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A new age for flexible benefits.

THE COST OF HEALTH CARE in the United States has gone from bad to worse with few signs of improvement. The crisis is now cutting into the profit margins of many companies, a fact that has caught the attention of chief executive officers from Maine to California.

According to the Employee Benefit Research Institute, employer spending as a percentage of corporate after-tax profits amounted to 103 percent in 1989. That year also saw private business spend $173.4 billion on health services and supplies, and the cost spiral continues to gather momentum with national health expenditures totaling $662.2 billion or 12.2 percent of the Gross National Product in 1990.

Although corporations are diligently looking for ways to clamp the lid on runaway health care expenses, easy solutions to the problem are usually impossible. The issue extends far beyond the simple act of slashing employee benefits packages. Ironically, because of increasing competition for qualified employees, corporations need attractive benefits packages more than ever as enticements. The real challenge for corporations is to dispel the mindset of diminishing entitlement to benefits and encourage employees to regard such compensation as part of a partnership in controlling health care costs.

To that end, businesses are beginning to pay heed to the radical lifestyle changes that have occurred in the United States over the last 30 years by querying employees about their benefits needs and preferences. Increasingly, many companies throughout the United States have adopted flexible benefits plans or are pausing to take a serious look at them as a way to forge an employer/employee alliance against the health care scourge. Flexible benefits are an approach to benefits management in which the needs and preferences of employees actually shape the configuration of their benefits. individual employees then actively participate in the benefits selection process.

Among the 30 large corporations that Duggan Consulting Associates surveyed, 25 have adopted flexible benefits plans, with half of these plans installed within the last two years. In addition, it is estimated that flexible benefits plans are already operable in as many as 6 percent to 8 percent of larger U.S. corporations. According to survey respondents, the shift to flexible benefits is irreversible. They see flexible benefits as a turning point in the configuration and delivery of employee benefits, and the believe such plans will "see down" to medium- and small-size companies becoming the dominant packaging format for benefits in these companies over the next decade.

In initiating a flexible benefits program, management determines the scope of an affordable mix of benefits. A program is then created that understands employee demographics and is sensitive to their needs. From this "menu" (usually with certain limitations), employees choose benefits and personalize their benefit programs.

In a flexible program, the benefit choice spectrum may be limited or broad. For instance, hi-lo insurance options and premium conversion plans typically have limited flexibility, whereas flexible spending accounts have a medium degree of flexibility. Full cafeteria plans are very flexible. Some companies adapt and/or combine these elements to create a unique approach for their own environment.

The concept of employees choosing their own benefits is not totally alien. For example, over the years, employees have been buying supplemental insurance for medical, disability and life coverage. The difference in a flexible benefits program is that benefit elections are permitted for coverage-sometimes basic coverage-paid for by the employer.

The Evolution of Flexible Benefits

AS THE COST OF BENEFITS approaches 40 percent of payroll in some companies, the term "fringe benefits" is becoming an employment anachronism. Today, benefits are rightly recognized as a key component of overall compensation and have become fully institutionalized.

As benefits began to evolve early in this century, the focus was on standardized "one-sizefits-all" plans that served as economic protection for the nuclear family. Americans now find themselves grappling with the implications of new radical demographics and social restructuring which began 30 years ago. During that 30-year span, the GNP has soared from $515 billion to $4.53 trillion and the demographics of the work force have diversified dramatically. Women accounted for 12 percent of the labor force in 1960-, in 1987, they amounted to 45 percent. In addition, technology has radically transformed businesses and lifestyles, and people have shifted away from traditional living arrangements. These upheavals have ultimately affected the way employees regard and utilize their benefits.

The first flexible benefits programs in the United States were installed in 1973 by a division of the TRW Company and by the Educational Testing Service. Other corporations watched, waited and saw that flexible benefits did not immediately catch on.

However, in 1978, Congress passed The Revenue Act creating Section 40 1 (k) and Section 125. These amendments to the tax code permitted employees to make taxable and non-taxable benefit selections. Simultaneously, a rapid escalation in computer technology meant that administering flexible benefits could finally be accomplished cost effectively. A short time later, American Can Company (now Primerica) became one of the first major corporations of the next wave to install a flexible benefits program.

Although more corporations began to adopt flexible benefits programs in the early 1980s, the pace was slow due to a recessionary economy and the preoccupation of benefits executives with the rapid escalation of health care costs. From 1983 to 1989, a broadening base of companies began to adopt flexible benefits, and cost containment was a key motivator for the switch. Flexible benefits created an opportunity to shift from defined benefit to defined contribution plans, an important milestone in the long struggle to control health care costs and liabilities.

A Turning Point

TODAY, FLEXIBLE BENEFITS plans are gaining even wider acceptance and the "FLEX economy" as a whole is growing. In the service sector, new flexible benefits niches and entrants are emerging. As a result, institutional arrangements among brokers, benefits consultants, carriers, administrators and technology vendors are shifting as players invest and maneuver for position. Leading suppliers like benefits consultants, insurance carriers and software vendors see the advent of flexible benefits as a turning point in the configuration and delivery of employee benefits and they are building strategies around this insight.

While a relatively small number of U.S. corporations employ flexible benefits, they are, for the most part, the largest and most influential. Furthermore, the flexible benefits movement has momentum. Most employers struggle against cost pressures. These are tough times for U.S. companies. They are responding to confusing economic indicators, confronting harsh foreign competition and dealing with radical financial restructuring and dynamic capital markets.

Downsizing, outplacing, abdicating paternalism and cost shifting to employees are not traditional American business practices and senior management is uneasy. However, as a potential cost control mechanism, flexible benefits accentuate the positive. Introducing choice and a measure of personal control for employees can mitigate possible negative connotations associated with health care cost containment.

As flexible benefits come of age in the 1990s, the future looks promising, particularly with the repeal of Section 89, which would have required widespread discrimination testing, onerous record-keeping tasks and the mandate of certain base levels of coverage for all employees. Over the next couple of years, if flexible benefits can tangibly moderate health care cost increases, operate cost effectively on an administrative basis and continue to meet the needs of a work force in flux, most survey respondents believe such programs will become the dominant benefit delivery vehicle.

Since flexible benefits are technology-driven, a key issue facing corporations thinking about implementing them is the provision for effective and cost efficient record keeping and administrative services. Most large corporations opt for flexible benefits self-administration because it affords more control, less cost, tailored reports and timeliness.

Conversely, insurers and consultants service approximately 15 percent of corporations which opt for third-party flexible benefits administration. Among large corporations, if there is a decreasing demand for this type of administration, there will probably be an increasing demand for personal computer and mainframe packaged software among companies electing to self-administer.

Some insurers, consultants, third-party administrators, software vendors, payroll processors and purveyors of benefits-related products and services are converging on flexible benefits services. These firms, active usually in different and discrete market segments, see such services as having strategic implications for the future of their benefits businesses. Also, they see a substantial market opportunity emerging which can lead to growth and increased profitability.

Among the flexible benefit software firms surveyed, most are experienced in human resources, payroll and benefits systems. They regard having the software in their product line-up as a critical edge in maintaining leadership and credibility, and see tight linkage among systems for human resources, benefits, administration and payroll. Generally, these firms believe there is an emerging demand for consolidating these systems which may happen in the next three to five years.

Survey respondents believe the largest companies will buy, not build, flexible benefits software. The advantages of a package include less risk, more effective maintenance, less time to install, ongoing regulatory compliance and cost effectiveness. Developing a system inhouse may no longer be attractive because it may cost more than the price of a packaged system, fall out of compliance and be expensive to maintain and upgrade.

Computer platforms for flexible benefits administration include mainframes, minis, micros/personal computers and participative processing/timesharing.

Implementation Issues

SINCE FLEXIBLE BENEFITS SYSTEMS are critical to the management and administration of a flexible benefits plan, and since plan designers may have to trade off the desirability of benefits features against the feasibility of systems capabilities, survey respondents believe systems people should be involved in the initial stages of the planning phase for flexible benefits programs.

When installing a mainframe system in a large corporation, survey respondents said an ideal time frame would be 12 to 15 months, including plan design. However, in the "real world," vendors are usually called in during or after plan design. At this point, respondents would prefer nine to 12 months to work with the client to familiarize, educate and train benefits and systems people, accommodate some customization and test the system. However, in a "rush" scenario, they can have the system operating in two to three months. In most instances, vendors are provided five to seven months lead time. Regarding personal computer systems, the time frame is one to three months with little, if any, customization.
COPYRIGHT 1992 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:employee benefits
Author:Duggan, Patrick
Publication:Risk Management
Date:Mar 1, 1992
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