Benefits Design and Delivery – A New Era

By Don Heilman

Governmental employers are faced with many challenges in managing benefits in today’s environment. Among those challenges: static/decreasing revenues, increasing costs, future/unfunded liabilities, workforce planning and health care reform—not to mention increasing public scrutiny.

While daunting, the current environment presents a distinct opportunity to fundamentally reassess and reposition benefits. That is, the benefits configuration creating many of the challenges is most valued by the baby boomers that are both contributing to the costs and who are entering their retirement phase. These employees in turn will be replaced with an employee population with a different level of expectations and values related to benefits, and for that matter, total compensation.

As such, now is an ideal time to strategically assess and position total compensation philosophies, with benefits integrally aligned with those philosophies. What is the goal of your compensation and benefits design? While traditional objectives have been to attract and retain, additional objectives should also be considered, such as to motivate and improve productivity.

Some benefits offered to employees are beyond the control of governmental employers, such as Social Security, statewide retirement systems, retiree health and workers’ compensation. Regardless of the degree to which an employer has control over these provisions, they should be included in this overall assessment, and aligned to the extent possible.

The two key benefit areas that present the greatest opportunity for reengineering are health benefits and paid time off. In terms of health, public employers have struggled with increasing costs, even more pronounced than in the private sector, for a number of reasons:

Aging workforce. The average age of the typical public employee is in the mid to upper 40s. As the covered population ages, their chronic conditions and increased prevalence of significant health incidents accelerates health care trends.

Prevailing practices. Public employers have, generally speaking, been less aggressive in implementing fundamental changes, driven in part by benchmarking practices that can tend to create a cyclical form of inertia, in that as employers survey and then rely on findings of “like” employers, there is a tendency to strive to remain at or above “average,” which discourages what might otherwise be rational (or necessary) changes. Moreover, benchmarking often is conducted via a series of “silos,” whereby specific provisions are assessed without knowing the context of the remaining provisions.

Retiree health. Whether driven by historical practices or state laws, retiree health care is not only much more prevalent than in the private sector, but is often subsidized. This practice, now elevated in visibility as a result of GASB 43/45, further contributes to the benefits component of total labor costs.

A first, fundamental step in reengineering health benefits is to assess the basics. Appropriate risk management through self-funding, where feasible, dynamic risk mitigation, optimizing current and evolving network developments and active pharmacy management all are keys to assuring efficiency. For example, through plan design and active management, generic substitution levels well in excess of 70 percent are attainable, and step therapy management can also favorably impact costs.

Furthermore, self-funding can afford the flexibility and data analytics that enhance the active management of underlying population health management. In addition, by demonstrating that these important steps have been taken, it sets the stage for educating and then gaining buy-in from other key constituents, including key labor representation, for other, more strategic changes.

Building on this foundation, the next iteration in reengineering health plan provisions involves the integration of rational consumerism and population health management. With appropriate alignment and organizational commitment, these attributes have been demonstrated to mitigate general health trends.

Historically, public employers have maintained more comprehensive plan designs—whether driven by collective bargaining constraints or benchmarking restricted to a narrow array of other public employers. The result of this plan design stagnation insulates employees from the realities of the underlying costs of health care. Further, since health design for active employees is typically extended to retirees, costs are exacerbated, as are GASB 45 liabilities.

Finally, as the health plan continues to command increasing employer funding, it hinders the ability of organizations to develop compensation levels that may be necessary to attract and retain younger employees who may not place the same value on benefits as more seasoned, long-term employees and retirees.

Consumer-oriented approaches can vary widely, depending on a variety of factors, but at a very basic level require a holistic approach to the level of employee cost sharing that is achieved through plan design, versus through employee contributions. Furthermore, if companion accounts are incorporated into the underlying plan configuration (whether health reimbursement arrangements or health savings accounts), a vehicle can be created to set the stage for further reengineering the nature of the benefit approach for current or future retirees—an aspect that takes on increased relevance should the current health care reform provisions pertaining to exchanges take shape.

With the stage set for a more consumer-oriented environment, engaging employees in an integrated population health management strategy logically follows. Such an approach ideally combines prevention, health advocacy and chronic condition management, so as to better—and more immediately—impact current health care costs as well as avoiding costs in the future.

Value-based benefit design, which has been shown to have merit, should also be considered as the overall plan design and management configuration is contemplated. While needing to be aligned with applicable regulatory constraints governing certain forms of consumer-oriented plans, value based plan designs are well suited to complement and engage employees in the active management of their chronic conditions, as well as overall life style and behaviors. As noted, this approach lends itself well to retiree health care provisions— most notably early retirees (i.e., retirees under age 65, and therefore not yet covered by Medicare). For Medicare-eligible retirees, increasing medical and prescription drug options that exist in the Medicare retiree insurance marketplace present opportunities for savings and reduced GASB 45 liabilities.

As explicit and implicit retiree costs are mitigated, this not only reduces current and future costs, but also the cost for past service that inflates the benefits component of total labor costs. Another common and in some cases appreciable cost for past service relates to cash-outs or other associated payouts of accrued vacation and sick leave. The paid time off continuum prevailing in the public sector may hold the greatest opportunity for reengineering, cost savings and productivity enhancement.

Common paid time off provisions include vacation, sick time and long-term disability, sometimes in conjunction with/through an overarching pension system. Within these three “benefits,” we often find the following themes:

Vacation: Appreciable carryover of unused accruals

Sick leave: Significant/unlimited carryover of accruals; payout of some portion of unused sick leave at retirement/termination; conversion of some portion of unused sick leave to vacation; creation of sick leave “donor banks” for employees with no/insufficient sick leave accruals; lack of clinical/claims “management”; unknown/unintended exposure for the underlying medical, life insurance programs

Long term disability: Lack of coordination with sick leave design, management; inefficient risk management

The results of these provisions are:

Strong sense of entitlement

Lack of consistent review/oversight/management of absences

Marginal use/misuse of sick leave

Inflated value of accruals, as hours accrued at prior, lower compensation levels are valued at current levels

Appreciable cash payouts of "deferred compensation"

Significant, possibly unfunded liabilities

The solution lies in moving away from a silo approach to a more aligned, rational and managed approach to paid time off. While the public sector has adopted these approaches more slowly than the private sector, there is evidence of change. According to “Benefits in the New Economy: 2011 IPMA-HR Benchmarking Survey Report,” the percentage of survey respondents that have paid time off banks increased from 12 percent in 2001 to 18 percent in 2011.

Furthermore, an additional 16 percent of respondents said they are considering the adoption of a PTO program.

Central to this reengineering is an objective setting process to define (or redefine) the philosophic and intended objectives relative to paid time off. For example:

How do we view paid time off? As a benefit to be used when necessary, or as compensation? How does it align with our general human resources and benefits philosophies and objectives?

What is the intent of vacation? To afford work-life balance? To allow employees time away to recharge and reenergize? To attract/retain?

What is the intent of sick leave? To address day-to-day concerns? To provide short term disability benefits?

How can we best align these provisions to meet employee needs, manage absences and improve productivity while mitigating terminal payouts/liabilities?

Finally, once a design is developed, how do we best transition from the current environment to this “desired state”?

While there are a variety of iterations that can be explored, the fundamental transformation typically involves moving away from, or substantially restricting, sick leave accruals, in favor of well designed, well-managed short-term disability (STD) program. This approach:

Addresses the entitlement, and potential abuses, inherent in traditional sick leave accrual programs,

Allows for more managed, more equitable and more cost effective delivery of benefits for legitimate absences/needs,

Better aligns with long term disability design and risk management, and

Mitigates/eliminates payouts and liabilities associated with compensable unused accruals.

Around this core theme, employers then can design their vacation/personal time/incidental sick time in a way that best suits their objectives and their needs. In doing so, the underlying philosophies and objectives should continue to serve as the foundation for the design.

For example, the STD program typically would be self-insured, but with an external party (typically the LTD insurer) either administering the program, or at a minimum, providing claims adjudication services. Service-based differentials may also be considered, if that is viewed as important/desirable, whether on a going-forward basis or merely as part of a transitional/grandfathered provision.

Furthermore, the elements of the STD design should be aligned with the objectives and underlying design of vacation/personal/incidental sick time, as well as with the LTD program. In so doing, a rational alignment can be achieved, risk management will be improved, and a more consistent, well-defined basis for determining termination of eligibility for other benefits will be established.

Vacation and incidental sick leave may continue to be viewed as separate provisions, or combined into more of a consolidated paid time off arrangement. Regardless, the underlying provisions around usage, carryover, etc., should be revised to align with the overall objectives.

The process used to achieve this transformation is a key to the ultimate success. Objective setting, data gathering/analysis, involvement of both management and key employee groups, and sensitivity to transitional considerations are all important to the ultimate outcome of the effort. Done well, you will reposition these programs as benefits, rather than compensation, increase overall productivity, improve overall employee satisfaction, and reduce costs.

What’s more, this reengineering can, and should, align with your health plan strategy. That is, themes around population health, engagement and consumerism are well suited and should carry over to a contemporary paid time off program. Moreover, this vision can be extended to a more holistic human resources and compensation philosophy. As these liabilities/costs are reduced, the opportunity is presented to address compensation needs/objectives that are “aligned” (there’s that word again) with a consistent theme that will enable you to better navigate the next several years as the baby boomers give way to the next generation.