Employee Benefits are Inequitable and It is Getting Worse
Updated: Sep 29, 2022
Employee Benefits programs are intended to attract and retain talent. However, talent comes in all shapes and sizes. For most employers, benefits programs are essentially, one-size-fits all. The 60-year-old with a heart condition getting ready for retirement gets the same benefits as a 28-year-old triathlete who may be living paycheck to paycheck. However, while the insurance and retirement programs are often the “same”, the value of those programs to the individual employees is much different. I will go a step further and say that they have become highly inequitable with some employees actually subsidizing the benefits of others. It simply isn’t fair. It is time for employers to start paying attention to these inequities and deliver more equitable programs.
The major driver of the inequity is the cost of health insurance. A recent New Hampshire based employer I reviewed had a health insurance plan where the employee contribution was $223/month for single coverage. This was roughly 30% of the cost. The problem with this is that the value a 28-year-old is getting for their money is much different than that of a 60-year-old. We all know that older people have higher insurance costs than younger people. However, in the employer health insurance market, most insurance companies and employers charge the same fee for all employees. This composite rating model is outdated. It was designed years ago when employers were paying for most of the premium. Now that employers are charging employees more, it has created an environment where some employees are subsidizing the cost of other employees.
For this same employer I compared the cost of a similar plan on the individual market, which is age rated. The monthly premium for the 28year-old is $399 and $996 for the 60-year-old. Using these numbers, the 28-year-old paying $223 month is paying 55.8% of the real cost while the 60-year-old is paying only 22.3% of the premium. Looking at it another way, the employer is providing the 28-year-old $176 in monthly value and the 60-year-old $773. This works out to $2112 vs. $9276 annually with the 60-year-old getting over 4 times the value than the 28-year-old.
Is this fair? It really doesn’t matter if the idea is to attract and retain talent. Going by the numbers the program is much less valuable to the 28-year-old. My 28-year-old son and 24-year-old daughter hardly view their health insurance as very beneficial. In their lives they view the cost of health insurance as a reduction in pay.
Life and disability insurance follow the same formulas for the most part. The value of a life insurance policy is much less valuable to a 28-year-old than a 60-year-old.
One does not have to look far to read about the “Great Resignation”. According to a government job report well over 20 million Americans quit their jobs in 2021 and labor shortages are evident almost everywhere. While I am not making the claim that this is due to inequitable benefits programs, an employer does need to acknowledge the value of a benefits program to attract and retain talent throughout a diverse population.
With the current one-size-fits all benefits programs what we really have is a zero-sum game. When you have one health insurance product for a population of 100 employees it will fit some and not others. If you had a lunch and only had sausage pizza some would like it and others wouldn’t. Think about how unhappy people would be if you charged them for the pizza and they didn’t like it. What does a 28-year-old paying $2500/year for health insurance they don’t use think?
Within an employee population there are winners and there are losers. If one wants to attract and retain talent, then it is important to understand who the “losers” are. And as costs continue to rise and employers increase the employee contribution the same for all, the inequities continue to grow.
The time has come to provide a more personalized benefits program designed to deliver more value across the employee population. Employers need to consider benefits that the younger and healthier employees would value. Things like college debt repayment, health club memberships, and an emergency fund come to mind. Yes, an emergency fund. With 69% of Americans having less than $1000 in the bank1, the probability of a 28-year-old employee needing funds to pay the deductible for a car accident is greater than needing to pay the deductible for health care.
The challenge is doing this while maintaining the current benefits budget, if that is a requirement. The only option would be to spend the same dollars in a different way. One way to do this is by giving employees more choice. On average, employers are buying more health insurance than many most employees need, and then they impose the costs on those employees. If an employer continues this practice, it becomes difficult to develop an equitable program.
Employers can now give employees choice of health insurance by adopting an Individual Coverage Health Reimbursement Account. This type of program allows an employer to give employees money and let them buy the health insurance they want from the individual health insurance marketplace. In my example above a 28-year-old could buy a higher deductible plan for $238. This savings of $173/month could accumulate to over $2000 in an emergency fund in just one-year. The cost for the same plan for the 60-year-old is $594, close to $4500 less expensive annually than the plan the employer had chosen. While this is one extreme example this can play out for millions of employees across America today.
If the goal is to attract and retain talent, employers need to turn their thinking upside down. Stop buying insurance products you think people want and then imposing the costs on the whole population. Start by thinking about how much you are charging employees to participate. Then give them choice and let them spend or save their own money.
1 GoBanking Rates 2019 Survey