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.