Magazine article Risk Management

A New Age for Flexible Benefits

Magazine article Risk Management

A New Age for Flexible Benefits

Article excerpt

THE COST OF HEALTH CARE in the United States has gone from bad to worse with few signs of improvement. The crisis is now cutting into the profit margins of many companies, a fact that has caught the attention of chief executive officers from Maine to California.

According to the Employee Benefit Research Institute, employer spending as a percentage of corporate after-tax profits amounted to 103 percent in 1989. That year also saw private business spend $173.4 billion on health services and supplies, and the cost spiral continues to gather momentum with national health expenditures totaling $662.2 billion or 12.2 percent of the Gross National Product in 1990.

Although corporations are diligently looking for ways to clamp the lid on runaway health care expenses, easy solutions to the problem are usually impossible. The issue extends far beyond the simple act of slashing employee benefits packages. Ironically, because of increasing competition for qualified employees, corporations need attractive benefits packages more than ever as enticements. The real challenge for corporations is to dispel the mindset of diminishing entitlement to benefits and encourage employees to regard such compensation as part of a partnership in controlling health care costs.

To that end, businesses are beginning to pay heed to the radical lifestyle changes that have occurred in the United States over the last 30 years by querying employees about their benefits needs and preferences. Increasingly, many companies throughout the United States have adopted flexible benefits plans or are pausing to take a serious look at them as a way to forge an employer/employee alliance against the health care scourge. Flexible benefits are an approach to benefits management in which the needs and preferences of employees actually shape the configuration of their benefits. individual employees then actively participate in the benefits selection process.

Among the 30 large corporations that Duggan Consulting Associates surveyed, 25 have adopted flexible benefits plans, with half of these plans installed within the last two years. In addition, it is estimated that flexible benefits plans are already operable in as many as 6 percent to 8 percent of larger U.S. corporations. According to survey respondents, the shift to flexible benefits is irreversible. They see flexible benefits as a turning point in the configuration and delivery of employee benefits, and the believe such plans will "see down" to medium- and small-size companies becoming the dominant packaging format for benefits in these companies over the next decade.

In initiating a flexible benefits program, management determines the scope of an affordable mix of benefits. A program is then created that understands employee demographics and is sensitive to their needs. From this "menu" (usually with certain limitations), employees choose benefits and personalize their benefit programs.

In a flexible program, the benefit choice spectrum may be limited or broad. For instance, hi-lo insurance options and premium conversion plans typically have limited flexibility, whereas flexible spending accounts have a medium degree of flexibility. Full cafeteria plans are very flexible. Some companies adapt and/or combine these elements to create a unique approach for their own environment.

The concept of employees choosing their own benefits is not totally alien. For example, over the years, employees have been buying supplemental insurance for medical, disability and life coverage. The difference in a flexible benefits program is that benefit elections are permitted for coverage-sometimes basic coverage-paid for by the employer.

The Evolution of Flexible Benefits

AS THE COST OF BENEFITS approaches 40 percent of payroll in some companies, the term "fringe benefits" is becoming an employment anachronism. Today, benefits are rightly recognized as a key component of overall compensation and have become fully institutionalized. …

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