BENEFITS PRACTICE | EMPLOYEE BENEFITS

All employers provide benefits in some form or another to employees, but practice varies according to:

§  Employee status: typically, the more senior the employee, the more benefits provided. But this is not always the picture. A growing number of organizations, especially in high technology and other sectors requiring rapid growth and employee flexibility, have opted for harmonized benefits and conditions for core benefits.

§  Local 'national' sector practice: there are marked differences in benefits entitlements between the finance sector and the rest of the private sector, between organizations where workforce costs form a small part of corporate expenditure and those which are labour intensive, and between profitable and progressive organizations and those which have to keep a tight control on workforce costs to survive. Differences by job function may also exist.

§  Private or public sector status: differences were much greater in the early 1980s than in the new millenium. Apart from generous, indexlinked pension schemes and longer holidays, the public sector enjoy comparatively few fringe benefits and they very rarely have company cars - recently market competition for scarce skills has changed that for many public servants, notably in local authorities, non-departmental public bodies and the new Executive Agencies hived off from the core of the Civil Service.

§  Employers' views on the advisability of providing benefits: the extent to which they wish to use benefits to attract and retain staff - some organizations take a much more generous line than others or simply prefer to pay more in 'clean cash' than in benefits.

So the emphasis now in the UK is predominantly on cash payments rather than benefits. Most employers have therefore concentrated on providing a competitive set of 'core' benefits to supplement cash remuneration. The wilder extremes of tax-efficient 'beyond the fringe' benefits only exist in areas where extremely high pay is given in response to severe market pressure and for directors/owners of private companies where shareholder pressure is not an issue.

BENEFITS POLICIES | EMPLOYEE BENEFITS

Policies on employee benefits need to be formulated in the following areas:

§  Range of benefits provided: some benefits, such as pensions and holidays, are expected, others, such as permanent health insurance, are optional extras.

§  Scale of benefits provided: the size of each benefit, taking into account its cost to the company and its perceived value to employees. Note that the perceived value of some benefits such as company cars or pension schemes (particularly in the case of older employees), can be very different from their actual cash value.

§  Proportion of benefits to total remuneration: in cash terms, a benefit such as a pension scheme can cost the company between approximately 5 and 15 per cent of an employee's salary. A decision has to be made on the proportion of total remuneration to be allocated to other benefits which incur expenditure of cash by the company. This policy decision is, of course, related to decisions on the range and scale of benefits provided, and it can be affected by decisions on allowing choice of benefits and on the distribution of benefits. Some companies try to move towards a 'clean cash' policy which minimizes the number and scale of fringe benefits.

§  Allowing choice: benefits will be most effective in the process of attracting and retaining employees if they satisfy individual needs. But individual needs vary so much that no benefits package or single item within the package will satisfy all employees equally. Younger employees may be more interested in housing assistance than a company pension plan. Some employees have ethical or political objections to medical insurance schemes. Not everyone wants a company car - especially if they live in an inner city area and have a spouse with a better car entitlement. Many people may prefer cash to an automatic benefit which is not precisely what they want. Allocation of benefits: policy on the allocation of benefits determines the extent to which it is decided that a single status organization should be created. If the policy is to have a hierarchy of benefits, then the allocation of these at different levels has to be determined, usually in terms of broad bands of entitlements - typically called benefit grades.

§  Harmonization: in the new flatter organizations, where multiskilling is prevalent and new technology is eliminating the old distinction between white- and blue-collared workers, harmonization of benefit packages is increasingly taking place. The objective is to increase unity of purpose and improve team work by abolishing invidious distinctions between benefits, rewarding different levels of responsibility and contribution by pay alone. Single status companies are becoming much more common. Full harmonization means that there are no distinctions at any level in the hierarchy between the benefits provided, which may vary only with length of service or specific market practice.

Partial harmonization may provide the same basic benefits in some areas such as pensions, holidays, sick pay and redundancy for white- and blue-collared staff, but have a hierarchy of benefits above this base according to job grades. These benefits could include company cars, topped-up pension schemes or medical insurance.

§  Market considerations: whatever degree of choice or harmonization is decided upon, the precise arrangements will always be affected by market considerations. It may only be possible to attract and retain some key staff by, for example, offering a company car in line with what other organizations are doing for similar jobs. To attract a senior executive, it may be necessary to offer him or her a special pension arrangement - especially if he or she is earning over the Finance Act 1989 'earnings cap' (£102,000 for the 2004/05 tax year). As in all aspects of pay, market considerations and the need to offer competitive packages may have to override the principle of equity.

§  Government policy: it is essential, when reviewing benefit policies, to monitor tax legislation in order to assess the relative tax efficiency of benefits and to keep employees informed of the implications for them. For example, since 2001 the government has substantially changed the basis of company car taxation to encourage individuals to drive more environmentally friendly cars and to discourage the provision of free private fuel.

§  Trade unions: trade unions are increasingly concerned with the whole remuneration package and therefore may be involved or ask to be involved in negotiating the provision and level of benefits. Many companies, however, resist negotiating such items as pensions, although they will be prepared to consult unions or staff associations on benefit arrangements and do sometimes have trade unionists as trustees of the pension scheme.

Definition of Managed Care

For purposes of this chapter, managed care includes those programs intended to influence and direct the delivery of health care through one or more of the following techniques:

1.  Plan-design features, including incentives and disincentives in the level of coverage, intended to redirect delivery of medical care.

2.  Access restricted to a specified group of preselected providers.

3.  Utilization management (UM) programs, also called utilization review (UR), intended to preauthorize certain forms of medical care use and/or concurrently monitor the use of more expensive forms of care such as inpatient treatment.

This definition includes a broad range of "managed" indemnity plans, HMOs, PPOs, POS and many hybrid plans. There is disagreement within the industry about whether managed indemnity plans are truly managed care, particularly since there are no formal contractual obligations between providers and payers. Some experts like to classify managed indemnity plans and PPOs as "soft-form" managed care, and HMOs and POS plans as "stronger-form" managed care since they commonly rely upon a primary care physican ("gatekeeper") to manage utilization.

While there may be some validity to this perspective, managed indemnity is included here to provide a complete picture of all common forms of group health coverage today. Strong-form managed care arranges for selected providers to furnish comprehensive health care services to members under a set of formal programs of ongoing quality assurance and UM review, coupled with significant benefit-plan incentives for members to use contracted providers. In managed care programs, medical care is delivered by health care professionals who are committed to providing effective and efficient health care services, and who are willing to evaluate their own treatment patterns using medical outcomes data.

The medical provider—whether hospital or physician or ancillary provider—is an integral player in managed care plans. The provider's definition of managed care also differs from that noted above, referring to a patient's treatment program rather than to a specific benefit design or provider reimbursement method. The ultimate definition of managed care may need to be one that embraces some financial risk and responsibility, a particular set of benefits, quality of care mechanisms, and payment initiatives. Unfortunately, employers, payers, consumers, providers, and plan managers all see the puzzle based on their own perspective and experience often without seeing the other pieces. In short, they often define managed care through the lenses of their own self-interest.

The specific definition used for managed care is not as important as having an understanding of the context in which it is applied. Managed care is best understood as a change in the process of health care delivery, rather than as distinct products. The definition of managed care as a process helps the reader understand how a specific product operates and how it can best address a plan sponsor's objectives. This chapter provides the reader with effective tools to analyze the process of competing products and hopefully understand those characteristics that distinguish managed care products.

Health care delivery is a complex business, shaped in the local community and influenced by social environment, clinical culture, and economic realities. Most managed care companies, whether HMO or insurers, recognize the importance of developing an infrastructure in the local markets in which they operate, even if they are headquartered outside of the market. This local perspective means doing the following:

1.  Understanding the local health care delivery systems.

2.  Developing an appropriate panel of providers.

3.  Incorporating the necessary managed care mechanisms in the network.

The Development And Growth Of Managed Care

History of Managed Care

In the strictest sense, the very earliest forms of group health insurance were managed care. Such insurance was started as a prepaid health plan, under a contract with Baylor University Hospitals, in the late 1920s. This led to the eventual development of today's Blue Cross/Blue Shield plans, most of which were started as prepaid plans. However, these early prepaid plans differed greatly from today's managed care programs, in that they had no provider restrictions or utilization management programs. Insurance companies introduced major medical and comprehensive medical plans in the 1950s and 1960s, and group health coverage grew tremendously. However, as medical plan costs began to spiral upward, the health insurance industry was compelled to start addressing employer concerns. During the 1970s, most traditional health insurers developed few products to compete directly with the newly emerging HMOs, preferring instead to encourage clients to use plan design techniques alone to control cost increases. During this time, insurance companies, TPAs, and the benefits consulting community recommended a variety of refinements to existing indemnity (fee for service) health plans—from greater employee contributions to expanded coverage for "cost-effective" forms of treatment, such as home health care or generic drugs.

However, for the most part, these efforts provided only short-term relief, and there is little evidence today to prove that plan design changes alone led to long-term cost control of indemnity insurance plans. This lack of significant positive results from incremental efforts, coupled with growing competition from HMOs in the late 1970s and 1980s, forced insurers and many Blues plans to develop new managed care products and to add more aggressive utilization management (UM) protocols to their traditional indemnity programs. Simultaneously, many insurers were purchasing or developing their own local HMO plans.

In fact, the origins of today's managed care plans are founded in health maintenance organizations. The HMO concept is not new, and its earliest roots parallel those of the prepaid plans before World War II. While some of the earlier prepaid plans evolved into Blues plans, others evolved into HMOs. Several group practice-based HMOs were established in the Pacific Northwest and California, but the most well-known plan—Kaiser Permanente—was started in the early 1930s by Sidney Garfield, MD, to serve workers building an aqueduct to bring fresh water from the Colorado River to the city of Los Angeles. Kaiser opened to the general public following World War II and has continued on a steady growth that has brought it to a premier position nationally, serving 8.2 million members, in nine states and the District of Columbia, by 2004.

Other HMOs started in Washington, D.C., New York City, and Minneapolis, although their initial development was slow because of heavy opposition from the proponents of fee-for-service (FFS) medicine. Major HMO growth began after the passage and enactment of the HMO Act of 1973 (P.L. 93–222). The act, named and promoted as the "health maintenance strategy" by Dr Paul Ellwood, consisted of federal grants and loans to organizations wishing to investigate the feasibility of what would be called "federally qualified HMOs."

The federal government continued to nurture the growth of the HMO industry through the 1970s and early 1980s, and the Department of Health and Human Services issued hundreds of millions of dollars to start-up HMOs. However, as part of its overall reduction in federal government regulation, the Reagan Administration encouraged HMOs to look to private capital sources for future funding and expansion. Many smaller plans, especially those in early development, did not survive the 1980s, while others consolidated or were purchased by large national insurance companies that were expanding their managed care capabilities. In fact, by 2003, corporate HMO chains and national insurance companies owned over 220 licensed HMOs operating in the United States, covering almost 42 million members, which was over 58 percent of total national HMO enrollment. Managed care had not only become mainstream health care, it had become big business.

In the late 1970s and 1980s, PPOs also grew rapidly, sponsored heavily by national insurance companies, third-party administrators, Blue Cross/Blue Shield plans, and even hospital organizations, and which needed to offer their customers alternatives to compete against emerging HMOs. PPOs gained quick popularity with employers that wanted cost savings but were unwilling to reduce provider choice as much as required in HMOs.

In 1983, there were about 115 PPOs. By 1999, that number had increased to more than 1125 plans, covering an estimated 98.3 million members nationwide, including those in specialty PPOs (e.g., mental health benefit treatment). Similar to the direction of HMO ownership, corporate chains and national insurance companies operated more than 70 percent of the PPO plans by 1999. Total national PPO enrollment topped 113 million by 2003.

Early PPO plans were primarily discounted fee arrangements with little focus on utilization control, and, as a result, many employers never achieved long-term cost savings. PPO companies responded by increasing the monitoring of utilization, implementing quality control, and surveying member satisfaction. In some structural aspects, PPOs resemble individual practice association (IPA) model HMOs, since both organizations contract with private practice physicians. However, opponents argue that PPOs are a weak form of managed care, coupled with rich benefits, which make them more expensive than HMOs. While average PPO costs are typically higher than HMO costs, the broader provider networks, the availability of coverage outside of network and generally less restrictive UM requirement have led to PPO enrollment nearly doubling that of HMO. PPOs are the largest part of the group health market today and will likely continue to be a factor for some time.

Economic Trends Facing The Employer

For many years, both public and private employers in the United States have faced multiple economic and financial challenges, during cycles of growth and recession within the economy. Powerful economic realities are forcing corporations to reduce operating costs and improve productivity in order to survive in an increasingly competitive global environment. Simultaneously, employers often face key labor shortages in positions that require new and specialized expertise critical to businesses' new growth and development. Plan sponsors are caught in the paradox of providing an attractive benefits package in order to attract and maintain a well trained, productive workforce while trying to manage health care benefit expenses within viable budgets. Creative and cost-effective solutions are needed so that plan sponsors can attract, retain, and motivate talented people who are vital to their success in today's economy. Some of the economic pressures facing employers are discussed below.

Federal Government Cost Shifting
Government-funded health care programs continue to experience escalating cost increases, particularly the Medicare and Medicaid programs. Attempts to contain federal health care expenditures have shifted costs both directly and indirectly to the state and local governments and to the private sector. Private health care plans bear a large share of the burden of federal cutbacks to Medicare providers. Squeezed by Medicare reimbursements that often are below their costs of operation, hospitals and physicians are forced to shift costs to other payers to make up for lost revenues.

Beginning with the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), federal legislation has shifted portions of Medicare costs directly to private employer plans. Federal law requires that active employees over age 65 select either Medicare or their employer's health plan as the primary source of medical coverage. Employers are prohibited from providing secondary or supplemental coverage to employees who select Medicare as their primary coverage. Because employer plans typically provide richer benefits and easier access to medical providers than Medicare, it is not surprising that many employees continue their primary coverage through their employer's plan. As a result, employers have been forced to accept greater responsibility for financing the medical care costs of an aging population.

Competitive Global Environment
U.S. companies also face increased economic pressure from new global competitors. In addition to dominant economic players in Western Europe and Japan, entrants from developing nations and former European communist bloc nations are playing a greater role in international production. Alliances among foreign capital markets, such as the European Economic Community pact of 1992, test the ability of U.S. companies to compete with the collective strength of nations linked by free-trade agreements.

Furthermore, much of workers' medical care in competing foreign companies is provided through governmental programs, such that the direct costs of health insurance are less directly identifiable as part of a company's costs of production.

Shrinking Workforce
Both private- and public-sector employers are operating today with a tightening supply of trained labor for critical new positions. Since the 1970s, most industrialized nations—including the United States—have faced flat or even negative net population growth. In addition, the baby boom generation (born between 1946 and 1964 inclusive) is now well into midlife and will retire in large numbers over the next 10 to 15 years. Confronting a shrinking workforce, employers have been forced to offer more competitive wages and benefits in order to attract qualified employees. Acute labor shortages are projected in the areas of science and technology, health care, and hospitality services. Thus, employers must maintain competitive compensation packages to attract and maintain a stable and highly qualified workforce. Doing so will require employers to offer an enticing and well-developed package of employee benefits.

National Resources Spent on Health Care
Total national health care expenditures exceeded $1.5 trillion in 2002, an increase of 115 percent over the $699 billion spent in 1990 and 507 percent over the $247 million spent in 1980. Annual growth rates in national healthcare expenditures averaged 10.6 percent in the 1960s, jumped to an average of 12.9 percent in the 1970s and slowed only slightly to 11.0 percent in the 1980s. While the average growth rate dropped to 6.5 percent in the 1990s, the rate was still more than double the general consumer price index (CPI).

While these total dollar expenditures seem staggering, perhaps more startling is the fact that health care costs, which accounted for about 5.2 percent of gross domestic product (GDP) in 1960, consumed more than 14.9 percent of GDP by 2002, according to Department of Labor statistics. While growth rates leveled during the mid-1990s and general economic growth kept pace with these levels, healthcare expenditures growth has catapulted ahead of economic growth since 2000 and, in 2003, healthcare expenditures grew 9.3 percent versus just 3.6 percent growth in GDP.

Developing A Health Care Strategy

Developing a health care strategy for providing employee health and medical care benefits can be viewed as a program for managing risk exposures on a variety of levels. In its most elementary form, managing this risk involves a three-pronged strategy. First, the organization sponsoring the plan must decide what mode of health care delivery system will be used. Second, the organization must decide on the benefits that will be provided through the selected system. Third, the plan sponsor must decide what contractual, financial, or payment arrangement will be negotiated with insurers or providers of medical care. Negotiation of the financial arrangement also includes what level of risk is assumed by the plan sponsor and whether certain types or levels of risk will be shifted to a third party such as an insurer or the providers of the medical care itself. Increasingly, plan sponsors shift some of this risk to ensure that medical providers have a stake in providing cost-effective and quality care. All three of these macro decisions involve many other tiers of decisions at the micro level, which can have a profound impact on the levels of risk assumed and the financial costs assumed by the plan sponsor.

Designing the Plan and Delivery System

Multitiered Decisions

Not only is the plan sponsor selecting one of the delivery systems discussed previously, but the plan sponsor has latitude to select various plan designs offered by alternate delivery systems or to include plan-specific provisions or procedures particular to the employer group. Unless state law requires certain benefits, an employer quite often has flexibility to design its own schedule of benefits, assuming it is of sufficient size to gain this degree of customization by an insurer or managed care company. At times, even state insurance law is not an immovable constraint because certain administrative service financing arrangements exempt plans from state insurance mandates. Limitations on specific coverages, uses of deductibles/copayments, and the systems for case management and precertification can profoundly impact both risk exposure and cost. The delivery system and plan design, its oversight, and financial incentives also can have behavioral impacts on plan participants influencing the utilization of health care services.

Self-Administration, Third-Party Administrators, and Unbundled Services

The decision to purchase an assembled delivery system from an insurer or managed care company, or to directly contract with providers is generally dependent on employer size and the geographical concentrations of an organization's employees. When an employer is of sufficient size, it might want to deal directly with medical providers and eliminate the costs associated with the intermediary insurer. Even if an employer does not want to assume the burden of self-administration, it is not necessary to purchase all medical care management services through a single provider.

An employer can decide to unbundle specific services that might be more effectively performed by separate entities or purchase an integrated set of services or programs through one provider. Moving specific, specialized functions to third-party vendors with specific expertise in one area can sometimes address specific goals. At the very least, an employer should understand the costs of these services if they are left bundled with the insurer and review claims and other reports to evaluate the services' effectiveness and contributions to cost control.

Use of Multiple Plan Offerings and Single or Multiple Administrators

Medical care delivery systems and benefit design are not an "all-or-nothing" decision for many large employers. Though some employers place their entire block of business with a single insurer or managed care company, many other employers have configured a variety of health plan alternatives and give employees the choice of selecting the health plan that best meets their individual needs. This can be accomplished through a simple choice of medical plan options or through a flexible benefit plan. In large part because of limited dollars available to expand benefit programs and a recognition that a diverse workforce may have varying benefit needs, flexible benefit programs proliferated in the 1980s. In a flex plan, employees are allocated a set amount generally in the form of credits or dollars from the employer, which they can "spend" to select the benefits and plan options of their choice or receive those credits in the form of cash if not spent on benefits. Nevertheless, many managed care companies and insurers offer employers an array of multiple plan designs. Price concessions are often offered if an employer agrees to place the entire block of business with a single administrative entity. An employer must balance the price concessions it will receive and assess the effectiveness of the administrative entity at managing health care costs against the loss of competition that occurs when multiple plan offerings through various administrators are eliminated.

Pricing Plan Options and Designing Employer Subsidies

Regardless of whether multiple administrators or a single administrator is used for separate plan offerings, the plan sponsor must look at the pricing of plan options and make decisions regarding the form and amount of employer subsidy provided to employees. An employer offering a flexible benefit program may price various plan options at prevailing market rates, assign all employees an equal credit amount, and allow them to spend the credits as they prefer. Other employers provide a direct subsidy to their medical plans and only show employees the remaining employee costs they will be required to pay. Some employers subsidize family contracts to a greater extent than single coverage. The employer also must decide how to relate the subsidy to each medical plan option. Plan pricing will affect employee selection patterns. Premiums are impacted by the level of deductibles and co-payments that have been included in the front-end plan design. Accordingly, an employer can determine whether plan costs and certain benefits are being borne by those utilizing those particular benefits, or are being spread over the employee group at large.

The Effects of Multiple Plan Offerings on Employee Selection Patterns and Pricing

The offering of multiple benefit offerings can create an exodus of favorable risks from existing offerings and result in price escalations for those who choose to stay with a previously offered plan. In some cases, the offering of a new plan at favorable pricing can cause such dramatic migration out of a plan that the remaining plan will experience a price spiral that causes termination of the plan. This was particularly true in the mid-1980s for many employers who offered traditional indemnity plans. The offering of either a less expensive comprehensive plan or an HMO resulted in those employees with low utilization for major services migrating to the less costly plans, seeking to reduce their expenditures on monthly health care premiums. With this loss of favorable risks, the indemnity plan retained less favorable risks with higher utilization patterns. Because there was a smaller pool of favorable risks in the plan over which to spread plan costs, the premiums charged to those who remained increased. This increase in plan costs resulted in another group of more favorable risks choosing to leave the plan rather than bear the increased costs of the plan. Again costs increased, giving further incentive for favorable risks to migrate from the plan. Ultimately, a cost spiral like this will cause a plan to become prohibitively expensive and result in its demise.

Designing the Underwriting and Financial Arrangements

As indicated in the discussion of alternative financing techniques, an employer can dramatically alter the financial arrangement of its medical benefits program by determining the amount of risk it will accept. The strategic issue is to select a financial arrangement that controls costs and allows management to assume the level of risk that it believes appropriate for its employee group. The financial arrangement selected can have a behavioral impact on both the providers managing care and the insurer or administrator responsible for management of the plan. Increasingly, employers have explored arrangements that shift more risk to health care providers and that promote incentives to provide quality care. Much research is being done on measuring quality of care and developing information systems that can be used to evaluate cost and quality of care.

The financial strategy for a medical benefits program will have multiple tiers. This is particularly true if multiple plan options are available and employees choose between plan offerings. Plan pricing and plan offerings can alter enrollment patterns and affect the effectiveness of a given financial arrangement or risk-management strategy.

Determining cost-effective medical providers and health plans is not an easy exercise. Certain plans will attract employees from certain demographic and geographical constituencies because of plan benefits or the convenience of provider locations. Health care costs are directly correlated with age, in that older individuals tend to need more care and need to access more extensive and thus more expensive care. Likewise, there can be regional differences in the cost of medical care. Sometimes base premium costs or allocated costs per participant are not the best indicator of cost-effective medical care. Analyzing plan costs by adjusting for demographic, geographic, and other variables in the plan population is the best way to evaluate the cost efficiency.

Measuring Performance and Managing the Plan

A final attribute of health care strategy is to create a system of monitoring and measuring the attainment of plan objectives. It is also important to have a system of controls that ensures that the plan is being effectively managed. A well-developed plan design is of little use if a third-party administrator is unable to administer the design as it was intended. A system for auditing plan results, ensuring quality outcomes and reporting utilization is necessary. For this reason, any delegation of responsibilities for health plan management should involve negotiation on the management reporting responsibilities of the administrator and the performance standards it is expected to achieve. Assigning financial penalties or providing rewards associated with these performance standards can be very effective. For instance, with a traditional insured product, a plan sponsor can require claims payment within a certain number of days for a percent of the claims. With a managed care provider operating a staff model HMO, reporting could be required on the telephone systems for contacting PCPs. There could be performance criteria on the amount of time it takes to reach a physician by phone, and scheduling standards for the amount of time between the initial call and an available appointment.