Tell it like it is: why employees need to know what companies spend on healthcare. Entry 7 – 2010


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A friend of mine, Sam, has worked for a very large, Fortune 100 company for over 15 years. Recently he commented that there had been some changes to their health plan options that were not popular among employees. “You wouldn’t believe what the company did!” He then recounted how the company had issued an apology to employees for taking “too big a step, too fast.” Sitting in a small group of friends, we asked him what happened.

First, something you should know about Sam: he is a trained technology professional, known for doing his homework. In our circle of friends, we all “ask Sam” when we plan to make any significant purchase related to cars, travel, computers, sound systems, televisions, printers, you name it. Chances are, Sam is up on the latest brands, vendors, where to get a good price, and who to avoid. Sam is the definition of the smart, informed consumer.

It turns out that the “big” change involved increasing deductibles (to a whopping $750) and increasing single employees’ monthly contribution UP to $60 per month. As he described the changes, he clearly expected us to share his concern. However, he got the opposite reaction. Two people in our group are self-employed and fully paying for coverage. Several have deductibles above $2,000. By the time they all finished telling Sam to consider the generosity of his benefit package, his perspective had shifted.

Among Sam’s points (while defending himself) was that, “We have lower salaries because Acme Technology has such great benefits.” Actually, that may be true, but Sam has no evidence one way or another because he has never been told how much his benefit package costs.

Despite being one of the most informed consumers I know, in the case of healthcare benefits, Sam was clueless about price and mad about what he wasn’t getting. (It made me realize that he was probably not informed or cost-conscious in his use of care, either.)

Someone else’s money
Sam’s lack of awareness is a telling example of how differently we behave when (we believe we are) spending other people’s money. Sam is correct that he has TRADED wages for these benefits, but has never asked, ‘How much?’ He’s treating ‘company benefits’ as though they are paid for by the company, when, ironically, it is he that funds them right out of his own paycheck. Remember, total compensation is finite. When benefit costs increase, less money is available for salaries or bonuses.

It is critical to understand the degree to which healthcare costs are eroding available funds for take-home pay. According to the Milliman 2010 Medical Index (1), this year’s premium cost for a family of four will exceed $18,000. Employers will cover about $11,000 (more than half) of that on average (probably much more in Sam’s case!). Knowing Sam, he would definitely find a way to get a plan he likes for less than $18,000—if he understood that it was his own money.

The real problem here
Not knowing how the change was communicated and implemented, I can’t comment on whether I agree with the need for an apology or not. Nor can I comment on the types of plans that were offered, beyond our well-known bias toward high deductibles and funded health accounts.

Regardless, the change in plan is not the real problem; the problem is that Sam has no idea how much his health insurance costs.

Show me an employee uninformed about the cost of what he receives and I’ll show you an employee who believes he is entitled to more.

The biggest mistake his company is making isn’t benefit design, it’s keeping employees in the dark about the true cost of benefits and their connection to total compensation.

Tell it like it is
An employment contract is a business agreement between employees and their employer. Both parties need complete information to understand the terms of the exchange of work for pay. Specifically, employees should see a full statement at least once per year that summarizes how much the corporation is investing in their full compensation:

1. Wages

2. Bonuses

3. Profit sharing and stock options/awards

4. Paid-time-off value (vacation, sick leave, personal days)

5. Health insurance premiums, self and family

6. Disability and workers’ compensation insurance premiums

7. 401K matching and pension accrual

8. Health savings accounts

9. Taxes paid by the company (payroll, etc.)

10. Training and certification fees

Plus, it wouldn’t hurt to also share how much the company subsidizes programs, facilities, food, and other conveniences on a per-employee basis.

Without this context, it is almost impossible for employees to fully grasp the tradeoffs companies make when choosing (or revising) benefit options. Further, it promotes a more rational discussion about ways that companies can choose to allocate more money into employees’ hands (for example, into health savings accounts rather than premiums). Otherwise, employees simply notice their salary and undervalue all the “other stuff” the company buys for them.

Add to this situation another complexity: wages are taxed, but most benefits are not. Thus, the relative value of benefits is artificially inflated because those rewards are treated differently.

How much does all that “other stuff” cost?
The Bureau of Labor Statistics reported in March that the average portion of total compensation dedicated to salary and bonuses is about 71% (39K out of 55K), leaving 29% for “other” benefits. This average includes many small businesses, some of which do not provide health insurance or other benefits* (2).

However, we often see much higher expenditures in large, long-standing organizations. In one recent analysis we did for a company of roughly 20,000 employees, salary and bonus or overtime averaged about $85K, and all of the other benefits summed to another $55K, almost 40% of all compensation!

The most alarming thing about the $18,000 price tag published by Milliman last month is that it was just over $9,000 as recently as 2002 (3). This means that in less than a decade workers making a 50K salary have had to absorb an additional 9K (almost 20%) in their total compensation costs that is NOT going to salary.

Add to that a disturbing report last week that the portion of income coming from private industry wages (as opposed to investment income or government programs such as social security, food stamps, and unemployment) has reached an all-time low in U.S. history, just 42%. The report’s authors note that while an accelerated decline in recent years has resulted from government stimulus during the recession, the longer-term decline reflects how “private wages were eroding because of the substitution of health and pension benefits for taxable salaries” (4). See the figure at right. Knowing that government benefits come from taxes on private income, it becomes clear that the trend cannot continue.

What’s the right number?
There is no single formula for the right balance of wages and benefits (although readers know we would lean toward trading higher wages, bonuses and health accounts in place of richer benefits). However, every company can keep employees informed about total compensation. With today’s software packages for managing human resources and payroll, there is no excuse not to.

Why this matters: As healthcare costs continue their expected climb, companies will have to a) reduce the amount available for wages, or b) develop different strategies for reducing cost. Either option will require tradeoffs by workers; more dollars for healthcare means fewer dollars for something else. The only way to begin this conversation constructively is with cold hard facts and numbers. Rather than underestimating people like Sam and keeping them in the dark, help employees play an active role, or at least be informed participants in the decisions that companies will face. Without this as a starting place, companies may find themselves issuing a lot of apologies, even when trying to do what they believe is best for all.

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*note: National statistics did not include training, but did include most other categories.

References

1. Milliman, Inc.Milliman Medical Index 2010. May, 2010;  (accessed June 2, 2010).

2. Bureau of Labor Statistics. Employer Costs for Employee Compensation. March 2010.  (accessed June 2, 2010).

3. Milliman, Inc. Milliman Medical Index 2006. (accessed June 2, 2010).

4. Cauchon, D.Private pay shrinks to historic lows as gov’t payouts rise. USA Today, May 26, 2010; (accessed June 2, 2010).


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