When an employee is about to be terminated, their consumption of health benefits increases by over 50%. Previous HCMS Group research indicates that the difference in cost for terminating employees is largely due to the incentives generated by their pending change in benefits coverage (55%). The rest of the cost disparity is explained by differences in health status (roughly 30%) and demographics (roughly 15%). Figure 1 below illustrates the annual cost of employees in each population cohort: new hires, steady population, and terminated. The employee costs for terminated employees are calculated in the year prior to termination.
Figure 1: Annual Benefit Costs by Employee Tenure Status
Employees anticipating employment termination, whether voluntary or not, respond very rationally to economic incentives by increasing their health benefits consumption prior to termination (the so-called “use it or lose it” phenomenon). This is particularly true if they have a health reimbursement or flexible spending account and they have already met their deductible for the year. The main finding from this study is that employees don’t only use benefits when they are sick. Managing turnover becomes crucial because the cost of turnover is more than lost productivity and new-hire training.