The Costs of Employee Benefits Joseph J. Martocchio.

The Costs of Employee The Costs of Employee BenefitsBenefits

Joseph J. Martocchio Joseph J. Martocchio

What are Employee BenefitsWhat are Employee Benefits

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

Two Dimensions of Employee Two Dimensions of Employee BenefitsBenefits

The source of the benefit can be The source of the benefit can be characterized as legally required or characterized as legally required or discretionary discretionary

The role the benefit serves recipients The role the benefit serves recipients can be characterized as protection, can be characterized as protection, paid time off, or accommodation and paid time off, or accommodation and enhancement enhancement

Legally Required BenefitsLegally Required Benefits

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

Discretionary Employee BenefitsDiscretionary Employee Benefits

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

Income Protection ProgramsIncome Protection Programs

Three types of protection programs:Three types of protection programs:• Disability insuranceDisability insurance• Life insuranceLife insurance• Retirement plansRetirement plans

Defined Benefit PlansDefined Benefit Plans

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

Defined Contribution PlansDefined Contribution Plans

Plans allow employees to set aside a Plans allow employees to set aside a portion of their salary for investment portion of their salary for investment purposes purposes

These plans are riskier than defined These plans are riskier than defined benefit plans due to the uncertainty benefit plans due to the uncertainty of the investment incomeof the investment income

Employers may match a small Employers may match a small portionportion

Health Protection ProgramsHealth Protection Programs

Programs refer to a host of practices Programs refer to a host of practices geared toward promoting sound geared toward promoting sound health health

Health insurance plans represent the Health insurance plans represent the largest portion of a company’s health largest portion of a company’s health protection offerings protection offerings

Health Insurance ProgramsHealth Insurance Programs

Fee-for-service plansFee-for-service plans Managed care plansManaged care plans Point-of-service plansPoint-of-service plans Savings accounts based on the Savings accounts based on the

consumer-driven health care consumer-driven health care philosophy philosophy

Fee-for-Service PlansFee-for-Service Plans

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

Managed Care PlansManaged Care Plans

Include HMOs and PPOsInclude HMOs and PPOs Managed care plans impose Managed care plans impose

substantial restrictions on an substantial restrictions on an employee’s ability to make choices employee’s ability to make choices about from whom they can receive about from whom they can receive medical treatmentmedical treatment

Point of Service PlansPoint of Service Plans

Combines features of fee-for-service Combines features of fee-for-service systems and HMOs systems and HMOs

Employees pay a nominal copayment Employees pay a nominal copayment for each visit to a designated in-for each visit to a designated in-network physician however the network physician however the possess the option to receive care possess the option to receive care from out of network physicians for a from out of network physicians for a higher costhigher cost

Consumer-Driven Health CareConsumer-Driven Health Care

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

(HRAs)(HRAs)

Paid Time OffPaid Time Off

VacationVacation Sick leaveSick leave HolidaysHolidays

Accommodation and Enhancement Accommodation and Enhancement ProgramsPrograms

Promote opportunities for employees Promote opportunities for employees and family members through:and family members through:• Mental and physical well being of Mental and physical well being of

employeesemployees• Family assistance programsFamily assistance programs• Flexible work scheduleFlexible work schedule• Skills and knowledge acquisitionsSkills and knowledge acquisitions

Employer Costs for Compensation Employer Costs for Compensation and Benefitsand Benefits

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

Environmental Factors and the Environmental Factors and the Cost of BenefitsCost of Benefits

Industry prospects with economic Industry prospects with economic conditions and forecastsconditions and forecasts

Government regulation of employee Government regulation of employee benefitsbenefits

Changing demographics of the labor Changing demographics of the labor force force

Advances in health care Advances in health care

Industry prospects with economic Industry prospects with economic conditions and forecastsconditions and forecasts

Economic forecasts can influence the Economic forecasts can influence the extent that the firm is willing to extent that the firm is willing to invest in employee benefitsinvest in employee benefits

Employers will likely continue Employers will likely continue employee benefits due to:employee benefits due to:• Tax benefitsTax benefits• Attracting and retaining quality Attracting and retaining quality

employeesemployees

Government Regulation of Government Regulation of Employee BenefitsEmployee Benefits

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

Changing Demographics of the Changing Demographics of the WorkforceWorkforce

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

Advances in Health CareAdvances in Health Care

Health insurance costs continue to Health insurance costs continue to increase due to:increase due to:• Increasing life expectanciesIncreasing life expectancies• Aging of baby boomersAging of baby boomers• Advances in medical research that add Advances in medical research that add

diagnostic tests and treatmentsdiagnostic tests and treatments• Higher expenditures to prolong the lives Higher expenditures to prolong the lives

of the terminally ill of the terminally ill

Responses by the Firm to Rising Responses by the Firm to Rising Benefit CostsBenefit Costs

Requiring employees to pay more for Requiring employees to pay more for health carehealth care

Making greater investments in Making greater investments in accommodation and enhancement accommodation and enhancement benefitsbenefits

Eliminating retiree health care Eliminating retiree health care insurance coverageinsurance coverage

Requiring Employees to Pay More Requiring Employees to Pay More for Health Carefor Health Care

In addition to various insurance In addition to various insurance plans, FSAs and HRAs provide an plans, FSAs and HRAs provide an important alternative to firmsimportant alternative to firms

These accounts provide employees These accounts provide employees with resources to pay for medical with resources to pay for medical and related expenses not covered by and related expenses not covered by higher deductible insurance plans at higher deductible insurance plans at substantially lower costs to substantially lower costs to employers employers

Increased Accommodation and Increased Accommodation and Enhancement BenefitsEnhancement Benefits

Decrease absenteeism and tardinessDecrease absenteeism and tardiness Enhance worker productivity through Enhance worker productivity through

improved healthimproved health Education benefits may increase the Education benefits may increase the

skills of employees and allow for skills of employees and allow for more flexibility within the workforcemore flexibility within the workforce

Guidelines to Curbing Benefits Guidelines to Curbing Benefits CostsCosts

Employee contributions to help Employee contributions to help companies save money by requiring companies save money by requiring that employees pay a nominal that employees pay a nominal portion of the benefit costs portion of the benefit costs

Waiting periods to limit participation Waiting periods to limit participation in the benefits program in the benefits program

Guidelines to Curbing Benefits Guidelines to Curbing Benefits Costs ContinuedCosts Continued

Educate employees about the cost of Educate employees about the cost of health care health care

Conduct utilization reviews to Conduct utilization reviews to evaluate the quality of specific health evaluate the quality of specific health care services care services

Guidelines to Curbing Benefits Guidelines to Curbing Benefits Costs ContinuedCosts Continued

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

Guidelines to Curbing Benefits Guidelines to Curbing Benefits Costs ContinuedCosts Continued

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

SummarySummary

This chapter has covered:This chapter has covered:• Types of benefitsTypes of benefits• Types of health care plansTypes of health care plans• Environmental factorsEnvironmental factors• Company responsesCompany responses• Guidelines for cutting benefits costsGuidelines for cutting benefits costs