Analyzing the Health Benefits Promise

By Launer, Lee E.; Bald, Barbara S. et al. | The CPA Journal, January 1991 | Go to article overview

Analyzing the Health Benefits Promise


Launer, Lee E., Bald, Barbara S., Akresh, Murray S., The CPA Journal


Analyzing the Health Benefits Promise*

By Lee E. Launer, Barbara S. Bald and Murray S. Akresh

Controlling the rising cost of health care benefit plans has become a major business issue. In the last 20 years, health care spending has risen at about twice the average rate of inflation. As a result, all types of businesses look for ways to improve management and effectiveness of their benefit programs. Of special concern are rising health care costs for retirees and dependents. To better understand how to control these costs, managers need to examine employee relations and cost control issues as well as financing and accounting implications.

UNDERSTAND A COMPANY'S CONCERNS

Outside factors have hindered many employers' attempts to hold health care cost increases to a reasonable level. Some have become so concerned that they have considered cutting benefits or eliminating them altogether. However, such drastic steps are usually not taken because they are inconsistent with the company's employee relations objectives, or are unrealistic in light of collective bargaining agreements or other business pressures. The situation challenges managers to develop cost-effective programs.

For many, unfunded retiree health obligations cause increasing concern. Health care costs have increased dramatically and Medicare has absorbed less of this increasing burden. As the baby boom generation ages, the magnitude of retiree health care benefits issues will grow significantly. The FASB's new statement will require companies to calculate the future costs of retiree health benefits and record the expense in financial statements. The proposed mechanics for this requirement are both complex and and contentious. This statement adds to existing concerns about rising health care costs and provides an additional impetus to look more closely at retiree health programs.

RECOMMENDED ACTION

Evaluating these plans has much in common with evaluating other health plans and retiree benehts as a whole. Many of the recommended actions are similar to evaluating these latter programs.

By studying the recommended actions, managers can focus on issues that will directly affect them while improving their understanding of related financial and accounting issues. Of course, the general action plan must be tailored to meet a company's specific needs and circumstances. While this article specifically focuses on retiree health benefits, similar action should be considered with respect to current health cate benefit programs for active employees.

ESTABLISHING PROGRAM DESIGN AND COST CONTROL OBJECTIVES

The first step is to establish objectives for the program.

Considering Broad Human Resource Strategies

Retiree health benefits are one component of a benefits package. Managers should first address the company's overall human resource needs, considering steps that should be taken to remain competitive in an increasingly tight labor market. Managers should consider recruitment, retention, and training issues as well as the policy on early retirement.

Once these key human resource issues have been addressed, managers should evaluate the total compensation and benefits package -- including retiree health care benefits -- weighing cost and budget constraints against benefits that must be offered to attract and retain high-quality employees.

As part of this evaluation, managers should evaluate the demographics of the current work force and project the work force needed each year in both the near and long term. These projections should anticipate significant changes in factors affecting the work force, including anticipated changes in product mix, manufacturing technology, site selection, and human obsolescence. The projections may also show a need to change historic patterns in early/late retirement.

An employer forecasting a shortage of skilled workers may attempt to reduce early retirement trends by limiting health benefits available to early retirees. …

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