Improve Employee Benefits With a Consumer-Driven Health Plan

January 1, 2010



Small businesses use employee benefits to attract and retain employees. Since there is no requirement for a business to provide employee benefits and relatively few legal mandates on the design or operation of these plans, employee benefits vary widely from company to company. The most common type of employee benefit plan is a health insurance plan, followed by 401(k) and a dental plan.

The effort to build goodwill using employee benefit plans backfires if employees do not appreciate the value of the benefits, or worse yet, hold the business owner accountable for benefit shortcomings outside of the employer's control.

One of the most common mistakes business owners make is to provide a Defined Benefit type of health plan design. These plans are characterized by benefit plans that provide a tightly controlled and limited choice of benefits. In a Defined Benefit plan, the employer actually does the shopping for a benefit product and presents it to the employees as "our benefit plan". These have become known in the by the phrase "one size fits all" plans, referring to the noticeable lack of employee selection. For example, the employer might interview three health plans and three investment companies, and select one of each of them. Each plan might have its unique strengths and weaknesses, but ultimately only one of the three choices was made available to the employees. The employer spends valuable time making a benefits decision that presumes to know what is in the best interest of its employees. Employees view this approach to providing employee benefits as paternalistic. A tangible repercussion of this trend is the increased likelihood of employees complaining to the employer or taking legal action when the employer-selected benefit does not meet performance expectations.

Another problem with these Defined Benefit type plans is dealing with increasing benefit costs. The most common example is cost of health plans. Over the next decade, heath plan costs could easily rise at two or three times the overall rate of inflation. This cost will likely rise faster than any other cost we face in operating a small business. Some business owners respond to this problem by re-shopping benefit plans every year or two, adding further stress to the problems listed above. Other firms respond by adding cost-sharing measures or cutting back benefit levels, neither of which are popular with employees. Some firms absorb the increased cost but adjust other expenses like wage increases to make up the difference. No matter what approach is taken the burden of increased costs rests firmly on the business owner's shoulders.

A smarter approach to providing employee benefits is the use of a Defined Contribution plan. This type of plan is characterized by the employer defining the dollar amount of benefits available to the employee, and then allowing the employee to arrange her own benefits without restriction. These are also known as consumer-driven health plans.  Almost all large employers utilize this approach, but many small employers have been slow to catch-on to the advantages. This is partly due to the marketers of small business insurance and retirement plans who tend to benefit financially from the old defined benefit plans. In general, unlimited employee choice means less business for any one benefits provider, the traditional insurance and investment complies tend to avoid this approach. A growing number of Internet-based firms provide these benefit plans free of charge or at a low fee to small businesses.

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