By Robert Birdsell & John Marcelliano
This article is reprinted with permission from the November/December issue of PSX: The Exchange for People Strategy, an eMagazine that brings you cutting edge views and perspectives on all things related to people strategy.
Is the title of this article an oxymoron or simply a naïve attempt at a perverse tall tale? Actually, it is neither. Obviously, Obamacare was never intended to support or stimulate supplemental executive benefits, however, a concept recently developed by Grahall Partners can accomplish exactly that by using savings from health care changes to cover the cost of supplemental executive benefits. This article reveals how this is both plausible and, more importantly, achievable.
The review begins with neither Obamacare nor Executive Benefits, but rather the challenge created by the ever-increasing cost of health care. Most companies are struggling with the rapidly rising cost (both to the company and the employee) of providing health insurance post Obamacare. Many companies with whom we have spoken do not see a light at the end of the tunnel and are desperately seeking solutions to this challenge.
The question is simple, “How can we continue to provide high quality health insurance for our employees and not substantially increase our cost?” It appears most solutions offered by the so-called benefit gurus have more to do with restructuring existing medical plan design and transferring additional cost to employees.
Now that is a novel approach . . . right?
The genesis of the concept that motivated us to write this article occurred recently. A new client project involved two issues:
The frustrations expressed by the client were shared by many organizations but prior to this project these concerns were addressed separately rather than as a single issue. After all, companies tend to keep broad-based employee benefits far away from the subject of Executive Benefits. But a new paradigm where one benefit plan can, in fact, be used to support another might provide a holistic solution.
Regarding Executive Benefits, there have been dramatic changes over the past several years. Few companies are seeking new strategies to expand their existing Executive Benefit portfolios for two reasons: 1) new executive benefits strategies require an additional expense which few companies are prepared to accept; and 2) executive benefits are subject now to paralyzing regulations. Unless these issues can be addressed to the satisfaction of all stakeholders, nothing can get done in the area of executive benefits and the status quo will continue.
New Medical Plans Generate Savings (Without Substantial Impact to Employees)
Co-author John Marcelliano said, “In my prior careers as Vice President of HR, I was charged with the responsibility of creating a methodology that would both reduce the company’s cost of medical care with minimal impact on employee costs.” You might think that sounds impossible, right?
After analyzing many options, Marcelliano took an unorthodox approach that was rather simple, but, in the end, resulted in a reduction of over $700,000 in the company’s health insurance cost in just one year. This was done without substantially impacting costs for the population of 1,500 employees.
• First, an employee could retain the existing PPO Plan with a higher premium than the prior year based on medical trend.
• Second, the employee could elect a High Deductible Health Plan (HDHP) with an In-Network deductible of $1,500 for individual and $3,000 for family coverage ($3,000 / $6,000 Out-of-Network) with employee payroll contributions set at about half of the cost of the PPO plan.
Those who elected the HDHP were also eligible for company-paid supplemental benefits including a $5,000 Critical Illness Plan and a Hospital Indemnity Plan which pays $1,500 per hospital admission and $165 per day for up to 60 days per year. In addition, the company made a Health Savings Account (HSA) contribution of $300 individual/$600 family for every employee who elected the HDHP.
Approximately 30 percent of the total employee population elected the High Deductible Health Plan. The employees were especially appreciative of the contribution to the HSA plan which can be carried over from year-to-year if not used to pay current medical purposes and is portable should the employee leave the company.
The company employed the savings that resulted from this new strategy to partially offset the cost of the new company-paid supplemental plans and HSA offered to employees who elected the HDHP. But only about 25% of the savings was required to fund those new benefits. The cost savings realized from those who elected the higher deductible plan was approximately $3000 per employee. The cost of providing the new supplemental benefits was approximately $300 per employee. Adding in an average contribution to the HSA of approximately $400 resulted in a net annual savings of about $2,300 per employee.
These new found savings provided both an opportunity and a dilemma to the company. The company could do whatever it desired with the savings achieved by restructuring the existing health plan since each employee had a choice to either retain the existing PPO coverage or elect to participate in the new High Deductible Plan alternative. Furthermore, based on the results of the first enrollment where approximately 30% elected the High Deductible plan, it is likely that number will increase in the future, particularly as costs for the traditional PPO plan continue to escalate with medical inflation.
More and more employers are moving to HDHPs as medical plan costs increase and as the Affordable Care Act’s “Cadillac Plan Tax” approaches in 2018.
Deploying Additional Savings
Co-author Robert Birdsell realized that the opportunity presented was to use additional savings could to fund an Executive Benefits plan.
The dilemma: since none of the employees were forced to elect the HDHP, if the company used part of the savings to fund a benefit program designed for senior managers and executives, would the company be subject to criticism?
The rationale for allocating some of the savings to fund a new executive benefit plan involved the fact that no new executive benefit plans had been adopted for some time, and in order to remain competitive and attract and retain the key personnel needed to grow the business, it was a strategic use of the realized savings.
Many companies are taking the “easy way out” in an effort to reduce employer cost of medical insurance by simply restructuring benefit plans and shifting additional cost to the employee. We maintain that many employees will feel that approach is unfair.
Instead, a company could elect to adopt a program as described in this article which creates a win-win for the company and for employees who elect the HDHP. Considering the objective to remain competitive and attract key staff at every level, a company could choose, for example, to allocate some savings from the health plan for a supplemental executive benefit program. The incremental cost to the company for this enhanced executive plan is zero!
Although there are many types of executive benefit programs that could be adopted, below are examples of simple programs where savings are allocated to each executive based on his/her total compensation
First, the executive could elect to have his/her allocation applied to offset the cost of an individual disability income policy.
Second, if a disability income policy was not needed, the executive could have the allocation used to offset the purchase of a new individually owned and controlled life insurance policy.
Third, the executive could divide his/her allocation between the two benefits described above.
Under the options above the policies will be guaranteed issue, (no medical underwriting required) something that the executives and managers cannot secure on their own, and the cost is totally deductible by the company and reportable as additional compensation by the executive.
In summary, by integrating two seemingly separate issues, we were able to address two problems without adversely affecting any employee group. Everyone came out a winner. All employees could either elect to keep the higher cost medical plan or elect to take a High Deductible Plan but gain additional financial protection and benefits because of the company-paid supplemental programs designed to offset and cover the high deductibles and out-of-pocket limits.
Equally important, for those who did not have current medical expenses, the company’s contribution to the HSA would be distributed to the employee after retirement or termination.
The other benefit realized from this strategy involved the opportunity to fund a valuable Executive Benefit plan with only a partial reallocation of the savings resulting from the medial insurance plan: a strategy that helps to attract, retain and protect the company’s key leadership team.◘◘◘