Guest Article

(From the May 14, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

GAO Report Looks At Employers' Efforts to Control Benefit Costs

Health and retirement benefit costs have increased at more than three times the rate of wages and other benefit costs since 1991, according to an analysis by the Government Accountability Office (GAO). So it should come as no surprise that, during this same time period, employers have focused their compensation cost control efforts on these benefits. As a result, 401(k) plans and other defined contribution plans have replaced defined benefit plans as the predominant form of employer-provided retirement benefits. Similarly, traditional fee-for-service health benefit plans have been replaced by managed care plans -- and consumer-directed health plans (CDHPs) are coming on strong. But how do these and other changes to retirement and health benefits affect employees? A new GAO report (Employer-Sponsored Health and Retirement Benefits: Efforts to Control Employer Costs and the Implications for Workers, GAO-07-355 (March 2007)) tries to answer that question.

The GAO Report provides a useful overview of employer-sponsored benefits, how health and retirement benefits have evolved, and the types of changes employers have been making to these benefits in order to manage costs. For example, the GAO Report repeats the well-documented rise of defined contribution plans and the concurrent decline of defined benefit plans, and notes the shift from traditional final average pay defined benefit plan designs to cash balance and other hybrid designs. It also traces the trend of shifting health benefit cost increases to employees by raising their premium contributions and increasing deductible, copayment, and coinsurance requirements. Finally, the GAO Report discusses the rise of new health benefit options such as CDHPs and so-called "mini-medical plans" (which are characterized by very low annual and/or lifetime benefit caps), as well as health and wellness programs. But the GAO Report is fairly short on details about how these and other changes affect employees.

Managing Retirement Benefit Costs

With respect to retirement benefits, the shift from defined benefit to defined contribution plans means employees' ultimate retirement benefit largely depends on when they enroll, how much they contribute, and how well they manage their investments. The GAO Report acknowledges this, but does not attempt to compare outcomes for employees in defined benefit and defined contribution plans -- a daunting task, to be sure. Instead, it summarizes how employers are turning to automatic enrollment, automatically escalating contributions, and default investments to make certain an employee's inaction does not prevent him or her from taking advantage of the opportunity to save for retirement through a defined contribution plan.

Health Benefits

Turning to health benefits, the GAO Report explains that rising health care costs likely have prevented new small employers from offering health benefits to employees. However, recent cost trends generally have not caused existing employers -- large or small -- to drop health benefits. Instead, the GAO Report identifies several ways employers have attempted to manage their health benefit costs. These include:

The effect on employees of shifting costs through premium contributions, deductibles, and copayments, etc. is fairly obvious -- that is, employees must pay more for their health benefits. But, as the GAO Report points out, some employees are better able to absorb these higher costs than others. According to the GAO Report, "the Agency for Healthcare Research and Quality reported that between 2001 and 2004, enrollment among eligible workers employed by large retail firms -- which often employ low-wage workers -- fell, while enrollment among all employers held steady." Specifically, "enrollment among workers at large retail firms with 1,000 workers or more dropped from about 76 percent in 2001 to about 67 percent in 2004, while enrollment by eligible workers among all large employers held steady at about 81 percent over the same period."

The effect of CDHPs and mini-medical plans on employees are less clear. Both types of plans can be more affordable for employers and employees, which might result both in more employers offering health benefits and more employees enrolling. However, lower income employees might not be able to afford to pay out-of-pocket medical expenses, meaning they may be forced to delay or skip needed medical care. Also, CDHPs and mini-medical plans might not be good for employees with chronic illnesses.

Workforce Restructuring

Finally, the GAO Report examines the effect of using contingent workers on employers' benefit costs. As a general rule employers do not provide health and retirement benefits to contingent workers, so using contingent workers can reduce benefit costs. However, the GAO Report notes that employers may restructure their workforces for a variety of strategic reasons, and in any given case reducing benefit costs may be but one of many factors.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Laura Morrison 202.879.5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.