How to Stop Employee Benefits From Biting Your Bottom Line

Controlling the rising costs of employee benefits is a challenge that never seems to get easier. While the recent spike in health insurance premiums has gotten the lion's share of attention recently,

the fact remains that business owners must consider the impact of the full range of worker benefits, which when combined comprise 37.2 percent of the average payroll, according to the U.S. Chamber of Commerce.

Doing away with benefits, of course, is not an option. Hourly workers and salaried staff demand good benefits as part and parcel of the employment agreement. Your challenge is to offer attractive plans to keep your good personnel—while maintaining a healthy bottom line.

How can this be done. Start by making sure you aren't paying for benefits your staff doesn't need. "Being all things to all people is more expensive than narrowing in on what people really want," says Robert Dughi, president of Citi Street, a defined contribution plan provider based in Quincy, Mass. "Survey your employees about their wants, and listen to what they say. Put your energy where there's 'value added,' as opposed to offering a little bit of everything."

Controlling health insurance costs

Health insurance, by far the most popular of benefits, is offered by 96 percent of employers, according to Business and Legal Reports (BLR). When containing costs, there are several lines of defense you can take:

• Join a purchasing group for added leverage when negotiating.

• Shift costs to employees through cost sharing (raising employee co-payments and/or annual deductibles for services received).

• Use a vesting schedule based on an employee's length of service to determine how much you will pay for a health plan.

• Offer more than one managed care plan—for example, a Health Maintenance Organization (HMO) plan, and also a Point of Service (POS) plan that allows employees to go to a doctor outside the network. This scenario would involve your company funding most of the HMO plan, satisfying those employees who want to save money, while other employees would have the option to buy access to a broader range of health services through the POS plan.

• Pass along the cost of drugs to employees by initiating a three-tiered program in which employees make co-pays of $5 for generic drugs, $10 for preferred formularies and $15 for non-formularies.

(For more detailed information on each of the options, see "Health Care 911" on page 49 in Hardwood Floors' December 2001/January 2002 issue or visit www.woodfloorbusiness.com to download the article from the article archives.)

Retirement plans

With 73 percent of employers offering 401(k) retirement plans, it's important to look into services that can help cut the shuffling of paperwork required for record keeping, reduce the time educating employees about their options and take on the complex task of compliance testing to make sure the plan satisfies IRS guidelines. New Internet services offer these services and more. One example is Success 401(k),which maintains a service site at www.success401k.com.

"It's difficult for a small business to manage all of the activities that go into supporting a 401(k)," says Linda DeLoreto, vice president of Success401(k). "One important feature of our product is that it eliminates the paper reports and checks associated with traditional payroll contributions. All of the data are entered electronically." The system collects the money automatically from the payroll account.

How much does a system like this save? While Success 401(k) posts its price menu on the Web, DeLoreto notes that it's difficult to compare the pricing of plans because each one breaks down its fees differently. For example, one plan may break out record keeping fees while another buries them in its asset fees. "We know that Internet products are generally less expensive than products sold through sales people, but there are all kinds of variations," she says.

Beware the temptation to buy a 401(k) plan off the shelf without carefully considering alternative plans. "Most of these plans are being sold by brokerage and insurance companies, and because no one has sat down with the client to see what is an appropriate design, companies end up squandering money," says Joel Levy, principal with Benefit and Compensation Consultants, an actuarial benefits, compensation and human resources advisory firm in New York City. Comparison-shopping is critical, since organizations that sell these plans can vary widely in terms of administration costs. Levy has seen such annual costs range from $1,000 to $35,000.

Life insurance

"Life insurance is very inexpensive to provide," says Levy. And it's also very popular: 89 percent of employers nationally offer this benefit. 

Are plans pretty much the same when it comes to premiums? Not at all. "Life insurance is a commodity item," says Levy. "Employers should shop around for the best rate." A common error is to save time by purchasing different forms of insurance from the same broker … a practice Levy says can be costly. Some employers take advantage of differences in prices by purchasing group life from one carrier and accidental death and dismemberment (AD&D) from another. "Be aware that some life carriers have divisions that compete with each other," says Levy. "One division offers both life and AD&D, and another division may offer just life." The prices of the life insurance may differ in the two divisions. Lesson learned: Shop around.

Don't have time to go comparison shopping? Says Levy: "Get a good broker." Ask other employers which brokers have proven to be highly knowledgeable about carriers.

Workers' compensation

Workers' compensation is a mandated benefit that can erode your bottom line if you do not watch it carefully. Premiums are increasing nationwide at about 10 to 15 percent annually, according to Stephen B. Paulin, senior vice president of Sullivan Curtis Monroe, an insurance brokerage in Irvine, Calif. "It's starting to hit businesses in the pocketbook," says Paulin. "They are asking, 'What can we do now?'"

Premium increases are only part of your cost. Indirect costs can be two to three times as great. They include costs to administer a claim, supervisory time in investigating an accident and lost time from the injured individual. Paulin suggests these cost containment measures:

• Run physical tests for applicants. Run "range of motion" tests for applicants for jobs that require much lifting, stopping and standing.

• Improve your workplace. Adjust work stations to reduce claims that result from repetitive stress injury.

• Choose an experienced carrier. Don't just buy insurance from the carrier with the lowest price. "Choosing the cheapest carrier can end up costing you more when it does not handle claims properly," says Paulin. Instead, look for a company with a good claims handling history. "Meet with the individuals who will handle your claims, and determine their operating philosophy," says Paulin. "And get feedback from other businesses that have experience with that carrier."

You also can reduce your premiums or keep them from increasing unnecessarily downstream by taking some proactive steps. "Overcharges by insurance companies are very common, "says Edward Priz, principal of Advanced Insurance Management in Riverside, Ill. To prevent overcharges, you need to audit your own classification codes to ensure accuracy with the workplace conditions to which your personnel are exposed. You also need to make sure your "experience modification factor" is correct. Consider having an outside auditor review your records.

Disability income

Workers' compensation protects your workers from financial disaster if they are injured on the job. But what if the injury takes place outside of work. That's where long- and short-term disability come to the rescue. They can be valuable benefits and are offered by 68 percent of employers nationwide.

Edward Muldoon, director of absence and disability management at the Washington Business Group on Health, an organization that assists businesses on this topic, points to three key areas to control disability costs:

 • Institute early return to work policies. To save money, you want to encourage people to return to work as soon as possible. "The costs of a disability go far beyond disability payments and insurance premiums," says Muldoon. "Other costs include lost productivity, overtime for employees required to accomplish the missing person's work and training time. Whatever you can do to return the employee to work quickly can make a big difference."

To encourage early return, institute workplace programs that will accommodate workers who suffer from temporary disabilities. Many employers have these in place for staff members covered by workers' comp, but have not extended the programs to cover people absent under short term or long-term disability. Now is the time to do so.

• Pick the right plan. "Look at your plan to see if there are any incentives for workers to stay home longer," suggests Muldoon. For example, some plans call for no payments unless a person stays out for two weeks, at which time the payments become retro activeto the first day. "Under these plans, individuals often stay out longer because it is in their self-interest."

• Select your carrier wisely. Not all companies providing insurance are equal. Muldoon suggests selecting a company that will help you increase your productivity by assisting injured people to return to work more quickly. "Select a company that helps manage the duration of the disability," says Muldoon. "Ask the right questions. Do they spend money on rehabilitation. Do they have good medical resources. Do they have doctors and nurses on staff. What training do they give their people." Muldoon also advises checking with other businesses in your area to find out which insurers they use and their level of satisfaction.

• Put disability insurance in context. "It's all about productivity. You can push down cost by choosing a plan that is less expensive, but the result may be longer periods of time during which people are away from the workplace. The savings you pick up on the health side can be canceled out by losses on the productivity side," Muldoon says.

Cohesive approach

Left uncontrolled, the rising costs of employee benefits can erode your bottom line and lead to staff discontent when Draconian measures are needed to cap spiraling expenses. Take action now to review your entire benefits package. Survey your staff to find out which benefits they really want, in contrast with the benefits you always have assumed are most important. And finally, share information on growing costs with your employees. When employees know the effect that benefits have on the health of your company, they will be more willing to help by cost sharing and using benefits responsibly.

"Rather than just react to a crisis such as rising health insurance premiums, it's important to conduct a total review of your company's benefits structure," says Levy. "Develop cost effective benefits plans for the company that will be understood and appreciated by employees."