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The Costs of Employee Benefits Joseph J. Martocchio.

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1 The Costs of Employee Benefits Joseph J. Martocchio

2 What are Employee Benefits Employee benefits refer to employee compensation other than hourly wage or salary Employee benefits refer to employee compensation other than hourly wage or salary

3 Two Dimensions of Employee Benefits The source of the benefit can be characterized as legally required or discretionary The source of the benefit can be characterized as legally required or discretionary The role the benefit serves recipients can be characterized as protection, paid time off, or accommodation and enhancement The role the benefit serves recipients can be characterized as protection, paid time off, or accommodation and enhancement

4 Legally Required Benefits Legally required benefits are mandated by several laws: Legally required benefits are mandated by several laws: Social Security Act of 1935Social Security Act of 1935 State workers’ compensation lawsState workers’ compensation laws Family and Medical Leave Act of 1993Family and Medical Leave Act of 1993

5 Discretionary Employee Benefits Discretionary benefits fulfill three main roles: Discretionary benefits fulfill three main roles: Protection programsProtection programs Paid timePaid time Accommodation and enhancementsAccommodation and enhancements

6 Income Protection Programs Three types of protection programs: Three types of protection programs: Disability insuranceDisability insurance Life insuranceLife insurance Retirement plansRetirement plans

7 Defined Benefit Plans Retirees receive guaranteed payments for the duration of their lives based on years of employment, age, and final salary level before retirement Retirees receive guaranteed payments for the duration of their lives based on years of employment, age, and final salary level before retirement

8 Defined Contribution Plans Plans allow employees to set aside a portion of their salary for investment purposes Plans allow employees to set aside a portion of their salary for investment purposes These plans are riskier than defined benefit plans due to the uncertainty of the investment income These plans are riskier than defined benefit plans due to the uncertainty of the investment income Employers may match a small portion Employers may match a small portion

9 Health Protection Programs Programs refer to a host of practices geared toward promoting sound health Programs refer to a host of practices geared toward promoting sound health Health insurance plans represent the largest portion of a company’s health protection offerings Health insurance plans represent the largest portion of a company’s health protection offerings

10 Health Insurance Programs Fee-for-service plans Fee-for-service plans Managed care plans Managed care plans Point-of-service plans Point-of-service plans Savings accounts based on the consumer-driven health care philosophy Savings accounts based on the consumer-driven health care philosophy

11 Fee-for-Service Plans Provide protection for three types of medical expenses: hospital expenses, surgical expenses, and physicians’ charges Provide protection for three types of medical expenses: hospital expenses, surgical expenses, and physicians’ charges

12 Managed Care Plans Include HMOs and PPOs Include HMOs and PPOs Managed care plans impose substantial restrictions on an employee’s ability to make choices about from whom they can receive medical treatment Managed care plans impose substantial restrictions on an employee’s ability to make choices about from whom they can receive medical treatment

13 Point of Service Plans Combines features of fee-for-service systems and HMOs Combines features of fee-for-service systems and HMOs Employees pay a nominal copayment for each visit to a designated in- network physician however the possess the option to receive care from out of network physicians for a higher cost Employees pay a nominal copayment for each visit to a designated in- network physician however the possess the option to receive care from out of network physicians for a higher cost

14 Consumer-Driven Health Care Flexible spending accounts (FSAs) Flexible spending accounts (FSAs) Health reimbursement accounts (HRAs) Health reimbursement accounts (HRAs)

15 Paid Time Off Vacation Vacation Sick leave Sick leave Holidays Holidays

16 Accommodation and Enhancement Programs Promote opportunities for employees and family members through: Promote opportunities for employees and family members through: Mental and physical well being of employeesMental and physical well being of employees Family assistance programsFamily assistance programs Flexible work scheduleFlexible work schedule Skills and knowledge acquisitionsSkills and knowledge acquisitions

17 Employer Costs for Compensation and Benefits Overall, benefits accounted for approximately 30 percent of total compensation costs Overall, benefits accounted for approximately 30 percent of total compensation costs

18 Environmental Factors and the Cost of Benefits Industry prospects with economic conditions and forecasts Industry prospects with economic conditions and forecasts Government regulation of employee benefits Government regulation of employee benefits Changing demographics of the labor force Changing demographics of the labor force Advances in health care Advances in health care

19 Industry prospects with economic conditions and forecasts Economic forecasts can influence the extent that the firm is willing to invest in employee benefits Economic forecasts can influence the extent that the firm is willing to invest in employee benefits Employers will likely continue employee benefits due to: Employers will likely continue employee benefits due to: Tax benefitsTax benefits Attracting and retaining quality employeesAttracting and retaining quality employees

20 Government Regulation of Employee Benefits The cost of legally required benefits reduces the ability of the firm to pay discretionary benefits The cost of legally required benefits reduces the ability of the firm to pay discretionary benefits

21 Changing Demographics of the Workforce Greater diversity in the workforce in terms of gender, age, and cultural makeup requires a greater array of benefits programs Greater diversity in the workforce in terms of gender, age, and cultural makeup requires a greater array of benefits programs

22 Advances in Health Care Health insurance costs continue to increase due to: Health insurance costs continue to increase due to: Increasing life expectanciesIncreasing life expectancies Aging of baby boomersAging of baby boomers Advances in medical research that add diagnostic tests and treatmentsAdvances in medical research that add diagnostic tests and treatments Higher expenditures to prolong the lives of the terminally illHigher expenditures to prolong the lives of the terminally ill

23 Responses by the Firm to Rising Benefit Costs Requiring employees to pay more for health care Requiring employees to pay more for health care Making greater investments in accommodation and enhancement benefits Making greater investments in accommodation and enhancement benefits Eliminating retiree health care insurance coverage Eliminating retiree health care insurance coverage

24 Requiring Employees to Pay More for Health Care In addition to various insurance plans, FSAs and HRAs provide an important alternative to firms In addition to various insurance plans, FSAs and HRAs provide an important alternative to firms These accounts provide employees with resources to pay for medical and related expenses not covered by higher deductible insurance plans at substantially lower costs to employers These accounts provide employees with resources to pay for medical and related expenses not covered by higher deductible insurance plans at substantially lower costs to employers

25 Increased Accommodation and Enhancement Benefits Decrease absenteeism and tardiness Decrease absenteeism and tardiness Enhance worker productivity through improved health Enhance worker productivity through improved health Education benefits may increase the skills of employees and allow for more flexibility within the workforce Education benefits may increase the skills of employees and allow for more flexibility within the workforce

26 Guidelines to Curbing Benefits Costs Employee contributions to help companies save money by requiring that employees pay a nominal portion of the benefit costs Employee contributions to help companies save money by requiring that employees pay a nominal portion of the benefit costs Waiting periods to limit participation in the benefits program Waiting periods to limit participation in the benefits program

27 Guidelines to Curbing Benefits Costs Continued Educate employees about the cost of health care Educate employees about the cost of health care Conduct utilization reviews to evaluate the quality of specific health care services Conduct utilization reviews to evaluate the quality of specific health care services

28 Guidelines to Curbing Benefits Costs Continued Use the services of independent case management companies to ensure that participants with serious health problems receive essential medical attention on a cost-effective basis Use the services of independent case management companies to ensure that participants with serious health problems receive essential medical attention on a cost-effective basis

29 Guidelines to Curbing Benefits Costs Continued Provider payment systems that begin with negotiations over amounts the system will pay participating physicians, health care facilities, and pharmacies for the duration of the managed care plan’s contract with these providers Provider payment systems that begin with negotiations over amounts the system will pay participating physicians, health care facilities, and pharmacies for the duration of the managed care plan’s contract with these providers

30 Summary This chapter has covered: This chapter has covered: Types of benefitsTypes of benefits Types of health care plansTypes of health care plans Environmental factorsEnvironmental factors Company responsesCompany responses Guidelines for cutting benefits costsGuidelines for cutting benefits costs


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