, a manager making $60,000 per year may have a group term-life policy with a face value of $120,000 or $150,000. Keep in mind, however, that the more expenses and dependents you have, the more life insurance you will need.17 About 95 percent of companies offer this benefit.18 To discourage turnover, almost all of them cancel it if an employee terminates.
Life insurance has been heavily affected by flexible benefits programs. Typically such programs provide a core of basic life coverage (e.g., $25,000) and then permit employees to choose greater coverage (e.g., in increments of $10,000 to $25,000) as part of their optional package. Employees purchase the additional insurance through payroll deductions.
Workers' compensation programs cover 127 million workers in the United States. They provide payments to workers who are injured on the job or who contract a work-related illness. The payments cover three areas: payments to replace lost wages, medical treatment and rehabilitation costs, and retraining to perform a different type of work (if necessary). As shown in Table 12-1, these payments vary by state. Mortgage-lender Countrywide Financial and phone company Verizon pay four to five times more in workers' compensation per employee in California than in Texas.19 Disability benefits, which have been extended to cover stress (in four states) and occupational disease, tend to be highest in states where organized labor is strong.20 With regard to stress, most states require some bodily injury manifestation of stress—that is, mental, physical, or where some specific and defined event occurred.21 In providing health care and cash payments to disabled workers and their families, workers' compensation is second in size only to the sum of Social Security disability insurance and Medicare.22
A state's industrial structure also plays a big part in setting disability insurance rates. Thus, serious injuries are more common and costly among Oregon loggers and Michigan machinists than among assembly line workers in a Texas semiconductor plant. Sometimes the costs can get out of hand, especially for small businesses. Consider Los Angeles fish wholesaler City Sea Foods. In 2003 premiums jumped 68 percent—to nearly $7,000 per worker. As a result, the company had to lay off 7 of 57 employees.23Trends such as these have prompted high-cost states, such as California, Florida, Michigan, and Maine, to lower workers' compensation premiums so that they can continue to attract and retain businesses in their states.
COMPANY EXAMPLE: WORKERS' COMPENSATION
Workers' compensation costs employers some $72.9 billion a year, and it is a major cost of doing business.24Some of the driving forces behind these costs are higher medical costs, the increasing involvement of attorneys, and widespread fraud. According to The New York Times, as much as 20 percent or more of claims may involve cheating.25 What are states and companies doing to control costs?
California set up a fund, financed by employers, that pays for special teams to go after fraud. Job injury claims declined to 8.4 per 100 workers, from nearly 10 two years earlier. Connecticut no longer awards disability benefits for mental or psychological disorders unless they are the result of an injury. It has eliminated cost-of-living adjustments on disability benefits, and has cut some benefits by a third. Insurance premiums in the state have fallen 24 percent in the last two years.
Controlling the Costs
Finally, workers' compensation insurers are forming alliances with managed care providers in order to take advantage of case-management methods and volume discounting. At Coca-Cola Bottling Co. of New York, the company paid an average of $3,164 in workers' compensation claims when it turned to managed care and addressed long-standing safety issues in its plants. Six years later its average claim was $1,257—a 60 percent reduction.26
Is there an underlying theme in these approaches? Yes, and it's simple: Aggressive management of workplace safety issues pays dividends for workers and for their employers as well.
At present, all 50 states have workers' compensation laws. While specific terms and levels of coverage vary by state, all state laws share the following features:27
· All job-related injuries and illnesses are covered.
· Coverage is provided regardless of who caused the injury or illness (i.e., regardless of who was “at fault”).
· Payments are usually made through an insurance program financed by employer-paid premiums.
· A worker's loss is usually not covered fully by the insurance program. Most cash payments are at least two-thirds of the worker's weekly wage, but, together with disability benefits from Social Security, the payments may not exceed 80 percent of the worker's weekly wage.
· Workers' compensation programs protect employees, dependents, and survivors against income loss resulting from total disability, partial disability, or death; medical expenses; and rehabilitation expenses.
Such coverage provides a supplemental, one-time payment when death is accidental, and it provides a range of benefits when employees are disabled—that is, when they can't perform the “main functions” of their occupations.28Long-term disability (LTD) plans cover employees who are disabled six months or longer, usually at no more than 60 percent of their base pay, until they begin receiving pension benefits.
Disability leaves for those in their twenties to fifties rose throughout the 1980s and 1990s, coinciding with significant rises in the incidence of obesity, diabetes, and asthma. These illnesses can cause disability among those most severely afflicted. Disability leaves cost companies between 8 and 20 percent of payroll annually.29 The following company example shows what progressive firms are doing to control these costs.
COMPANY EXAMPLE
To control disability leave costs, Canadian Imperial Bank of Commerce (CIBC) turned to disability managementprograms that emphasize a partnership among the physician, the employee, the manager, and the HR representative, known as a “facilitator.” The physician's role is to specify what the employee can and cannot do. Ongoing discussions between the employee and manager, assisted by the facilitator, determine what tasks an employee is actually capable of doing—the opposite of traditional disability management, which focuses on what the employee cannot do. This approach balances flexibility in meeting individual needs with consistency and fairness.
Does disability management work? At CIBC, the average duration for short-term disability dropped by 32 percent in the first nine months of the program. In addition, the firm's long-term disability (LTD) insurance carrier reported that employees on LTD were back to work 38 percent faster than the average for LTD claimants in general.
Controlling Disability Costs30
Although disability benefits traditionally were divided into salary continuation, short-term disability, and long-term disability, combined disability management programs now merge all three. Doing so allows for a single claim application process and uniform case management. An employee whose short-term illness turns into a lengthy disability doesn't have to reapply for benefits or start over with a new case manager; the process is uniform and seamless, regardless of the length of the disability.
Another developing trend is toward integrating disability coverage with workers' compensation and, eventually, with group health care. Under this scenario, patients would be treated under the same health care delivery system, regardless of whether they became ill or were injured at work or on their own time. This concept—called managed health or total health and productivity management, is still in its infancy but holds great potential.31
Hospitalization, Surgical, and Maternity Coverage
These are essential benefits for most working Americans. Self-insurance is out of the question because the costs incurred by one serious, prolonged illness could easily wipe out a lifetime of savings and assets and place a family in debt for years to come. The U.S. health insurance system is based primarily on group coverage provided by employers. At a general level, the system is characterized by statistics such as the following:32
· Most Americans have health insurance and receive excellent care. Except for the poor, especially in inner cities, Americans are healthier than ever.
· Those over age 65 are covered by Medicare, but less than half of those living below the poverty line are covered by Medicaid. About 45 million Americans have no health insurance.
· Contrary to popular belief, nearly 75 percent of the uninsured are jobholders—part-timers and per-day workers—the working poor.33 Nearly one-third of workers in companies with 25 or fewer employees are uninsured.
· Insurance rates have climbed faster for small businesses than for large ones.
· Whether employed or not, younger people, as well as African Americans and Hispanics, are most likely to lack health insurance. Americans with chronic diseases or a history of serious illness have trouble obtaining affordable insurance.
· Figures on the number of uninsured people understate the extent of vulnerability. Over a recent 28-month period, one in four Americans spent at least a month without health insurance.
· Polls indicate that most Americans are pleased with their doctors and hospitals. Yet there is widespread anxiety about the reliability of the system. From 1999 to 2004, the average increase in health insurance premiums was 32 percent. This far exceeded the levels of overall inflation in those years34Figure 12-1 shows the annual increase in health insurance premiums relative to workers' earnings and inflation from 1999 to 2003. Recent increases have hit small businesses hardest, as Figure 12-2 illustrates.
Figure 12-1 Annual increase in health insurance premiums, relative to workers' earnings and overall inflation, 1999-2003.
[Source: Save an arm and a leg. (2003, Oct. 27). Fortune, p. 210.]
Figure 12-2 Recent increases in health care costs have hit small companies hardest.
Source: Hopkins, J. (2004, June 4). Rising benefit costs hurt small businesses' financial health. USA Today, p. 2B.
Because employers pay most of the nation's health care premiums (79 percent in 2004),35 over time such increases may make them less competitive in global markets. Indeed, rising medical costs automatically translate into lower wages, and they are a big reason offshoring has become so attractive for many companies.
Rising premiums cut into profits by increasing operating costs. To put this into perspective, let us return to an example we cited earlier, namely, that General Motors spends about $1,784 per vehicle just for retiree pension and health care costs, compared with less than $200 per vehicle for Toyota. Together, GM, Chrysler, and Ford have 524,000 hourly worker retirees. Toyota has 49. Without those costs the American companies could cut prices or offer better cars, either of which would make them far more competitive with Toyota.36 Competitiveness issues arising from health care costs are particularly acute at companies with the following three characteristics:
1. Their workforces are comprised largely of people in their forties and fifties, who require more health care than younger workers do.
2. Their health plans cover a much larger number of retired workers than do those of newer companies, such as computer or airline concerns.
3. They make products that must compete in world markets.37
Why is this happening? What's driving these increases in the cost of health care? In addition to population changes, general inflation, and excess medical inflation (including administrative costs that add millions to the country's health care spending), other factors are mergers among local hospitals, costly new drugs and rising prescription volumes, plus the cost of new technology.38
It is true that drugs are the fastest growing part of health care spending, but increased usage of drugs causes much of that increase. In 1993, for example, U.S. prescription drug spending was $50 billion. In 2003 it was $162.4 billion.39 At the same time, drugs represent just 10 cents of every health care dollar we spend.40 The switch to generics may help, as $35 billion in branded drugs go off patent in the next few years. To appreciate the impact, consider that the average cost of a brand-name drug is $76.29; the average cost of a generic drug is $22.79.41
When it comes to health care technology, the United States relies far more heavily on it than do other advanced nations. On a per-capita basis, for example, the United States has four times as many diagnostic imaging machines (magnetic resonance imaging) as Germany and eight times as many as Canada. U.S. doctors perform open heart surgery 2.6 times as often as Canadian doctors and 4.4 times as often as German doctors. When it comes to the use of “smart” machines to perform medical tests, one expert noted: “There's no way to shut it off. The doctors crave it, it's reassuring, and patients crave it.”42 On top of that, hospitals often push to buy the latest machines in order to retain their competitive status as full-service, modern health care centers.
Strategies to contain the high costs of health care are taking center stage in the boardroom as well as in the health care industry itself. Here are some measures that firms have taken to gain tighter management control over the cost of health care:
1. Band together with other companies to form a “purchasing coalition” to negotiate better rates with insurers. Coalitions have become key cost-control devices for small businesses, and about 75 such coalitions exist today, according to the National Business Coalition on Health.43
2. Deal with hospitals and insurers as with any other suppliers. Begin by providing benefits information online. Companies are using the Net and their intranet sites to give employees access to medical treatment information as well as sophisticated comparisons of benefit plan options. Pacific Business Group on Health (a consortium of large San Francisco companies such as Bechtel and Safeway) ranks providers by quality as well as cost on its Web site. Ford Motor Company started distributing a ranking of hospitals on quality and costs to Detroit-area employees in hopes of steering them to the most responsive providers.44 Soon employees may have enough information to comparison shop for health care, much the same way they now buy a car. It's a win—win for employees and their companies: Employees gain control, and companies slash their administrative costs.45
3. Introduce a three-tier plan to encourage the use of generic drugs. Fully 57 percent of workers with prescription drug benefits are now in such plans. In a typical plan, drugs are divided into three categories, with employees' copayments based on the category from which they order prescriptions. In the first tier—with the lowest copayment—are generic drugs. The second tier, with a higher copayment, consists of “preferred” brand-name drugs, generally those for which there are no generic equivalents. Brand-name drugs command higher prices because they have patent protection and a single company controls their manufacture. The third tier, with the highest copayment, includes brand-name drugs for which there are generic equivalents, such as the anti-depressant, Prozac. Borders Group, the book and music retailer, with 30,000 employees nationwide, opted for a three-tier plan in 2000, after a 14.4 percent spike in drug costs. By 2003, after raising employees' copayments as well, cost increases dropped back to 13 percent.46
4. Offer incentives to nudge working spouses off company health plans. Verizon Communications Inc. imposes a $40 monthly fee for employees whose working spouses decline comparable health care coverage at their own companies. Boeing charges workers an extra $100 a month if their working spouse or domestic partner chooses Boeing's health plan rather than that of their own employer. General Electric's plan charges more for large families than small ones.47
5. Adopt a consumer-driven health plan (CDHP). CDHPs are high-deductible, managed care plans that are matched with health care reimbursement accounts (HRAs) funded by employers. Managed care relies on a “gate-keeper” system of cost controls. The gatekeeper is a primary-care physician who monitors the medical history and care of each employee and his or her family. The doctor orders testing, makes referrals to specialists, and recommends hospitalization, surgery, or outpatient care, as appropriate. Fully 85 percent of Americans with health insurance belong to some kind of managed care plan.48
Here's the consumer-directed part of CDHPs. You use your account—typically $1,000 to $2,000 for families and about half that for individuals—to pay for prescription drugs and medical services from the providers in the network that you have selected. Web tools and call centers are available to help you choose the most cost-effective options. Once your HRA is exhausted, you face a deductible—usually another $1,000 to $2,000 for family coverage. When you've satisfied your deductible, coverage continues at the usual co-insurance rate, in which employees and insurers share the cost of the health care. The theory behind CDHPs is simple: Knowing the true costs will make you shop for less costly care—if you get lower premiums as a reward. Fully 35 percent of midsize and large employers may soon add a CDHP to their benefits package.49
Managed care may take a variety of forms. In our next section we discuss one of the most popular, the health maintenance organization or HMO.
Health Maintenance Organizations
An HMO is an organized system of health care that ensures the delivery of services to employees who enroll voluntarily under a prepayment plan. The emphasis is on preventive medicine, that is, maintaining the health of each employee. Legally, HMOs are authorized under the HMO Act of 1973.
The objective of HMOs is to control health care costs by keeping people out of the hospital. It was quite successful in the early 1990s in doing so. In fact, health care costs actually lagged overall inflation in 1994, but as Figure 12-1 showed, the gains have not lasted. Here are five reasons:50
1. Much of the progress came from eliminating unnecessary procedures and hospitalizations—a one-time savings.
2. An explosion of new medical technologies and drug treatments increased prices again.
3. The population has also aged, further spiking expenses.
4. Hospitals and doctors have refused to accept reduced reimbursement rates.
5. Employees have rebelled against managed care limits on doctors and procedures.
These factors have led to a growing realization that the managed care revolution seems to have run its course.
To overcome some employees' complaints about the lack of freedom to choose their doctors in an HMO, some firms offerpoint-of-service (POS) plans.Such plans offer you, the patient, a choice every time you seek medical care. You can use the plan's network of doctors and hospitals and pay no deductibles, with only a $10 to $15 copayment for office visits, as with a traditional HMO. Or you can see a physician outside the network, and pay 30 percent to 40 percent of the total cost, just like traditional health coverage.51Table 12-2 presents a summary of alternative types of managed care plans, HMOs, preferred provider organizations, and POS plans.
Table 12-2 The ABCs of Managed Care
Plan |
How it works |
What you pay |
Benefits |
Health maintenance organization (HMO) |
A specified group of doctors and hospitals provide the care. A gatekeeper must approve all services before they are performed. |
There is no deductible. The nominal fees generally range from $5 to $30 per visit depending on the service performed. |
Virtually all services are covered, including preventive care. Out-of-pocket costs tend to be lower than for any other managed care plan. |
Preferred provider organization (PPO) |
In-network care comes from a specified group of physicians and hospitals. Patients can pay extra to get care from outside the network. There generally is no gatekeeper. |
The typical yearly family deductible is $500. The plan pays 80 to 100% for what is done within the network, but only 50 to 70% for services rendered outside it. |
Preventive services may be covered. There are lower deductibles and copayments for in-network care than for out-of-network care. |
Point-of-service (POS) plan |
POSs combine the features of HMOs and PPOs. Patients can get care in or out of the network, but there is an in-network gatekeeper who must approve all services. |
In addition to a deductible, there is a flat $5 to $30 fee for in-network care, and patients pay 20 to 60% of the bills for care they get outside the network. |
Preventive services are generally covered. And there are low out-of-pocket costs for the care patients get in the network. |
Recent evidence indicates that employees who are provided a choice are continuing to move away from the more stringent HMO and POS plans toward preferred provider organizations (PPOs), even though PPOs are more expensive on a monthly basis. Apparently employees are willing to pay more for freedom of choice.52
In the extreme, a few companies are giving workers the money they would have contributed to their health insurance premiums and letting them make their own decisions about coverage. Forces driving the trend include the backlash against managed care, the popularity of company-sponsored savings plans that let employees decide how to invest their money, and the rise of Web sites that help consumers make decisions. While the practice is controversial, experts see only a gradual transition to greater consumer control—perhaps over the next decade—as policy makers, the market, and employees themselves get used to the idea.53
Medical coverage in areas such as employee assistance programs and mental illness is offered by about 70 percent of companies.54 Big insurers often limit coverage for most psychiatric benefits to just two years for all ailments for the lifetime of an insured individual.55 As for dental care, dental HMOs, PPOs, and indemnity (traditional fee-for-service plans) are growing fast. As with medical HMOs, a dental plan is usually paid a set annual fee per employee (usually about 10 to 15 percent of the amounts paid for medical benefits). Dental coverage is a standard inclusion for 95 percent of U.S. employers. Fully 71 percent offer their employees some form of vision care insurance as well.56
These programs provide short-term insurance to workers against loss of wages due to short-term illness. In 2004, 57 percent of U.S. firms offered paid sick leave benefits.57 However, in many firms such well-intentioned programs have often added to labor costs because of abuse by employees and because of the widespread perception that sick leave is a right and that if it is not used, it will be lost (“use it or lose it”). From the employer's perspective, such un-scheduled absences cost between 8 and 20 percent of payroll annually. To control these costs, 29 percent of firms are turning to paid time-off plans that combine sick leave, vacation, and personal days into one plan.58 Others, such as Garden Valley Telephone Co. of Minnesota, have taken a different tack. It reduced discretionary sick-leave time from 12 days to 5. Unused benefits at year-end are paid to employees at their current wage rates. Extended sick-leave benefits (8 to 12 weeks, based on years of service) are available after a five-day waiting period. Over a 10-year period, paid absences decreased by 22,000 hours.59
A pension is a sum of money paid at regular intervals to an employee (or to his or her dependents) who has retired from a company and is eligible to receive such benefits. Before World War II, private pensions were rare. However, two developments in the late 1940s stimulated their growth: (1) clarification of the tax treatment of employer contributions and (2) the 1948 Inland Steel case, in which the National Labor Relations Board ruled that pensions were subject to compulsory collective bargaining.
For a time there were no standards and little regulation, which led to abuses in funding many pension plans and to the denial of pension benefits to employees who had worked many years. Perhaps the most notorious example of this occurred in 1963, when Studebaker closed its South Bend, Indiana, car factory and stopped payments to the seriously underfunded plan that covered the workers. Only those already retired or on the verge of retirement received the pension benefits they expected. Others got only a fraction—or nothing.60
Incidents like these led to the passage of the Employee Retirement Income Security Act (ERISA; see Table 12-1) in 1974. ERISA does not require employers to offer a pension plan. If they do, however, the plan is rigidly controlled by ERISA provisions, the objective of which is to achieve two goals: (1) protect the interests of 99 million active participants who are covered by 730,000 plans and (2) promote the growth of such plans.61
Money set aside by employers to cover pension obligations has become the nation's largest source of capital, with total assets (private employers plus local, state, and federal government pensions) of $8.9 trillion.62 This is an enormous force in the nation's (and the world's) capital markets. Pension fund managers tend to invest for the long term, and the big corporate pension funds (95 percent of pension fund assets are covered by 5 percent of the plans) have less than 1 percent of their assets invested in leveraged buyouts or high-risk, high-yield junk bonds.63
The “perfect storm” of falling stock prices and low interest rates that characterized the first few years of the 21st century, together with practices such as using pension assets to pay for the costs of laying off workers and retiree health benefits, caused many pension plans to become underfunded (i.e., their assets fell to less than 85 percent of their projected benefits obligations).64However, to ensure that covered workers will receive their accrued benefits even if their companies fail, ERISA created the Pension Benefit Guaranty Corporation (PBGC). This agency acts as an insurance company, collecting annual premiums from companies with defined-benefit plans ($19 per participant in most plans) that spell out specific payments upon retirement.65 A company can still walk away from its obligation to pay pension benefits to employees entitled to receive them, but it must then hand over up to 30 percent of its net worth to the PBGC for distribution to the affected employees.
The PBGC insures 31,000 pension plans that cover 44 million workers and retirees. In 2002, for example, the PBGC became trustee of 144 pension plans covering 187,000 people, primarily in the steel industry. Currently the PBGC provides benefits to 783,000 individuals and is running a deficit in excess of $11 billion.66 If a company terminates its pension plan, the PBGC guarantees the payment of vested benefits to employees up to a maximum amount set by law. In 2004 that maximum amount for a 65-year-old retiring worker was $44,386.67
Despite these protections, the consequences of pension plan termination can still be devastating to some pensioners. Executives whose accrued benefits are bigger than the PBGC's guaranteed limits can see their monthly checks shrivel. Employees who haven't worked at a company long enough (typically five years68) to be vested, that is, where their receipt of pension benefits does not depend on future service, aren't entitled to any benefits. So they wind up having to get by with less to support them than they had planned. Nevertheless, as a matter of social policy, it is important that, as retirees, most workers end up getting nearly all that is promised to them—and they do.
Contributions to pension funds are typically managed by trustees or outside financial institutions, frequently insurance companies. As an incentive for employers to begin and maintain such plans, the government defers taxes on the pension contributions and their earnings. Retirees pay taxes on the money as they receive it.
Traditionally, most big corporate plans have been defined-benefit plans, under which an employer promises to pay a retiree a stated pension, often expressed as a percentage of preretirement pay. In 2004, 44 percent of companies offered them.69 The most common formula is 1.5 percent of average salary over the last five years prior to retirement (“final average pay”) times the number of years employed. In determining final average pay, the company may use base pay alone or base pay plus bonuses and other compensation. An example of a monthly pension for a worker earning final average pay of $50,000 a year, as a function of years of service, is shown in Figure 12-3. When combined with Social Security benefits, that percentage is often about 50 percent of final average pay.70 The company then pays into the fund each year whatever is needed to cover expected benefit payments.
Figure 12-3 Monthly pension for a worker whose final average pay is $50,000 per year.
A second type of pension plan, popular either as a support to an existing defined-benefit plan or as a stand-alone retirement-savings vehicle, is called a defined-contribution plan. Fully 77 percent of U.S. employers offered some form of such a plan in 2004.71 Examples include stock bonuses, savings plans, profit sharing, and various kinds of employee stock ownership plans. Brief descriptions of five types of such plans are shown in Table 12-3.
Table 12-3 Five Types of Defined-Contribution Pension Plans
· Profit-sharing plan. The company puts a designated amount of its profits into each employee's account and then invests the money. ESOPs are a form of profit-sharing. · ESOP. An employee stock ownership plan pays off in company stock. Each employee gets shares of company stock that are deposited into a retirement account. Dividends from the stock are then added to the account. · 401(k) plan. A program in which an employee can deduct up to $14,000 of his or her income (in 2005, $18,000 for workers over 50) from taxes and place the money into a personal retirement account. Many employers add matching funds, and the combined sums grow tax-free until they are withdrawn, usually at retirement. · Money-purchase plan. The employer contributes a set percentage of each employee's salary, up to 25% of net income, or $40,000 (whichever is less), to each employee's account. Employees must be vested to be eligible to receive funds. Withdrawals after age 59½ are taxed at ordinary income tax rates. · Simplified employee pension (SEP). Under SEP, a small-business employer can contribute up the lesser of 100% of an employee's salary or $40,000. The employee is vested immediately for the amount paid into the account. The employee cannot withdraw any funds before age 59½ without penalty.
|
Source: What the tax cut means to you. Money, Aug. 2001, pp. 90-96.
Defined-contribution plans fix a rate for employer contributions to the fund. Future benefits depend on how fast the fund grows. Such plans therefore favor young employees who are just beginning their careers (because they contribute for many years). Defined-benefit plans favor older, long-service workers.
Defined-contribution plans have great appeal for employers because a company will never owe more than what was contributed. However, because the amount of benefits received depends on the investment performance of the monies contributed, employees cannot be sure of the size of their retirement checks. In fact, regardless of whether a plan is a defined-benefit or defined-contribution plan, employees will not know what the purchasing power of their pension checks will be, because the inflation rate is variable.
A third type of pension plan is known as a cash-balance plan, offered by 14 percent of large employers.72 Under it, everyone gets the same, steady annual credit toward an eventual pension, adding to his or her pension account “cash balance.” Employers contribute a percentage of an employee's pay, typically 4 percent. The balance earns an interest credit, usually around 5 percent. It is portable when the employee leaves, but cash-balance plans do not vest any sooner than traditional pension plans (five years). So if a four-year employee leaves, he or she gets nothing.73
For the young, 4 percent of pay each year is more than what they were accruing under a defined-benefit plan. But for those nearing retirement the amount is far less. So an older employee who is switched into a cash-balance system can find his or her eventual pension reduced by 20 to 50 percent, and in rare cases, even more.74 Employers such as FedEx are aware of this effect on older workers, so they soften the blow by providing a grandfather clause to allow older employees to remain in the old plan. Only 9 percent of companies converting their plans to cash-balance plans do this, but about two-thirds offer partial transition benefits that lessen, but do not eliminate, the blow.75
At a broader level, empirical research shows that employees differ in their preferences for various features of defined-benefit, defined-contribution, and cash-balance plans. Allowing employees to choose plans that are consistent with their personal characteristics and needs should lead to great satisfaction with the plans and also serve as an effective tool in attracting and retaining employees.76
Just as the practice of awarding large bonuses to some executives as their companies were laying off workers aroused a deep sense of injustice among members of the public, similar sentiments now apply to the pension plans of many large employers. Why? Because they have been cutting back on pension payouts in many subtle ways, while at the same time boosting payouts for senior executives.77 Consider just one example. Leo Mullin, former CEO of Delta Airlines, was awarded 22 years of service, but he served only 5 years at the carrier.78 As an employee of the company, would this help close the trust gap?
COMPANY EXAMPLE: THE 401(k) ASSOCIATION
Only 46 percent of full-time employees of small businesses have a retirement plan, compared with 79 percent of those who work for large companies. The most common reason small employers cite is cost. Fortunately, there are alternatives that needn't cost owners a bundle. One of these is a simplified version of the well-known 401(k) plan. For an annual administrative fee of $700 plus $10 per participant in excess of 10, the 401(k) Association of Langhorne, Pennsylvania, will administer a simple starter plan for businesses with fewer than 25 employees. Participants receive performance statements quarterly, and they direct how their contributions are invested. Although employees may invest in only three mutual funds from within a mutual-fund family and there are no provisions for loans or hardship withdrawals, these features keep administrative costs down. As the business grows larger or employees amass larger sums of money in their savings plans, the firm may gravitate to a full-featured 401(k).
Retirement Benefits and Small Business79
Pension Reforms That Benefit Women.
These reforms were incorporated into the Retirement Equity Act of 1984. Corporate pension plans must now include younger workers and permit longer breaks in service. Women typically start work at a younger age than do men, and they are more likely to stop working for several years in order to have and care for children. However, because the new rules apply to both sexes, men also will accrue larger benefits. There are five major changes under the act:80
1. Pension plans must include all employees 21 or older (down from 25). This provision extended pension coverage to an additional 600,000 women and 500,000 men.
2. Employers must use 18 rather than 22 as the starting age for counting years of service. For example, consider an employee who works at a firm that requires five years of service to be fully vested. If the employee is hired at age 19, he or she can join a plan at 21 and can be fully vested by age 24.
3. Employees may have breaks in service of as long as five years before losing credit for prior years of work. In addition, a year of maternity or paternity leave cannot be considered a break in service.
4. Pension benefits may now be considered a joint asset in divorce settlements. State courts can award part of an individual's pension to the ex-spouse.
5. Employers must provide survivor benefits to spouses of fully vested employees who die before reaching the minimum retirement age.
Table 12-1 outlined provisions for this program. Social Security is an income maintenance program, not a pension program. It is the nation's best defense against poverty for the elderly, and it has worked well. Without it, according to one study, the poverty rate among the elderly would have jumped from about 15 to 50 percent.81Table 12-4 shows maximum and average Social Security benefits for 2004.82
Table 12-4 Average 2004 Social Security Benefits—Monthly
Retired worker |
$ 922 |
Retired couple |
1,523 |
Disabled worker |
862 |
Disabled worker with a spouse and child |
1,442 |
Widow or widower |
888 |
Young widow or widower with two children |
1,904 |
Current Social Security beneficiaries are benefiting from the massive surplus accumulated throughout the 1990s as baby boomers hit their peak earning potential. In 2000, that surplus was $167 billion.83 However, keep in mind that Social Security is a pay-as-you-go system. Payroll taxes earned by current workers are distributed to pay benefits for those who are already retired. Right now there are more than 3 workers for every retiree in our society, but by 2015 there will only be 2.7, and by 2030 there will only be about 2 workers per retiree.84 In addition, people are living substantially longer—by 2020 the life expectancy for 65-year-old men and women will be 81.5 and 85 years, respectively.
While the system will be solvent through the year 2030, at that time, given the large number of retirements by baby boomers, Social Security taxes will cover only 75 percent of promised benefits.85 By 2042 the Social Security Trust Fund will be exhausted.86 To meet such long-term funding needs, the system will have to be reformed soon—by raising payroll taxes or retirement ages, cutting benefits, or by investing a portion of the current surplus in the stock market.87
This last alternative raises several vexing policy arguments:88
· Should workers' retirement be built on government guarantees or the economy's health?
· Should the government own one-sixth of the stock market?
· Should Washington expose workers' retirement funds to market fluctuations?
Keep in mind, however, that Social Security was never intended to cover 100 percent of retirement expenses. For a worker earning $60,000 a year, for example, experts estimate that he or she will need about 75 percent of that in retirement. Social Security will replace about 40 percent of preretirement income; pensions and personal savings will have to make up the rest. How does this compare to the actual distribution of retirees' income?
Figure 12-4 shows the distribution of retirees' income, on average. Only 56 percent comes from Social Security plus pensions; the rest comes primarily from personal savings and current earnings in retirement. By contrast, the percentage of final salary that Social Security replaces depends on the actual final salary of the retiree. For a worker whose final salary is $50,000, Social Security replaces 45 percent in the United States, 75 percent in Italy, 74 percent in Portugal, 63 percent in Spain, 51 percent in France, 43 percent in Germany, 31 percent in the Netherlands, 21 percent in Ireland, and just 14 percent in the United Kingdom.89
Figure 12-4 Where retirees get their income.
(Source: Presentation by Cynthia Drinkwater, International Foundation of Employee Benefit Plans, to U.S. Department of Labor, February 28, 2002. Available at http://www.saversummit.dol.gov/drinkwater.html.)
INTERNATIONAL APPLICATION Social Security in Other Countries
An ever-increasing number of countries are publicizing their social security programs on the World Wide Web. For a listing of them, see http://www.ssa.gov/international/links.html. Here is a brief sample of countries that have adopted pension programs that combine social security with private retirement accounts.
In Britain, workers can opt out of part of the state pension system by applying up to 44 percent of their social security tax to their own private individual investment accounts. Japan, Finland, Sweden, France, and Switzerland have similar programs. In these countries, the social security component of the pension system remains on a pay-as-you-go basis in which current tax receipts are used to pay for both current benefits and other government programs.
In contrast, Chile's retirement system is 100 percent privatized, with a mandatory 10 percent of employees' pay going into individual accounts. Australia is moving to a privatization plan that calls for 9 percent of workers' pay to go into private retirement accounts, up from 6 percent previously. The employer chooses a menu of investment options that employees can use to allocate their retirement savings.
Singapore uses a payroll tax to fund retirement, but it works like a private pension system. The revenues are invested in individually owned accounts; unlike U.S. Social Security taxes, they are tax deductible and not subject to income taxes.
Employees can withdraw money from their retirement funds to purchase housing, and, as a result, 80 percent of Singapore's citizens own their own residences. If an employee is dissatisfied with the return earned by the public fund, he or she can transfer the account to investments in the Singapore stock market or other approved vehicles. The asset balance in a Singaporean's retirement fund passes to his or her beneficiaries upon death. Among the countries that have systems similar to Singapore's are India, Kenya, Malaysia, Zambia, and Indonesia.90
Although 97 percent of the workforce is covered by federal and state unemployment insurance laws, each worker must meet eligibility requirements in order to receive benefits. That is, an unemployed worker must (1) be able and available to work and be actively seeking work, (2) not have refused suitable employment, (3) not be unemployed because of a labor dispute (except in Rhode Island and New York), (4) not have left a job voluntarily, (5) not have been terminated for gross misconduct, and (6) have been employed previously in a covered industry or occupation, earning a designated minimum amount for a specific minimum amount of time. Many claims are disallowed for failure to satisfy one or more of these requirements.
As of 2000, states have the option to use state unemployment compensation resources to make partial wage replacement available to parents who leave employment after the birth or adoption of a child. This rule, published by the Department of Labor, creates a new exemption to the requirement that recipients of unemployment funds be able and available to work.91
Every unemployed worker's benefits are “charged” against one or more companies. The more money paid out on behalf of a firm, the higher is the unemployment insurance rate for that firm. The tax in most states amounts to 6.2 percent of the first $7,000 earned by each worker. The state receives 5.4 percent of this 6.2 percent, and the remainder goes to the federal government. However, the tax rate may fall to 0 percent in some states for employers who have had no recent claims by former employees, and it may rise to 10 percent for organizations with large numbers of layoffs.
Benefits can be paid for a maximum of 26 weeks in most states. An additional 13 weeks of benefits may be available during times of high unemployment. Benefits are subject to federal income taxes and must be reported on workers' federal income tax returns. In general, benefits are based on a percentage of a worker's earnings over a recent 52-week period, up to a state maximum amount. Benefit levels have generally not kept up with inflation. States with the highest average weekly benefits are Massachusetts, $278.86; Minnesota, $278.76; and Washington, $275.82. The lowest average weekly benefits are paid in Puerto Rico, $102.82; Mississippi, $153.30; and Alabama, $155.55. The most recent calculation of the average weekly unemployment insurance benefit was $211.75.92
Unemployment insurance benefits provide a “safety net” for individuals who qualify. These people are standing in line to receive benefits from the New York State Department of Labor.
Such pay is not legally required, and, because of unemployment compensation, many firms do not offer it. This is especially true of dot-com companies that went bankrupt in 2000 and 2001.93 However, severance pay has been used extensively by some firms that are downsizing in order to provide a smooth outflow of employees.94 This is a good example of the strategic use of compensation. Thus Philadelphia Electric Co. gave an extra nine months' severance pay to 1,859 older workers who agreed to stagger their early retirements over a two-year period. Roughly 17 percent of the workforce took advantage of the offer.95 Said an executive of the firm: “If we lost all of them at once, we couldn't keep our electricity going.”
While length of service, organization level, and the cause of the termination are key factors that affect the amount of severance pay, those amounts have been declining. For example, the typical manager now gets just 10 weeks of severance pay, down from 22 weeks at the height of the tech boom in 1999.96 In addition, only 35 percent of employers now offer guaranteed severance to new executives, down from 38.5 percent in 2001.97 Chief executive officers with management contracts may receive two to three years' salary in the event of a takeover.98
Included in this category are such benefits as the following:
Vacations |
Personal excused absences |
Holidays |
Grievances and negotiations |
Reporting time |
Sabbatical leaves |
Suppose you could take as much vacation time as you like. Sound crazy? Think about your own experience. On your last vacation did you do no work at all? Or did you listen to your voice mail, check your e-mail, and spend further time responding to messages and maybe participating in one or two phone meetings? The reality in the Infotech Age is that for huge numbers of workers, the concept of a vacation—as an entitlement or an imposed restriction—is not realistic.99 Suppose instead that you had no allotted vacation time. When you go on vacation is up to you, something to be worked out with your goals and your coworkers in mind. Microsoft recently decided that high-level executives would get to take vacation as needed, with no time limit imposed. Do you think people would abuse this freedom? Or would they recognize that they are responsible for most decisions that affect their job performance and that decisions about vacation time fall into that general category? What do you think?
COMPANY EXAMPLE: MORNINGSTAR, XEROX, AND WELLS FARGO
Company policies vary from quite liberal to restricted. Mutual fund researcher Morningstar allows all employees a six-week, paid sabbatical every four years to do whatever they choose. Xerox lets U.S. employees who have been with the company for at least three years take off for 12 months with pay—but they must work for a nonprofit organization with which they are already affiliated. About 100 of its 47,500 employees apply each year, and 10 to 15 are accepted. Similarly, Wells Fargo Bank in San Francisco offers both three- and six-month paid leaves to a small number of employees chosen by a selection committee. Some employees work with persons with disabilities, others do alcohol and drug counseling, and still others do preretirement counseling. Employees want such a program, and society needs them.
About 18 percent of large employers in the United States currently offer unpaid sabbaticals.101 They are most popular at law firms, computer firms, and consulting companies, where burnout is often a problem.
Sabbatical Leaves100
A broad group of benefits falls into the employee-services category. Employees qualify for them purely by virtue of their membership in the organization, and not because of merit. Some examples include the following:
Tuition aid |
Thrift and short-term savings plans |
Credit unions |
Stock purchase plans |
Auto insurance |
Fitness and wellness programs |
Food service |
Moving and transfer allowances |
Company car |
Transportation and parking 102 |
Career clothing |
Merchandise purchasing |
Financial planning 103 |
Professional association memberships |
Legal services |
Christmas bonuses |
Counseling |
Service and seniority awards |
Child adoption |
Umbrella liability coverage |
Child care |
Social activities |
Elder care |
Referral awards |
Gift matching |
Purchase of used equipment |
Charter flights |
Family leaves |
Domestic partner benefits |
Flexible work arrangements |
102See, for example, Hirschman, C. (2004). Commuter connections. HRMagazine, pp. 99-102.
103Lorenzetti, J. P. (2002). Financial planning services on the rise. HRMagazine, 47 (4), pp. 85-89.
National survey data now indicate that people are more attached and committed to organizations that offer family-friendly policies, regardless of the extent to which they benefit personally from the policies.104 Benefits that define family-friendly firms include onsite child care, subsidized child care onsite and offsite, child adoption, elder care, flexible work schedules, and the ability to convert sick days into personal days that employees can use to care for a sick child or family member. For example,Figure 12-5 shows the distribution of requests for flexible work arrangements.
Figure 12-5 The distribution of flexible work arrangements.
[Source: Adapted from Demby, E. R. (2004). Do your family-friendly programs make cents? HRMagazine, 49 (1), 75.]
Once viewed as an expense with little return, such policies are now endorsed by a growing number of executives as an investment that pays dividends in morale, productivity, and ability to attract and retain top-notch talent. Pharmaceutical giant Merck & Co. found that it cost approximately $50,000 to replace the “average” employee, but only $38,000 to give the employee a six-month parental leave of absence with partial pay and benefits. Merck provides employees with benefits and full pay for up to eight weeks following the birth or adoption of a child. After eight weeks and up to six months, employees on parental leave do not get paid but keep their benefits and are guaranteed reinstatement. From 6 to 18 months, they retain their benefits but are not guaranteed job reinstatement, although they have access to in-house job postings.105
Domestic partner benefits are voluntarily offered by employers to an employee's unmarried partner, whether of the same or opposite sex. Firms such as General Motors, Ford, DaimlerChrysler, Boeing, Citigroup, General Mills, Goldman Sachs, and Texas Instruments offer such benefits, as do about 30 percent of U.S. firms.106 They do so to be fair to all employees, regardless of their sexual orientation and marital status, and because of the competition and diversity that characterize today's labor markets.
ETHICAL DILEMMA What to Do with Bad News?107
Consider this situation. You are the chief HR officer (CHRO) of a company whose stock is publicly traded. A supervisor tells you about an impending penalty from a federal regulatory agency, a penalty large enough to make headlines and to slam the company's stock price. The supervisor wants the CHRO to convince the CEO to begin making 401(k) matches with cash instead of company stock and to advise employees to move their company stock in the 401(k) plan into one of the other fund selections.
The CHRO is a member of the company's executive committee but is not a member of the committee that oversees the 401(k) plan. Administration of the plan is outsourced to a company that provides general financial education to all employees on saving for retirement in the 401(k) plan but that offers no third-party advice on how the funds should be invested. What should the CHRO do? Would doing something about it constitute insider trading?
Benefits and Equal Employment Opportunity
Equal employment opportunity requirements also affect the administration of benefits. Consider as examples health care coverage and pensions. The Age Discrimination in Employment Act has eliminated mandatory retirement at any age. It also requires employers to continue the same group health insurance coverage offered to younger employees to employees over the age of 70. Medicare payments are limited to what Medicare would have paid for in the absence of a group health plan and to the actual charge for the services. This is another example of government cost shifting to the private sector.
As we noted in Chapter 3, the Older Workers Benefit Protection Act of 1990 restored age discrimination protection to employee benefits. Early retirement offers are now legal if they are offered at least 45 days prior to the decision, and, if they are accepted, employees are given seven days to revoke them. Employers were also granted some flexibility in plant closings to offset retiree health benefits or pension sweeteners against severance pay. That is, an employer is entitled to deny severance pay if an employee is eligible for retiree health benefits.
With regard to pensions, the IRS considers a plan discriminatory unless the employer's contribution for the benefit of lower-paid employees covered by the plan is comparable to contributions for the benefit of higher-paid employees. An example of this is the 401(k) salary reduction plan described briefly in Table 12-3. The plan permits significant savings out of pretax compensation, produces higher take-home pay, and results in lower Social Security taxes. The catch: The plan has to be available to everyone in any company that implements it. Maximum employee contributions each year ($14,000 in 2005 for workers under 50; $18,000 for those over 50) are based on average company participation. Thus, poor participation by lower-paid employees curbs the ability of the higher-paid to make full use of the 401(k).108
Despite the high cost of benefits, many employees take them for granted. A major reason for this is that employers have failed to do in-depth cost analyses of their benefit programs and thus have not communicated the value of their benefits programs to employees. Four approaches are used widely to express the costs of employee benefits and services. Although each has value individually, a combination of all four often enhances their impact on employees. The four methods are:109
· Annual cost of benefits for all employees. Valuable for developing budgets and for describing the total cost of the benefits program.
· Cost per employee per year. The total annual cost of each benefits program divided by the number of employees participating in it.
· Percentage of payroll. The total annual cost divided by total annual payroll (this figure is valuable in comparing benefits costs across organizations).
· Cents per hour. The total annual cost of benefits divided by the total number of hours worked by all employees during the year.
Table 12-5 presents a company example of actual benefits costs for a fictitious firm named Sun Inc. The table includes all four methods of costing benefits. Can you find an example of each?
Table 12-5 Employee Benefits: The Forgotten Extras
Listed below are the benefits for the average full-time employee of Sun Inc. (annual salary $52,000 * ). |
||||
Benefit |
Who pays |
Sun's annual cost |
Percentage of base earnings |
What the employee receives |
Health, dental, and life insurance |
Sun and employee |
$ 4,165.20 |
8.01 |
Comprehensive health and dental plus life insurance equivalent to the employee's salary |
Holidays |
Sun |
2,600.00 |
5.00 |
13 paid holidays |
Annual leave (vacation) |
Sun |
2,002.00 |
3.85 |
10 days of vacation per year (additional days starting with sixth year of service) |
Sick days |
Sun |
2,397.20 |
4.61 |
12 days annually |
Company retirement |
Sun |
4,160.00 |
8.00 |
Vested after 5 years of service |
Social Security |
Sun and employee |
3,978.00 |
7.65 |
Retirement and disability benefits as provided by law |
Workers' compensation and unemployment insurance |
Sun |
520 |
1.00 |
Compensation if injured on duty and if eligible; income while seeking employment |
Total |
|
$19,822.40 or $9.53 per hour |
38.12 |
|
*The dollar amount and percentages will differ slightly depending upon the employee's salary. If an employee's annual salary is less than $52,000, the percentage of base pay will be greater. If the employee's salary is greater than $52,000, the percentage will be less but the dollar amount will be greater. Benefit costs to Sun Inc. on behalf of 5,480 employees are more than $100,000,000 per year.
Cafeteria, or Flexible, Benefits
The theory underlying the cafeteria benefits approach is simple: Instead of all workers at a company getting the same benefits, each worker can pick and choose among alternative options cafeteria style. Thus, the elderly bachelor might pass up maternity coverage for additional pension contributions. The mother whose children are covered under her husband's health insurance may choose legal and auto insurance instead.
The typical plan works like this: Workers are offered a package of benefits that includes “basic” and “optional” items. Basics might include modest medical coverage, life insurance equal to a year's salary, vacation time based on length of service, and some retirement pay. But then employees can use “flexible credits” to choose among such additional benefits as full medical coverage, dental and eye care, more vacation time, additional disability income, and higher company payments to the retirement fund. Nationwide, about 42 percent of large firms, but only 24 percent of small ones, offer flexible benefit plans.110 They were devised largely in response to the rise in the number of two-income families. When working spouses both have conventional plans, their basic benefits, such as health and life insurance, tend to overlap. Couples rarely can use both plans fully. But if at least one spouse is covered by a “flex” plan, the couple can add benefits, such as child care, prepaid legal fees, and dental coverage, that they might otherwise have to buy on their own. Two studies have now examined employees' satisfaction with their benefits and understanding of them both before and after the introduction of a flexible benefits plan. Both found substantial improvements in satisfaction and understanding after the plan was implemented.111
There are advantages for employers as well. Under conventional plans, employers risked alienating employees if they cut benefits, regardless of increases in the costs of coverage. Flexible plans allow them to pass some of the increases on to workers more easily. Instead of providing employees a set package of benefits, the employer says, “Based on your $50,000 annual salary, I promise you $18,000 to spend any way you want.” If health care costs soar, the employee—not the employer—decides whether to pay more or to take less coverage.
There's help for employees even under these circumstances if they work for firms that sponsor flexible spending accounts(about 70 percent of all large firms). Employees can save for expenses such as additional health insurance or day care with pretax dollars, up to a specified amount (e.g., in a dependent care spending account, up to $5,000 for child or elder care). As a result, it's a win—win situation for both employer and employee.112
To realize these potential advantages, major communications efforts are needed to help employees understand their benefits fully. Because employees have more choices, they often experience anxiety about making the “right” choices. In addition, they need benefits information on a continuing basis to ensure that their choices continue to support their changing needs. Careful attention to communication can enhance recruitment efforts, help cut turnover, and make employees more aware of their total package of benefits.
IMPACT OF BENEFITS ON PRODUCTIVITY, QUALITY OF WORK LIFE, AND THE BOTTOM LINE
Generally speaking, employee benefits do not enhance productivity. Their major impact is on attraction and retention (although there is little research on this issue) and on improving the quality of life for employees and their dependents. Today there is widespread recognition among employers and employees that benefits are an important component of total compensation. As long as employees perceive that their total compensation is equitable and that their benefit options are priced fairly, benefits programs can achieve the strategic objectives set for them. The challenge for executives will be to maintain control over the costs of benefits while providing genuine value to employees in the benefits offered. If they can do this, everybody wins.
Try to make a list of good reasons a company should not make a deliberate effort to market its benefits package effectively. It will be a short list. Generally speaking, there are four broad objectives in communicating benefits:
1. To make employees aware of them. This can be done by reminding them of their coverages periodically and of how to apply for benefits when needed.
2. To help employees understand the benefits information they receive in order to take full advantage of the plans.
3. To make employees confident that they can trust the information they receive.
4. To convince present and future employees of the worth or value of the benefits package. After all, it's their “hidden paycheck.”113
As with any other communication challenge, employers find that a multimedia approach is often the most effective way to educate employees about their benefits. Some employees prefer direct-mail information that comes to their homes so they can discuss benefits options with their spouses or significant others away from the context of work.114 Whether in brochures, PowerPoint presentations, or over the Web, employers such as Allied Signal, Alcoa, and AT&T incorporate strategic graphic design when presenting benefits and compensation information to their employees.115 They provide their employees “the benefits information you need, when you need it.” Company-based intranets, with ready access by all employees to personalized benefits information, make “HR on the desktop” a reality for these and other firms, at a cost that is as much as 99 percent cheaper than conventional means of presentation.116
Companies are trying to engage employees more actively with seminars or online tools on how to choose the best health plan or how to spend health care dollars more wisely. Instead of just sending employees enrollment forms, employers are taking a different tack—encouraging employees to learn what's right for them.117 IBM is a good example of this approach. Its employees use an interactive question-and-answer tool called “Plan Finder” on the company's intranet to weigh the merits of different benefits and criteria, such as cost, coverage, customer service, or performance. The tool sorts through dozens of different health plans offered by the company, uses data and choices supplied by the employee, and then returns views of preferred plans, ranked and graphed. “Plan Finder” allows employees to model the information that is most important to them in order to make better benefits selections. It's no surprise then, that 80 percent of employees now enroll via the intranet system, saving IBM $1 million per year in costs associated with the delivery of benefits information.
THE NEW WORLD OF EMPLOYEE BENEFITS
Human Resource Management in Action: Conclusion
In this new world of sharing costs and sharing risks, there are four major areas that change has affected most profoundly: health insurance, programs to promote healthy lifestyles, retirement programs, and employee savings programs.
· Health insurance. No more blank checks. Employers and insurers are both taking an aggressive role in managing chronic diseases. About 160 companies now use disease management programs to help patients with costly chronic diseases such as asthma, diabetes, and heart disease manage their illnesses better so they don't progress and become costlier to treat.118These patients, some 90 million people, account for an astounding 75 percent of the nation's health care bill. Disease managers, usually nurses, operate from call centers. They check in regularly with patients by phone to encourage them to get all the necessary tests and treatments for their diseases. Does it work? Early results say yes. American Healthways saved Blue Cross and Blue Shield of Minnesota $40 million in 2003, shaving three percentage points off its overall cost increase.119
· Keeping employees healthier. One of the most important themes in employee benefits is now prevention: limiting health care claims by keeping employees and their families healthier. The Travelers Insurance Companies thoroughly studied its own programs in this area and found that the funds it spent on health promotion helped it save $7.8 million in employee benefits costs. That's a savings of $3.40 for every dollar spent. The biggest payoffs came from education programs, including efforts to discourage smoking and drinking and to encourage healthier diets.
Some companies have added new benefits, even as they eliminated others. Johnson & Johnson and Hewlett-Packard began paying for routine checkups and tests for infants, while AT&T launched a prenatal care program.
· Retirement programs—sharing the risk. The number of defined-contribution pension plans, in which the employee shares the investment risk, is growing by 10 percent per year.120 In return, however, employees have a larger voice in choosing how the funds will be invested. They also have greater “portability”—due largely to the meteoric growth of 401(k) plans.121 Nine out of 10 companies that offer 401(k)s provide a partial matching (up to $5,000 a year or more) of employees' savings. Such plans provide a true incentive to save because they are easily funded through payroll deductions. The most progressive companies allow workers to choose the type of plan that best fits their individual circumstances.122
· Expanding the 401(k) concept. To many observers, the kind of sharing and choice embodied in 401(k) plans is the wave of the future in employee benefits. Companies want plans that give employees choices to suit their needs, incentives to conserve funds, and risks to share with the company. At the same time, however, it is important to address key flaws in 401(k) plans that experts have long recognized: high fees, poor investment decisions, underparticipation, and overreliance on company stock. This effort is well taken, as firms try to avoid the debacle that occurred when Enron collapsed and $1 billion of the 401(k) savings of its employees—largely comprised of Enron stock—collapsed as well.
Of one thing we can be sure, however. During the next decade the number of choices available to employees seems likely to expand and become more complicated. Advice on how to make informed choices will itself become an increasingly popular employee benefit.
IMPLICATIONS FOR MANAGEMENT PRACTICE
As you think about the design and implementation of employee benefit plans, consider three practical issues:
1. What are you trying to accomplish by means of the benefits package? Ensure that the benefits offered are consistent with the strategic objectives of the unit or organization as a whole.
2. Take the time to learn about alternative benefit arrangements. Doing so can save large amounts of money.
3. Develop an effective strategy for communicating benefits regularly to all employees.
Managers need to think carefully about what they wish to accomplish by means of their benefits programs. At a cost of about 40 percent of base pay for every employee on the payroll, benefits represent substantial annual expenditures. Factors such as the following are important strategic considerations in the design of benefits programs: the long-term plans of a business, its stage of development, its projected rate of growth or downsizing, characteristics of its workforce, legal requirements, the competitiveness of its overall benefits “package,” and its total compensation strategy.
There are three major components of the benefits “package”: security and health, payments for time not worked, and employee services. Despite the high cost of benefits, many employees take them for granted. A major reason for this is that employers have not done in-depth cost analyses or communicated the value of their benefits programs. This is a multimillion-dollar oversight. Certainly the counseling that must accompany the implementation of a flexible benefits program, coupled with the use of computer-based expert systems and decision support systems, can do much to alleviate this problem.
· doctrine of constructive receipt
· antidiscrimination rule
· contributory plans
· noncontributory plans
· protected health information
· yearly renewable term insurance
· flexible benefits
· workers' compensation programs
· long-term disability
· disability management
· managed health
· managed care
· gatekeeper
· health maintenance organization (HMO)
· point-of-service plan
· pension
· vesting
· defined-benefit plan
· defined-contribution plan
· cash-balance plan
· grandfather clause
· cost shifting
· cafeteria benefits
· flexible spending accounts
Case 12-1: Reducing Health Care Costs
In the spring of 2002, Ron McGee, vice president of group insurance and labor relations at Polson Corporation, delivered the bad news to top management. Medical insurance premiums for the following fiscal year were expected to increase approximately 30 percent, up dramatically from the 8 percent increase of the previous year. And future cost projections were equally grim. It was estimated that by 2006, the company's $455 million annual health care bill would increase to a staggering $713 million.
Polson is a large, high-technology, automotive-and-electronics-products company that employs about 70,000 people in the United States. It decided not to tinker with traditional remedies to escalating health care costs, such as increasing deductibles and shifting larger copayments to employees. Instead, it turned to managed health care. It did so by contracting with Whitefish Corporation, a large employee benefits company specializing in such managed health care plans.
A task force was formed in 2002 under the direction of McGee. The task force included HR executives from the corporate office of Polson in Morristown, New Jersey. This group was given the challenge of developing a custom-designed program that would hold down health care premium costs to a reasonable level. The group decided that the new program would be built on the following foundation:
1. The insurance carrier, Whitefish Corporation, would be a partner in the program and would carry a financial risk, not merely be an administrator that paid the bills as they came in.
2. The insurance carrier would use its buying power to establish a network of highly qualified primary-care physicians and specialists throughout the United States, coinciding with the company's primary locations.
3. The insurance carrier would guarantee a high level of quality care to be provided to Polson's employees.
4. Unlike other health maintenance organization (HMO) plans, under the new Polson Plan employees would be able to switch from managed care to a traditional indemnity plan at will, but they would pay extra for exercising this option.
“We sought to change the way health care was delivered to our employees,” says Al Gesler, corporate director of HR for Polson. “The net result was a hybrid program, taking into account the best features of HMOs and indemnity plans and combining that with a partnership arrangement between Whitefish, Polson, and its employees.” Whitefish was chosen because it was a large and experienced insurance carrier and had a health care network in place across the United States that pretty well coincided with major locations where Polson had operations.
In March 2003, Polson signed a three-year agreement with Whitefish for a managed care program that was called “The Health Care Connection.” This plan covered medical, dental, vision, and hearing care, as well as prescription medications. It also included a well care program covering such items as an annual physical exam and prenatal care. An important feature of the plan was that Whitefish guaranteed annual premium increases of less than 10 percent during each of the three contract years on the managed care side of the program. No similar guarantee was provided on the indemnity side. The actual figure would depend on the number of employees using the indemnity portion of the program.
“We wanted a very strong gatekeeper system,” says McGee. “For our employees to take advantage of the extremely comprehensive benefits found on the in-network side of The Health Care Connection program, as well as the modest $15 copayment feature, they had to agree to choose a primary-care physician from within the closed panel and visit specialists in hospitals only when referred by their primary-care physicians. That was the trade-off.” Where employees stayed in the network, the costs were very modest: a $15 copayment per office visit and $15 per prescription (generic drug) and 25 percent of the cost of a brand-name drug. If employees chose to go outside the network, they could switch to the indemnity side of the plan at any time for any particular illness or injury with no restrictions. Those who did, however, paid an annual deductible equal to 1 percent of their annual salaries and then were subject to an 80/20 copayment split (in other words, employees paid 20 percent of the medical care costs after the deductible was met).
“The basic concept behind managed care is just that, managing it,” says McGee. “By staying in the network, everyone saves money. We felt this was a major effort aimed at limiting unnecessary care.”
For its part, Whitefish is responsible for guaranteeing the quality of the managed care side of the network. It is responsible for using its buying power to ensure that hospitals in the plan attract an adequate supply of high-quality physicians. It also means continual monitoring of employee usage of different types of medical care through “utilization studies.”
Questions
1. How should Polson communicate its new health benefits plan to employees?
2. What results in terms of cost reduction do you anticipate Polson will achieve through the implementation of its new health care program?
3. What additional follow-up should the benefits administration people at Polson take now that the program has been in effect for several years?
4. To what extent do you believe managed health care plans such as those at Polson are the wave of the future for health benefits plans in major American corporations?
1Regnier, P. (2003, Fall). Health & money. Money, Special Report, pp. 14-19.
2Bennet, J. (1993, Sept. 5). Auto talks hang on health costs, but workers are loath to chip in. The New York Times, pp. 1, 8-10.
3Byrnes, N. (2004, July 19). The benefits trap. BusinessWeek, pp. 64-72.
4U.S. Chamber of Commerce. (2004, Jan. 21). Chamber survey shows worker benefits continue growth. Medical payments account for largest share of employee benefit costs. Accessed from http://www.uschamber.com on Oct. 4, 2004.
5Byrnes, op. cit.
6McCaffery, R. M. (1989). Employee benefits and services. In L. R. Gomez-Mejia (ed.), Compensation and benefits. Washington, DC: Bureau of National Affairs, pp. 3-101 to 3-135.
7Caudron, S. Change keeps TQM programs thriving. Accessed from http://www.workforce.com on October 4, 2004; Smart, T. (1993, May 10). IBM has a new product: Employee benefits. BusinessWeek, p. 58.
8Cable, D. M., & Judge, T. A. (1994). Pay preferences and job search decisions: A person-organization fit perspective. Personnel Psychology, 47,317-348.
9Ledvinka, J., & Scarpello, V. G. (1991). Federal regulation of personnel and human resource management (2d ed.). Boston: PWS-Kent.
10Ibid.
11Milkovich, G. T., & Newman, J. M. (2005). Compensation (8th ed.). Burr Ridge, IL: Irwin/McGraw-Hill.
12Shellenbarger, S. (1993, Dec. 17). Firms try to match people with benefits. The Wall Street Journal, p. B1.
13Society for Human Resource Management. (2004, June). 2004 Benefits survey. Alexandria, VA: Author.
14Hopkins, J. (2004, June 4). Rising benefit costs hurt small businesses' financial health. USA Today, pp. 1B, 2B. See also Milkovich & Newman, op. cit.
15You can view the Final HIPAA Privacy Rules on the Department of Health and Human Services site athttp://www.hhs.gov/news/press/2002pres/20020809.html. A HIPAA toolkit is also available on the SHRM site athttp://www.shrm.org/hrtools/toolkits/hipaatoolkit.asp.
16Garay, J. M. (2004, Jan.). HIPAA privacy standards: What you need to know to get started. Dallas, TX: Employment Practices Solutions.
17Do I have enough life insurance? (2001, Sept.). Money, pp. 92, 94.
18SHRM 2004 Benefits survey, op. cit.
19Tully, S. (2003, Aug. 11). Greetings from California: The state that's bad for business. Fortune, pp. 33-34.
20Say, does workers' comp cover wretched excess? (1991, July 22). BusinessWeek, p. 23.
21Atkinson, W. (2000, July). Is workers' comp changing? HRMagazine, pp. 50-61.
22National Academy of Social Insurance. (2004). Workers compensation: Benefits, coverage, and costs, 2002. Accessed from http://www.nasi.orgon Oct. 5, 2004.
23Treaster, J. B. (2003, June 23). Cost of insurance for work injuries soars across U.S. The New York Times, pp. A1, A18.
24National Academy of Social Insurance, op. cit.
25Treaster, op. cit. See also Kerr, P. (1991, Dec. 29). Vast amount of fraud discovered in workers' compensation system. The New York Times, pp. 1, 14.
26First aid for workers comp. (1996, March 18). BusinessWeek, p. 106. See also Crackdown on job-injury costs: New workers' compensation rules have double edge. (1995, Mar. 16). The New York Times, pp. D1, D7; Evangelista-Uhl, G. A. (1995, June). Avoid the workers' comp crunch.HRMagazine, pp. 95-99; Fefer, M. D. (1994, October 3). Taking control of your workers' comp costs. Fortune, pp. 131-136.
27McCaffery, R. M. (1992). Employee benefit programs: A total compensation perspective (2nd ed.). Boston: PWS-Kent.
28Gutner, T. (2001, June 4). What if suddenly you can't work? BusinessWeek, p. 106. See also There when you need it: Disability coverage. (1996, Oct.). USAA Magazine, p. 5.
29The young and the disabled. (2001, June 4). BusinessWeek, p. 30. See also King, D. (1996, Oct.). A comprehensive approach to disability management. HRMagazine, pp. 97-102.
30Lawrence, L. (2000, Dec.). Disability management partnerships save time, money. HR News, pp. 11, 17.
31Ibid.
32Fuhrmans, V. (2004a, July 13). Attacking rise in health costs, big company meets resistance. The Wall Street Journal, pp. A1, A10; Simon, R. (2003, Oct. 15). Your health plan's new math. The Wall Street Journal, pp. D1, D2; Bernasek, A. (2004, May 3). Jobs are back; too bad wages aren't.Fortune, pp. 40, 42.
33Health insurance: Small biz is in a bind. (2004, Sept. 27). BusinessWeek, pp. 47, 48.
34Bernasek, op. cit. See also Save an arm and a leg. (2003, Oct. 27). Fortune, pp. 208-210.
35Fuhrmans, V. (2004b, Oct. 6). Health-care cost surge set to ease. The Wall Street Journal, p. A2.
36Colvin, G. (2003, Sept. 29). Detroit's health-care crisis—and ours. Fortune, p. 50.
37Ibid. See also Gentry, C. (2000, May 23). Doctor yes: How is Merrill Lynch limiting health costs? By expanding benefits. The Wall Street Journal,pp. A1, A6.
38Fuhrmans (2004a), op. cit.
39Reuteman, R. (2004, Feb. 14). A number of thoughts to ponder. Rocky Mountain News, p. 2C. See also Costly habit. (2002, Sept. 11). The Wall Street Journal, p. A1.
40Gibbs, L. (2003, Fall). Why do drugs cost so much? Money Special Report, pp. 94-99.
41Stires, D. (2003, May 3). Rx for investors. Fortune, pp. 158-172.
42Furhmans (2004), op. cit. See also A crisis of medical success (1993, Mar. 15). BusinessWeek, pp. 78-80, Pollack, A. (1991, Apr. 29). Medical technology “arms race” adds billions to the nation's bills. The New York Times, pp. A1, B8-B10.
43What comes after managed care? (2000, Oct. 23). BusinessWeek, pp. 149, 152.
44Blumenstein, R. (1996, Dec. 9). Seeking a cure: Auto makers attack high health-care bills with a new approach. The Wall Street Journal, pp. A1, A4.
45What comes after managed care? op. cit.
46Kendall, J. (2003, June). Reining in Rx expenses. HRMagazine, 48 (6), 70-74.
47Furhmans, V. (2003, Sept. 9). Company health plans try to drop spouses. The Wall Street Journal, pp. D1, D2.
48Winslow, R. (1998, Jan. 20). Health-care inflation kept in check last year. The Wall Street Journal, p. B1.
49McGirst, E. (2003, Fall). How to get the right insurance. Money Special Report, pp. 88-93. See also Martinez, B. (2003, June 16). With medical costs climbing, workers are asked to pay more. The Wall Street Journal, pp. A1, A6.
50What comes after managed care? op. cit.
51Simon, op. cit. See also Jeffrey, N. A. (1996, Dec. 2). Bills and costs lurk within HMO options. The Wall Street Journal, pp. C1, C19.
52Hirschman, C. (2002). More choices, less cost? HRMagazine, 47 (1), 36-41. See also Barrette, D. L. (2000, Nov.). Survey finds employers offering additional health care choices. HR News, pp. 10, 22.
53Winslow, R., & Gentry, C. (2000, Feb. 8). Medical vouchers. Health benefits trend: Give workers money, let them buy a plan. The Wall Street Journal, pp. A1, A12.
54SHRM 2004 Benefits survey, op. cit.
55Stressed out over stress benefits? (1997, Feb. 10). BusinessWeek, p. 132.
56SHRM 2004 Benefits survey, op. cit. See also Barrette, op. cit.
57SHRM 2004 Benefits survey, op. cit.
58Ibid.
59Howe, R. C. (1995, March). Rx for an ailing sick-leave plan. HRMagazine, pp. 67-69.
60Colvin, G. (1982, Oct. 4). How sick companies are endangering the pension system. Fortune, pp. 72-78.
61For more information about ERISA, see http://www.dol.gov/dol/topic/health-plans/erisa.htm.
62Hirschman, C. (2002). Growing pains. HRMagazine, 47 (6), 30-38.
63Raabe, S. (2000, Aug. 13). Aggressive tactics boost pension plan. The Denver Post, pp. 1M, 11M. See also White, J. A. (1990, Mar. 20). Pension funds try to retire idea that they are villians. The Wall Street Journal, pp. C1, C8.
64Schultz, E. E. (2003, July 10). Coming up short: Firms had a hand in pension plight they now bemoan. The Wall Street Journal, pp. A1, A6; Gibbs, L. (2003, Jan.). The next scare? Money, pp. 33-36; Revell, J. (2003a, Mar. 17). Bye-bye pension. Fortune, pp. 65-74; Francis, T., & Schulz, E. E. (2003, Nov. 18); McNamee, M. (2002, Oct. 21). When “safer” pensions aren't so safe. BusinessWeek, pp. 152, 153.
65Bater, J. (2003, Jan. 31). U.S. pension insurer posts gap of $3.64 billion, after surplus. The Wall Street Journal, p. B8.
66Ibid. See also U.S. pension agency chief sees plan solvency risk (2004, Oct. 7). Accessed from http://www.reuters.com on Oct. 7, 2004.
67Schwanhausser, M. (2004, Aug. 21). United retirees being put at risk. San Jose Mercury News, pp. 1C, 4C.
68Schultz, E. E. (1999, Dec. 16). Young and vestless. The Wall Street Journal, pp. A1, A8.
69SHRM 2004 Benefits survey, op. cit.
70Schultz, E. E. (2001, June 20). Big send-off: As firms pare pensions for most, they boost those for executives. The Wall Street Journal, pp. A1, A8.
71SHRM 2004 Benefits survey, op. cit.
72Ibid.
73Revell (2003a), op. cit. See also Schultz (1999), op. cit.
74Revell (2003a), op. cit. See also Revell, J. (2003b, Sept. 1). Uh-oh: Pensions may all be in peril. Fortune, p. 44; Byrnes, N. (2003, Aug. 25). Pensions that discriminate against older workers. BusinessWeek, pp. 45, 46.
75Revell (2003a), op. cit. See also Schultz, E. E., & Rundle, R. L. (1999, Sept. 23). Utility's pension plan allowing choice offers contrast to the bitterness at IBM. The Wall Street Journal, pp. C1, C21; Schultz, E. E., & McDonald, E. (1998, Dec. 4). Retirement wrinkle: Employers win big with a pension shift; employees often lose. The Wall Street Journal, pp. A1, A6.
76Dulebohn, J. H., Murray, B., & Sun, M. (2000). Selection among employer-sponsored pension plans: the role of individual differences. Personnel Psychology, 53, 405-432.
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110SHRM 2004 Benefits survey, op. cit.
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119Stires, op. cit.
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Managing Human Resources
Indirect Compensation
ISBN: 9780072987324 Author: Wayne F. Cascio
Copyright © The McGraw-Hill Companies (2005