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By CYRIL TUOHY, managing editor of Risk & Insurance®

Distributing voluntary benefits such as group health, disability and retirement perks through the employer is a bankrupt strategy. It's time to cart that moribund business model off to the morgue.

But that was around the time of World War II, when the nation's economic growth was galloping apace, when Ford and General Motors had more than 80 percent market share between them, when the cities of Europe and Russia were still smoldering from the hell of battle, when U.S. manufacturing had no equal, when leaders believed in Great Societies, when management could afford to give in to unions' inflexible wage demands.

That's the world we used to live in, but it's not the world we live in today. In fact, this world drained from U.S. shores more than 20 years ago, and there's nothing like a nasty recession to uncover the shortcomings of an employer-based health benefits system.

With March unemployment standing at 8.5 percent, double what it was just a few years ago, and Corporate America shedding jobs by the millions, a lot more people have all of a sudden found themselves uninsured.

The argument for structuring benefits through the employer was that employers were in a better bargaining position to negotiate lower rates from insurers. That's still true. An employer who can bring 1,000 employees to the table will surely get a better rate than individuals negotiating with carriers on their own.

But it's also made employees too dependent on employers for benefits. We've built a system where the employer, simply by dint of being able to offer basic benefits, has too much leverage over the well-being of an employee. In an expanding economy, when workers can easily find a job, that's not a problem. In a shrinking economy, the reverse is true, and we're now in a situation in which employees who lose their jobs also lose their benefits. This should not be so.

Employers, in fact, have for years been gradually foisting more responsibility onto the employee for managing his or her own benefits program: either throughincreasing co-payments and deductibles, or by letting employees figure out how much to put aside in special savings accounts reserved for health expenses.

In the past 15 years, employers have let workers even manage their own retirement program. Employers have been getting out of the defined benefits business, otherwise known as pensions, and into the defined contributions business, also known as the 401(k).

Why not just come clean and offer employees another system entirely? Yes, that will surely give workers more homework, but they're doing some of that anyway. At the very least, workers wouldn't be dependent on their employers to provide healthcare. Losing a job would only mean loss of income, at least until a worker joins the labor force once more. Either way, workers wouldn't lose their benefits. In fact, this model is already in place with the 401(k) retirement benefit.

Laid-off workers are entitled to their 401(k) funds, against which they can borrow or draw up if needed. The 401(k) is portable, and workers can take it with them and roll it over into an IRA if they get laid off. When they get rehired, they begin contributing again if their employer offers such a benefit.

The nation's economy is morphing into a much more elastic and responsive animal than it used to be, fueled to a greater degree by small businesses and freelance talent more than it has at any time in the past.

These businesses need to be free to concentrate on what they do best, not fret over the amount of benefits they may or may not be able to provide to potential workers. That means uncoupling the benefits offerings from employment.

(Read Senior Editor Matthew Brodsky's Point here.)

June 1, 2009

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