Meet your new health plan option - Employee Communication

HR Magazine, Dec, 2002 by Kathryn Tyler

Defined contribution health care plans--the latest tool for holding down spiraling health care costs--are expected to become increasingly popular, especially since a ruling this summer makes the plans potentially more palatable to employees from a tax perspective. (For more information, see "How Defined Contribution Health Plans Work" on page 64.)

Even so, defined contribution health plans may not be an easy pill for workers to swallow. The plans place new burdens on employees, making them responsible for managing their health care dollars. For these plans to realize their cost-savings potential, employees must not only buy into them, they also must use them to buy health care services more judiciously.

For that to happen, HR professionals will likely need to pave the way with thorough and comprehensive education and implementation programs.

The core of such efforts involves helping employees understand the true costs of their health care and persuading them to buy into the idea that they have an important role in managing those costs. At some companies the education begins long before a defined contribution plan is made available to employees so they can acquire a sense of their own health costs and learn about the options available to them.

A Prescription for Business?

Defined contribution plans now account for about 2 percent of all health care coverage in the United States, experts say, but their slice of the pie is expected to grow rapidly in the next five years as employers turn to such plans in their efforts to help slow the pace of health care cost increases.

The need to rein in cost hikes is clear: In 2001, for example, employer-sponsored health insurance premiums increased 11 percent, according to the Kaiser Family Foundation. Projected rates of increase for the subsequent five years are even higher.

Some signs of cost savings attributable to defined contribution plans are already emerging. For example, Budget Group Inc., the car and truck rental company headquartered in Lisle, Ill., introduced its defined contribution option in January 2002, and about 13 percent of eligible employees enrolled. Jan Cohen, managing director of benefits for Budget, says: "We have seen a cultural shift among those employees [who signed up]. They ask more questions. They think more about the costs associated with health care as they are being treated, which may serve to mitigate costs in the long run."

Positive results have been documented at Humana Inc., a health benefits company based in Louisville, Ky. Before Humana introduced its defined contribution plan, says spokeswoman Mary Sellers, "we were experiencing 19 percent increases in premiums [per year]. Now they're down to 10 percent." The plan was made available first to a pilot group of 4,800 employees in 2001, and 6 percent of those eligible signed up. This year, the company introduced it to the rest of its 14,000 employees, and 18 percent signed up.

"The HR group needs to put a lot of time and effort into communicating" facts and choices when a defined contribution program is about to be introduced, says Sellers. "Planning is very important. We tried to give people as much information [as possible] ahead of time and also through open enrollment. We wanted to educate our employees on the costs of health care." Many people, she adds, "don't realize that a prescription isn't $5 or $10, a visit to the doctor isn't $15 to $20."

A Tale of Two Approaches

The value of advance preparation and education is well illustrated by Novartis AG, a Switzerland-based pharmaceutical giant that realized both stunning success and disappointment in two different roll-out efforts.

In its first effort, in August 2001, Novartis introduced a defined contribution health care program for its pre-65 retirees in the United States. An impressive 17 percent of those eligible enrolled in the program.

But when Novartis rolled out the defined contribution plan to U.S. employees the following January, enrollment fell short of expectations: Only about 3 percent to 4 percent of employees in the company's three business units signed up.

What happened?

It was a matter of approach, says William A. Flannery, director of compensation and benefits for Novartis' U.S. operations. In unveiling the plan for retirees, he says, "we had a longer period of time to put together communications and education. It was presented clearly, effectively and in a timely manner."

But most important, he says, the plan provider, Alexandria, Va.-based Lumenos Inc., joined Novartis in sponsoring lunch seminars in places where company retirees were clustered, such as Florida and the Carolinas. "Turnouts were exceptional in those areas, and a significant number of retirees signed up," says Flannery, noting that 21 percent of the enrollees had attended a Lumenos seminar.

But the company had a relatively short period of time--from August 2001 to January 2002--to communicate the defined contribution plan to current employees, Flannery says. And part of that time had to be devoted to explaining changes in the company's other plans as well.