Rethinking Benefits, Consumerism and Incentives Strategies with Wendy Lynch

LYNCH Consulting LTD

Saving your business and your people

Who Survives? How Benefits Costs are Killing Your Company

Wendy D. Lynch Ph.D.

Every day,

employees make hundreds of choices that affect business

directly

© 2013 Lynch Consulting LTD

Daily choices

At work Do I come to work today?

Motivated Do I give my full effort?

Effective Do I acquire new skills?

Healthy Do I make healthy choices?

Stay Do I look for another job?

These are all connected


IF your employees have the opportunity to

1) lower expenses 2) be more productive

Do you want them to?

Can they?


We’ve been led to believe the problem is…… Unhealthy lifestyle and illness


3 companies, 3 health cost stories

$3,536

$2,705

$4,981

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Company #1 Company #2 Company #3

Predicted Medical Costs

Three companies: Same gender, age, tenure, salary.

Healthiest

Most Wellness


Predicted Medical Costs by Company

Predicted Medical Costs

$3,536

$2,705

$4,981

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

#1 #2 #3

Three companies: Administrative Workers. Modeled as same age, same gender, same tenure, same salary, same # diagnoses, same co-morbidity, same region of the country

Not health


Us versus them…..

Usual Approach: It’s the employees fault. They aren’t healthy They have bad attitudes They don’t have good skills

We need to change employee behavior! ________ management pick one: case, care, disease, absence,

stress


Face the facts

Health-related costs are not simply due to health problems

Employers won’t be solving the wellness problem any time soon.

Now what?


Do you really want to know?

If things don’t work like you THINK they do……



1) lower expenses 2) be more productive


Will they?


Imagine that…a company is a river….

Optimal Performance


When things go wrong…..

Inefficiency, High Costs and Low

Performance


Currents aligned with optimal human capital performance


“Currents” are incentives

Aligned with optimal human capital performance

High Job Performance

Optimal Benefits Use

High Engagement in Health Protection

Job Mobility

Financially Self-Sufficient

Capacity Growth


Currents misaligned with optimal human capital performance


Currents are incentives

Low Performance

High Benefits Use Low Engagement in Health Protection

Job Lock Financially Limited Capacity Stagnation

Misaligned with optimal human capital performance


The reservoir of capacity each human has to contribute to the well-being of his community, job and family. Comprised of three types of assets: •Skills •Health •Motivation

Health Motivation

Skills

Human Capital


Human Capital

Human Capital

Assets

How you

choose

Work,

Leisure

You Spend

Money

Recognition

Travel

To Get Something Useful or Satisfying

Rewards

Intrinsic, Extrinsic, Monetary, Intangible

Health Motivation

Skills


Less earnings… more benefits

and other benefits


Compensation as Motivation

Who Survives: Lynch & Gardner, 2011

60.0%

3.0%

3.0% 2.0%

1.0%

13%

11%

7.0%

Wages

Performance Bonus

Retirement

Training

Health Accounts

Health Insurance

Paid Time Off

Taxes

Misaligned rewards for Low Performance Absence Health care utilization

Rewards for High performance Attendance Health




Currents are created through incentives

Shared Rewards

Short-term rewards Longer-term human capital investments

Something to Gain 1


Shared Rewards Does this condition exist for most employees? Check if Yes

Eligible for performance bonuses

If yes, employees know exactly how their bonus is determined

Bonus is at least partially determined by individual performance

Total amount employees can earn in bonus or profit sharing is >10% of salary

Can cash-in some unused paid time-off at 100%

Cover prevention/screenings at 100% (no deductible)

BOTH: Offer training/tuition allowance worth at least 2% of salary

AND >10% of employees use it

BOTH: Offer a HSA with $2,000 or more in employer funds

AND at least 30% of employees choose this option

Match a 401K deposit at 4% or higher

All workers have multiple opportunities to increase skills and advance


Implications

Score Result Implication

0 to 3 Misaligned Productivity 30%-40% below achievable.

High turnover of top performers.

4 to 6 Neutral Productivity and turnover will depend on

other factors. When business climate is

good, performance will be better. When

climate is difficult, performance will

suffer.

7 to 10 Aligned Strong productivity. Retention of high

performers.


Data on shared rewards

Variable pay

35 - 44% increase in output

15 - 25% increase in average wage

Profit sharing

Three studies: productivity increased by ◦ 5% - 9%

Ohkusa, Y. Journal of the Japanese and International Economies, Elsevier, vol. 11(3), pages 385-402, September. Cable, J.The Economic Journal, Vol. 99, No. 396 (Jun., 1989), pp. 366-375. Lazear. The American Economic Review. 2000. Vol 90. No.

http://ideas.repec.org/s/eee/jjieco.html


Reduction in absences after implementing pay-for- performance

Average monthly absences in department

After bonus


Likelihood of STD by Percent of Variable Pay For Which Employee is Eligible

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0% 10% 20% 30% 40% 50% 60%

Relative Variable Pay (Variable Pay/Total Compensation)

Lik

elih

oo

d o

f H

avin

g a

(N

on

-Pre

gn

ancy

) S

TD

Cla

im

Likelihood of having a (Non-

Pregnancy) STD Claim, controlling

for age and gender.

Likelihood of having a (non-pregnancy) STD claim, controlling for age and gender.



1) be more productive


Will they?


Realign Compensation to Optimal

Realign and Maximize Revenue


60%

3% 3%

2%

1%

13%

11%

7%

Wages Performance Bonus Retirement Training Health Accounts Health Insurance Paid Time Off Taxes

60% 15%

3%

2%

3% 5% 5%

7% Company X

Optimal Benchmark




Currents are created through incentives

Shared Rewards

Short-term rewards Longer-term human capital investments

Something to Gain 1

Shared Responsibilities

Something to Lose 2

Consequences Ownership of decisions



Does this condition exist for most employees? Check if Yes

A pay statement clearly identifying the dollar value of all investments/benefits the organization makes on their behalf

A PTO bank of time off, rather than separate sick leave, vacation, etc.

Less than 100% of pay during short-term / long term disability

A company-wide high-deductible health plan, with the deductible at least $2000/$4000 (individual/family)

An out-of-pocket maximum of $3000/$6000 (individual/family) or higher

Fewer than 31 days of paid-time off per year including holidays (but options for unpaid time)

Active use of a quality improvement process (such as lean six sigma) at all levels of the organization

A culture encouraging independent decisions about work

Resources for financial decision-making provided

Resources for healthcare decision-making provided


Implications

Score Result Implication

0 to 3 Misaligned Avoidable healthcare utilization up to 30%

higher regardless of health status. High

absenteeism and disability rates.

4 to 6 Neutral Healthcare utilization and absenteeism

will depend on other influences, such as

business climate.

7 to 10 Aligned Prudent spending of healthcare dollars.

Minimal avoidable cost. Minimal excess or

unplanned absences.


83%

10%

7%

Human Capital

We

exchange

work for pay

The employment contract

Health Motivation

Skills

Performance

Rewards

Compensation


Human Capital

When we

substitute

benefits for

performance

rewards

Reward What?

benefit 1

benefit 2

benefit 3

?

83%

10%

7%

Investments Safeguards

Taxes

Health Motivation

Skills

69%

24%

7%

Performance

Rewards

The employment contract


69%

24%

7%

Rewards

Business Investments

When we

substitute

benefits for

performance

rewards

Reward What?

Unlimited

sick leave

@ full pay

Extreme incentives: Belgium

• 1.3% GNP

• Some departments 35 days/year

• 65% could be working

• Most labeled with depression

Health Motivation

Skills

?

Performance


69%

24%

7%

Business Investments

When we

substitute

benefits for

performance

rewards

Reward What? Health Motivation

Skills

?

Performance

Misaligned incentives: healthcare

Rewards Rich

Medical

Benefits • Cover Bariatric Surgery

• New employees getting surgery

• Full coverage and STD

• Most quit in 18months


0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10

Shar

ed R

ewar

ds


Alig

ned

Pampered Partners

Entitled Disengaged

AlignedMisaligned

Misa

ligne

d

An aligned work contract

High performance

and high benefit costs

High performance

and low benefit costs



2) lower expenses


Will they?

YOU

YOU?


Realign Compensation to Optimal


60%

3% 3%

2%

1%

13%

11%

7%

Wages Performance Bonus Retirement Training Health Accounts Health Insurance Paid Time Off Taxes

60% 15%

3%

2%

3% 5% 5%

7%

Optimal Benchmark


Another kind of current….

Insurance coverage…. If you don’t know what you SHOULD be paying…….. Are you likely to be under or over paying?

Under Paying?


Another kind of current…..

If the real cost is hidden And there are conflicting goals among plan/brokers/team Are you likely to be under or over paying?

Over paying?


Have you ever wondered if maybe…. you aren’t getting the best deal?

Fees

Premium Insurer’s risk

Employee Cost-share

$2,000,000

$1,000,000

$1,500,000

$500,000

$0

$500 deductible Fully-insured

CDHP ($3500) Fully-insured

Fees


Employee Cost-share

Health Account

Difference < $200K


Have you ever wondered if maybe…. you aren’t getting the best deal?

Fees


Employee Cost-share

$3,000,000

$1,500,000

$2,500,000

$500,000

$0


Self-insured, CDHP ($4000)

Fees


Employee Cost-share

Health Account

Difference < $300K

Employer’s Exposure

$2,000,000

$1,000,000


How do you know?

you don’t.

Unless you go through an informed coverage review process.


The typical process ignores…..

Five things in a rational coverage review PROCESS (see all sides – and their incentives) Design, Optimizing: 1. Level of Risk 2. Consumer selection (the right plan) Transparency, Identifying 3. Reasonable rates 4. Add-on fees 5. Optimal negotiation strategy

Nobody tells you


What did the coverage review process find?

Fees


Employee Cost-share

$2,000,000

$1,000,000

$1,500,000

$500,000

$0


CDHP ($2500) Fully-insured

Fees


Employee Cost-share

Health Account

Difference < $200K Optimal Risk Transparent rates & negotiation

New (better) design transparent

Difference $375K more Optimal Selection

Employer


Fees


Employee Cost-share

$3,000,000

$1,500,000

$2,500,000

$500,000

$0



Fees


Employee Cost-share

Health Account

Difference < $300K

Employer’s Exposure

$2,000,000

$1,000,000

What did the coverage review process find?

Transparent rates Transparent fees & better negotiation

Difference $500K more



Of savings, percent attributable to design and transparency elements

60%

20%

0% 0%

20% 20%

0%

50%

0%

30%

25%

13%

21%

42%

0%

38%

0%

15%

46%

0%

10%

20%

30%

40%

50%

60%

70%

Risk Consumer selection

Reasonable rates

Add-on Fees Optimal Negotiation

Strategy

Design, Optimizing…. Transparency identifying…

Company 1: $ 600,000

Company 2: $375,000

Company 3: $675,000

Company 4: $575,000

$1,000 to $,3000 PER EMPLOYEE


What/who gets in the way?

Would your internal team…..? Would your health plan representative…..? Would your broker…..?

Welcome an independent review


It will do more good for your employees

60% 15%

3%

2%

3% 5% 5%

7%

than it does giving it to the insurance company



2) lower expenses


Will they?

YOU

YOU?

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