Objective 3 - Employee Benefit Strategy

Question 1

Definition of employee benefits

Answer 1

Broad definition - includes virtually any form of compensation other than direct wages, including:
1. The employer’s share of legally required payments (such as Social Security)
2. Payments for time not worked (such as paid sick leave, paid vacations, and holidays)
3. The employer’s share of medical and medically-related payments
4. The employer’s share of retirement and savings plan payments
5. Miscellaneous benefits (such as employee discounts, severance pay, and educational expenditures)
More limited definition - excludes legally-mandated benefits

Question 2

Reasons for the growth in employee benefit plans

Answer 2

1. Business reasons - good benefit plans help the employer attract and retain capable employees, and can improve employee morale and productivity
2. Collective bargaining - the Taft-Hartley Act requires good-faith collective bargaining over conditions of employments (including benefit plans)
3. Favorable tax legislation - many plans are designed to maximize available tax benefits
4. Efficiency of the employee benefits approach - marketing of benefits through the employer is a cost-effective and administratively efficient distribution channel
5. Wage increase limits - wage increase limits during WWII and the Korean War led to an expansion of employee benefits as a way in which employers could increase the employees’ total compensation
6. Legislative actions - the government has encouraged employee benefit plans through various legislative actions

Question 3

Characteristics of the group technique of providing employee benefits

Answer 3

(all but the last one are meant to minimize adverse selection)

1. Only certain groups are eligible - groups formed solely for the purpose of obtaining insurance should not be offered coverage
2. Steady flow of lives through the group - to maintain a fairly healthy group
3. Minimum number of persons in a group - to prevent less-healthy lives from being a major part of the group
4. A minimum portion of the group must participate - such as 75% of employees must be covered in plans where the employee must pay a portion of the premium
5. Eligibility requirements and waiting periods are imposed
6. Maximum limits for any one person - to prevent the possibility of excessive amounts of coverage for any particular unhealthy individual
7. Automatic determination of benefits - some benefits may be determined based on a formula (such as a multiple of salary) to prevent unhealthy lives from obtaining large benefit amounts
8. A central and efficient administrative agency - to minimize expenses and handle the mechanics of the benefit plan

Question 4

Questions to ask in evaluating employee benefit plans

Answer 4

1. What are the objectives of the employer and employee?
2. What benefits should be provided?
3. Who should be covered under the benefit plan? - retirees, dependents?
4. Should employees have benefit options?
5. How should the benefit plan be financed?
6. How should the benefit plan be administered - by the employer, an insurer, or a TPA?
7. How should the benefit plan be communicated?

Question 5

Reasons for using the functional approach for designing and evaluating employee benefits

Answer 5

1. Benefits must be organized to be as effective as possible in meeting employee needs
2. Avoiding waste in benefits can be an important cost-control measure for employers
3. It is important to analyze where current benefits may overlap and costs may be saved
4. A systematic approach is needed to keep benefits current, cost-effective, and in compliance with regulations
5. A systematic approach is needed to ensure that the various benefits can be integrated with each other

Question 6

Steps in applying the functional approach for employee benefit plan design and evaluation

Answer 6

1. Classify employee and dependent needs or objectives into logical functional categories (see separate list of common loss exposures)
2. Classify the categories of persons the employer may want or need to protect (see separate list)
3. Analyze current benefits with respect to employee needs and the covered categories of covered persons (see separate list)
4. Determine any gaps in benefits or overlapping benefits in the current plan
5. Consider recommendations for plan changes to meet any gaps in benefits and to correct any overlapping benefits
6. Estimate the costs or savings from each of the recommendations made
7. Evaluate alternative methods of financing or securing the benefits
8. Consider other cost-saving or cost-containment techniques for both current and recommended benefits
9. Decide upon the appropriate benefits, methods of financing, and sources of benefits, by using the preceding analysis
10. Implement the changes
11. Communicate benefit changes to employees
12. Periodically reevaluate the employee benefit plan

Question 7

Common loss exposures covered by employee benefit plans

Answer 7

1. Medical expenses for employees (active and retired) and their dependents
2. Losses due to employees’ disability (short-term and long-term)
3. Losses due to the death of active employees, their dependents, and retired employees
4. Retirement needs of employees and their dependents
5. Capital accumulation needs or goals
6. Needs arising from unemployment or from temporary termination or suspension of employment
7. Needs for financial counseling, retirement counseling, and other counseling services
8. Losses resulting from property and liability exposures
9. Needs for dependent care assistance (eg. child-care or elder-care services)
10. Needs for educational assistance for employees and their dependents
11. Needs for LTC for employees (active and retired) and their dependents
12. Other employee benefit needs or goals (such as incentive programs)

Question 8

Categories of persons the employer may want to or be required to provide benefits for

Answer 8

1. Active full-time employees
2. Dependents of active full-time employees
3. Retired former employees
4. Dependents of retired former employees
5. Disabled employees and their dependents
6. Surviving dependents of deceased employees
7. Terminated employees and their dependents
8. Employees (and dependents) on temporary leaves of absence (such as for military duty)
9. Active employees who are not full time (such as part-time employees and directors)

Question 9

Considerations for analyzing current benefits in the employee benefit plan

Answer 9

1. Types of benefits - a common approach is to prepare an outline or table showing how the different type of benefits meet the various employee needs
2. Levels of benefits - the analysis should also show the amount of those benefits that is currently provided under various scenarios
3. Probationary periods - analyze any periods during which newly-hired employees are not yet eligible to receive benefits, to determine whether they are appropriate
4. Eligibility requirements - various requirements should be analyzed. For example, should survivors of deceased employees continue to be covered, for what benefits, and for how long?
5. Employee contribution requirements - determine how much employees will be required to contribute to the cost, and whether the plans will be mandatory or voluntary
6. Flexibility available to employees - determining the choices that will e given to employees in selecting their benefits
7. Actual employee participation in benefit plans - determine what percentage of employees enroll in each benefit, which may indicate whether the benefit meets employee needs

Question 10

Typical elements of CDHPs

Answer 10

1. A high-deductible health plan (HDHP)
2. An individual health account to pay for expenses not covered by HDHP
3. Information and tools to provide health education and help find the highest-quality providers at the lowest cost
4. A communications program to encourage consumerism and healthy behaviors
5. A health coach or consultant to help individuals use available information and provide guidance on use of health care providers
6. For serious chronic conditions, a proactive medical professional to coordinate care for the patient

Question 11

Basic plan structures of CDHPs

Answer 11

1. First-dollar coverage provided through a health care account
2. Employee is responsible for the difference between the account amount and the deductible
3. After the deductible, the plan coinsurance and copayments apply
4. Deductibles, coinsurance, and copayments differ for single vs. family coverage and in-network vs. out-of-network services

Question 12

Types of health care accounts

Answer 12

(see separate lists for comparisons of these accounts)

1. HSA
   a) Must accompany a high-deductible health plan with a maximum deductible ($1,200 individual, $2,400 family) and maximum out-of-pocket limit ($5,950 individual, $11,900 family) (yr 2011 amount, indexed for inflation)
   b) Can be used to pay for qualified medical expenses, health insurance premium in limited circumstances, LTC premiums, and LTC services
   c) Owned by the employee, who gets to keep the unused balance upon terminating employment
2. HRA - can be used to pay for qualified medical expenses, health insurance premiums, and LTC premiums
3. FSA
   a) Can be used to pay for qualified medical expenses
   b) The contribution amount must be specified at the beginning of the period, and the employee can use the full amount at any time in the coverage period
   c) Funds not used at the end of the period are forfeited

Question 13

Comparison of key features of health care accounts

Answer 13

HSA / HRA / FSA

• Who can set up account: HSA individuals and Employees covered by CDHP and no other health insurance / HRA & FSA only employer
• Who can contribute: HSA employers and employees / HRA only employers / FSA employers and employees
• Contribution limits: HSA $3,050 for individuals and $6,150 for families (yr 2011, indexed) / HRA no federal tax limits, employers usually set limits / FSA through 2012; no limit. 2013: $2,500 (indexed)
• Carryover of unused balances: HSA yes / HRA yes, subject to employer limits; FSA no
• Portability: HSA yes / HRA no / FSA no

Question 14

Tax treatment of health care accounts

Answer 14

HSA / HRA / FSA

• Employer contributions - (all) Contributions excluded from gross income and not subject to FICA; funding limits for HS and FSA
• Individual contributions - HSA funding limits; contributions are deductible / HRA employees cannot contribute / FSA generally pretax & not subject to FICA
• Earnings on accounts - HSA generally not taxable / HRA and FSA accounts are generally notional, so there are no earnings
• Distributions - HSA permissible reimbursements are not taxes; otherwise 20% penalty (some exceptions) / HRA and FSA distributions only allowed for qualified medical expenses

Question 15

Plan design considerations for CDHPs

Answer 15

1. Establishing the parameters of the HDHP
2. Selecting a type of health care coverage
3. Level of preventative care coverage
   a) Most offer an initial health screening or physical at no, or very low, cost
   b) Also included are immunizations, routine annual physicals, and well-mother and well-baby visits
4. Whether the CDHP will be a full replacement plan or one of multiple options. A full replacement plan will minimize adverse selection and maximize cost savings, but may face employee resistance
5. Employer contribution strategy
   a) Must decide how much to contribute to the employees’ accounts
   b) CDHP contributions are often set to compare favorably with other options
6. For HRA pans, whether to permit carryovers of unused balances

Question 16

Advantages of voluntary benefits

Answer 16

Voluntary benefits are offered by the employer but employees purchase them on their own
Employer advantages:
1. More benefits can be offered without significant added cost
2. Can supplement or replace employer-sponsored benefits that have been reduced or eliminated
3. Can act as an employee recruitment or retention tool
4. Can offer to employees that meet performance targets
Employee advantages:
1. Can get the employer’s group discount
2. In some cases, can purchase with pretax dollars
3. Convenience of obtaining benefits through the workplace (not having to shop around) and during work time
4. They are often portable (employees can keep them upon changing jobs)

Question 17

Types of voluntary benefits

Answer 17

1. Group term life
2. Dependent life insurance
3. Supplemental life insurance
4. Long-term and/or short-term disability income insurance
5. Dental insurance
6. LTC coverage
7. Adoption assistance
8. Accidental death and dismemberment insurance
9. Automobile insurance
10. Homeowners insurance
11. Benefits under a legal services plan
12. Vision benefits coverage
13. Critical care insurance
14. Cancer insurance
15. Group homeowners and automobile insurance
16. Hospital indemnity insurance
17. Travel accident insurance
18. Student medical insurance

Question 18

Common functions for administering employee benefits

Answer 18

(all plan sponsors must perform these core activities, and the benefits director must be proficient at these)

1. Benefits plan design - create a benefit program that addresses the needs of the organization and can be effectively administered and communicated
2. Benefits plan delivery - involves service plan participants through various activities (see separate list). Must met legal standards for quality service (eg. complying with ERISA and COBRA standards)
3. Benefits policy formation - management must make decisions on questions and issues that arise. These decisions must be codified into policies.
4. Communications - must effectively communicate benefit programs and plan provisions, which is challenging due to workforce diversity and plan complexity. Legal standards require certain communications (eg. summary plan descriptions, benefit statements, and statement of COBRA rights).
5. Applying technology - involves setting up a database containing information on all the employer’s different benefit plans. This information should be secure and easily accessible to the employer and its employees.
6. Cost management and resource controls - benefits directors must evaluate proposals from insurers and develop the firm’s risk management approach
7. Management reporting - information systems are needed to monitor financial results, utilization, and compliance. Reports are needed in order to:
   a) Compare to the competition (see separate list of comparison methods)
   b) Measure achievement of human resource objectives (through industry surveys, employee surveys, and focus groups)
   c) Access and manage program risks
8. Legal and regulatory compliance - must comply with fiduciary, funding, and other requirements as prescribed by law. Many standards were codified as part of ERISA.
9. Monitoring the external environment - involves monitoring various factors that impact benefit management activities (see separate list)

Question 19

Activities required for serving plan participants

Answer 19

1. New employee benefits orientation
2. Policy clarification on benefits eligibility, coverage, and applicability of plan provisions
3. Dealing with exceptional circumstances and unusual cases
4. Collection and processing of enrollment data, claims information, and requests for plan distributions
5. Benefits conseling and response to employee inquiries for active employees
6. Benefits counseling for employees who are terminating, retiring, disabled, or on leave

Question 20

Technological tools used by benefits directors to support customer-driven processes

Answer 20

1. Executive information systems - provide management information in summary format. Helps identify utilization patterns and cost factors.
2. Imaging and optical storage - eliminates paper records and allows sharing of documents over a network
3. Access to information over the internet - facilitates paper-less communication from the plan sponsor to insurance carriers, investment custodians, and third-party administrators
4. Client-server technology - integrates networked applications with desktop and mobile tools, allowing decentralized management and supporting self-sufficient plan participants
5. Employee self-service - allows customer-driven benefits modeling, retirement planning, and updating of personal data

Question 21

Methods for comparing benefits programs to the competition

Answer 21

1. Compare the benefits payable to representative employees under different circumstances
2. Compare actual costs to the employer for different benefit plans
3. Calculate relative values of the different benefits based on uniform actuarial methods and assumptions
4. Compare benefit plans feature by feature to isolate specific provisions that may be appealing to certain employee groups

Question 22

External factors that impact benefit management activities

Answer 22

1. General business and competitive conditions - benefit programs are increasingly important for attracting and retaining employees. There is a trend towards benefits outsourcing.
2. Governmental policy - requires monitoring laws and subsequent regulations, as well as proposed legislation
3. Workforce demographic shifts - greater diversity has led to flexible benefit plan offerings. The aging of the workforce has created greater interest in retirement programs.
4. New product development - must develop a means to evaluate new products and services, and to integrate them into existing plan offerings
5. New organizational structures - must redesign plans to fit the new structures and remain compliant
6. Technological enhancement and innovation - must keep abreast of technological changes and proactively plan the introduction of new technologies

Question 23

Reasons plans are outsourcing benefits administration

Answer 23

1. The complexity of administering benefits
2. The efficiencies of specialized service providers
3. The abilities of specialized providers to obtain favorable pricing because of their business volume
4. The ability of service providers to more readily implement technology and monitor regulations and market trends

Question 24

Cafeteria plan advantages and disadvantages to the employee

Answer 24

Advantages
1. Employees can pay for benefits on a tax-favored basis
2. Employees can have more control over their health spending
Disadvantages
1. Benefit elections must be made prior to the beginning of the year, and the election is irrevocable (with limited exceptions)
2. For FSAs, the use-it-or-lose-it rule means benefit dollars unused at the end of the year are forfeited
3. Since there is no FICA tax, participants may see a slight reduction in social security benefits

Question 25

Cafeteria plan advantages and disadvantages to the employer

Answer 25

Advantages
1. The employer does not have to pay FICA or FUTA (Federal Unemployment Tax Act) taxes on contributions
2. Deferred amounts do not count when determining workers’ compensation premiums
3. Creates increased awareness of the overall cost an value of employee benefits
4. Helps to contain health care costs and prevent wasting benefit dollars on duplicate or unneeded benefits
Disadvantages
1. The large cost of administration and operation of a cafeteria plan
2. If a medical reimbursement account is included in the plan, the total amount of the employee’s account must be available at any time in the year
3. Adverse selection can result in increased costs
4. Plans are subject to complex coverage and nondiscrimination testing

Question 26

Types of cafeteria plans in the US

Answer 26

1. Premium conversion plans - there are no employer contributions. The plan is offered so that employees can pay for their employee-paid insurance costs on a tax-favored basis
2. FSAs - these accounts are permitted for medical reimbursements, dependent care, and adoption
3. Full flex plans - participants can select from a wide range of benefits. The employer selects and amount to give her benefits, which is put towards the cafeteria plan or into an account

Question 27

Benefits that can be offered in a cafeteria plan

Answer 27

Qualified benefits (can be offered on a pre-tax basis)

1. Employer-provided accident or health coverage - this includes medical, dental, vision, disability, AD&D, business travel and accident plans, hospital indemnity, cancer policies, Medicare supplements, and reimbursements for FSAs
2. Individually-owned accident or health policies
3. Employer-provided group term life insurance coverage (only the first $50,000 is nontaxable)
4. Employer-provided dependent care assistance
5. Employer-provided adoption assistance
6. Contributions to a 401(k) plan
7. Contributions to an HSA
8. Coverage under a qualified group legal plan
9. Post-retirement life insurance (only for employees of educational organizations)

Permissible benefits (these can be offered, but are taxable)

1. Cash
2. Paid vacation days
3. Group term life insurance in excess of $50,000

Question 28

Benefits that cannot be offered in a cafeteria plan

Answer 28

1. Contributions to medical savings accounts
2. Qualified scholarships and educations assistance programs
3. Certain fringe benefits
4. Qualified LTC insurance (although an HSA fund can be used to pay for LTC)
5. Athletic facilities
6. De minimis (too trivial or minor to merit consideration, esp. in law) benefits
7. Cash value or dependent life insurance
8. Employee discounts
9. Lodging on the business premises
10. Meals
11. Moving expense reimbursements
12. No-additional-cost services
13. Parking and mass transit reimbursement
14. Contributions to a college savings account
15. Legal or financial assistance
16. 403(b) plans
17. Deferred compensation
18. Reimbursement for cosmetic surgery
19. Retirement health benefits paid for working employees

Question 29

Most common employee benefits for small companies

Answer 29

1. Medical - plan design options usually include HMOs, PPOs, POS plans, direct-access POS plans, and CDHPs
2. Disability income insurance - long-term, short-term, and supplemental
3. Life and AD&D - for companies with fewer than 10 employees, it may be cheaper to buy individual policies than a group policy
4. Dental - may not be cost effective, especially for the smallest of employers. But it can be cost-effective for employees because the employer is paying some of the cost and tax savings can result if a pretax spending account is used
5. Cafeteria plan (aka Section 125 plan or flex plan) - this can include an FSA to provide tax benefits. Types include:
   a) Premium-only plan - includes only pre-tax premium payments
   b) Full-range cafeteria pan - may offer 3-4 options in each benefit area. Small companies are generally not able to offer these due to cost and lack of availability

Question 30

Challenges for small companies offering group medical plans

Answer 30

1. Because small companies are most often fully insured, they are subject to state-mandated benefits
2. Because employees are usually in a relatively small geographic area, plans must be designed using options available in that area
3. Small companies may have to provide additional documentation so that insurers can verify the existence of the company
4. Most states do not allow companies to join forces to form larger purchasing pools in order to get group discounts

Question 31

Reasons a small company should require employee contributions for medical insurance

Answer 31

1. Most employees today are accustomed to paying some level on contribution
2. Requiring a contribution motivates employees who have other coverage options to use those options
3. It is easier to require contributions beginning at the plan’s inception than it is to start requiring contributions at a later date
4. Requiring a contribution can help avoid legal problems since the contribution makes it clear who is covered by the plan versus who opted out

Question 32

Eligibility and amounts for the ACA small employer tax credit

Answer 32

1. To be eligible, employers must:
   a) Have no more than 25 full-time employees (FTEs)
   b) Have average annual wages of $50,000 or less
   c) Pay at least 50% of the premium for employees
2. The credit is a percentage of the employer-paid premium. It is on a sliding scale, with the maximum available to employers with fewer than 10 FTEs and average annual wages of less than $25,000. The maximum credit is:
   a) 35% from 2010-2013
   b) 50% beginning in 2014, and can only be taken for up to two consecutive years and if employees are covered under a state-based exchange

Question 33

Types of flexible accounts in Canada

Answer 33

1. Health spending account (non taxable if requirements are met) - may cover any health care expenses that would be tax deductible under the Income Tax Act, as long as they are not covered by the provincial plan or other private insurance
2. Personal account (taxable) - may cover a wide range of benefits, at the employer’s discretion, such as child care, financial counseling, or even sports equipment or gym memberships
3. Executive perquisite account (taxation depends on the taxability of the covered expense) - normally administered separately from the flexible plan

Question 34

Advantages to the employer of offering flexible accounts

Answer 34

1. Expand the types of benefits offered with little or no additional employer cost
2. Add a new benefit without subsidizing an expensive coverage area
3. Offer a benefit that might appeal to only a small segment of the employee population
4. Contain costs (by setting a defined contribution) while providing employees with flexibility over how funds are spent
5. Test the appeal of flexible benefits without committing to a full-choice program

Question 35

Additional advantage of health spending accounts

Answer 35

(these are in addition to the advantages of flexible accounts from the previous list)

1. Deliver compensation tax effectively
2. Encourage employees to self-insure predictable and budgetable expenses (such as vision and dental)
3. Soften the impact of higher employee cost sharing
4. Replace existing coverage, allowing the employer to gain control of future cost increases
5. Obtain the maximum value from health benefits under the Quebec tax system

Question 36

Requirements for Canadian health spending account reimbursements to be tax-free

Answer 36

1. An employee’s election to allocate funds to the account must be made in advance of the plan year and must be irrevocable. An exception is allowed for family status changes.
2. The plan must require forfeiture of any unused account balances, using one of the following methods:
   a) One year rollover of unused balances - funds allocated to the account can be used to reimburse current year expenses or rolled over to the next year’s account. Unused amounts are forfeited at the end of the second year.
   b) One year rollover of unpaid claims - roll over unpaid claims from the prior year to be paid by this year’s account balance. Funds remaining at the end of the year are forfeited.

Question 37

Sources of funds for health spending accounts

Answer 37

1. New contributions by the employer
2. Employer savings from reducing medical plan costs
3. Employees directing employer-provided flexible credits to the account
4. Employees allocating a part of annual bonuses or company savings plan matches to the accoun

Question 38

Considerations for designing flexible accounts

Answer 38

1. Type of approach - decide whether to introduce a flexible account and which types of accounts to offer
2. How will the presence of the account impact other benefit choices?
3. Funding considerations - for example, decide if contributions to the accounts will be monthly or annually
4. Should there be limits on how much the employee can allocate to the flexible account?
5. How will mid-year changes be handled? - this will vary by account type and the reason for the change (family status change, termination, retirement, or death)
6. Disposition of funds at year end - funds are forfeited, rolled over, or (for personal or perquisite accounts) paid in cash

Question 39

Advantages and disadvantages of health spending account replacing health and dental plans

Answer 39

Advantages for the employer

1. Fixed contribution (gives employer control over benefit cost increases)
2. Contributions to the account are tax deductible
3. The accounts are easy to administer and communicate

Advantages for the employees

1. The accounts provide flexibility as to how the money is spent
2. Benefits are non-taxable to the employee
3. Can be used to buy insurance
4. The employee can decide what expenses are covered

Disadvantages

1. Benefits are inadequate since there is no insurance
2. Inequities
   a) A flat contribution per employee means families receive relatively less protection than singles
   b) A percentage of pay contribution means lower-paid employees receive less protection than higher-paid employees
3. Inflation is borne by the employees

Question 40

Pricing objectives for flexible benefit programs

Answer 40

(it is generally impossible to achieve all four at once)

1. Realistic prices - option price tags should reflect the value of the coverage
2. Equity - credits should be allocated based on an equal dollar amount or percentage of pay for all employees
3. No losers - each employee should be able to repurchase prior coverage with no increase in costs
4. No additional company cost - the new plan should cost the same as the old plan would have in the next plan year

Question 41

Pricing approaches for flexible benefit programs

Answer 41

1. Flat credits - an equal amount of credits are allocated to all employees. Achieves objective 2 (equity). Variations include:
   a) Family credits - each employee receives credits equal to the current company cost for family coverage. Price tags are based on expected claims. Fails objective 4 (no additional company cost)
   b) Average credits - each employee receives credits equal to the current average company cost for all employees. Price tags are based on expected claims. Fails objective 3 (no losers)
   c) Single coverage credits - each employee receives credits or subsidies equal to the current company cost for single coverage. IN order to have no losers, price tags for family coverage are reduced. Fails objective 1 (realistic prices).
2. Buy-back pricing - credits are allocated based on the average cost to the employer of singles and families prior to the flexible benefit program. Fails objective 2 (equity) because families get more credits.
3. Election-based pricing - same as buy-back pricing except families who opt down are given fewer credits, such as singles and families in those options have the same net cost. Comes closer to achieving objective 2 (equity), but still fails.

Question 42

Steps in the flexible benefit option pricing process

Answer 42

1. Data collection and analysis
2. Preliminary option pricing - determine a fair price (based on relative values) for each option, using the claims data collected
3. Preliminary subgroup pricing - divide into smaller groups, such as single vs. family
4. Anticipation of changes - adjust preliminary prices for the following:
   a) Medical and dental inflation
   b) Technological improvements
   c) Plan (benefit) changes
   d) Adverse selection
   e) Shifts in government benefits - causing private plan costs to increase
   f) Smarter consumers - upon seeing the cost of care, they stop using some unnecessary care
5. Taxes and administration fees - decide whether to include these in the price tags
6. Adjustments to realistic price tags
   a) Subsidized pricing (see separate list of reasons for and against using subsidized pricing)
   b) Carve-out pricing - subsidize all options by the cost of the lowest option, os that option then costs $0
7. No coverage option pricing - decide whether to allow employees to waive coverage, and calculate opt-out credits
8. Pricing by business unit or location - may be done to reflect local costs or competition

Question 43

Reasons for and against using subsidized pricing

Answer 43

Reasons to use subsidized pricing:

1. To encourage selection of cost-efficient options
2. To limit potential for adverse selection by encouraging broader participation

Reasons to avoid subsidized pricing:

1. Can skew employee choice by masking the true value of each option
2. Can restrict cost management effectiveness since some costs are hidden and are therefore harder to control
3. Re-pricing can be harder if prices are artificially derived in the first place
4. It is harder to determine employer cost because price tags no longer equal expected claims

Question 44

Decisions needed for developing the credit structure of the flexible benefit program

Answer 44

1. Source of credits (see separate list)
2. Amount of credits - for the upcoming year and develop a strategy for future years
3. Allocation of credits - considerations include:
   a) Equity (objective 2)
   b) Allowing repurchase of the current program (objective 3 - no losers)
   c) Organizational objectives (see separate list)

Question 45

Sources of credits for flexible benefit programs

Answer 45

1. Current benefits - employer costs or current benefits that will continue as part of the program
2. Benefit reductions - a plan may be eliminated and the savings may be used as credits
3. Additional employer money - to provide a new benefit plan or make the program more attractive
4. Wellness credits - employees may have to earn credits through health or wellness initiatives, such as not smoking and completing a health risk assessment
5. Renegotiation of compensation - employees can direct a portion of their bonus into flex credits
6. Employee after-tax payroll deductions

Question 46

Organizational objectives of credit allocation

Answer 46

1. Cost management
2. Profit sharing - allocate credits based on the profitability of the company
3. Service recognition - vary credits based on length of service
4. Social responsibility - may require a minimum level of coverage
5. Benefit value equity - may want to give the same number of credits to everyone
6. Employee performance - may link some credits to performance
7. Health awareness - link credits to a health awareness campaign

Question 47

Analyses for testing the pricing structure of the flexible benefit plan

Answer 47

1. Winners and losers analysis - a comparison of the employee’s situation before and after implementing the program
2. Employer cost analysis - involves identifying costs in the following categories:
   a) Credits
   b) Price subsidies
   c) Adverse selection
   d) Dependent coverage - will the program cause employees to change their coverage?
   e) Benefit utilization - will the new plan cause employees to change the services they use?
3. Reasonableness - test whether the options are understandable, if the price tags make sense, and if the credits are adequate for employee needs

Question 48

Plan design approaches for controlling adverse selection

Answer 48

1. Parallel design should be maintained - eg. include vision and ortho at the same coverage in all plans
2. Delay full payment - have lower benefits during a waiting period of 6 to 12 months
3. Certain coverages can be grouped together - predictable expenses (such as dental or vision) could be grouped with less predictable expenses (such as supplemental medical)
4. Offer a health spending account instead of insurance - useful for vision and dental
5. Not allow a large spread between options - could be done by requiring a core coverage level
6. Test the program with employees - to bring to light potential design weaknesses
7. Require proof of insurability for increases in coverage
8. Only allow mid-cycle changes if a life-changing event occurs
9. Limit the frequency of choice - allow benefit changes only every 2-3 years, instead of annually
10. Limit the degree of change - restrict changes to one level of coverage per year (staircase rule)

Question 49

Pricing strategies for controlling adverse selection

Answer 49

1. Risk-based pricing - price options in a way that reflects the expected cost of the benefit (eg. vary rates by age, gender, and smoker status)
2. Employer subsidization - subsidize prices to encourage broad participation, which will cause a better spread of risk

Question 50

Options for spreading the cost of adverse selection

Answer 50

1. Load the prices of the lesser-valued options - reduces the reward for opting down
2. Load the prices of the highest-valued option - this may cause more employees to opt down
3. Spread the cost of the adverse selection over the price of all options

Question 51

Common elements of private exchanges

Answer 51

1. Employee choice - private exchanges often offer more plan design options than traditional employer-sponsored plans
2. Employer subsidies - the employer typically makes a defined contribution
3. Ancillary product offerings - products such as dental and vision are often offered alongside medical and pharmacy benefits
4. Online enrollment and decision-making tools - these tools allow members to evaluate their health care needs, understand their employer’s subsidy, and elect benefits that meet their needs
5. Benefits administration - most private exchanges offer end-to-end benefits administration, including enrollment, eligibility, customer service, and billing

Question 52

Advantages and disadvantages of private exchanges

Answer 52

Advantages:

1. Increased employee choice
2. Cost-savings potential from increased competition across carriers and best-in-class carrier pricing
3. Increased consumerism from members buying-down benefits as a result of a transparent defined-contribution approach
4. Robust online decision-support tools and customer service
5. Benefits administration simplification
6. Shift of financial and regulatory risks (for fully-insured models)
7. Cost predictability (for fully-insured models)
8. Improved cost transparency

Disadvantages:

1. Additional expense for exchange operator financing
2. Less control over plan design, clinical management, and member outreach
3. The need for the employer to increase the defined-contribution amount over time
4. Other member concerns, such as loss of plan-sponsor support and less generous benefits

Question 53

Considerations for determining the employer’s optimal defined-contribution amount for a private exchange

Answer 53

1. Current funding approach - what is the employer’s current philosophy around subsidies and how does it compare to a defined-contribution approach?
2. Variations by coverage tier - does the employer want to subsidize dependents at a different level than the employee?
3. Member impact - how does this impact the member payroll contributions and what sort of dissatisfaction could arise?
4. Financial goals - does this change meet the employer’s financial goals?
5. Competitive pressures - how does the subsidy compare to the benefits provided by other organizations that compete for similar talent?