Benefits Special Report

Voluntary benefits: New choices for
employees, big savings for employers

As group health costs soar, voluntary products are an appealing option

By Len Strazewski

Employee benefits costs keep rising. Health care reform legislation is a snarl. Employees are cranky about changes in their benefits and increases in their deductibles and copayments.

What should employers and their trusted advisors do? Employee benefits experts say that voluntary benefits—employee-paid life, health and disability insurance and ancillary services—can provide valuable supple­ments to employer-paid benefits and give employers something positive to communicate to their employees at a time when most messages are negative.

“Dare to be different,” says David Harvey a former employee benefits consultant and now an instructor for the agents education program at the International Foundation for Employee Benefit Plans in Brookfield, Wisconsin. “Give employees some creative choices.”

Harvey describes the state of employee benefits programs as “an uphill slog” for employers as they continue to struggle with rising health care costs. As a result, they continue to massage plan design to contain the rate of premium increases and pass a greater portion of premium cost on to employees.

Most of their benefit communications are negative, he notes, explaining how costs are rising and why employees must contribute more out of their pockets. And, with the passage of new health reform legislation, which will bring mandated changes to the group and individual health insurance marketplace by 2014, agents and brokers may not be able to provide much relief or inspiration to change those messages.

However, Harvey says, “The biggest challenge for benefits producers right now is avoiding tunnel vision. With all of the challenges of group health plan costs, it’s easy to lose sight of the opportunities outside the world of group health plans.”

Employers are looking for benefit options that can provide some value to employees without additional costs to their companies, he says. Voluntary benefit programs provide benefits and services outside the scope of group health plans that can meet employee needs which employers have ignored or overlooked—without additional cost to the employers.

The key is to be creative in choosing appropriate benefits that can appeal to employees and in communicating their value effectively—making connections between the voluntary products and employee needs.

Health reform hasn’t been the only instigator of interest in voluntary benefits programs. The recession has also generated more interest in voluntary benefits from employers and stronger participation from employees, says Doug Mantz, vice president of Farmington Company in Farmington, Connecticut. His company communicates and administers voluntary benefits programs for employers.

Actual case counts are down a bit as the unemployment rate has increased, but employee participation rates in voluntary programs increased more than 20% in 2009, Mantz says. He says this is an indication that employees are interested in a broader range of benefits and that agents and brokers are doing a better job of communicating their value.

“Every employer has a different pattern of participation that can depend on demographics, the local economy...a wide range of factors,” he explains. “But in general, employees are realizing the value of many voluntary products in protecting their income or personal worth in uncertain times.”

Consumer-directed health plans such as health reimbursement accounts (HRAs) and health savings accounts (HSAs) that include high-deductible health coverage have grown in popularity, garnering as much as 85% participation at some employers. Their adoption has helped educate employees about health costs and the need to improve management of their income.

As a result, Mantz comments, employees are choosing voluntary benefits that provide additional income protection or fill in the gaps created by their high-deductible health plans.

Short-term disability insurance (STD) is one of Farmington’s most popular products as families live closer to the edge of their income, and Mantz has seen participation rates as high as 60% with good employer communica­tion. Also growing in popularity is critical illness insurance, which provides depth of protection for individuals with cancer and other serious illnesses.

Supplemental life insurance is also gaining in popularity with 30% or more participation, he says. Other voluntary products are identity theft insurance, homeowners and auto insurance, long term care insurance and pet medical insurance.

Filling the gaps

Jay Hutchins, vice president of broker marketing for Colonial Life and Accident Insurance Company in Atlanta, agrees that voluntary benefits products are gaining wide recognition and better-than-ever participation.

One of the oldest and largest voluntary benefit providers, Colonial Life, provides hospital confinement insurance, critical illness insurance, long term disability insurance (LTD), STD, supplemental life insurance, and enrollment and administrative services.

“We are a gap-filler for employees,” Hutchins says. “Many of our voluntary products fill in the gaps in coverage that people see in their group plans—additional costs of hospitalization, cancer and other illness expense, and loss of income due to short periods of disability.

“They see our products as a way of containing their costs.”

Voluntary benefits may be particu­larly valuable to small businesses that face greater health insurance cost and administrative challenges than larger employers, according to a recent report by Colonial Life. Small businesses may be the biggest new market for benefits producers.

The company’s review of insurance industry research indicates that almost one-third of employers with 10 to 100 employees—a prime market for many independent agents—lack a dedicated human resource manage­ment staff. They also tend to pay up to 18% more in group health premiums than do larger employers.

About 34% of small employers do not yet offer a voluntary benefits program, but about 43% of those surveyed by the company say they are interested in providing voluntary benefits in the future.

Hutchins say small business employee participation in voluntary benefits can be 50% or more with good communication and employer support.

Long term care

Long term care insurance (LTC) is another common component of voluntary benefits programs, but employee participation has lagged other products, benefits experts say. The coverage is perceived as too expensive for many blue-collar employees and not yet necessary for young employees who are generally unaware of the high costs of nursing home and assisted living services.

But the perception may be chang­ing—with the help of savvy benefits producers and some opportunities created by health care reform, says Dennis Healy, vice president of group long term care at John Hancock Life.

“Ten percent participation is excep­tional with LTC,” he says, “but that can vary dramatically by employer.”

Healy says small employers tend to be better markets for LTC coverage than larger employers. When benefits producers are successful in communicating the value of the coverage to top executives of small employers, these companies are more likely to purchase low levels of group LTC for all employees; this creates opportunities to offer voluntary LTC as a way to increase coverage for the executives and their employees.

Agents and brokers have a new opportunity to introduce a discussion of LTC, Healy adds. Health care reform legislation includes a voluntary federal long term care insurance program called Community Living Assistance Services and Supports (CLASS).

“Most employers are interested in CLASS, but few understand it,” Healy remarks. “Agents and brokers have an opportunity to offer their clients an education on the CLASS provisions and comparison to commercial products.

“Most employers will see that commercial LTC insurance is a superior benefit.”

Health spending options

Many voluntary benefits can also be coordinated with CDHPs, HRAs and flexible spending accounts (FSAs), which allow employers to structure ways for employees to make better use of their spending on health services, explains William Short, president and chief executive officer of AmeriFlex in Mount Laurel, New Jersey, a third-party administrator that specializes in managing health care spending accounts.

Employers are increasing their use of HRAs as a way of introducing flexibility and value to employees without adding to company costs, he says. Because HRAs use pre-tax dollars that can be rolled over from year to year, they provide both immediate value to employees as well as an opportunity to save for future medical expenses.

The plans can be designed to reallocate an existing group health benefit budget into an account that allows the employee to make a broader range of decisions about pharmacy and health services purchasing.

In the past, agents and brokers have been slow to promote HRAs because of the complexity of fund administration, Short notes. However, technology has now caught up to the administrative issues, and more TPA platforms allow for efficient manage­ment of both health services and pharmacy spending.

AmeriFlex is promoting a new product, Ameriflex Convenience Sleeve, a wrap-around for an employee’s health plan identification card that links an HRA account to an employee’s pharmacy benefit plan, providing enhanced flexibility for use of the HRA funds

“With demand comes innovation and opportunity, and brokers and employers would be wise to take another look at the HRA. As insurance premiums rise and health care reform efforts persist, there is no doubt that the HRA will become an increasingly attractive option,” Short declares.