Why Employers are Wasting Money on Their Employees’ Benefits
When I think about how much money companies spend on their employee benefits, this quote from John Wanamaker always comes to mind:
“Half the money I spend on advertising is wasted; the trouble is, I don’t know which half”
For the very practical purpose of attracting and retaining quality employees, companies invest in benefits expecting to see value in return. But in reality, companies who approach benefits purchases in the traditional, paternalistic, one-size-fits-all manner are wasting a significant portion of that investment. Research studies indicate that employees typically estimate the monetary value of their benefit packages at 65% of actual cost. That means that even if a company offers employees some choice of benefits, say three or four medical plan options, they still don’t get much more than 65 cents of perceived value for every dollar spent. It’s hard to imagine that companies would stand for that low of a return for any other business investment. So why are they willing to do so for employee benefits?
In some ways it is because as Mr. Wanamaker says, they don’t know which part of their benefit spend is working and which is wasted. Largely, that is because when they pick benefit plans to fit the needs of their employees they don’t – actually can’t – know what plans will correctly fit the needs of each employee. Employers are not allowed to ask individual employees about their medical status, future plans for utilization like having a baby, chronic illnesses or genetic disposition for disease. Nor can they know about the financial status of an individual like availability of reserve cash to accommodate higher deductibles, or weather a short-term disability, etc.
From a practical standpoint, even if a company were allowed to have the individual information necessary to select plans for each employee, it is inconceivable that a handful of plan designs could accommodate the range of needs for all employees of even a small-sized company. What typically happens is this: a company and their advisors take a broad look at their population and establish a median level of coverage for their employees. Then, they select a plan, or a few plans, that best fit that benchmark. This results in only a small proportion of employees’ needs coincidentally aligning with the plan option(s) offered, and therefore they have the right-sized benefits for their situation and get full value for the dollars that their employer has invested in their coverage. But far more employees end up being over-insured, having more coverage than they need and effectively wasting benefit dollars, or underinsured, not getting the coverage they need and thereby failing the employer’s goal of employee attraction and retention via benefits offerings.
Employers need to get out of the benefit buying game, give their employees the money they would have spent on benefits, and turn them loose in a well-stocked private benefits exchange equipped with a decision support engine that can lead each individual to purchase a benefits portfolio unique to their needs. This leads to immediate transparency on the value of the employer contribution to benefits for the employee. At the same time, it enables employees to invest that money in plan portfolios that meet their needs more closely than the employer-designated plans, limiting the waste associated with over or under insuring an individual.
Of course there is more to the story of how private exchanges work to better serve employers and employees. And I’ll be looking at some of the finer points of it more extensively in my posts here going forward. But for today, at least we have solved John Wanamaker’s conundrum as it applies to spending on employee benefits. We can avoid wasting either half, we just have to make employers understand they have options, and then pass those options on to their employees.