Tough Responsibilities in a Tough Era

Change Is Now Constant

by Russ Banham

Entrusted with overseeing retirement and health care benefits to employees at a time when both are under siege, few jobs today are more taxing than that of the employee benefits manager. Just ask Eileen Maraldo. “The issues are so complex, and changing so quickly, that we’re racing to keep up,” the vice president of employee benefits at Time, Inc., confides.

Maraldo is not alone in her fretting. Health care costs have gone up so much for so long it has become increasingly difficult for employers to absorb the expense, especially in the current economic environment. Added to the pressures is the specter of fundamental change in how health care will be provided. “The speed of expected health care legislation and reform is unprecedented,” says Maraldo. “We’ve got the high cost of health care colliding with legislative priorities ...[and] no one knows what the outcome will be.”

The provision of retirement income benefits — traditional defined benefit pensions and relatively newer defined contribution 401(k) plans — is the other stress inducer. Obligations to provide the former is weighing down heavily on cash-strapped companies, while the latter is a factor in many employees’ own restlessness. “The investment loss on pension assets has been so large recently for companies providing defined benefit plans, it’s driving up costs for those plans beyond anyone’s wildest expectations,” Maraldo says. “At the same time, many employees have lost a great deal of money in their defined contribution plans. Some are telling me they will have to postpone their retirement. If people need to work longer, but companies are downsizing and cutting back on pensions, there’s a serious disconnect.”

A Perfect Storm

The U.S. Congressional Budget Office estimates $2 trillion in retirement savings plan losses since the onset of the economic crisis. Small wonder why Maraldo is reaching for the aspirin. The problems are so acute for employee benefit managers and people whose job title contains the word “benefit,” that they ache at a very human level. So do others on the sidelines. “Employee benefit managers are in a crunch time right now, as are a lot of employee benefit attorneys handling ERISA compliance,” says Joel Daniel, employee benefits practice group leader at Atlanta-based law firm Ogletree Deakins, which specializes in ERISA (Employee Retirement Income Security Act) issues. “It’s sort of a ‘perfect storm,’ resulting from the accelerated funding requirements under the Pension Protection Act for defined benefit plans, together with the recent financial market declines. Add to that 401(k) plans underwater, increasing health care costs and mass layoffs and other reductions in workforce, and you see the problems.”

Employee benefit managers vent their concerns each year in the Top Five Total Rewards Priorities survey conducted by the International Society of Certified Employee Benefits Specialists and Deloitte Consulting. A startling 44 percent of respondents in the 2009 survey expect to delay retirement because they don’t have as much money to retire as planned. Not surprisingly, the same survey cites health care costs as the number one strategic challenge facing organizations today.

“Health care benefit costs have climbed faster than the inflation rate for so many years that it is now a big chunk of the GDP and there is really no end in sight,” says Julie Stich, senior information research specialist at the International Foundation of Employee Benefit Plans, the educational arm of the employee benefits industry. “While health care reform is needed, it’s a thorny subject. Hence, the focus in many organizations on employee wellness programs — ways to make the employee healthier.”

Regarding retirement income security concerns, Stich notes a sad irony: many employers, burdened by their defined benefit promises, turned to defined contribution plans as an alternative. “We’re trying to make employees more responsible for their retirement income, and then this financial turmoil happens,” Stich says. “We open our monthly statements now and wonder what happened to our money.”

When employees fret about affording health insurance and having enough money to retire, the stress trickles down to their productivity. At the onset of the recession in late 2007, slightly more people in the Gallup-Healthways Well-Being Index said they were “thriving” as opposed to “struggling.” By the end of 2008, the numbers had reversed, with 58 percent struggling, 38 percent thriving and 4 percent suffering. “It’s so bad out there that unless somebody finds a way to magically reverse the course of the markets, interest rates and health care costs, it will only get worse” says Dallas Salisbury, CEO of the Employee Benefit Research Institute, a public policy research organization.

For many, the worst has arrived. Pam Kehaly, president of national accounts at insurer Aetna, says “employers are very concerned about the impact of the economy on employees. The housing crisis, erosion of retirement savings, credit problems — they are all creating stress on employees, and, that takes a toll on productivity and presenteeism. We have seen evidence of this stress in the increased number of calls coming into our EAP lines from individuals looking for help in dealing with economic-related issues.”

For employee benefit managers entrusted with managing these issues, they are stuck in a classic Catch 22 situation, says Salisbury. “They need to find money to fund defined benefit plans at a time when money is scarce, and yet still take care of future benefit obligations. If you freeze a [defined benefit] plan, you run into potential recruitment and retention issues. The same applies to the continued growth of health care costs. You can shift more of the cost to employees, but that leads to potential unhappiness similarly affecting recruitment and retention.”

Belinda Kitts relates to the Catch 22 dilemma. As vice president of support services in the human resources department of publicly-traded restaurant chain Ruby Tuesday, Inc., Kitts calls her job an ongoing struggle. “We’re trying to delicately balance our responsibilities to the shareholders to conserve expenses in the slower sales environment at the same time we’re trying to provide a rewarding work environment,” she says. “And we have found that the key to achieving it is creativity.”

Innovative Health Care

In the lexicon of employee benefit managers, creativity means simultaneously balancing three benefits objectives — retaining talent, cost control and increasing employee productivity. “In the current economic climate, benefits optimization is all the more critical. Benefit managers are looking for ways to get more value out of their benefit programs by ensuring benefit plan design and structure effectively meet employee needs while also controlling costs,” explains William J. Mullaney, president of MetLife’s Institutional Division, which provides benefit solutions to more than 60,000 group customers in the United States. “We saw from MetLife’s seventh annual Employee Benefits Trends Study that the economy has increased employees’ appreciation of their workplace benefits. With this increased appreciation comes great opportunities for employers.”

An example is wellness programs lowering the risk of employees’ needing costly medical care interventions. Today’s wellness programs are a long way from the smoking cessation and exercise regimes of the past. United Essentials, the research and development arm of United Healthcare, recently launched Diabetes Health Plan, aimed at identifying employees at risk of developing type 2 diabetes. According to the American Diabetes Association, of the estimated 23.6 million people in the U.S. with diabetes, only 17.9 million of them have been diagnosed, 90 percent of which are type 2. “On a voluntary basis, we’re offering employees the opportunity, through the use of biometric screening of weight and sugar levels, to learn if they are pre-diabetic, and via an analysis of their employer’s claims data to determine if they are a previously undiagnosed type 2,” says Tom Beauregard, CEO of United Essentials.

Once an employee has been diagnosed as pre-diabetic or having type 2 diabetes, the insurer will customize a medical care plan that offers financial incentives, diabetic drugs, wellness exams and lab testing to the employee at less cost to both the employee and the employer. “We not only identify candidates for diabetes, we track them with an online scorecard to ensure they’re complying,” Beauregard says, noting that noncompliance bars the employee from being invited back into the plan in year two.

Other health insurance providers like Aetna Inc. also have broadened their menu of wellness options to improve employee health, thereby reducing medical care utilization rates. “Clients look to us to respond to the dilemma of reducing their medical cost expenditures by delivering innovative ways to make their employees healthier,” says Kehaly. “Employers are also asking us to help them help their employees better cope with the financial and emotional stresses created by the current economic environment. We’re partnering with customers to create campaigns to educate their employees on programs available to help them manage stress and obtain financial or legal counseling, as well as guidance on how to stretch their health care dollar, such as the benefits of buying drugs mail order versus going directly to a drugstore, which costs more. When times are good, people don’t think about things like discount programs. When times are tough, it is important to remind them.”

With major medical insurance costs skyrocketing, insurer Aflac offers a range of supplemental benefits better suited to some employers’ shrinking wallets. “Our insurance policies enhance major medical plans, which don’t cover risks like travel expenses and lost wages, especially if the policyholder has to leave work to care for a recuperating family member,” says Audrey Boone Tillman, executive vice president of corporate services at the Columbus, GA-based insurer. “An employee in a terrible traffic accident, out of work for weeks and losing a regular paycheck is unlikely to find financial recourse in a major medical policy. We can supplement that policy with a rider offering disability income insurance. Our cancer policy provides cash benefits that can be used for travel and lodging expenses if treatment is at a remote location, and our accident policy picks up ambulance benefits.”

Easing Retirement Anxiety

There are also ways for employers to help their employees improve their chances of enjoying the retirement they had hoped for. More than half of those surveyed in MetLife’s Employee Benefits Trends Study expressed interest in receiving retirement-related advice in the workplace. To meet this growing need, the company offers employers retirewise®, a comprehensive series of free educational seminars conducted at the workplace for employees. The seminars, which complement an employer’s existing benefits program, take a holistic view of retirement, going beyond savings and investment strategies to ensure that employees have the appropriate income stream in retirement, as well as examining social security, estate planning, long-term care and tax considerations.

Prudential Retirement touts a way for employers to rest assured the guaranteed income promised from their employees’ defined benefit retirement plan is delivered, while addressing the funding level responsibilities created by the Pension Protection Act. “By buying a single premium group annuity, the employer transfers the investment and mortality risks to an insurance company, thus getting the liability immediately off the books,” explains Jamie Kalamarides, senior vice president and head of retirement solutions at the Newark, NJ-based insurer. “By doing this transfer the company will prevent a future repeat of 2008, where a defined benefit plan’s funded status fell by 25 percent or more.”

Another annuity, grouped together by the insurance industry as guaranteed minimum withdrawal benefit (GMWB) annuities, provides a way for employees to lock in the value of a 401(k) plan during periods of stock market declines. The annuities provide guaranteed income for life, allowing employees to accumulate assets in a diversified portfolio without the threat that future investment losses will erode retirement income — a risk that is passed on to the insurer. “We see this as a way to make a defined contribution plan look more like a defined benefit plan, without the commensurate risk to the employer,” says Kalamarides. Prudential calls its GMWB annuity IncomeFlex.

Kitts says alternative ways of providing retirement income security and medical care as employee benefits are helping make a difference for Ruby Tuesday’s 36,000 employees. “On the health care front, we offer a variety of different plans at different affordability levels,” she says. “For example, we have a limited dollar-a-day program that covers most prescriptions, doctor office visits and up to $10,000 a year in hospital costs. That gets our younger employees in the door of the doctor’s office at a cost they can afford. We’re also covering 100 percent of all our restaurant management and support staff employees’ preventative medical care, helping them lead healthier lifestyles.”

With respect to retirement income, Ruby Tuesday takes a line from the Rolling Stones song that inspired the company’s name, “Yesterday don’t matter if it’s gone.” “We tell employees, especially our younger ones, that even with the stock market in the shape it’s in, it’s only temporary,” Kitts says. “If they keep investing now, they can buy more shares of a stock that will probably rise someday in the future. Since they’re young and seemingly invincible, they have faith in their futures. We all should.”

The Future of Retirement Plans

by Dallas Salisbury, Employee Benefit Research Institute®

Like never before, the American public is being reminded each day of the retirement challenges that lay ahead. For both the employers that sponsor retirement plans and the workers who participate in them, the future of employment-based retirement plans seems to be in question:

• Business failures and unemployment are both on the rise, and sages like Warren Buffett suggest that things will not return to “normal” for perhaps five years.
• The recession has brought a flood of employer announcements that 401(k) matches are being reduced or eliminated, and that defined benefit pension plans are being “frozen in place” (so that benefits will not grow) or replaced by less generous retirement plans.
• Financial publications report the ongoing decline in value of the largest asset for most Americans — their homes — and an ongoing rise in foreclosures. That’s a direct threat to many Americans’ ability to afford a comfortable retirement as it dims their prospects of selling their houses for big capital gains or taking out reverse annuity mortgages.
• An ever-growing number of surveys report that those lucky enough to still have a job now expect to work many years longer because they cannot afford to retire.
• Social Security is described as “fixable” but unsustainable without either more income or a reduction in benefits. Yet, it is the only source of income for one-quarter of current retirees, and the primary source for nearly three-quarters. That dependence will only grow for baby boomers.
• Retirement plans currently account for the bulk of employers’ spending on benefits, but health care will soon be the number one benefits expense. The health care system is described as being in “crisis,” with the rate of health cost growth threatening the benefits promised by employers, Medicare and Medicaid. Yet, for more than half of all retirees, Medicare and Medicaid are the only meaningful health and long-term care protection they have in retirement — and, again, that dependency will only increase for baby boomers.

Retirement plans, retirement programs and the very concept of retirement are all changing at a rapid pace. The current economic “war” will drive more change at several levels: government policy, employers’ plan-design decisions and worker and individual decisions on participation, contributions, asset allocation and distributions. Many retirees are already being forced to change their decisions on spending, investments and lifestyle, among other things.

Many retirees would now like to return to work. Phased retirement, which has been advocated in recent years as a way to keep individuals from leaving the work force entirely, could now shift to becoming a way to ease people into retirement more quickly.

PPA Changes to 401(k) Plans

Even before all this challenging news, employers and the government were concerned about the nation’s poor preparation for retirement. The most current data (for 2006) show that, among all nonagricultural wage and salary workers (the ones most likely to have benefits), almost two-thirds (64 percent) had an employer that sponsored a retirement plan at work, but less than half (47 percent) participated. For workers who are in a 401(k)-type retirement plan, the average annual employee contribution is 7.5 percent of salary.

The Pension Protection Act of 2006 (PPA) was enacted by Congress to bring changes that would improve the picture. Many of the PPA’s changes are now taking place at a rapid pace:

• Automatic enrollment in 401(k) plans is spreading quickly and participation rates in plans are rising as a result. Most workers are choosing to remain in the plan. The positive results are leading to more adoptions of auto-enrollment each week.
• Automatic escalation of participants’ 401(k) contributions is being adopted by fewer plans, but where it is adopted, most workers are accepting it. Research indicates that when workers are automatically enrolled without automatic escalation they “stick” at the initial contribution rate. Some employers are responding by simply increasing the initial rate, and others by moving to automatic escalation.
• Plan sponsors have responded to the qualified default investment rules of the PPA with a massive movement away from money market and fixed-return (“stable value”) investment options and into diversified investment portfolios. The most common adoption has been “target-date” mutual funds, typically matched to the worker’s expected year of retirement, which automatically reduce the account’s equity allocation as the target retirement year approaches. A smaller number of employers have moved to PPA-qualified “balanced funds” (a pre-determined mix of stocks and bonds) or “managed accounts,” where information is collected from the participant and the portfolio is matched to more than the participant’s age.

Outside of the qualified default investments, some employers are offering “unit annuity purchase” programs that also provide a base minimum return as long as the participant remains in the option.

These changes matter because so many American workers now depend on 401(k)s for their savings and future retirement income. Just under 16 percent of private-sector workers were active participants in 401(k)-type plans in 1975, compared with nearly 42 percent today. This number will grow in the years ahead, as more and more 401(k) plans adopt PPA-allowed automatic design features.

PPA Changes to “Traditional” Pension Plans

The PPA also included rules clarifying the status of so-called “cash balance” defined benefit (pension) plans in an effort to keep sponsoring employers from dropping them and encourage others to establish them. The hope was that employers with no defined benefit pension would move to establish a cash balance plan, but that has happened only on a limited basis among firms. Post-PPA, some large employers have shifted from traditional defined benefit to cash balance plans.

The economic crisis has affected defined benefit pension plans in ways that could lead to more decisions to freeze these plans in place, convert them to cash-balance plans or move them entirely to 401(k)-type plans:

• First is the dramatic decline in the equity markets. This resulted in a dramatic drop in pension plan assets, totaling more than an estimated $500 billion.
• Second is the decline in government interest rates and the prospect of lower corporate bond interest rates ahead, which cause the present value of liabilities of defined benefit pension plans to grow.
• Third is the dramatic increase in required contributions (under current PPA rules) to pension plans that this combination of equity losses and low interest rates can demand. Congress has already granted pension plan sponsors some relief from the PPA’s funding requirements, and the Treasury Department issued new guidance this month to aid employers in moving forward.

More than 40 percent of private-sector workers were active participants in “traditional” defined benefit pensions in 1975, compared with less than 17 percent today. This number will continue to decline, as employers that do not have workforces uniquely suited to a traditional defined benefit plan convert to cash balance or 401(k)-type plans. Workforces that are “uniquely suited” are those where full-career job tenure is desired by the employer — and such jobs are also in decline in the U.S. economy.

401(k) Losses in the Financial Crisis

It’s no surprise that workers have generally seen their 401(k) balances hit hard by the current financial crisis. However, the continuous flow of new contributions with each pay period helps fill the hole, while also allowing the purchase of new investment shares at lower prices, holding the potential for higher eventual balances than if the equity markets had never declined. So far, 401(k) participants have remained (what some might view as) amazingly calm, based on reports from several organizations that provide or administer 401(k) plans. Low double-digit percentages have shifted assets or stopped contributing, and 401(k) loan and hardship-withdrawal rates have changed little from historical patterns.

Our research shows that actual declines in individual 401(k) balances vary significantly by a worker’s age and tenure, with job tenure being the dominant factor. The longer someone has been in a 401(k) plan, the larger the balance — and the bigger the potential loss. Thus, it will take longer for these workers to catch up, as the economy recovers and the markets climb.

There are no data to suggest that participants are yet responding in the single smartest way: contribute the maximum allowed while markets are at their current or lower levels. Decades ago, a professor told me that the hope of every investor should be to have flat markets until shortly before you retire, so that your purchases get you the greatest ultimate value. Few actually hope for that, but for those who want to be in equities and have years to accumulate earnings, today’s prices are undeniably lower than in recent years. Employers do not yet seem to be communicating aggressively for workers to contribute more to their 401(k)s now, but campaigns are beginning. They can be expected to accelerate.

The Policy Response

One thing’s for sure: members of Congress “feel the pain” of the current financial crisis. Lawmakers watch the news closely, have seen their own 401(k)-type balances decline and are hearing from constituents and family members. While retirement savings are not at the very top of the political agenda, they are high on the pain threshold with constituents.

This could have implications for the existing voluntary employment-based retirement system in the United States. Advocates of “reforming” this system clearly see an opportunity and silver lining in the current economic cloud of darkness: a chance to declare voluntarily-provided plans like

401(k)s and individual retirement accounts (IRAs) “a failed experiment” as they are currently designed and function.

The data do not support this contention, relative to the objectives contained in existing statutes and legislative histories. But some academics suggest that the objectives were wrong and that 401(k) plans should be judged against an objective of providing adequate retirement security when combined with Social Security.

The proposed alternative policies to achieve the objective of adequate are new forms of mandated or “default” savings plans that both employers and workers would contribute to. Some proposals would make the savings mandatory while others would give the individual the option of “opting out.” Congressional hearings are being held, books are being published and President Obama has included an “automatic default IRA” in his first budget. Even some financial trade groups have suggested that mandated automatic enrollment defaults in employer-sponsored 401(k) plans would be acceptable.

For employers, this policy direction would appear to mean not only mandated costs but less control over a major form of benefits compensation. For workers, it might also mean mandatory savings — putting money aside for their own retirement.

It is far too early to know what the policy outcome will be. But as a matter of retirement planning and savings advocacy, it suggests a growing recognition that most Americans have saved far too little to afford the retirement they have dreamed of, even if they have managed to save enough to at least survive in retirement. For most, of course, the “retirement dream” is about far more than just survival.

My own conclusion is that the current economic crisis — similar to the Great Depression — will produce a fundamental change in individual savings behavior that will be with us for the decades immediately ahead. This has attendant implications both for a consumer-based economy and for personal financial responsibility and thrift.

Financial emergency is the immediate cause, but we can also expect that a combination of government, employer, media and other thrift and savings advocacy forces will arise and grow in the years ahead, with or without system reforms.

If your orientation is that of consumption and debt, the change will be somewhat depressing, as I believe the inevitable shift (already evident in the growing personal savings rate) will be toward thrift and savings.

If your orientation is like mine, to save for personal economic security, then the increased number of Americans with reserve funds and the ability to realize their retirement dreams — rather than just survive — will be viewed as good news. If this financial change toward real national savings comes to pass, at least some of the sacrifices required by our current “economic war” will have been worth it for society in the end.

The end of this “war” will bring a stream of changes that increase the use of retirement savings programs, the development of expanded financial education and advice programs and the development and use of programs that spread income efficiently over individuals’ full retirement span, with protections for longevity and inflation. Potentially, the result could be a greatly expanded (and possibly mandated at some point in the future) market for personal finance products and services for business and improved economic security for workers.

In short, the future of retirement can be brighter as a result of what we will have been through. And despite the considerable pain our nation is currently going through, I believe it will be.

In Tough Economic Times, Employers Turn to Value-Based Health Care

by Michael Wilson, CEO, International Foundation of Employee Benefit Plans

Employers have spent years struggling to manage rapidly increasing health care costs. They have attempted to restrict overuse of medical services (utilization management, health maintenance organizations, gatekeeper models) and to share the burden of providing coverage (premium contributions, copayments, deductibles).

Despite these efforts, the cost of providing health care benefits to employees and their dependents continues to increase. The Kaiser Family Foundation and the Health Research and Educational Trust found that in 2008, the average annual premium for employer-sponsored health care was $4,704 for single coverage and $12,680 for family coverage, a more than 115 percent jump since 1999.

Despite — or because of — the high cost of providing health care, an estimated 46 million Americans are uninsured, and that number is likely to climb as the economic crisis continues. Talk of reform is resurging. As bright minds discuss structural changes to the overall health care system, benefit plan design change initiatives at the employer level are being examined as well.

One approach, value-based health benefit design, is attracting attention. This concept focuses on the individual and works to maximize his or her overall health and quality of life.

The High Costs of Aging and Chronic Conditions

Employers are facing the potential for even greater health claims costs as aging employees contend with illnesses and chronic conditions, and younger individuals enter the workforce less healthy than previous generations. Chronic conditions, if not prevented or controlled, can lead to costly emergency room visits and hospitalizations, surgeries, complications and the onset of related diseases.

The true cost of a health condition to an employer involves both direct medical expenses and indirect workplace costs. Direct expenses involve the claims costs for medical and pharmaceutical interventions. While direct costs can be high, they can pale in comparison to indirect costs relating to lost time and productivity due to unscheduled absences, short- and long-term disability, workers’ compensation and presenteeism (a decrease in job performance due to a health-related condition).

Value-Based Health Care

Value-based health benefit design is a holistic, consumer-centered approach that focuses not on the actual dollars being spent but on how the dollars being spent work to improve employees’ health. Healthier and more productive employees result in a better return on health care investment, positively impacting a business’s bottom line.

The first step is to create a culture of health within a company — a positive environment that supports and encourages physical, emotional and financial health among employees. Healthy, satisfied employees are valuable assets, and successful companies offer them the means to attain an enhanced quality of life. Senior management must champion the cause and be active participants in the endeavor.

Employee Education and Involvement

With this type of value-based system, the employer provides educational resources and tools combined with health improvement programs such as disease and case management, and wellness programs. The goal is to help healthy individuals maintain, at-risk individuals improve and ill individuals manage their health.

Employees are encouraged to become the primary person responsible for their own health. Through education, support and tools, they understand their diagnosis and course of treatment. They become part of their medical team and participate in decision making. They are aware of the costs of services and are encouraged to choose high-quality care. Employers can help by providing nurse advice lines, a case manager or a health coach to assist employees on their medical journey.

Focusing on chronic conditions such as diabetes, asthma, hypertension and high cholesterol, the city of Asheville, NC, implemented a value-based initiative in 1996. Employees with these conditions received intensive education and were teamed with pharmacists to ensure prescription compliance and improve health outcomes. While the city saw an increase in claims costs for prescription drugs, an analysis of the diabetes care program showed a decrease in mean per patient per year prescription and insurance claims costs, from $7,082 before program implementation to $4,651 in the fifth year. On average, the number of sick days taken per patient per year decreased from 12.6 to six.

Health Benefit Redesign

Value-based initiatives may involve a redesign in benefit plan cost-sharing levels to incent individuals to seek proper treatment and effective therapies, and to comply with medical advice. Benefit coverage levels may be changed to provide no-cost health equipment or supplies to manage chronic conditions. As an example, an employer can reduce the copayment for a maintenance prescription drug to encourage an employee to adhere to prescription directions. Pitney-Bowes Inc., Stamford, CT., moved prescription drugs used to treat chronic conditions to a lower cost-share tier and saw improved refill rates.

To reinforce the importance of becoming a stakeholder in medical decision making, some employers and health plans are providing individuals with electronic personal health records. PHRs are used to store information from individual and family medical histories and to track an individual’s medical conditions, hospitalizations, medical test results, doctor visits, medications and the like. Despite security and accuracy concerns, supporters of this technology feel that ready access to the information contained in PHRs will lead to improved patient care.

Some employers are embracing the idea of personal health records. IBM Corp., Armonk, NY, is making them available to employees as a way to reinforce individuals’ involvement in their own care and reduce medical errors. A coalition of employers — including AT&T, BP America, Intel Corp. and Pitney Bowes — have joined together to develop a data warehouse to store employee electronic personal health records.

High-Quality Care Providers

Access to high-quality medical services and providers is imperative in a value-based health care model. Evidence-based medicine identifies the best course of treatment for a diagnosis. Individuals are encouraged to make use of services with high clinical value. Health coaches and case managers can guide patients to high-quality providers.

Employers may offer incentives for their workers to visit health providers with a history of positive outcomes. For example, supermarket chain Hannaford Bros. Co., Scarborough, ME, urges employees to seek care at hospitals determined to be centers of excellence by offering a reduced or eliminated copayment.

United Food and Commercial Workers Local 1546 in Chicago provides a medical center and pharmacy for its members and their families. Members receive a wide array of medical and dental services, including access to primary care physicians and specialists, lab and diagnostic services and therapies. A managed care department assists members needing further testing or hospitalization. The center negotiates directly with area hospitals. Members choosing one of these hospitals have 100 percent of the bill paid by the plan. Designed to provide easy access to quality health care professionals, the center maintains both the health and productivity of members while being cost-effective for employers.

Some employers are considering a switch to a medical home model that involves an ongoing relationship between a patient and a personal physician who oversees all aspects of his or her care. This coordinated-care approach can eliminate duplicative or conflicting services and therapies, while providing skilled care. One employer making use of this model is the Mayo Clinic, Rochester, MN. Employees who coordinate their care through their primary care physicians are freed from copayments.

Data Driven

Value-based medicine begins by using data and technology to identify employees with established or newly diagnosed chronic conditions or those at high risk to develop such conditions. Data and technology are also used to identify chronic conditions that are costly or responsible for productivity problems. Specifically, employers and health plans are analyzing health and prescription claims as well as short-term and long-term disability, workers’ compensation and absenteeism rates to identify high-cost conditions and employees. This data mining also reveals efficiencies and problems in the plan’s design, providers’ clinical outcomes and gaps in individuals’ treatments.

Some employers and plans are turning to predictive modeling, a strategy that uses claims data and lifestyle analytics to identify potential catastrophic claims and disease states. Many employers are asking employees to participate in a health risk assessment, a tool that collects an individual’s health data via questionnaire and testing. This collected data can assist in identifying needed workplace health improvement programs.

Implementing a value-based health design can be challenging. Employers may see an initial increase in costs if the cost-share structure is changed to reduce or eliminate copayments and deductibles. As improvement in an individual’s health status takes time, so can seeing a positive return on investment. A value-based design may also cause administrative and employee relations challenges. But employers who have implemented value-based initiatives have seen positive results in productivity levels and overall employee health.

Changing the structure of the health-care system alone will not change the health care cost and delivery problems facing the United States. Health benefit plan design change initiatives are necessary, especially initiatives that focus on achieving and maintaining employee health and enhanced quality of life. As this financial crisis drives shrinking workforces, employee well-being and productivity are more important than ever. Preventive care and effective medical therapies lead to declining rates of illness, absenteeism and presenteeism. Tough economic times require efficient and positive health spending.

A Tax Cap on Health Benefits? Remember Sec. 89

by Paul Fronstin, Employee Benefit Research Institute®

If there’s one bipartisan consensus in Congress on health reform, it might be the proposal — most recently voiced by the chairman of the Senate Finance Committee — to limit the tax exclusion for health benefits. In one form or other, both Democrats and Republicans have been advocating this for many years.

The old line of “where you stand depends on where you sit” applies in spades in this case:

• For budgeteers in Congress, the tax preference given to health coverage is too big to ignore: according to the Congressional Budget Office, income tax revenue would increase $108.1 billion during 2009–2013 if the health benefit tax exclusion for workers was limited (not repealed, mind you, just limited).
• For employers, for whom tax policy has always been a huge incentive (or disincentive) to act in any area of business, the change could result in significant new administrative costs at time of deep recession and ever-increasing health costs.
• And for workers, suddenly having one of their most valued forms of compensation suddenly taxed would be a major shock, one that potentially could cause at least some to drop coverage.

For everyone, the health benefit tax cap could turn into a very big fight.

Employment-Based Coverage

Voluntarily provided employment-based health benefits are the most common source of health coverage in the United States today, and health coverage provided by employers has been excluded without limit from workers’ taxable income for more than 60 years.

Recently, as a source of coverage, employment-based coverage has been eroding: Less than two-thirds (62 percent) of Americans under age 65 currently have employment-based coverage, down from nearly 70 percent less than a decade ago. The corresponding increase in the uninsured is a large factor driving the debate over national health insurance coverage.

How a Tax Cap Might Work

On the surface, capping the tax exclusion for workers’ health coverage sounds straightforward. Employers would report the cost of coverage on workers’ W-2 statements. Workers whose cost for coverage was below the cap would see no changes, while workers whose cost for coverage was above the cap would see a change. Those with a choice of health plan would either pay the tax on the excess value of coverage or choose a less costly plan. Workers above the cap but without a choice of plan would either pay the tax on the excess value of coverage or demand that their employers offer less costly plans.

As long as employers are required to report the value of coverage on workers’ W-2 forms, the implications of such a requirement will vary by employer and the way in which they finance health benefits.

Employers that purchase health insurance for their employees and pay a premium to an insurer would only have to report the premium on employees’ W-2 forms. However, in a self-insured plan — where the employer acts as its own insurer — the employer would have to determine the “value” of health benefits to report it for income tax purposes. Under a self-insured arrangement, some employees use coverage while others do not. While employers can create the equivalent of a premium, determining it for each employee may be costly.

The least costly way for a self-insured employer to calculate the premium equivalent would be to use the COBRA premium. For each plan, the employer would estimate the anticipated claims for the upcoming year. The estimates on anticipated claims would then be used to derive the average cost of coverage per worker.

Whether self-insured employers would be able to use the simplest method to determine the premium equivalent will be determined by legislation and/or regulations.

The Sec. 89 Experience

The red flag that many health experts see in this debate is Sec. 89 of the Tax Reform Act of 1986, which was repealed by Congress in November 1989 because the regulations created an unwieldy and very expensive burden for employers trying to comply with the law. Once the details and the costs of Sec. 89 became clear, employers forced Congress to reverse itself and repeal the new rules.

Specifically, valuation calculations rules imposed under a tax cap could become so burdensome that the cost of complying with a coverage valuation mandate may outweigh any benefits, creating another Sec. 89-type scenario. While Congress might allow employers to use COBRA or domestic partner premiums to value coverage, it could also be silent on the issue — forcing employers to either wait for regulations or seek IRS letters of determination.

In addition to offering health coverage, larger employers frequently offer on-site clinics and employee assistance programs that provide mental health benefits, flu shots, fitness centers, smoking cessation programs and other health promotion, disease prevention and disease management programs. Some employers even offer incentives for healthy behavior by providing direct payments to an account for those who follow good health practices. Inevitably, questions would arise regarding how to include the value of these programs, potentially putting employee “wellness” efforts at risk.

As the debate over a health benefit tax cap gets underway, a number of lessons can be learned from the experience from the Sec. 89 repeal.

First, a rule intended to raise government revenue can actually cost the government revenue if billions are spent simply doing the administrative work to comply. Second, valuing health coverage can be complex and time-consuming to implement. Third, policymakers should consider the unintended consequences of any actions they take regarding enacting and implementing a tax cap.

As experience has shown, there is always the risk of unanticipated consequences from any change to the tax treatment of health insurance and employment-based health coverage. For the government, employers and workers, translating “tax cap” into “Sec. 89” could turn into a debacle none of them want.