The Costs of Employee Benefits

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The Costs of Employee Benefits

• Joseph J. Martocchio

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What are Employee Benefits

• Employee benefits refer to employee compensation
  other than hourly wage or salary

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Two Dimensions of Employee Benefits

• The source of the benefit can be characterized as
  legally required or discretionary
• The role the benefit serves recipients can be
  characterized as protection, paid time off, or
  accommodation and enhancement

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Legally Required Benefits

• Legally required benefits are mandated by several
  laws
• Social Security Act of 1935
• State workers compensation laws
• Family and Medical Leave Act of 1993

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Discretionary Employee Benefits

• Discretionary benefits fulfill three main roles
• Protection programs
• Paid time
• Accommodation and enhancements

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Income Protection Programs

• Three types of protection programs
• Disability insurance
• Life insurance
• Retirement plans

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Defined Benefit Plans

• Retirees receive guaranteed payments for the
  duration of their lives based on years of
  employment, age, and final salary level before
  retirement

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Defined Contribution Plans

• Plans allow employees to set aside a portion of
  their salary for investment purposes
• These plans are riskier than defined benefit
  plans due to the uncertainty of the investment
  income
• Employers may match a small portion

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Health Protection Programs

• Programs refer to a host of practices geared
  toward promoting sound health
• Health insurance plans represent the largest
  portion of a companys health protection
  offerings

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Health Insurance Programs

• Fee-for-service plans
• Managed care plans
• Point-of-service plans
• Savings accounts based on the consumer-driven
  health care philosophy

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Fee-for-Service Plans

• Provide protection for three types of medical
  expenses hospital expenses, surgical expenses,
  and physicians charges

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Managed Care Plans

• Include HMOs and PPOs
• Managed care plans impose substantial
  restrictions on an employees ability to make
  choices about from whom they can receive medical
  treatment

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Point of Service Plans

• Combines features of fee-for-service systems and
  HMOs
• Employees pay a nominal copayment for each visit
  to a designated in-network physician however the
  possess the option to receive care from out of
  network physicians for a higher cost

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Consumer-Driven Health Care

• Flexible spending accounts (FSAs)
• Health reimbursement accounts (HRAs)

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Paid Time Off

• Vacation
• Sick leave
• Holidays

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Accommodation and Enhancement Programs

• Promote opportunities for employees and family
  members through
• Mental and physical well being of employees
• Family assistance programs
• Flexible work schedule
• Skills and knowledge acquisitions

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Employer Costs for Compensation and Benefits

• Overall, benefits accounted for approximately 30
  percent of total compensation costs

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Environmental Factors and the Cost of Benefits

• Industry prospects with economic conditions and
  forecasts
• Government regulation of employee benefits
• Changing demographics of the labor force
• Advances in health care

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Industry prospects with economic conditions and
forecasts

• Economic forecasts can influence the extent that
  the firm is willing to invest in employee
  benefits
• Employers will likely continue employee benefits
  due to
• Tax benefits
• Attracting and retaining quality employees

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Government Regulation of Employee Benefits

• The cost of legally required benefits reduces the
  ability of the firm to pay discretionary benefits

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Changing Demographics of the Workforce

• Greater diversity in the workforce in terms of
  gender, age, and cultural makeup requires a
  greater array of benefits programs

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Advances in Health Care

• Health insurance costs continue to increase due
  to
• Increasing life expectancies
• Aging of baby boomers
• Advances in medical research that add diagnostic
  tests and treatments
• Higher expenditures to prolong the lives of the
  terminally ill

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Responses by the Firm to Rising Benefit Costs

• Requiring employees to pay more for health care
• Making greater investments in accommodation and
  enhancement benefits
• Eliminating retiree health care insurance
  coverage

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Requiring Employees to Pay More for Health Care

• In addition to various insurance plans, FSAs and
  HRAs provide an important alternative to firms
• These accounts provide employees with resources
  to pay for medical and related expenses not
  covered by higher deductible insurance plans at
  substantially lower costs to employers

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Increased Accommodation and Enhancement Benefits

• Decrease absenteeism and tardiness
• Enhance worker productivity through improved
  health
• Education benefits may increase the skills of
  employees and allow for more flexibility within
  the workforce

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Guidelines to Curbing Benefits Costs

• Employee contributions to help companies save
  money by requiring that employees pay a nominal
  portion of the benefit costs
• Waiting periods to limit participation in the
  benefits program

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Guidelines to Curbing Benefits Costs Continued

• Educate employees about the cost of health care
• Conduct utilization reviews to evaluate the
  quality of specific health care services

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Guidelines to Curbing Benefits Costs Continued

• Use the services of independent case management
  companies to ensure that participants with
  serious health problems receive essential medical
  attention on a cost-effective basis

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Guidelines to Curbing Benefits Costs Continued

• Provider payment systems that begin with
  negotiations over amounts the system will pay
  participating physicians, health care facilities,
  and pharmacies for the duration of the managed
  care plans contract with these providers

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Summary

• This chapter has covered
• Types of benefits
• Types of health care plans
• Environmental factors
• Company responses
• Guidelines for cutting benefits costs