It seems every aspect of the economy is feeling the effects of the financial crisis. As employer clients gird for tough times, it is our job as benefits providers to help them adapt benefits programs to better withstand the downturn. Although no one can be certain where the economy is headed, it is important to anticipate some of the factors that may drive changes to employer benefits decisions. Here are four trends that could reshape the benefits market during this period of turmoil.
1. Growth in health care funding alternatives
Tired of escalating health care costs and facing difficult economic conditions, many companies are re-evaluating the conventional approach of fully insuring their employer-sponsored medical plans. One alternative, self-funded medical plans, is uniquely positioned to succeed as a health care solution in times of financial stress.
Businesses are under enormous pressure to better manage costs as a result of persistent volatility. Along with payroll, health care is one of the most significant business expenses. Health care costs also can be quite unpredictable from one year to the next. By self funding their medical plans, employers can better leverage efficiencies and help stabilize health care expenses over time.
Self-funding is very different than conventional health care plans, where employers pay a premium to purchase a policy and have an outside party fully insure the benefits. Instead, employers fund employees' health care claims themselves, and the claims are then physically paid by a third party administrator. Since the plan is owned and sponsored by the employer, there is more flexibility in designing the medical benefits covered under the plan. Self-funding gives employers the ability to customize plans to fit their unique claims experience and potentially realize positive cash flow.
To protect against any single large claim or a higher-than-expected claims level for the entire employer group, the employer usually secures medical stop loss insurance. Providing this critical component to self-funded plans is one area where benefits brokers can help employer clients reclaim control of health care expenses.
Because of the enhanced control and flexibility they offer, self-funded plans enable employers to better stretch their health care dollar. In addition, self-funded plans have special exemptions from state insurance law requirements. Whereas fully-insured plans take in premium in exchange for predominantly one-size-fits-all plan design, self-funding allows employers more freedom to adjust benefits in response to particular workforce needs and changing market conditions.
2. Expansion of "gap coverage" solutions
When companies search for ways to trim costs without cutting benefits outright, it can create gaps in coverage for employees. In the case of new hires, this can take the form of extending the introductory period before an employee becomes eligible to take part in the major medical plan. In addition, employers may turn to high-deductible medical plans to offset part of the cost of providing health insurance. In both cases, limited-benefit solutions can help "bridge the gap" in employer-sponsored health care. They can provide some level of benefits to employees until more extensive coverage kicks in or higher deductibles are met.
Limited-benefit medical policies generally provide coverage for routine services and preventive care. This includes things like doctor's office visits, prescription benefits and emergency room visits. More recently, limited-benefit policies have been expanded to address critical illness, inpatient hospital admission and ambulance transportation needs as well.
Here is how limited-benefit plans can address coverage gaps for new hires. Similar to a grace period before a 401(k) plan fully vests, there can be an introductory period before a new employee can take part in the major medical plan. Naturally, employees worry about being in health insurance limbo until they transition into the major medical plan. Limited-benefit medical insurance with built in "go to the doctor" features allows these employees and their dependents access to at least basic care when they start working. Monthly employer-paid premiums for a robust limited-benefits plan can range from around $40 to $75 per family (cost can vary by state), with different levels of cost sharing for workers. This can be a cost-effective way to close the gap between no benefits and full benefits.
High-deductible plans can create coverage gap concerns as well. First, if an employee is forced to pay out-of-pocket for the first $2,000 of expenses, he or she could be less inclined to see a doctor for routine visits like preventive care, diagnostic tests or immunizations. This can be a detriment to their health, can negatively impact the employer group's claims experience, and can lead to decreased productivity and profitability. Secondly, employers may be concerned that $2,000 out-of-pocket may be a financial burden their employees are unprepared for in the event of a major medical situation.
By offering a limited-benefit medical plan with a high-deductible plan, employers can continue to provide catastrophic coverage, but still offer employees coverage for routine medical events the average person typically uses year-in and year-out -- all without breaking the budget. The combination can prove economical for employers while giving employees access to the everyday medical services they value most.
3. Accelerating shift to voluntary benefits
Voluntary products are becoming more widely adopted among employers. LIMRA recently reported some 650,000 U.S. companies now sponsor at least one employee-pay-all benefits option. Previously, this growth was driven more by products separate from core benefits. Legal plans, pet coverage and mortgage insurance are a few examples of these ancillary voluntary benefits. Looking ahead, voluntary benefits should grow at a faster pace because they are now factoring more into traditional core employer-sponsored benefits.
In periods of rising unemployment, premium-weary companies are inclined to ask employees to shoulder more of the benefits burden themselves, lest job cuts run deeper. Yet companies recognize they still need robust benefits to retain talent and remain competitive.
Voluntary benefits can help broaden the overall benefits package at virtually no expense to the employer. For brokers, that means looking for creative voluntary worksite solutions that augment everything from medical benefits, to dental insurance, life insurance, short- and long-term disability, travel coverage and beyond.
4. Pressure to revise 401(k) plans
The dramatic decline in financial markets has revitalized the issue of 401(k) and defined contribution plans as a nationwide retirement savings system. Pressure is mounting for legislative changes that could further reshape the retirement plan market. Although the overall model will likely remain intact, the focus could shift toward creating more reliable savings options as part of 401(k) plans.
One area that stands out is the possible addition of guaranteed income payout options at retirement. Persistent volatility will only add to the urgency in enabling at least partial 401(k) distributions through lower-fee annuities that protect against market declines. Stable income payout options would not just be an appropriate response to declining account values for an aging workforce, but would also help address longevity concerns among baby boomers.
In addition, nondiscrimination testing within 401(k) plans is likely to pose problems for many employers. Federal rules prohibit companies from allowing higher-earning workers to contribute a significantly larger proportion of their salary to the 401(k) plan than that of workers with lower incomes. Companies must regularly test plan participation to avoid failing nondiscrimination guidelines. In principle, this testing is meant to prevent leveraging a 401(k) plan more for the tax benefit of highly-compensated employees than for the savings needs of the broader employee base. In practice however, these rules could further threaten retirement savings and the broader financial system in the current environment.
As employment levels come down and existing plan participants cut back on contributions, more companies could be at risk of falling below nondiscrimination thresholds. If 401(k) participation continues to deteriorate, companies might be forced to make sizeable refunds of contributions or face tax penalties.
Instituting automatic enrollment and shorter vesting timeframes are just two strategies to guard against nondiscrimination pitfalls. Nonetheless, additional government provisions may be necessary to avoid large numbers of employers getting squeezed by nondiscrimination rules.
In such a fluid and challenging market, the key to success is helping employers adapt. When it comes to employer-sponsored benefits, the status quo will not be sustainable for many companies. By understanding how certain factors are changing the dynamics of the group benefits market, providers will be in a better position to help their employer clients create a more viable benefits package, and ultimately help them through these turbulent times.
