Richard Quinn has a Point

Amidst the lefty statism, there is something worth thinking about in his Benefit News article.

What are employers thinking? There is no health care crisis

According to a study by Hewitt Associates, 82% of employers plan to increase retiree premiums, 76% will increase cost-sharing, and 25% will shift to a defined contribution approach.

All of which inspires this question: What are employers thinking? Let's be clear: There is no health care crisis in America.

I am fortunate that my employer hasn't increased it's rates as horrifically as other business have. My increases are marginal at worst and none of my benefits have been drawn back or reduced. However, this is mostly due to TASB's unique nature in the market it does business in: whenever the insurance markets tighten on public schools, we do better.

The fact is that the vast majority of Americans obtain health care when needed and the majority is satisfied with the system.

If there is anything wrong with the health care system it is caused by...well, us.

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It is striking how shortsighted and strategically ill informed most employers are. I receive e-mails regularly from employees worried about the security of their benefits, primarily pension and health benefits. They read about companies eliminating retiree medical, making benefits employee-pay-all and they wonder about their future. The idea that the "promises" of the past may not be secure is mind boggling to many workers who have counted on this security...and why not?

Employers were happy to build the entitlement mentality when it suited their needs, were happy to encourage company loyalty and to provide high level first-dollar benefits when things were good. In tough times, however, it seems health care costs have become the rallying cry for cost-cutting.

Indeed, the entitlement mentality is responsible for a great deal of the political storminess these days, possible even the single biggest reason. Many people seem to think that health care is a right and if the coverage they get with their company (if at all) can't fit their needs, then other people (read: taxpayers) should pay for it.

However, it is well-established that labor costs are responsible for the largest chunk of business operation costs. A huge portion of that is due to non-salary benefits such as medical coverage, pensions, retirement plans, etc. It is a logical place to cut costs and save money...

We benefit managers talk about the brilliant ideas we have to control costs as if they only affect some invisible group of people and as if we are on a mission to save the world from health care costs. In the process we may be disaffecting the very work force our companies will need in order to be successful in the future. At the very least we are providing significant distractions for our current workers, the ones we desperately need to leverage for the success of our organizations. What are we thinking?

Medical is the number-one benefit. Individuals will join a company because of its health benefits and will stay with a company because of the health benefits. When competition for workers is strong, health benefits can tip the scale. But it appears that when labor is plentiful these benefits can go by the wayside. How shortsighted on the employers' part. Smart companies will use the value of health benefits to prudently make their organizations an attractive place to work. People who have good memories and loyalty will be out the window for a long time when a company plays with its workers' security for short-term gain.

...but Mr. Quinn is also correct here in that the very value people place on their non-salary benefits (with a strong emphasis on medical) is one of the primary reasons people choose one job over another. Cutting those benefits may make sense in the near-term, but people want those benefits and may go elsewhere to get them, resulting in a "brain drain" of talent.

He continues with an even more important point:

Defined benefit pensions have been replaced with defined contribution plans as the primary retirement vehicle (if the worker has any vehicle). According to the Employee Benefit Research Institute (EBRI), about 41% of retirees 55 and older have pension income from their former employer and only 36% of retirees age 65 or older have such benefits. Cash balance conversions from the old DB plan save an employer money and give workers a warm and comfortable feeling in the process.

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Seniors comprise the fastest growing segment of the population. Seniors are typically retired workers, and when they are retired they are consumers of all kinds of goods and services. That is, if they have income to make those purchases. The average monthly income for a retiree age 55-64 is about $1,300 and the amount declines with age. The average retiree today has a total of $15,000 in financial assets. So, are employers as smart as they think? Today we are helping to establish a new generation of retirees with less retirement income and much of it based on what they can save.

While we are talking about saving, let's talk about the other saving for retirement. Of course, we know about saving for retirement income. Generally speaking, people don't. But there is another savings objective people ignore as well: According to EBRI, only about one-third of workers at firms with 1,000 or more employees still have retiree medical from their employer. Workers in smaller firms are even worse off. If future retirees lack employer-provided retiree medical, how will they pay for it? By saving of course.

And unfortunately, Americans are crappy at planning for their futures. I've read that on average, Americans save only 4% of their disposable income. If not less.

EBRI has done several projections of the savings needed for a retiree to pay for health benefits. For example, for a person to pay for premiums and out of pocket costs only between ages 55 and 64, starting in 2003 and assuming they have access to employer-based coverage, they will need between $75,000 and $94,000. Oh yes, if you want coverage for your spouse as well, double those numbers. And, add another $80,000 to $117,000 per person for coverage supplementing Medicare if you plan on living only to age 80.

Mr. Quinn's conclusion?

We are helping to make a new generation more dependent on government programs. We are making it virtually impossible for a person to retire before achieving Medicare eligibility because they will not have employerbased health benefits (and they will be more dependent on Social Security income generally not available before age 66). It is estimated that 88% of today's workforce will not have access to retiree medical benefits. We are placing more strain on Social Security and Medicare, two other crises that do not exist as evidenced by our largely ignoring both.

People want health care and they want retirement income. If their employer won't give it to them and they won't save for the future, they will overwhelmingly turn to the government to satisfy subsidize their desires.

Though Mr. Quinn's solution is "a long-term strategy that allows fair cost sharing, a meaningful commitment workers can count on and a strategy to provide health care benefits not merely based on the latest trend and knee-jerk reaction to costs. It requires employers working together - in teams, like workers are told to do."

I'd add that beyond business innovation and collaboration, we must eliminate the benefits the government attempts to provide. It would accomplish two worthwhile things, among others:

Reduce taxes dramatically, leading to a higher level of take home pay and company profitability. This would spur all manner of healthy economic activity: savings, investment, and spending on goods and services. That in turn feeds back into the economy (even the savings, which banks use to finance loans).

Go great lengths to erase the entitlement mentality Americans have and remind them it is their responsibility to provide for themselves through savings and investment or through employment that provides the benefits they want.

I'm turning 23 on the 26th of this month. My father did the intelligent thing long ago and started saving and investing for my future. Only recently have I made a serious effort to start saving and looking for investments on my own. I must do a better job, even when nifty opportunities to buy stuff present themselves.

Part of my investment is a health-related one. I quit smoking in October of 2000, I've made serious efforts to clean up my diet, and I've been working out and jogging regularly. The longer I can hold off the nasty results of growing older, the longer I can hopefully hold off the almost-as-nasty costs of getting those results fixed in the future.

Posted by Drizzten at June 18, 2003 07:02 PM