77. CASE: CONTROLLING EMPLOYEE HEALTHCARE BENEFIT COSTS
I. OVERVIEW:
This case focuses on the problem of rapidly rising employee health benefit costs. This problem
appears to be universal. The gap between health-care in/a0on and general in/a0on which appeared to
be widening in the early 1990s is now narrowing as corporation pressure health care providers through
managed care and employer coali0ons.
In the present case, a small automobile parts equipment manufacturer and supplier is
experiencing a threat to its very survival due to rising employee health insurance premiums. Many of
their competitor do not provide health insurance to their employees and these companies can
underprice their products rela0ve to those of Quality Auto Parts. While management is aware that
employee health benefits’ costs will need to be reduced, they are also aware that these benefits are
extremely important to most of their employees. Several other companies in their industry have
experienced costly strikes and/or lost excellent employees over the issue of health benefits.
II. OBJECTIVES:
1. To make students aware of the seriousness of the health-care cost crises and its
potential impact on wages, employment, profit, and the ultimate survival of some
organization.
2. To sensi0ze students to the complexity of the problem, the fact that “tradeo?s” are
necessary, the range of possible alternative, and lack of any single “magic bullet”
which will solve this problem.
III. DISCUSSION:
The major problem here is a lack of sophis0ca0on of the part of Quality Auto Parts management
to actively manage their employee health costs in an environment where no one else (i.e., government
and their insurance company) is willing or able to do it for them. A lack of sophis0ca0on concerning this
issue is not at all uncommon among corporate executive since their focus is on their own business and
industry. However, if these benefits (and their associated costs) are not understood and actively
managed, they could threaten the survival of many small companies and the compe00ve position of
some larger ones. Students should read, (either in their text or other sources) about what steps
employers are currently taking to contain their health benefits costs. Some of these possible solution
are noted in the case itself. In addition to those listed, students might also consider whether the
company should provide economic incentive for healthy behavior (i.e., smoking cessa0on, weight
reduction, and exercise) and elimina0on or reduction in benefits for self-imposed condition such as
alcoholism or drug abuse.
IV. ANSWERS TO CASE QUESTIONS:
1. Describe the nature and causes of the employee health insurance cost problem in
this case.
The company has not managed its health insurance costs at all. In particular, it has not created
incentive for employees to stay healthy and minimize their use of expensive health services. Like any
2. What information should the commiEee gather before making any
recommendation?
The local health-care coali0on should have data concerning average utilization of particular
services, hospitaliza0on rates, average length of hospital stay, and average costs for particular services
for each provider. The objective should be to gather similar data from their own insurance company
Once the particular problems are identified, then the commiEee will be in a beEer position to
recommend solution. If employees of the company are considerably more likely than employees of
other companies to be treated for particular condition, the causes of the apparent over utilization might
If particular health-care providers tend to be signiticantly more expensive than others in
providing particular highly utilized services, the commiEee may want to recommend restructuring the
benefits to either not allow employees to receive services from these providers or providing incentive
In any case, it is important to understand the nature and causes of the cost in/a0on problem
before aEemp0ng to propose solution Even if the solution proposed do not have an immediate
3. Given the desire of most employees to protect themselves from high healthcare
costs, is there any way for Quality Auto Parts to continue to aEract the best
employees while containing health benefit costs. Why or why not?
The company needs to be careful as it restructures its health insurance option to make sure it does not
alienate large numbers of its current employees. The goal should be to contain health benefit costs
without shiIing a signiticantly high proportion of such costs to employees. This requires that health
4. On the basis of what you know about Quality Auto Parts, which of the four specific
proposals would you be likely to recommend and why? Should the company consider
adop0ng some combination of these proposals?
The first op0on of staying with the existing insurance policy does not appear feasible since it into
sustainable long term. That which is not sustainable will not be sustained. The current policy is
The second op0on of o?ering an HMO op0on in addition to the current plan will do liEle to
contain costs. As pressure on HMOs increased as they denied enrollees access to certain
procedures, public and political pressure mounted for them to become more /exible. As a
The third op0on, self insurance with nego0ated prices with local providers, might o?er some
The fourth op0on, a catastrophic health plan together with a health savings account (HSA) for
routine services would have the advantage of creating strong incentive for employees to shop
The students may choose some combination of option three and four which will create employee
incentive to carefully consider the costs of the health services they access while also allowing the
78. CASE: DOMESTIC PARTNER BENEFITS
I. OVERVIEW
This case addresses the view of domestic partner benefits in a religious hospital in the South.
The dominate regional and ins0tu0onal culture is quite conserva0ve. Yet the facility needs
to be compe00ve in terms of employee benefits in order to aEract and retain needed
personnel.
II. OBJECTIVES
1. To sensi0ze students to the issue of domestic partner benefits and the rela0ve
consideration both before and aIer implementation of such a policy.
2. To cause students to consider implementation strategies for domestic partner benefits.
III. DISCUSSION
While domestic partner benefits are not controversial in larger ci0es on the east and west
coasts, and in larger companies, they are far less common and more controversial in the
Midwest, Deep South, and Mountain States. They’re also less common in religious intui0ons
which tend to support “traditional marriage.”
The challenge in this case is how to be compe00ve in terms of employee benefits in order to
adequately sta? the facility with needed human resources. The impediments to doing so in
this case are the traditional conserva0ve cultures of both the organiza0on and the region.
IV. ANSWERS TO CASE QUESITONS
1. Would you recommend that Joan Collins bring this issue before the CEO and the Board of
Directors and recommend implementation? Why or why not?
We recommend a presentation to both that emphasizes the potential recruitment and
reten0on benefits to the facility if such benefits are o?ered as well as the downside if they
2. If you believe that Collins should recommend implementation of domestic partner
benefits, what are the potential benefits to Bap0st Hospital, and how should she
document these?
The potential benefits of adop0ng such a policy could be documented by
examining results of other similar facilities that have implemented domestic partner
benefits. For example, Collins could do a comparison of turnover and reten0on, staOng
levels, un+lled positions, 0me to +ll positions, the ratio of applicants to persons hired,
Then the above potential benefits, if they exist, could be translated into
potential dollar savings if such a policy were to be adopted. As a strategy for
implementation, perhaps she could suggest a trial period where data could be gathered
3. What are the potential disadvantages to the hospital and what steps should she
recommend to address these disadvantages?
As a conserva0ve religious ins0tu0on, the implementation of domestic partner benefits
would seem to be an0the0cal to its religious teachings which emphasize traditional
marriage. Such benefits are controversial even in public or secular institution. This
action could provoke a backlash of some members of the Church and the community.
As noted above, Collins need to +nd one or more advocated who would help her make
the business case for domestic partner benefits as well as support the argument that
such benefits are “fair.” The fairness issue concerns the fact that married employees
have certain health and pension benefits not available to single individuals whether they
4. Do you see any di?erences between heterosexual domestic partners and gay domestic
partners in terms of the health benefits which should be provided? If so, how would you
di?eren0ate the two and why?
Health benefits should be similar for both. Family coverage should cover health services
provided to both types of domes0c partners (heterosexual and gay) if domestic partner
5. Are you aware of any companies that provide domestic partner benefits, and if so, how
e?ec0ve have these programs been in aErac0ng and retaining employees?
A number of large companies now o?er such benefits including Disney, MicrosoI, Cisco Systems, Google,
Unfortunately, there isn’t much “hard data’ on the impact of domestic partner benefits on employee
recruitment and reten0on. However, anecdotal evidence is quite posi0ve in that companies indicate
6. Is there any research on domes0c partner benefits, and, if so, what does this research
show?
While research on the issue is sparse, it seems to show that in industries where
domestic partner benefits are prevalent (i.e., entertainment, high technology,
hospitality, state and local government, etc.), seem to have a compe00ve advantage in
In recent years, a signiticant percent of heterosexual couples live together before or instead of formally
marrying. Moreover, gay couples are now more open about their lifestyles. As a result, the social s0gma
associated with domestic partner benefits has declined and employers have met less resistance to such
79. EXERCISE: FLEXIBLE BENEFIT PLAN CHOICES
I. OBJECTIVES:
1. To familiarize students with how /exible benefit plans work.
2. To give students an understanding of some of the benefits o?ered in a /exible
benefit plan.
3. To give students experience in selecting benefits.
4. To give students an understanding of the criteria individuals use in selecting benefits.
II. OUT-OF-CLASS PREPARATION TIME: 10 minutes to read the exercise and select benefits.
III. IN CLASS TIME SUGGESTED: 30-40 minutes
IV. PROCEDURES: SEE Text
V. DISCUSSION:
Many firm are now o?ering employees the opportunity to choose some of the benefits they will
receive. In order to make these choices, employees must become far more familiar with their benefits
than in the past. Also, since employees must live with the consequences of their choices, these plans
place far more responsibility upon them. In making benefit decisions, employees must look at their own
individual situation to determine the right choices. The benefits that may be appropriate for one
employee may be totally inappropriate for another. The real issue becomes what criteria should be used
in selecting benefits. This exercise is designed to get students to examine these criteria.
VI. DEBRIEFING THE EXERCISE
The debrie+ng of this exercise should begin aIer each group prepares a list of criteria used in
making the benefit selections and writes them on an overhead or blackboard for all of the class to see.
To facilitate this, the instructor could write the name of the benefit on the blackboard or overhead and
then ask students to write the criteria they used to determine if the benefit should be selected
underneath the benefit. Thus, for each benefit, the board will show a composite class list of criteria. To
save 0me and space, groups can be told to write a criterion on the board only if no other group has
wriEen it. There is no need to repeat or duplicate a criterion. Also, it should be mentioned that the
instructor may want to shorten this exercise by telling students to exclude some of the benefits or by
asking only one group to examine each benefit and present criteria. A discussion of the di?erent
benefits is presented below.
Pre-tax Health Care Premium Payments
While most employees will want to provide for their own health care, there are several
condition that may lead employees to opt out. One of these is when an employee is already covered
under someone else’s health play. For example, if one’s spouse works at a firm that already has a plan
then there is no need to duplicate coverage. Also, employees might opt out if they are desperate for
money and simply can’t a?ord the plan. So, there are at least two criteria involved here: 1) is the
employee covered under another plan? and 2) Can the employee a?ord the plan?
Flexible Reimbursement Accounts
Two di?erent /exible reimbursement accounts are being o?ered by the firm. One is a medical
reimbursement account and the other a dependent care account. Both of these have the advantage of
allowing employees to set aside money for expenses on a pretax basis. However, as of this writing, the
account is a “use it or lose it” account (the government is considering a proposal to remove this feature).
Some of the criteria that could be used in selecting the medical reimbursement benefits are: 1) Does the
employee have signiticant medical expenses above and beyond those covered by the regular health care
plan? 2) Are these expenses covered under some other person’s plan? 3) Can he/she predict these
expenses somewhat accurately? With regard to the dependent care account, one could ask: 1) Does the
employee need to spend money on dependent care expenses, such as child-care? 2) Can these expenses
be predicted with reasonable accuracy? 3) Are these expenses covered under someone else’s plan such
as a spouse? For both types of accounts, one also needs to ask: Are the expenses for either of the two
accounts signiticant enough to jus0fy completing all of the necessary paperwork? Students need to
realize that these accounts require work on their part. They need to clearly know which expenses will be
reimbursed and which will not. In addition, they must save all receipts, complete forms, and then wait
to be reimbursed. If mistakes are made by anyone, it requires even more 0me.
retirement
This plan is o?ered by the firm automa0cally so no choice needs to be made.
Employee Stock Purchase Plan
The firm’s plan allows an employee to purchase the firm’s common stock at a 15% discount. To
determine if an employee should select this op0on, he or she needs to examine whether purchasing the
firm’s stock would be appropriate in light of other investments the employee already has and his/her
goals. Financial planners would call this an asset alloca0on issue. Then, assuming owning more stock is
appropriate, the issue becomes whether owning this particular firm’s stock, even at a discount, is the
best stock investment available. This involves comparing di?erent stocks to determine which is the best
choice. It is important to note that many financial planners would cau0on individuals not to purchase a
large amount of stock in the company they work for. The reason is that if the firm collapses, employees
take a double hit—their job is lost and so is their stock investment. One other issue relating to this
benefit is when the stock can be sold? If the stock can’t be sold for several years, the employee will need
to wait un0l then in order to get his/her money out. Some don’t want to or can’t wait that long. A final
criterion for selecting this op0on would be whether the employee can a?ord to buy stock or does he/she
need money for other expenses? Students need to be reminded that if an employee does not
understand stocks and the stock market, buying stock in any company is inappropriate. They should not
be lured into making a purchase just because a discount is being o?ered.
Life Insurance and Op0onal Life Insurance
The firm is providing life insurance to all employees so the only issue is whether they should
purchase additional insurance. Among the criteria to consider here are: 1) What is the health condi0on
of the employee? 2) Does the employee already have other life insurance? 3) Does the employee have
a need to own more life insurance than the firm already o?ers? 4) Can the employee a?ord more
insurance in light of other expenses?
Op0onal Long-term Care Insurance
Long-term care insurance is becoming more and more popular in light of the aging population
and the increased cost of long term care. Among the criteria to be considered here are: 1) What is the
health condi0on of the employee now and what is the likelihood of needing long term care in the
future? 2) Will the employee have suOcient assets in the future to pay for long-term care or will she/he
qualify for Medicaid so that the government will pay for it? 3) How much will the insurance cost and is it
worth it in light of other expenses? It should be mentioned that most long-term care policies provide for
a large number of option. Students need to realize that selecting a policy is not simple. It requires that
they carefully read each op0on to determine which ones they want.
Op0onal Long-term Disability Insurance
Long-term disability insurance provides employees with income in case they become disabled.
Several criteria need to be considered here including: 1) What is the health condi0on of the employee
right now and what is the likelihood that he/she will need this insurance in the future? Part of the
answer to this question will depend on how safe the employee’s environment is now and will be in the
future, both on and o? of the job. 2) Does the employee have suOcient income from other sources or
assets to cover expenses if he or she becomes sick or injured? 3) Can the employee a?ord this
insurance, or are other needs more important?
Personal Accident Insurance
This policy pays for losses due to accidents. The criteria to be considered are the same as for
Op0onal Long-term disability insurance.
transportation Reimbursement Account
This benefit allows employees to set aside pre-tax money for use in paying for parking or for
mass transit/van pooling. Several criteria to be considered here: 1) Does the employee currently need to
pay for these items out of aIer tax funds? If so, he/she could save money by using this account since
taxes would be saved. 2) Is the savings on these accounts worth the e?ort to +ll out all of the
paperwork?
Op0onal Pre-Paid Legal Plan
Among the criteria that could be considered in selecting this benefit are: 1) Does the employee
an0cipate the need for the legal assistance o?ered during the period covered? 2) Would the expected
costs of the needed legal assistance exceed the $19.20 per month premium? And, 3) Can the employee
a?ord the policy in light of other expenses?
Tui0on Assistance
The firm is o?ering tui0on assistance for full 0me employees, so while workers have no costs for
tui0on, they do have costs associated with books, travel, and use of their own free 0me. So employees
need to consider at least the following: 1) Does the employee have funds to pay for books and travel? 2)
Does the employee have transportation to get to the college? 3) Does the employee meet the
requirements of the college in order to gain admission? 4) Does the employee want to and would
she/he benefit from taking additional courses? 5) Does the employee have suOcient free 0me to aEend
class and do homework?