Employee benefits have become vital to the success of businesses. Good benefit plans help lure high-quality employees who can keep organizations competitive. But rising costs, particularly on the medical side, mean that employers must be careful when putting packages together. Plans should be attractive without being overly expensive. The importance and growing complexity of the employee benefits market are creating solid opportunities for advisors.
The term “employee benefits” is very broad. A benefits package, for instance, might include: major medical, dental, income protection, life insurance, pensions, travel insurance and legal expenses. Retirement packages can include pensions and 401(k) plans.The different needs of businesses provide good opportunities for advisors to offer tailored administrative and consulting services. There are also prospects for cross-selling in the form of both commercial coverage for a business and personal products for the business’ executives and other employees.
Effects of employee benefits
Well-run employee benefit programs can have widespread positive effects. According to the Health Insurance Association of America (HIAA), work-based medical insurance programs have helped reduce the number of uninsured in the U.S. During 1998 and 1999, the HIAA reports, more than two million people were thus added to the rolls of the nation’s medically insured.
Kevin Kautzmann, president and financial planner at broker EBNY Financial in New York, says that the cost of medical coverage can come as an unpleasant surprise, particularly in New York. “A family plan in New York,” he says, “is basically a mortgage payment. It’s kind of sad to see. A lot of people cannot afford the coverage.” EBNY Financial serves mainly small and medium-sized clients in Manhattan. Its range of products includes 401(k), group health and profit-sharing plans. Business, Kautzmann says, is good.
Bob Viola, CLU, REBC, RHU, principal at the Megro Corporation, a brokerage in Radnor, Penn., says that health care is the biggest part of an employee-benefits package. His advice to a start-up business is to begin with health, follow it up with dental, and then “build down.” According to Viola, smaller companies are often willing to buy the best in health coverage since they tend to see it as a valuable recruiting tool.
Karen Olson, president of broker Benefits Design Group, in New York, reports a surge in the number of small-business startups. Many of these new entrepreneurs, she believes, are the victims of layoffs by large corporations. Most of the new firms have between three and seven people—with all of them planning to double in size.
Putting it together
In developing a benefits package, Olson considers factors such as the age of the workforce to be covered and whether the employees are native to the area or imported from another state. Clients, she notes, may be either confident or discouraged when they hear what health coverage will cost. “Some are very well-financed,” Olson says. “And it’s only a question of what’s the best they might get.”
The expense of medical insurance is making some employers nervous about providing it. In April 2001, Hewitt Associates, a management and employee benefits consulting firm based in Lincolnshire, Ill., reported that the increasing cost of health coverage meant that employers wanted to be less involved in it. Hewitt also reported that coverage for retirees was eroding.
The Hewitt study, which was carried out in the fall of 2000, involved 600 firms, most of which had over 1,000 employees. The survey found particular concern among the employers about the implications of defined-contribution programs, under which the employers pay a set amount, without reference to the range of coverage or the cost of treatment. The employers were worried about rising costs and the possibility of being sued by employees unhappy with their medical treatment. The Hewitt study also noted predictions from experts that eventually, employers may prefer to stop providing health care and simply hand money over to their employees and allow them to make their own decisions. But for now, the study said, the preference of insurers for group policies and the federal tax structure make such a change impractical.
In addition, the Hewitt study found worries among employers about the cost of “open access” plans. These plans allow employees to choose their health care providers. “The clear consensus of surveyed employers,” the report said, “is that these shifts to open-access, managed-care models will increase employee satisfaction and access to care, but drive costs higher in a potentially inflationary environment.”
The rising cost of drugs
One of the major contributors to health-care costs has been the rising cost of drugs. And much of the increase in the cost of drugs has been attributed to very aggressive advertising by pharmaceutical companies. These ads, as any television viewer knows, are targeted not at doctors, but at consumers, who are encouraged to ask their physicians to prescribe them. Not surprisingly, the name brand drugs will cost more than their generic counterparts. One response from some employers has been to encourage co-pay plans that call for employees to pay more if they want expensive name-brand drugs.
“We’re shifting some of the costs over to the employee,” says Viola, of Megro. He notes that drug costs in the Philadelphia area are going up by about 25 percent a year, while the cost of health care is rising by about 12 percent annually. Under a co-pay plan, Viola says, an employee might pay $10 for a generic drug and $25 for a name-brand product.
Viola notes the emergence west of the Mississippi of a “triple option” co-pay-a generic drug, a name brand product and a name brand that is not on an approved list. The third option will call for a higher employee contribution. Employees in such plans are likely to be issued with booklets listing the status of various drugs. “We’re asking people to be proactive in the use of their drugs,” Viola says.
He discerns a greater willingness among employees to pay more for enhanced medical coverage. When offered a choice between a co-payment of $15 or $25 for an HMO, Viola says, employees will tend to opt for the higher payment. He suggests that family experience with managed care has shifted people toward more costly, less-managed care. “Five years ago,” he says, “they would have gone with the $15 plan. Even the younger kids are doing it. They want a better plan.”
Kim Quigley, CEBS, senior vice president at specialist broker Benefit Plans Design & Administration in Vernon, Conn., also notes the effect of drug marketing on the cost of medicines. “The pharmaceutical companies,” she says, “keep coming up with new, better, faster, stronger prescriptions, which they heavily advertise. And during the patent period there are no generics available.” On the plus side, Quigley says, prescription drugs have helped lower other medical costs by accomplishing what in the past might have required hands-on treatment or even minor surgery.
A source within a managing general underwriter, which provides services to insurance companies, detects some resistance from large employers to the rising cost of generic drugs. But he notes that larger companies can be slow to move because they usually work on yearly contracts. Meanwhile, the source adds, the insurers “are trying to tighten up on everything.” This means they are getting tougher on their underwriting and setting minimums on the size of self-funded plans. One effect has been to force small employers to go fully insured. The source does not offer much encouragement for smaller employers who might seek to join forces and create cross-company groups. Insurers, he says, are wary of such business.
The benefits market shadows the wider economy. In April 2001, the Labor Department reported that the cost of benefits to U.S. businesses increased by 4.7 percent for the year ended March 31. This was down from a 5 percent rise for the previous 12 months. This slight drop would appear to be in line with expectations of an economic slowdown.
A sustained economic downturn could have serious effects on the employee-benefits sector. It would increase the anxieties of employees and make cash-strapped employers less willing to put money into benefits programs. Also, dips in the stock markets could affect pension strategies by raising questions about the long-term performance of equity-based investments.
Viola believes that the U.S. economy is stronger than many analysts are suggesting. And he notes that his own market, the Philadelphia area, has historically avoided the wider swings of the U.S. economic cycle. One factor, he suggests, is the presence of a number of drug companies that are guaranteed a market in good times and bad. Viola says that the local exception to his generally optimistic report-duplicated elsewhere-has been the disappearance of a number of dot.com companies.
The workplace has become a focus of many of the tensions in American society. Complaints of discrimination by women and members of minority groups often concern hiring and promotion. The weakening of once-powerful labor unions has meant that the courts are now dealing with issues that were once settled around negotiating tables and written into relatively unambiguous contracts.
Lifestyle changes have brought pressure on employers to extend employee benefits to domestic partners. After a study of 570 of the largest employers in the U.S., Hewitt Associates reported that, in 2000, 22 percent were now offering benefits for domestic partners, up from 10 percent in 1997. Moreover, Hewitt said that 35 percent of the companies that didn’t offer these benefits were considering the possibility of adding them.
Creativity in assembling benefits packages can help businesses attract women, who are increasingly being seen as the answer to skill shortages. In considering their employment options, women are likely to put a high value on benefits like flexible hours, day-care facilities, the opportunity for training and the chance to work from home. Some of these features can be provided relatively inexpensively.
Kautzmann says that caution about medical costs is particularly noticeable among the dot.com companies of New York’s “Silicon Alley.” Things were very different, he adds, during the recent boom. “It was carte blanche,” Kautzmann recalls. “‘We’ll pay 100 percent.’ Now they’re kind of retooling that.”
Kautzmann says that the City of New York has created a number of programs in an effort to help employers and employees bridge the medical-costs gap. One is HealthPass, which is aimed at employers with groups of under 50 people. HealthPass combines a number of different insurance plans under one administrative roof. The employee can choose his own plan, opting, for instance, to remain in an HMO or pay extra for a PPO. The goal of HealthPass is to help the 200,000 qualifying smaller businesses in the city provide the same kinds of health benefits as their larger competitors. A major advantage of the plan, Kautzmann says, is that clients tend to stay with it, rather than jump around because a covering insurer has decided to increase its rates.
Kautzmann believes that programs such as HealthPass have the potential for significant growth because they alleviate much of the burden of employers. “Everybody can have their own plan,” he says, “but it’s all wrapped up into one.”
Insurers are constantly seeking more flexible ways to deal with the employee-benefits market. Aetna’s HealthWorks program, for instance, is designed to help workers who leave their jobs because of a disability to return to work more quickly. The plan, which tries to identify people most likely to be hurt on the job, offers close management of the treatment of those who do become injured.
Advisors who want to develop their employee-benefits consulting work might begin by offering to audit a client’s entire benefits package, starting with health insurance. Since health is the most costly of benefits, Kautzmann observes, any savings generated can be applied immediately to other areas.
It is important, Viola adds, to monitor a client’s benefits program to extract the maximum advantage from changes in the market. With a new client, Viola looks at co-payment arrangements and whether an HMO is in place. Viola says that brokers who don’t specialize in the employee-benefits market might neglect a program, to the detriment of a client. “We’ve gone into those,” he says, “and looked at stuff that’s three years old, and the prices have gone through the roof. “
Kautzmann’s employee-benefits portfolio has generated cross-selling of his individual financial advisory services for the owners and employees of his client companies. He frequently earns added commissions by rolling old 401(k) plans into new plans that he is assembling. He also taps into the alliances that he has forged with property and casualty brokers.
Megro, Viola says, stresses its ability to add value to a client’s benefits program. This is important, he notes, when products are community rated. Viola adds that Megro brings a deep knowledge of the insurance markets. It also offers clients a password that allows them to tap into an internet portal that carries information that may be of interest to them. Viola says that Megro has found that smaller companies, which make up the bulk of its market, are particularly appreciative of these services. He says that these organizations, which are likely to lack professional human resource staff, come to see Megro as both an adjunct and a sounding board.
Viola says that newcomers to the business world may not recognize the value of such attention, “but people who have been in business before snap it [up] right away.” Quigley says that the complexity of the employee-benefits market is such that price is not always the first consideration for clients. She adds that very few companies will attempt to deal with employee benefits without the help of either a broker or a consultant. She may, for instance, guide clients through plans available in Connecticut, which allow employees to buy plans with multiple health care options, thus allowing their employees to choose among a number of HMOs.
But even with such options, Quigley adds that programs available to smaller employers are “pretty much boilerplate. As the groups get large—the 50-plus or the 100-plus employees—then advisors can work with the carriers to design something that will meet the needs and control the costs of a particular employer.” A typical initiative for a larger employer might be a preventative program that is aimed at lowering the number of claims for high blood pressure.
Quigley says that Benefit Plans Design, an affiliate of Webster Insurance in Wallingford, Conn., focuses on the “middle-market” business. She estimates that 70 percent of clients have fewer than 100 employees and 90 percent have fewer than 500 employees. Smaller companies, Quigley says, often feel squeezed between the rising costs of benefits and the ability of larger organizations to offer more comprehensive packages. Some smaller companies, Quigley says, combine office visit and prescription drug co-pays with higher hospitalization deductibles which can now range from $1,500 to $2,500.
Benefits can also be tailored for the top echelons of an organization. Clarica Life Insurance Company, for instance, offers life insurance that is designed to act as a supplemental retirement-planning tool. Policies, explains Mike Western, director of advanced markets, can fund deferred compensation arrangements. Western, who is based in Fargo, N.D., says that Clarica’s target market consists of small business owners who are seeking to make provisions for themselves and selected employees. Products can be sold on a split-dollar basis. The insured would own the contract, but the premiums would be paid with corporate funds.
M&A’s effects on employee benefits
In some quarters, there is concern that mergers and corporate restructuring are allowing corporations to reduce their benefits. In December 2000, The Wall Street Journal reported that the employers involved in such deals may reduce medical coverage or shift pension plans into less attractive categories. These changes, the newspaper said, may be made to make a company more attractive to a potential acquirer. The newspaper said that corporations that have reduced employee benefits during mergers and acquisitions include General Electric, Monsanto and Chiquita Brands.
The consolidation that has taken place throughout the U.S. in recent years is likely to have its effects on employment-benefits intermediaries. There is a natural fit, for instance, between large property-casualty organizations and small, specialized, employee-benefits brokerages. Clients gain through added convenience and the greater sophistication of a product that they are able to buy.
The built-in connection between employment and health care may create problems as more people move toward retirement. Quigley points out that early retirees face a dilemma in that COBRA protection lasts for only 18 months—in many cases, not long enough to last until people qualify for Medicare. And individually underwritten coverage can be very costly, particularly for people with existing health problems. “It would certainly be helpful if there were some type of transition plan,” Quigley says. “Other than that, I am not really in favor of the government controlling the insurance industry.”
Kautzmann is optimistic about prospects in the employee-benefits market. He says that retirement planning “is always steadfast and always growing” and adds that the 401(k) plan has become much cheaper to administer.
Viola does not expect any dramatic moves from the Bush administration regarding health care. “There will be some tweaking and some minor things,” he says, “but there is no sense of any ‘Hillary-care’ or anything like that.”
The employee-benefits market is continuing to evolve. Advisors who master the details of employee benefits can expect rewards, in terms of products sold and in the creation of solid client relationships.
Robert O’Connor is a London-based freelance writer. He can be reached by phone at (44)-208-883-2062 or by email at: email@example.com.