Controlling Employee Benefit Costs John DeCarlo is President and CEO of Quality Auto Parts, an automotive parts equipment manufacturer and supplier in the Southwest. The company was started by DeCarlo and his father in 1988 and now employs 812 people at four different sites. Revenues and profits increased steadily from 1988 until 2001. Both revenues and profits were down in 2001 and 2002 and after recovering from 2003 to 2006, they were again down from 2007 to the present. As a result of declining auto sales, auto parts were also hit hard during the recent recession. In order to contain costs, the company has begun to examine its employee health benefits.

THE PROBLEM

DeCarlo recently met with his vice president for finance (David Schramm) and his vice president for human resources (Harriet Windham) to determine how costs could be cut so the company could price its products more competitively relative to foreign competitors. At this meeting, he learned that employee benefit costs had increased at approximately twice the rate of increase for wages alone (8 percent versus 2 percent yearly average increases) from 2000–2010. In particular, the total employee health insurance costs increased from $4,680 per employee per year in 2000 to $9,869 in 2010. DeCarlo expressed frustration at these increases and asked what could be done. Windham and Schramm invited DeCarlo to a meeting of healthcare providers, insurers, and employers, sponsored by the area Chamber of Commerce and scheduled for the following week. The topic of the meeting is the implications of the healthcare reform legislation passed by Congress and signed by the President in spring of 2010. Most employers did not know the details of the legislation, and there was much uncertainty regarding the legal status of some of the provisions in the legislation. At this meeting, they learned that some of the provisions might be repealed in the future. However, they also learned that taxes on such benefits would be increased, thus making such benefits more expensive to employers. This legislation made it more imperative that Quality Auto Parts and other companies offering health insurance benefits find a way of controlling the costs of such benefits. If not controlled, some forecasters have predicted that health benefit costs will be equal to the total profits of all U.S. corporations by the year 2016. They also learned more about the nature and causes of this problem. Many of the speakers at the conference cited large catastrophic-illness claims, increased use of mental health and substance abuse services, increased use of medical services, high-technology medicine, cost-shifting from government programs (Medicare and Medicaid) to private insurance, high physician fees, the AIDS crisis, the demographics of employees in the auto industry (i.e., a higher percentage of older employees), and recent premium increases by both traditional and managed care plans attempting to recoup recent losses. One speaker noted: “If businesses in the private sector don’t make a profit, they are not going to exist. The continuing escalation of healthcare costs is threatening the very survival of some companies, particularly small companies. Smaller businesses increasingly bear the brunt of the spiraling costs because they have no one else to whom they can shift their costs.” Several possible solutions were discussed although there was no consensus regarding their effectiveness or applicability to particular situations. Among the cost containment suggestions were self-insurance, utilization review, managed care (i.e., health maintenance organizations and preferred provider organizations), wellness programs, flexible benefits, cost-sharing (i.e., higher deductibles and co-insurance), pre-admission certification for surgery, financial incentives for outpatient services, use of retail clinics, development of employer health clinics, mail order prescription drug programs, health savings accounts, use of variable co-payments for different types of divisions, implementation of a disease management program, and audits of employee dependence to assess eligibility. Many speakers emphasized that the health reform legislation is not likely to contain employer costs but rather to increase such costs. When Congress has intervened in the past, it has usually made the cost problem worse as a result of mandates that raise costs for both insurance companies and employers. THE CHALLENGE DeCarlo came away from the conference with a greater appreciation of the complexity of the problem of increasing employee health insurance costs and a greater determination to do something about it. However, he wasn’t sure about his next steps. He viewed his company as a “preferred employer” because it had always paid above the market wage rates and its benefits were always more liberal than those of other U.S. companies and particularly those of foreign competitors. DeCarlo did not want to do anything to jeopardize his company’s advantage in attracting and retaining high-quality personnel. At the same time, he realized that if no changes were made, his health insurance premiums may be greater than his total projected company earnings by the year 2016. Quality Auto Parts’ present health insurance plan (Blue Cross-Blue Shield) is a traditional indemnity insurance plan. All employees have one plan, which makes no effort to control the health-care services provided. Employees select their own physicians, and the insurance company pays reimbursement for whatever services are provided at whatever price the particular provider charges. Neither physicians nor employees have a financial incentive to economize in the use of services or to seek out low-cost providers. Physician reimbursement is based upon the number of procedures they perform and the physician reimbursement rate for each procedure. DeCarlo decided to establish an employee health benefits committee that would report to him in one month with recommendations for containing health benefit costs while minimizing adverse employee reaction. Membership on the committee consisted of Windham, Schramm, and two other employees. You have been asked to serve as an employee member of this committee. The committee has recommended that DeCarlo consider four general options for the future: 1) stay with the current traditional indemnity policy with an average cost of $10,465 per year; 2) offer an HMO option in addition to the current plan; 3) establish a special self-insurance fund and negotiate preferred provider arrangements (PPOs) with local providers (i.e., discounted prices in exchange for the directing of these employees to these providers); or 4) the combination of catastrophic health insurance plan for major medical expenses coupled with a Health Savings Account (HSA) for smaller, more routine healthcare expenses. The committee members are split on the four options. The other employee wishes to continue with the current plan, Schramm wants to adopt the self-insurance option, and Windham wants to offer the HMO option. DeCarlo, the CEO, has previously expressed interest in the catastrophic plan coupled with an HSA. All four are looking to you to make a recommendation and help them reach a consensus.

QUESTIONS

1. Describe the nature and causes of the employee health insurance cost problem in this case.

2. What information should the employee health benefits committee gather before making any recommendations? Why?

3. Given the desire of most employees to protect themselves from high healthcare costs, is there any way for Quality Auto Parts to continue to attract the best employees while containing health benefit costs? Why or why not?

4. On the basis of what you know about Quality Auto Parts, which of the four specific proposals would you be likely to recommend? Can the company adopt some combination of the three options? What do you recommend and why?