Using flexible benefits as a communications tool - between employers and employees on the cost of health care

Business & Health, July, 1993 by Barbara Starr

When used as a vehicle for communicating the cost of health care, flexible benefits can be a mechanism for empowering employees.

Communicating the true cost of health care to employees is one of the most critical tasks employers face today. For the last several years, a growing number of employers have turned to flexible benefits as a means of controlling their health care costs. Now, both large and small employers increasingly view flexible benefits as an important vehicle for controlling costs and for communicating the cost of health benefits.

In addition, flexible benefits can provide employers with the opportunity to share more of the costs with their employees, particularly if an employee wants a richer benefit than the employer normally would provide. The result is that the employee becomes empowered: He is better able to make choices about benefits that best suit his needs and he can decide what benefits he is willing to pay more for.

"Communication is the key issue," says David Schorr, managing consultant at A. Foster Higgins & Co. Inc., New York, a benefits consulting firm. If successful, employees make better informed decisions and employers may see costs decline, he says.

Indeed, in a recent survey by Hewitt Associates, benefits consultants in Lincolnshire, Ill., "increasing employee understanding of benefits" was cited by 62% of 472 responding employers as the reason for implementing flex.

It's difficult to estimate financial savings garnered solely from better communication. But when communication strategies are effective, then "flex gives employees a better sense of the total cost of each benefit and the relative costs to them," says Michael McAllister, a benefits communications consultant with Foster Higgins.

The term "flex" covers a wide variety of employer strategies that involve offering choices to workers. Some employers offer full-scale cafeteria plans that qualify under Section 125 of the Internal Revenue Code. Section 125 plans allows employees to put aside pretax dollars in a flexible spending account to pay for unreimbursed medical costs, child care, and other expenses. Often employers combine employer provided credits (which enable employees to buy health care benefits) and employee flexible spending accounts (which allow employees to finance buying benefits).

Letting employees decide

When an employee has to decide how to spend credits, he makes decisions based on value. "Flexibility in having choices with different values focuses employees on the cost of benefits," says Richard Brown, manager of international benefits and special benefits projects, for the Chrysler Corp. Flexible plans "definitely communicate a total cost to the employee," he says.

Chrysler uses flexible benefits as a cost-sharing and an empowerment tool. For the last eight months, the automobile manufacturer in Highland Park, Mich., has had an 11-person in-house committee look at how other large employers develop, communicate, and administer the health care benefits portions of flexible benefits programs.

A recent in-house survey revealed that employees were confused about the array of health care choices in the flex program that Chrysler offers to its 19,000 salaried non-union employees, Brown says. For example, employees can choose from among six different health plans, and they can make decisions regarding participation in flexible spending accounts, dental coverage, disability, and life insurance.

Establishing the panel was a "recognition that our program is a complex one and not as well understood by employees as we would like," says Brown.

From among the six medical plans, employees can choose one of four PPOs, ranging from a $200 individual deductible ($250 for a family) to a $1,500 deductible ($3,000 for family), an HMO, and a Blue Cross/Blue Shield plan. In addition, employees can choose to opt out of any Chrysler-sponsored health care plan.

Since employees can earn extra benefit credits for meeting certain wellness criteria and because workers are encouraged to make their own benefits decisions, the program is also an empowerment tool. The company offers each participating employee $2,060 in medical credits and as much as $5,220 for a family. These credits are applied against "price tags," or the amount it costs Chrysler to provide such benefits. Employees also receive a maximum of $120 in credits for meeting six of seven health criteria: acceptable blood pressure, no tobacco use, acceptable cholesterol levels, regular exercise, seat belt use, limited use of alcohol and no drug abuse, and healthy body weight. If fewer than six criteria are satisfied, Chrysler gives the employee a $20 credit for each one that is satisfied. Credits may be spent on benefits, but may not be taken in cash.

Here's how it might work. An individual receiving $2,060 in credits, for example, can apply them to a PPO with a $200 deductible, a plan that has a price tag of $1,780. The worker could use the balance of $280 for unreimbursed medical expenses or to buy other benefits, such as vacation days. As many as five vacation days can be bought or sold. Proceeds from the sale of vacation days can be used to buy other benefits, such as dental care, or deposited in a spending account. Section 125 has no limit on how much can be set aside. With dependent care plans under Section 129 the limit is $5,000.