Aberdeen Group: Cleaning Up the Benefits Mess

BOSTON, Massachusetts, July 26 -- The Aberdeen Group issued the following information:

Benefits management is quickly becoming a nightmare for many organizations. Traditionally, benefits managers (or HR at smaller firms) had few mandates: negotiate and manage health plan offerings and additional cost requisitions for employees, and work with finance on retirement plan offerings.

Mixed in with the mandates were a host of compliance management and payroll pre-tax filing requirements but, otherwise, the job was fairly routine. In the last two-and-a-half decades, however, obfuscation, lack of transparency, and a rising amounts of non-negotiation areas have complicated these seemingly simple, central mandates.

The Healthcare Mess

Healthcare options have become massively and unnecessarily complex, making all three branches of the healthcare sector (hospitals, pharmaceuticals, and insurance providers) complicit in the rising cost of healthcare. Hospitals' diseconomies of scales, pharmaceutical's c-suite greed, and insurance's shareholder siphoning all lead to the same result: a needless yet persistent raise in the cost of healthcare.

As the three branches twist together, the shaky combination can result in the obfuscation of plan requirements and coverage, a lack of transparency in drug and medical equipment pricing, and closed-door negotiations when determining how medical administration fits into the picture for coverage and cost.

Considering that 67% of companies manage healthcare benefits negotiations and research internally, any increase in obfuscation, complexity, or a lack of transparency leaves more than 70% of these companies at a loss.

Even if their benefits administrators know what the average health resource consumption profile is for the workforce, it's nearly impossible to determine and negotiate fair plan pricing options.

Snapshot: The Damage of Indetermination

Operating costs have risen by 2.1x over the last 5 years just from negotiation, management, and administration.

To cut down on these costs, 40% of firms either considered (or moved to) work with a benefits broker as a subject-matter-expert in the hopes of negotiating a better position to competitively manage health plan costs. While the broker did bring down the magnitude of cost increases, built-in conflicts of interest arose.

In these cases, brokers favored certain plan providers over others while still shrinking the internal pool of plan offerings. This meant that organizations were still 28% up on operating for health benefits alone.

Meanwhile, dwindling plan offerings increase the amount of time that employees spend managing their health plans, leading many to put off treatment and increasing the likelihood of declines in overall productivity.

The Finance Mess

Similar to the insurance branch of healthcare, the world of financial benefits has become needlessly complex.

The average organization negotiates a 401(k) offering with a standardized match program, but for senior management and the c-suite who generally gain more favorable offerings for doing less of the base work to directly drive revenue. Deregulated financial institutions have also creatively produced options for firms to reduce their tax burdens at the expense of employees.

Snapshot: Student Debt Repayment

Student debt repayment, a new financial benefit, offers us an example of these effects.

Repayment allows employers to offer payment as a benefit, targeting employee compensation to a specific use while avoiding payroll taxes. While employees do reduce their FICA and income tax footprint, the net loss in tax revenue reduces the social safety net and infrastructure funding pool.

The result of this model, as evidenced by a recent Columbia University case study, is that employees pick up the slack for the fallout in the form of higher out-of-pocket costs.

These costs include healthcare, public safety, educational services and retraining, and transport inefficiencies, all of which reduce productivity and increase the risk of performance-based termination.

Overall, these costs reduce net take-home pay by more than the added tax burden.

The key lesson here is that it is better to increase wages and enable employees to invest against future losses or risks. Nevertheless, the burden of both administering, justifying, and driving engagement in these benefits falls to benefits managers.

As a part of their role, benefit managers must now act as advisers to employees to optimize the landscape of what they can afford respect to the supposed benefits they will receive. Meanwhile, inside the average organization, benefits offerings have been diversifying and expanding to include among other things, internal rewards management, ancillary benefits, and voluntary benefits all designed to alleviate employee stress and personalize health and wellness management.

Cleaning It All Up

While other benefits categories exist, the mandate for benefits administrators has changed dramatically from negotiating health plan arrangements and overseeing compliance in financial and healthcare transactional management. Several models have emerged to reduce benefits teams' burdens.

Nevertheless, the most viable option is to deploy an internal benefits marketplace. Then, the team can offer benefit options in accordance with the finance team's ability to fund match or contribution plans.

Only in this model do we see an overall reduction in operating costs, paired with striking improvements in employee resource engagement and employee workplace participation.

The marketplace democratizes benefits program selection, letting each employee optimize their selections to their specific needs. In this way, employees are 3x more likely to engage in preventative measures outlined by the benefits options open to them. Furthermore, since benefits are a core component of why employees consider joining an organization, the marketplace option boosts the likelihood that more than 50% of the workforce is highly engaged and will extend their tenure over leaving for greener pastures.

Aberdeen has found that the benefits marketplace model comes out on top. The model is the only one that solidly boosts consumption of ancillary and voluntary benefits, offsetting core costs of health plan management that contribute to a reduction in operating costs.