Putting medical under the knife

Dean Sexton is taking a hard look at two benefits this year: 401(k) and medical. With only 15 percent employee participation in the 401(k) at his 100-truck company, Sexton questions its value and may end the program altogether this year. Eliminating health insurance, however, is not an option. It’s really the only benefit drivers care about, he has discovered.

“A driver wants to know what you’re going to pay him per mile,” says Sexton, president of D&D Sexton Inc. in Carthage, Mo. “They ask about layovers, detentions and weekends off. Those are the things they want to see,” he says. “Drivers by nature are a different group.”

As the most requested benefit, health insurance is also the most expensive and is expected to continue climbing 10 percent a year, according to the Employee Benefit Research Institute. Some may feel the only solution is to pass cost increases to employees. For this reason, defined contribution and flexible spending plans are becoming more popular, says Paul Fronstin, Ph.D., an employee-benefits research analyst at EBRI.

It is possible, however, to stave off increases and actually cut premiums with “alternative” health plans. These plans involve more risk, but considering your options – offering less coverage or passing on more costs to employees in a tight labor market – it could be a risk you’re willing to take.

Cut carefully
Employees notice if you modify your medical benefits package. Passing more of the costs on to employees can lead to insecurity and lower morale, says Ken McDonnell, a research analyst at EBRI. In addition, your plan’s rules can have fundamental implications for your workforce.

Many companies, for example, wait 90 days before offering new employees health insurance. Given that drivers and other employees often decide within the first couple of month whether they will stay at a carrier, lack of health benefits might contribute to turnover.

Denny Transportation, a 60-truck carrier in Jeffersonville, Ind., begins medical coverage the first of the month after 30 days employment. The trucking company also pays full single-employee coverage, says Tricia Denny, director of human resources.

“Benefits are one of the first few questions drivers ask about over the phone,” Denny says. “We’ve been doing it this way for 15 years, so it’s hard to say if it’s made a difference, but when talking to folks, they ask when it is available. Generally they are very pleased with it.”

Denny says the company has done “fairly well” in keeping turnover low – generally about 20 percent – but it has increased over the past two years as other carriers have lured drivers away during the driver shortage. Offering health insurance before the typical 90-day wait may cost a few hundred dollars, but it’s worth it, Denny says. “It’s one of those intangibles. You can’t quantify it as far as retention goes.”

EBRI’s Fronstin recommends starting medical coverage as soon as possible. “Delaying medical coverage goes against the whole notion of managed care,” he says. “Many employers have done away with waiting periods because of the existing health condition of their employees.”

No simple solutions
Giving employees full coverage starting in as little as 30 days is becoming more difficult, however. Like other employers, Denny Transportation may have to budget its health care costs and pass increases to employees if premiums rise again, Denny says. This approach, called defined contribution, is a growing alternative to splitting costs with employees.

In a defined contribution arrangement, the employer passes all future increases to the employee. A.W. Temple Trucking, for example, allocates $116 per month for each employee, which “almost covers single coverage,” says Jack Bennett, vice president of the 60-truck carrier in Chesapeake, Va. When recruiting drivers, the defined contribution, as opposed to paying full coverage, has not made a difference with recruiting or retention compared to when the company paid full coverage, Bennett says.

Defined contributions aren’t limited to separate benefit accounts, such as health insurance. Some companies define a contribution for their employees’ total benefit plan, including insurance and retirement savings. This approach is typically called flexible spending accounts.

Justus Truck Lines, a 17-truck carrier in Hendersonville, N.C., gives its employees $200 of credit each month to choose from a variety of benefits, such as health, dental and life insurance and retirement, says Susan Justus, the secretary/treasurer. Employees can choose their own provider. Justus writes checks from a separate business account to its selected providers. If the employees don’t use the money or credits, they lose them at the end of the year.

Budgeting is the main reason Justus Truck Lines has flexible benefits; $200 per month is all the company can afford, Justus says. One advantage of flexible benefits is that employees get more choice, but with limited funds, employees often get fewer benefits, considering the high cost of health insurance.

“Flexible benefits haven’t saved a whole lot of money,” Fronstin says. Because until recently the labor market has been so tight, employers have been forced to increase what they allocate to flexible spending over time, he says.

One alternative or supplement to flexible spending is a section 125 plan, often called a cafeteria plan. A 125 plan gives employees discounted access to benefits at no additional cost to the employer. The employee realizes savings because the money he contributes is deducted from his income before taxes, thereby reducing his income tax liability.

Denny Transportation offers a cafeteria plan. “It’s completely optional. Employees can pick and choose from the different plans offered. We offer cancer, hospital indemnity and additional life insurance,” Denny says. “It’s totally payroll deductible.”

Going it alone
Another course many companies take to manage costs more closely is to self-fund or partially self-fund their medical coverage. Self-funding, which probably is appropriate only for very large companies, means that the employer acts as its own insurer – covering all medical expenses through funds it controls, such as company monies and payroll deductions.

A more comfortable approach for most companies is partial self-funding. The company handles all claims under a certain ceiling and takes out insurance policies to cover catastrophic losses above a certain amount. In effect, it’s an insurance policy with a huge deductible. Partial self-funding is not without risks, however.

Two years ago, faced with high increases in health insurance premiums, Sexton decided to partially self-fund D&D Sexton’s health insurance. Without taking this approach, Sexton would not have been able to maintain the company’s full range of benefits – medical, dental and vision.

“Through the years, we’ve stuck with traditional health insurance,” Sexton says. “We would take a quote and pay it, but the problem is that I never saw the bills. With self-funding, every time you watch your losses.”

Like other companies that partially self-fund, D&D Sexton bought stop-loss coverage, also known as re-insurance, to protect its assets from catastrophic medical claims. Sexton bought stop-loss coverage for two areas: individual ($20,000 per employee) and an aggregate stop-loss coverage of $3 million. Benefit Management Inc., a third-party benefits administrator in Joplin, Mo., managed the partially self-funded insurance.

Partially self-funded insurance looked great on paper to Sexton. Even taking the worst-case scenario, it seemed he would save money, he says. Self-funding has turned out to be very costly for D&D Sexton, however. Several drivers had some unexpected, and very expensive, health problems.

“At the end of our second year of doing it we were semi-whopped, then we revised it and we got hurt worse,” Sexton says. “We were rolling the dice, but we rolled them too early. If you didn’t have health problems, you could save a lot of money. We’ve tried working on wellness programs to teach drivers to be smarter and healthier, but all they want to hear is how much they are going to make. They don’t want to be told what to do,” Sexton says.

Most companies above 100 employees at least partially self-fund their health insurance, but any size of company can do it, says David Powell, president of Benefit Management Inc. Bigger companies have an advantage because they can tolerate more risk, set higher stop-loss coverage, and thus get cheaper rates. The key to successfully self-funding health insurance is to find the right stop-loss coverage by projecting your risk, Powell says. Sexton admits his losses were partially his fault.

Sexton notes that as his company grew he had failed to take into account changing characteristics of his workforce, such as the addition of older drivers. “I’m sure going to look at other options.”

As D&D Sexton has found, saving money on medical insurance often involves quite a bit of trial and error and tweaking here and there. Employers face differing characteristics among their employees that affect the likely cost of health care, and they often must weigh the unpredictable expectations of current and prospective employees. With all the variables and unknowns, it may seem like performing surgery blindfolded.