WHAT PROVISIONS FOR CONTROLLING COSTS SHOULD BE CONTAINED IN THE PLAN?

Employers have always been concerned about the costs of providing employee benefits. Traditionally, this concern has led to plan provisions that transfer the costs to employees rather than reducing benefits. These include probationary periods, benefit limitations, and contributory financing. Many recent attempts to control costs have been primarily directed toward the rapidly increasing costs of medical care, and, for the most part, cost-containment provisions have been designed to reduce administrative and claim costs without transferring them to employees. The focus here is on provisions and activities that can be used with all types of benefit plans.

Probationary Periods
Probationary periods reduce costs to employers because any claims that are incurred by employees during this time must be borne by the employees. In addition, probationary periods reduce the adverse selection that would most likely exist without their use. Administrative costs are also minimized for those employees who terminate employment shortly after being hired. However, probationary periods do impose hardships on newer employees who incur claims but find themselves without benefits. (Employees can minimize these hardships by proper use of COBRA and temporary medical expense policies.) Primarily for competitive reasons in attracting employees, the use and length of probationary periods, particularly in medical expense plans, have been decreasing except in high turnover situations.

Benefit Limitations
Benefit limitations in the form of deductibles, coinsurance, maximum benefits, and exclusions for certain types of expenses are common in medical expense insurance. However, some of these techniques can also be used in other types of insurance. The following are some examples:

The limiting of benefits to a maximum percentage of income in disability income plans. In addition to reducing the amount of benefits paid by the employer, a maximum percentage also minimizes the possibility of feigned and unnecessarily prolonged disabilities.

The setting of maximum benefits under dental plans for expenses such as orthodontics. There is little doubt that the availability of benefits will encourage treatment of orthodontic conditions, particularly when the treatment is primarily sought for cosmetic reasons. There is also the feeling that dentists will encourage the treatment of relatively minor orthodontic conditions if a patient has coverage for orthodontics.

Contributory Financing
Many benefit plans require that each employee pay a portion of the costs for his or her own coverage. This may lower the employer's costs and/or may enable the employer to use these saved dollars to provide additional or improved benefits. There are several arguments both for and against contributory financing, but in many instances it is a moot point because the decision is determined by collective bargaining or competition.

When contributory financing is used for benefits other than pension plans, employees are generally able to voluntarily elect or decline coverage. To the extent that some employees decline coverage, the costs to the employer will be further lowered. However, this savings may be offset by the adverse selection that can result because of those who do elect coverage. Furthermore, having the option to decline coverage could mean that employees or their dependents will be without coverage should a loss occur. Finally, there tend to be more administrative costs associated with a contributory plan than with a noncontributory plan.

Advocates of a contributory plan feel that sharing in the cost will increase the employees' awareness and appreciation of both the plan and the contribution the employer is making. This can be countered by the argument that payroll deductions for benefits are a source of employee dissatisfaction because they may view the employer as "cheap" for not paying the entire cost of the plan.

Although there are no empirical studies to support the contention, it has been argued that employees are less likely to misuse medical and dental benefits under a contributory plan because they realize that such misuse will probably lead to an increase in their future contributions.

Contributory financing can be used to encourage desired employee behavior. Employees who elect a managed care plan in lieu of a traditional medical expense plan often have a smaller contribution toward the cost of their coverage or possibly no contribution at all. In many cases, this lower contribution is determined by the cost savings to the employer. For example, if the cost of coverage to an employer for an unmarried employee is $150 under an HMO and $200 under an indemnity plan, the employee who elects the indemnity plan will be required to pay $50 more per month than an employee who elects the HMO. This alone will encourage many employees to elect the managed-care plan. Employers who want to encourage managed care because it tends to have lower annual cost increases might actually make the differential larger, perhaps $75.

Cost Containment
Recent attempts to control benefit costs have concentrated on either reducing the size of claims or minimizing the administrative costs associated with benefit plans. Rather than transfer the costs to employees, these techniques try to lower costs, or at least to lower the rate at which costs are increasing. Although employers are concerned primarily with their own costs, some of the advantages of this cost containment will affect the employees in the form of increased benefits or a lower rate of increase for out-of-pocket expenses.

Other than provisions or practices associated solely with medical expense plans, the following are some of the more common cost-containment techniques that are currently being used by employers:

- Alternative funding methods that lower administrative costs and improve cash flow

- Competitive bidding among insurance companies and third-party administrators that lowers administrative costs

- Wellness programs and employee-assistance plans that reduce future medical claims as well as minimize absences from work

Because many employers have coverage for dependents under their benefit plans, there is also an increasing awareness of the need to inform spouses of a firm's benefit programs. For example, spouses might be invited to benefit orientations.