Employee benefits continue to evolve

By every indication, employee benefits, and particularly health care, are primary concerns of American workers. As medical costs continue climbing, the issue will only become more critical for businesses of all sizes. Here is an assessment of what companies can look forward to in 2008 and even beyond.

1. Rising costs in health care rates. It doesn’t take a crystal ball to see what lies ahead in health care. What it does take is a solid grip on the corporate checkbook. In spite of attempts to ameliorate bad news, costs will continue to go up and premiums will rise anywhere from 6 to 20 percent, depending on the plan and the group. The Towers Perrin annual health care cost survey for 2008 indicates a 7-percent increase, bringing the average corporate health benefit cost to $9,312 per employee. If you’re asking when it will level off, not in the near future is the only honest answer. PriceWaterhouse Coopers indicates that the three major factors driving up health care costs are inflation, an aging population and consumer demand, and advances in medical technology and treatments.

2. More states will be mandating health care programs. With hospital emergency rooms serving as the health care delivery system for 45 million people across the nation who have no coverage, the bills for billions of dollars of these services are falling on taxpayers. In an effort to push back the tide, we can expect to see more states following the lead of Massachusetts, most notably California. Gov. Arnold Schwarzenegger supports the concept of compulsory coverage. In Illinois, the idea is part of the broader issue of health care reform. While mandatory coverage seemed unlikely just a few years ago, the tide may be turning, even though there are many hurdles, particularly when it coming to pricing and enrolling the young.

3. Greater interest in health savings accounts. But as is often the case, interest isn’t enough. Expect to hear both pros and cons about HSAs this coming year, particularly as more employers seek to become familiar with what is involved. As with most new financial products – 401(k) plans are a good example – it takes time for both employers and participants to develop a comfort level before the actual implementation curve begins to climb. HSAs can be appealing to employer and employee as they seek to escape from the clutches of ever-rising health care costs. They hold out the promise of lower costs and are tax-advantaged at the same time. That said, HSAs are “consumer-directed,” an approach that’s quite foreign to most employees and one that requires financial management, again something new. There is also concern that saving for medical expenses may not be particularly appealing to lower-paid employees. There is also the issue with having a high deductible, which may cause consumers to delay seeking medical care when it will do the most good.

In other words, employers should not look upon HSAs as a “silver bullet” for solving the health care cost problem. If there is to be success, it will depend upon a high level of consumer education. As Blair Woodbury writes on the Bell Policy Center web site, “Enrollees have been people with higher incomes than the average American, and the tax deduction for contributions to an HSA provides little or no incentive for low-income people, who have little or no incentive to open an account.”

4. Innovative ways to control health care costs. We can expect to see insurance companies trying out a variety of concepts for controlling costs. Tiered pricing is one example. Some insurance companies are offering these plans, with more expected to adopt similar approaches. The concept is simple. There’s a lower co-payment if subscribers select this option, which includes providers who meet certain cost and quality benchmarks. A second tier offers a higher co-payment and includes providers who have not met those benchmarks. Still another innovation comes from Precedent of Dallas, a division of American Community Mutual Insurance Company in Michigan. Since those with a mini-medical plan with a high deductible can face a serious financial situation should they have substantial medical costs, the company has plans that allow participants to purchase additional coverage when exhausting their underlying benefits. These are just two examples where participants are being given cost control choices.

5. Long-term care protection. This is another example of a health care product that has a slow growth history. Individual policies are costly and the trend will be upward in the coming year, as insurance companies re-price products based on experience factors. It’s almost to the point where those who can afford to buy it may not really need it since they have adequate financial resources to cover costly contingencies. However, expect to find many more businesses looking favorably on group long-term care coverage programs. As a company-paid and tax advantaged benefit, it is emerging as a way to reward and retain valued employees. At the same time, you will see more companies paying for basic, low-cost long-term care coverage and giving employees the option to buy up. Yet another trend offering coverage as a voluntary benefit with employees receiving group pricing and underwriting advantages but paying for it themselves.

6. 401(k) retirement plans. There are continuing indications that most Americans underestimate the financial resources necessary to maintain the lifestyle they expect to enjoy in retirement. At the same time, many employees fail to enroll in 401(k) plans even when employers match their contributions. Hewitt Associates found that only 31 percent of eligible workers 18-25 have caught 401(k) fever and are taking advantage of employer matches, while 63 percent of those 26-41 are enrolled and 72 percent of boomers. More employers are using “automatic enrollment” with new hires in an effort to help employees get started saving for retirement. Clearly, more employee education is needed, particularly among younger workers who say that they can’t afford to put money into a 401(k) plan. They need to be shown that the program is tax-advantaged so their net take home pay may not be affected, perhaps at all. An employer’s match could be an additional incentive.

7. Voluntary benefits. Why are some employers skeptical about offering voluntary benefits to their workers, particularly when the employees bear the full cost? Some executives find it difficult to believe that their employees will actually sign up for such products as disability income coverage, cancer insurance, accident plans and critical care.

Yet, as the need to take responsibility for one’s financial situation has grown over the past decade and employees have seen what happens to friends, associates and family members who were not prepared financially for a crisis, they are far more interested in protecting themselves and their families. Disability income is attractive since many employees live paycheck-to-paycheck. Now, workers are asking for critical care insurance that provides a lump sum payment when the policyholder has been diagnosed with cancer, Alzheimer’s disease, heart attack, stroke, as well as other conditions, depending on the particular policy. The money can be used as the policyholder decides. Since these are group plans, they are more inclusive, the cost is low and the underwriting is minimal. Most importantly, they give employees choices and offer peace of mind.

8. Increased patient participation in making health care decisions. If there is one word to describe a broad range of trends in health care, it is transparency. The driving force, of course, is clearly the Internet. Not only has online access made more information available in every field, including health care, it has also fueled the public’s demand for increased access.  A report by researchers at Bryant University in Rhode Island showed that in 2004, 82 percent of women and 75 percent of men used the Internet for health information.  Looking ahead, we can expect the public to demand more information from providers such as Internet access to hospital and physician ratings.

Clearly, health care costs will be a top concern in the year ahead and long after. It is equally clear that Americans are taking responsibility for health and for their retirement, two issues that are so closely intertwined that they are for all intents and purposes inseparable.

All of which is to say that employee benefits may be more important than pay for a growing segment of workers.

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