Size Does Matter!
By: Jane Petruniak
Plan design continues to be the most important factor when it comes to benefit cost. However, Jane Petruniak, of Watson Wyatt, says there are other drivers of cost for specific benefits.
As a predictor of benefit cost, size of the plan does matter. But so do average income, gender, age, degree of unionization, and employee turnover. Still, plan design remains the single most dominant (and controllable) factor impacting benefit cost.
This article explores the relative benefit costs of employers who participated in the recent Staying@work survey and also looks at industry sector analysis extracted from the COMPARISON database.
Findings from these two sources show that when we discuss cost in terms of percentage of payroll rather than absolute premium dollars or unit cost, we find that some factors played out as we would have expected. For example, smaller employers have higher life insurance costs, in general, than their larger counterparts.
On the other hand, who would have thought that employers with higher turnover rates would be spending less, on average, on dental plans than employers with lower turnover?
We also learn that the average cost varies for some benefits across industry sectors. From our work with employers across the country, we also know that the cost of certain benefits varies by province but the survey did not explore this factor.
Let’s look at each benefit to see what drives the cost up or down beyond the one factor over which a plan sponsor has control – plan design.
To make the comparisons, we captured the average reported cost against payroll. Eliminating the extremes and the outliers, we looked closely at companies whose costs were above or below the average and the factors which influence cost. The minimum size within the sample group was 100 employees. Co-dependent factors were not examined in the study. Here’s what we found.
The average cost within the survey group was 0.4 per cent of payroll. This is well within industry norms where the lowest cost was 0.3 per cent and the highest at just over 0.6 per cent of payroll.
However, companies with above average costs tended to be smaller than companies with costs below average. Harkening back to the traditional concepts of group underwriting, we can rationalize that larger groups with larger volumes would be eligible for volume breaks. As well, smaller employers still tend to use agents and brokers whose remuneration on a commission basis simply gets factored into the rates. Larger employers tend to use consultants whose remuneration is identified separately.
Looking at the other factors, we find groups with higher income tend to have higher life insurance costs largely because life insurance benefits tend to be salaryrelated. Other characteristics of groups with higher than average life insurance costs include a higher proportion of male employees and higher average age. This is quite consistent with the risk-based analysis of mortality on which actuarial costs are predicated.
A higher percentage of unionized employees generally means lower costs. If we had looked at co-dependent factors, we would likely see higher male content and higher average age compared to the overall average. We conclude that the lower life insurance cost reflects the prevalence of flat dollar benefits in collective agreements rather than the health of the workforce.
Companies with lower than average life insurance costs report higher employee turnover than companies with higher than average turnover. Employee turnover is a wild card factor which warrants thoughtful consideration at many levels. To some extent, turnover is a function of the industry, but there are intrinsic organizational issues which can raise or lower turnover. We are, of course, not suggesting that employers increase turnover to lower life insurance costs, but we are suggesting that all direct and indirect factors should be taken into account in any discussion of benefit cost or cost management.
STD (Short-term Disability) is defined as benefits paid due to absence from work resulting from illness or injury excluding Long-term Disability and Workers Compensation payments. The average reported cost was 1.1 per cent of payroll. However, looking at the broader base, we see a range of 0.6 per cent to 1.4 per cent across industry sectors. Retail and Wholesale sectors are at the low end. The Chemical sector, followed closely by Government, are around 1.3 per cent.
In general, companies with higher than average STD costs had higher average incomes, higher average age, and had a higher percentage of male employees. Employers who reported STD costs tended to have a higher percentage of non-salaried employees than the overall sample. From experience, we know that a substantial number of Canadian employers still do not rigorously monitor STD costs for their salaried ‘white collar’ employees, hence the results were not surprising.
While not remarkable in the other benefits, age was a factor in STD costs with higher cost associated with higher age. In the context of benefit review and forecasting cost, employers do need to look down the road to understand not only today’s demographics but also to look at the workforce of the future. Current demographics are the starting point, but to understand the shape of the future, one needs to consider workforce trends such as turnover by age, length of service, location, performance, and position. Long-term Disability
(LTD) costs averaged 0.8 per cent in the survey sample compared to a range of 0.4 per cent to 0.7 per cent. Companies with above average LTD costs tend to be larger and those with below average costs are more likely to have a higher union content, Companies with below average costs have a higher complement of males than companies below average. Age, surprisingly, is not a differentiator nor is average income.
Turnover again proved to be a factor. Companies reporting higher than average turnover also reported higher than average LTD costs. Turnover implies the need to replace and retrain staff which can be expensive and stressful for those employees already coping with the absence of their co-workers. In some organizations, turnover can also be used as an indicator of employee satisfaction. However, it should be cautioned that this is a lag factor not a lead factor.
Medical or extended healthcare benefits weighed in at an average cost of 1.4 per cent of payroll. Higher than average costs were reported for companies who also reported higher average income, and lower turnover. Conversely, gender, average age, and prevalence of unions were not significant differentiators.
A recent U.S. study – New Reality. New Choices – shows that employers who place more emphasis on individual accountability and responsibility expect to have a median cost increase of seven per cent which is 10 per cent lower than employers who continue to take a more passive approach. Because the health care dynamics are different between the two countries, we wonder what we would see if we conducted the same survey in Canada.
Dental costs in the survey group averaged out at 1.2 per cent of payroll compared to 1.5 per cent in the broader database. There is some variation across industries with universities and education at 1.2 per cent and government at 1.7 per cent. As with medical, groups with higher than average costs had higher average incomes and lower turnover. Gender came into play a bit more than with the medical plans as groups with higher than average costs also reported higher than average female content and higher union content.
Employee Assistance Programs (or Employee and Family Assistance Programs as they are now commonly called) were 0.1 per cent of payroll within the survey group. Some EAP providers operate on a flat fee per person (capitation), but increasingly some portion of the fee is based on utilization. Interestingly, age, gender, and income had modest to no impact. Higher union content was associated with lower than average cost and high turnover was associated with higher than average cost.
Parting Words Before you compare your own benefit costs against those of another organization, consider carefully the impact of some of these factors over which you have no control. You do have control over plan design and you can certainly educate employees in the ways of intelligent consumerism. Most organizations today have little appetite for unabated cost increases stressing the importance for prudent financial governance and careful thinking about plan design and communication.
Jane Petruniak is with Watson Wyatt Worldwide
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