Evaluate the advantages and disadvantages of each of the three approaches used by specific U.S. companies to reduce health care costs presented in the case

Employees covered by employer-sponsored health care plans in 2008 are paying over 119 percent more out of their own pockets than they did nine years ago, according to a study sponsored by the Kaiser Family Foundation and Health Research and Educational Trust. The cost of employee health care is a high priority issue in labor negotiations. The automobile industry, which has an aging workforce, already pays $9,000 per year, per employee, for health insurance, about 50 percent more than the rest of corporate America. In addition, companies in the manufacturing sector, such as the automotive and steel industries, that have made promises to give health benefits to retired workers are increasingly finding post retiree health benefits to be a huge cash drain that negatively affects firm performance. Employees’ monthly contributions to health insurance premiums for family coverage in 2008 averaged $279. The average monthly contribution for single coverage was $60. On an annual basis, average family and single coverage cost $3,354 and $721, respectively. Health care economists say that rising costs reflect advances in drugs and health care technology and a loosening of managed care cost restraints that were in force during the 1990s. Although employers are still paying most of employees’ health care costs, currently about 75 percent, most employers are in the process of shifting more costs to workers, in the hopes of lowering expenses by discouraging heavy use of doctors, hospitals, and prescription drugs. The following are some ways that companies are attempting to reduce health care costs:

¦ Medtronic, a medical-device manufacturer, is paying up to $2,000 per worker into a “personal care account.” Employees can spend the money as they choose, as long as it is on health care. The hope is that better information and greater personal responsibility will lead to better choices.

¦ In a pilot project, Ford gives bonuses to doctors who achieve treatment goals and rewards employees who agree to monitor health indicators such as blood glucose levels. It also tracks information on the quality of care given at 1,000 hospitals and feeds that information back to employees so they can use it to make better informed choices about where to go to get medical services.

¦ United Technologies requires that workers pick up 30 percent of the cost of using in-network services from managed care plans and 40 percent of out-of-network health services, until the costs reach caps as high as $10,000 per year.

Critical Thinking Questions

1. One of the key factors contributing to higher health care costs is the age composition of the American workforce. For example, the average age of U.S. employees covered by employer-provided health care plans is now 41 years, up from 38 in 2000. Why do you think the aging of the U.S. workforce increases health care costs? Do you expect this trend to continue in the future? Explain.

2. Referring to the approach used by United Technologies to lower health insurance costs presented in the case, what would be the maximum amount of out-of-pocket health costs that an employee could be expected to experience during a given year? How does this maximum annual health care expenditure at United Technologies compare to the average cost to employees of family health care coverage for 2008 that was given in the case? What conclusions do you draw from this health care–cost comparison?

Team Exercise

With a group of four or five students, evaluate the advantages and disadvantages of each of the three approaches used by specific U.S. companies to reduce health care costs presented in the case. How are the approaches similar? How do they differ? Is one approach superior to the others? Identify some key factors that you expect to affect the choices that managers make when they select ways to reduce health care costs. For example, would large companies (over 1,000 employees) select different methods to reduce health care costs than small companies (under 100 employees)? If so, why? Be prepared to present your team findings to the class.

Experiential Exercise: Team

This experiential exercise shows the importance of benefits communication between managers and employees. With a partner, decide who will enact one of two roles: (1) the role of a manager and (2) the role of an employee who is a subordinate in the manager’s unit. In the role-play, the manager has called a meeting to inform the employee that in the upcoming year the employee share of the cost of the health insurance premium for family coverage will increase $25 per month. The employee has a family with a stay-at-home spouse and is upset that the company is asking each employee to bear more of the burden of paying health insurance premiums. Each person role-plays their assigned role to be consistent with the situation. The role-play should continue for about 5 minutes. What could the manager have done to improve benefits communication? How could the HR department have helped the manager? The role-play partners should be prepared to share their insights of effective benefits communication with other members of the class.