Taking Cues From the Health Benefits Industry Burden

Can employers head off these catastrophic benefits expenses? Employee benefit consultants and other experts offer some plan design innovations, but none is a panacea,

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Many health benefits consultants say that managed care as a health care cost control technique is tapped out. However, they point to new consumer-directed health plan models as the latest best bet. These plans force employees to manage a larger amount of their medical expenses with a discretionary fund of $2,500 to $5,000, while protecting them against catastrophic expenses with more traditional health insurance.

"Everyone agrees that the only way to reduce employer costs is to get employees to be better health care consumers, but I think we will need a better device than what I have seen so far to make this happen," says Ed Kaplan, national health care practice leader at the Segal Co. in New York.

Other consultants believe that corporate risk managers and chief financial officers need to take a firmer hand in health risk financing and press to use captive insurance companies to fund domestic health benefits. But so far, the U.S. Department of Labor has only approved captives for life and disability benefits.

Demographics are working against good, financial solutions to defined benefit pension plan solutions. The employers most burdened with underfunded plans are also the companies with a shrinking active workforce. That leaves fewer employees earning profits to fund a growing number of retirees.

However, rebounding investment values are helping. According to a recent analysis by Watson Wyatt Worldwide in Washington, the funding status of large employer pension plans increased from 82 percent in 2002 to 88 percent in 2003, as the value of assets increased an average of 18 percent.

Retiree medical costs may be even more difficult to fix. The same demographics work against controlling retiree medical costs, compounded by the more stringent accounting requirements.

"It's virtually impossible to fix it," says Alex Sussman, national retirement practice leader at the Segal Co. "Though there are some administrative remedies available through the Medicare reform legislation, including Health Savings Accounts as a better way for employees to save toward their costs."

While Medicare reforms also offer employers a subsidy for providing prescription drug benefits to retirees--one of the biggest components of retiree medical costs--the subsidy is still small, says Jonathan Nemeth, a senior vice president of Aon Consulting in Somerset, N.J.

He pegs the subsidy at about $6.00 per month per employee. "That's not very much, but for an employer with tens of thousands of retirees, it is at least significant."

For more comprehensive solutions, employers and their support industries point to the need for public policy changes, including a national health care policy--if not a national health insurance program--and regulatory support for retirement plans.

If public policy doesn't change, more of the burden will shift to employees, either with greater cost-sharing or fewer benefits.

"There's always the possibility of a major public policy shift, but I don't see it coming," says Todd Swim, a principal and actuary with Mercer Human Resource Consulting in New York. "What I do see is a continuing shift from corporate responsibility to individual responsibility for costs. And for them, that translates to more sacrifice and pain."

October 15, 2005

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