Wednesday, March 28, 2007

The Black Hole in Your Benefit Plan I

The International Foundation of Employee Benefit Plans recently completed a survey of their membership on Salary Continuation and Short Term Disability (STD) which you can find for free here.

The survey revealed that salary continuation/STD is the black hole of employee benefit plans in terms of quantifying cost and controlling utilization.

Reasons cited for the difficulty of quantifying cost and controlling utilization and effecting changes are;
  1. Union Contracts
  2. Employee perception of value (Did anyone explain the probability of disability and the impact on employees of a sickness or injury which prevents work?).
  3. State Mandates like CA Paid leave (Huh?)
  4. FMLA Integration ( the machine is so well oiled and automated it cannot be improved?)
  5. Management Buy-in (Did anyone explain the facts and costs?)
  6. Entitlement (getting warmer!)
  7. A lenient culture that does not enforce return to work (getting hotter!)
  8. Most of the plans are payroll matters not ERISA plans (red hot, since employer cannot enforce plan terms and win an ADA challenge since payroll plans are not bonafide employee benefit plans

The survey further noted that medical and 401(k) are the most important benefits to their employees but when employers were asked to rank benefit dollars in terms of value to employees $100 as the reference point they indicated the breakdown was;

Medical $22
Paid time off $16
401(k) $16
Pension $13
Disability $12
Dental $11
Life $10

What we have here is failure to communicate. This is severe information asymmetry. Unfortunately it is all too common and there is a perfectly sequential explanation why the STD/Salary Continuation black hole continues to suck in dollars at an alarming rate. Here is the plot in this movie which I have seen dozens of times at Fortune 1000 firms.

  1. EMPLOYERS GET THE BEHAVIOR THEY TOLERATE in Salary continuance Plans.
  2. It is an entitlement to the employees and it is easy to get a doctors note.
  3. The entitlement becomes ingrained in the workforce and eventually the culture.
  4. Consultants focus so much on Health care and Retirement which are perceived to be of utmost importance to employers they never develop proficiency in disability. They do not want to call in subject matter experts from their own firm as that would eat into their own billable hours.
  5. Where the plan is outsourced it remains a pay matter so the TPA is hamstrung and its ASO anyway so who cares if most claims are approved and their durations are unmanaged. You do not manage an entitlement. You only limit its scope.
  6. So the whole ticking time bomb that is the STD/Salary continuance time bomb gets buried deep in the woods where it is never found hopefully.
Sometimes, the scope of the problem becomes evident during an RFP process and things change. Other times the CFO or another senior management does some back of the envelope math and quickly digests the magnitude of the problem, ideally after meeting with me for 30 minutes and hearing the financial ROI associated with change and asks for options.

The thing about a black hole is you can look at it up in the sky almost any night and be completely unaware of its existence, but if you get to close it crushes you. So its better to deal with the black hole before it deals with you. Your move.

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