Bloomberg Businessweek
Mamas, Don't Let Your Babies Be Born at AOL
By Justin Bachman
February 07, 2014 - Businessweek
AOL Chief Executive Tim Armstrong ruffled more than a few of his employeesf
feathers when he disclosed this week that two AOL workersf gdistressedh
babies had whacked the company with $2 million in medical bills.
The costly children were cited—along with more than $7 million in costs from
the Affordable Care Act—as the reason AOL (AOL) changed its 401(k) account match to an annual
lump sum payment. Workers who arenft on the payroll at yearfs end will forfeit
AOLfs 3 percent matching contribution to the accounts. IBM (IBM) made a similar change in 2012. If you plan to
quit, management thinking goes, forget about collecting our share of your
retirement savings.
Many employees didnft
react well to either bit of news, according to news reports. First, therefs
the financial blow to workers, who will lose 401(k) funds if they leave AOL, as
well as miss the opportunity to have the companyfs match bolster their financial
returns over a full year. Therefs also the shock that accompanies hearing your
boss tag a colleaguefs difficult pregnancy and her newborn child as the reason
your retirement plan was cut.
Why did two babies with special medical needs cost AOL $2 million? Most large
employers are self-insured for their workersf health coverage, given the savings
such plans can yield over traditional group insurance. Self-funding means that
an employer pays for health care rather than buying an insurance policy for
their workers. Such plans now cover 60 percent of private-sector workers with
health insurance—an estimated 100 million Americans. Financially, self-funding
is practically a no-brainer if you have 1,000 or more employees, given the
dramatic surge in U.S. health-care costs. The glaw of large numbersh takes over
and big employersf annual medical expenses can be projected with relative
precision, says Jon Trevisan, a senior vice president at Willis North America (WSH), an insurance brokerage that consults with
employers on health coverage.
Itfs not clear what kind of health plan AOL has; but with 4,000 employees,
the company is likely self-insured. The company declined to comment Friday on
that subject or the CEOfs remarks. Armstrong declined an interview request, an
AOL spokesman said.
Given the astronomic costs that a heart attack, premature birth, or cancer
can inflict, some self-insured companies purchase what are called stop-loss
products to limit their financial exposure. Those limits can kick in for an
individual employeefs claims beyond a certain level, or for an entire employee
group in aggregate. Once a company has a certain number of employees, however,
stop-loss insurance products may not make financial sense given the general
predictability of workersf typical annual claims, Trevisan says. But whether
their worker pool warrants stop-loss coverage is a matter of executivesf risk
tolerance as much as actuarial and cost-benefit analyses. Some companies may be
comfortable forgoing stop-loss coverage for 3,000 workers, while others with
10,000 or more may decide to buy it. gIt depends on the risk tolerance that a
company has,h Trevisan says. gAt the end of the day, itfs about how comfortable
the employer is in assuming risks.h
AOL, the parent of the Huffington Post news site, is a media and
Internet company with a workforce that may be younger—and healthier—than most
employersf. If so, its annual claims could be even more predictable than a more
age-diverse employee pool. That could argue against buying pricey insurance
products to limit catastrophic claims—but it could at times lead to a $1 million
baby bill.
Bachman is an associate editor for
Businessweek.com.