SUPPLEMENTAL CASE Controlling Employee Benefit Costs
John DeCarlo is President and CEO of Quality Auto Parts, an automotive parts equipment manufacturer and supplier in the Southwest. The company was started by DeCarlo and his father in 1968 and now employs 812 people at four different sites. Revenues and profits increased steadily from 1968 until 1992. Both were down in 1992 and 1993. During the remainder of the 1990s, both were erratic as a result of the increased foreign competition in both the auto parts industry and the auto industry itself. From 20002003, revenues have been increasing, but profitability is decreasing for a number of reasons. DeCarlo recently met with his Vice President for Finance (David Schramm) and his Vice President for Human Resources (Harriet Poster) to determine how costs could be cut so the company could price its products more competitively, relative to foreign competitors. At this meeting, he learned that employee benefit costs had increased at approximately twice the rate of increase for wages alone (12 percent versus 6 percent yearly) from 1988 to 1998. In particular, the employee health insurance costs increased from $2,184 per employee per year in 1988 to $8,316 in 2003. DeCarlo expressed frustration at these increases and asked what could be done. Foster and Schramm invited DeCarlo to a meeting of health care providers, insurers, and employers scheduled for the following week. At this meeting, they learned that their problem was quite common and being experienced by most other corporations in the area. One consultant surveyed the chief human resources executives at Fortune 500 and Fortune Service 500 corporations and found “controlling employee benefit program costs” to be the most critical issue facing these executives. Another national survey found that health benefit costs amounted to a whopping 26 percent of corporate earnings. Moreover, health care costs have grown faster than overall inflation and faster than any other segment of the economy since 1990. They also learned more about the nature and causes of this problem. Many of the speakers at the conference cited large catastrophicillness claims, increased use of mental health and substance abuse services, increased use of medical services, hightechnology medicine, costshifting from government programs (Medicare and Medicaid) to private insurance, high physician fees, the AIDS crisis, the demographics of employees in the auto industry (i.e., a higher percentage of older employees), and recent premium increases by both traditional and managedcare plans attempting to recoup recent losses. One speaker noted: “If businesses in the private sector don’t make a profit, they are not going to exist. The continuing escalation of health care costs is threatening the very survival of some companies, particularly small companies. Smaller businesses increasingly bear the brunt of the spiraling costs because they have no one else to whom they can shift their costs.” Several possible solutions were discussed, although there was no consensus regarding their effectiveness or applicability to particular situations. Among the cost containment suggestions were self insurance, utilization review, managed care (i.e., health maintenance organizations and preferred provider organizations), wellness programs, flexible benefits, cost sharing (i.e., higher deductibles and co insurance), and insuring ambulatory alternatives to hospitalization. Many speakers emphasized that employers should not wait passively for the government to solve the problem because that was unlikely to happen any time soon. In addition, health care reform raises fundamental questions about societal priorities, and there is currently no consensus regarding these questions. Health care reform is not currently a top priority of the public, and there is a strong antitax sentiment. Consequently, there is little political will to take on such reform, particularly since the failure of the Clinton health reform proposals in 1994. When Congress has intervened, it has usually made the problem worse by mandates which raise costs for insurance companies and employers.
DeCarlo came away from the conference with a greater appreciation of the complexity of the problem and a greater determination to do something about it. However, he wasn’t sure what to do. He
viewed his company as a “preferred employer” because it had always paid above the market wage rates, and its benefits were always more liberal than those of other U.S. companies and particularly those of foreign competitors. DeCarlo did not want to do anything to jeopardize his company’s advantage in attracting and retaining highquality personnel. At the same time, he realized that if no changes were made, his health insurance premiums would be greater than his total projected earnings by the year 2008. Quality Auto Parts’s present health insurance plan (Blue CrossBlue Shield) is a traditional indemnity insurance plan. All employees have one plan which makes no effort to control the health care services provided. Employees select their own physicians and the insurance company pays reimbursement for whatever services are provided at whatever price the particular provider charges. Neither physicians nor employees have a financial incentive to economize in the use of services or to seek out lowcost providers. DeCarlo decided to establish an Employee Health Benefits Committee that would report to him in one month with recommendations for containing health benefit costs while minimizing adverse employee reaction. Membership on the committee consisted of Foster, Schramm, and two other employees. You have been asked to serve as an employee member of this committee. The committee has recommended that DeCarlo consider three general options for the future: (1) stay with the current traditional indemnity policy with an average cost of $5,316 per year; (2) offer an HMO option in addition to the current plan; and (3) establish a special selfinsurance fund and negotiate preferred provider arrangements (PPOs) with local providers. (i.e., discounted prices in exchange for the directing of these employees to these providers). The committee members are split on the three options. The other employee wishes to continue with the current plan. Schramm wants to adopt the selfinsurance option and Foster wants to offer the HMO option. All three are looking to you to make a recommendation and help them reach a consensus.
1. Describe the nature and causes of the cost problem in this case.
2. What information should the committee gather before making any recommendations? Why?
3. Given the desire of most employees to protect themselves from high health care costs, is there any way for the company to continue to attract the best employees while containing health benefit costs? Why or why not?
4. On the basis of what you know about this company, which of the three specific proposals would you be likely to recommend? Can the company adopt some combination of the three options? What do you recommend and why?