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© 2001 by Prentice Hall 12-1
Cost of Employee Benefits in the United States, 1929-2000
Ye
ar
Percent of Wages (note text re: payroll)
0 5 10 15 20 25 30 35 40 45
2000
1984
1975
1965
1955
1929
37.5
33.8
30.0
21.5
17.0
3.0
© 2001 by Prentice Hall 12-2
How the Benefits Dollar Is SpentHow the Benefits Dollar Is Spent
© 2001 by Prentice Hall 12-3
Fig 12.2: Percentage of Employers Providing Selected Benefit Plans
Medium and Large
Private Firms
SmallPrivateFirms
State and Local
Governments
74
2156
7745
981005012
60
942
5425
87100
264
88
8329
7535
100100
5934
Health InsuranceRetirement Plans
Defined Benefit PlansDefined Contribution Plans
Insurance PlansLife InsuranceLong-term Disability Ins
Time-off PlansPaid VacationsPaid HolidaysPaid Sick Leave
Flexible Benefits Plans
U.S. Sept. of Labor, Bureau of Labor Statistics (2000). Employee Benefits in state and local governments, 1998.
© 2001 by Prentice Hall 12-4
Source: Business Week, 6/13/05
© 2001 by Prentice Hall 12-5
Legally Required Benefits Social Security
Retirement Income Disability Income Medicare Survivor Benefits
Workers’ Compensation Unemployment Insurance Unpaid Leave
© 2001 by Prentice Hall 12-6
Source: Business Week, 6/13/05
Family and Medical Leave
Although FMLA was widely perceived as maternity leave law, more than 80% of time it’s used by workers recovering from own illness or caring for sick family member Half of FMLA use
involves serious illnesses lasting less than 10 days
42% of users are male
© 2001 by Prentice Hall 12-7
Social Security in Context
Before Social Security, aging in America often meant poverty and sometimes poorhouse
Average life expectancy in 1900: 47 years When America was agricultural nation, elderly frequently lived w/ children
By 1920, more Americans lived in cities than on farms, urban homes smaller While life expectancy was increasing quickly, many Ers shunned older
workers In 1930, almost 1/3 of American factories had maximum age limits for new
ees (40, 45, 50) Retirement savings didn’t exist, except among wealthiest Americans
In early 20th century, only ~2% of ees covered by pensions Most counties had poorhouse (shelters for indigent)
Germany, Sweden, France, England legislated publicly-funded old-age insurance before Americans took up debate
Opponents argued that sensible people would provide for themselves Social Security Act ruled to be constitutional by 5-4 decision in 1937
– Source: Wall Street Journal, 9/15/04
© 2001 by Prentice Hall 12-8
Benefit Trends: Health Care
Ees rank health-care related benefits as most important 65% view as most important 17% as second-most important
Less than 3% of U.S. health care spending can be attributed to preventive medicine and health education Estimated that as much as 50% of costs of illness in U.S.
results from conditions that could be avoided or lessened by preventive care or healthy lifestyle changes
Nearly 23% of population has body mass index of 30 or higher (30 lbs over healthy weight)
– Source: Compensation and Benefits Review, Sept/Oct 2000; USA Today, 11/7/04
© 2001 by Prentice Hall 12-9
© 2001 by Prentice Hall 12-10
Health Care Costs
Considerable cost-shifting to Ees Costs increased 10.1% in 2003 (have moderated
since, somewhat) Biggest cost drivers: more prescriptions of heavily-marketed
drugs, increases in hospital prices, more expensive diagnostic tests, increase in visits to specialists (given shift from more restrictive HMOs)
Average cost per Ee, 2004: $6,679 Up 86% since 1997 ($3,594)
15.7% of U.S. population (~46m) now uninsured 60% of Americans covered by Er-sponsored health benefits Between 1996 and 2004, number of private-sector ees who
enrolled in health benefits plans offered to them declined from 88% to 81%
– Source: Mercer Human Resource Consulting, Census Bureau, Wall Street Journal, 11/2204; USA Today, 8/30/05; Wall Street Journal, 8.25/06
© 2001 by Prentice Hall 12-12
Workers Paying More of Health-Care Bills Ees provided family coverage thru Ers contributed $2,412 on
average in 2003, up from $1,619 in 2000 Causing divides between lower- and higher-income workers in
terms of health-care affordability Average premium for family plan increased from $6,438 in 2000 to
$9,068 in 2003 Ees provided individual coverage thru Ers contributed $454 on
average in 2002, up 27% Ers paid $2,066 for individual, up 14% On average, Ees pay about 16% of cost of single coverage, about
27% of cost of family coverage Ees obtaining brand-name drug when generic is available paid
$26 on average, up 24% Average deductible in PPO plans increased 37%, to $276
– Source: Wall Street Journal, 9/6/02
© 2001 by Prentice Hall 12-13
Source: Wall Street Journal, 11/7/06
© 2001 by Prentice Hall 12-14
Legal Environment for Health Care Plans Consolidated Omnibus Budget Reconciliation Act (COBRA)
Must offer extended group health plan participation for up to 18 months following termination, 36 months for divorced/deceased spouse
Cost borne by individual Health Insurance Portability and Accountability Act (HIPAA)
Improves ‘portability’ of health insurance (limits exclusions for pre-existing conditions, discrimination based on health status)
Does not… Ensure that Ee who changes jobs will have access to health insurance
on new job Ensure affordability of health insurance on new job Enable individuals to maintain same group health plan on job change
Privacy of health information
© 2001 by Prentice Hall 12-15
Health Care Costs and Firm Competitiveness In 2004 health-care spending amounted to over $1,500 for every
vehicle GM produced in U.S. (Chrysler, $1,400; Ford, $1,100) American workers on average pay ~32% of their health costs, GM salaried
ees ~27%, UAW members ~7% Current ees and families account for 1/3 of total health bill, retirees the
remainder Competition prevents passing on cost to customers
Japanese competitors have younger workforces with lower costs As of 2003, Big Three had 524,000 hourly retirees, Toyota 49 (258 as of 2006)
Expense impacts bottom-line and investment in R&D See also “As Benefits for Veterans Climb, Military Spending Feels
Squeeze,” Wall Street Journal, 1/25/05 Adding prescription drug benefit to Medicare will save automakers
millions Companies lobbied for legislation that would cover all over 65, even those
with retiree health coverage thru Er GM spends $924 million annually on prescription drugs for retirees,
including those under age 65, Ford spends $300 million– Source: Fortune, 9/29/03; Wall Street Journal, 4/7/05, 4/15/05; New York Times, 5/19/06
© 2001 by Prentice Hall 12-16
Health Spending in Various Health Spending in Various Countries 2003Countries 2003
© 2001 by Prentice Hall 12-17
Health Benefits for Retirees Continue to Shrink
17% of retiree health plans have virtually eliminated liabilities by requiring retirees to pay full premiums
20% have eliminated such plans altogether for new hires
Share of private-sector orgs offering health insurance to retirees 65+ dropped to 11% in 2000, from 20% in 1997
– Source: Wall Street Journal, 9/16/02
© 2001 by Prentice Hall 12-18
Source: WSJ, 7/16/08
© 2001 by Prentice Hall 12-19
“Consumer-Driven” Health Plans, Health Savings Accounts (HSAs), Health Reimbursement Accounts (HRAs) Congress authorized HSAs in 2003, HRAs
evolved in late 90s and early 00s Lower premiums, higher deductible (e.g.,
$2,000/yr), more consumer control of health care expenditures Er can match part or all of Ee contribution to
account Pre-tax dollars into HSA, up to amount of deductible If you don’t spend all your allowance on medical care,
you carry over unused balance Once deductible is paid, traditional insurance
policy takes over Maximum out-of-pocket spending limits ($5k for
individuals, $10k for families)
© 2001 by Prentice Hall 12-20
“Consumer-Driven” Health Plans, Health Savings Accounts (HSAs), and Health Reimbursement Accounts (HRAs) Encourages consumers to take active role in keeping health-
care costs down Ers will provide detailed information about prices and quality of
doctors and hospitals in area Critics fear plans will discourage people from getting care they
need Recent research indicates that when co-payments for prescription
drugs increase, health of patients w/ certain chronic illnesses (e.g., diabetes and asthma) can suffer
Further, if healthy Ees sign up for HSAs while less-healthy Ees stick w/ traditional plans, costs of those plans will increase at even faster rate… Tax breaks benefit wealthy more than low-income workers Less-educated workers may have trouble taking advantage of Web-
based information By 2006 73% of U.S. Ers likely or somewhat likely to offer HSAs
– Source: USA Today, 10/31/03; Wall Street Journal, 6/23/04; Wall Street Journal, 5/19/04; Business Week, 11/8/04
© 2001 by Prentice Hall 12-21
Advantages and Disadvantages of Flexible Benefit Programs
Advantages1) Employees choose packages that best satisfy
their unique needs
2) Flexible benefits help firms meet the changing needs of a changing work force
3) Increased involvement of employees and families improves understanding of benefits
4) Makes introduction of new benefits less costly – added as one option among many
5) Cost containment – organization sets dollar maximum, Ee chooses within that constraint
© 2001 by Prentice Hall 12-22
Advantages and Disadvantages of Flexible Benefit Programs
Disadvantages1) Ees make bad choices and find
themselves not covered for predictable emergencies
2) Administrative burdens and expenses increase
3) Adverse selection – Ees pick only benefits they will use, thus driving up costs