A dynamic employee benefit landscape is prompting organizations in all industries to review their employee and retiree benefit strategies. Hospitals in particular have a unique opportunity to manage benefit costs effectively while meeting their critical employee attraction and retention objectives. However, our research shows many are not yet taking full advantage of these opportunities.
To help hospitals address these challenges, Towers Watson recently conducted its 2012 Benefits Benchmarking Study of the U.S. Hospital Industry. The study examined benefit practices at 48 U.S. hospital organizations. In this article, three senior hospital industry consultants discuss the study’s findings and their implications for hospitals.
What is the Benefits Benchmarking Study, and how can hospitals use its findings to make thoughtful decisions about their employee benefit offerings?
DeFelice: The study draws on Towers Watson’s extensive database of benefit summaries to determine the value of benefits offered to hospital employees in the U.S. The database contains benefit information from over a thousand employers. Our findings provide insights that can help hospitals benchmark their employee benefits against those offered by their peers, including local competitors, so they can make better program design decisions in light of industry trends.
This is particularly important in light of the U.S. Supreme Court’s decision to uphold the Patient Protection and Affordable Care Act (PPACA). The hospital industry has already experienced dramatic change, in large part due to health care reform, and the pace of change will accelerate. Hospitals will feel increasing pressure to manage costs on the one hand and to engage the right talent to support new health care delivery approaches on the other. Developing optimal strategies for their benefit and reward programs will be more critical than ever — and is now on an accelerated timeline.
What are some of the key insights from the findings?
Dizenhouse: For one thing, the study sheds light on how dramatically benefit value can vary from one hospital to the next. For example, across the hospital systems in the study, the value of employer-provided medical benefits ranged from a low of 5.7% of pay to a high of 10.7%. Such wide variations suggest that hospitals are tailoring benefit programs to fit the needs of various workforce segments, and they are subsidizing a higher percentage for some groups (e.g., union employees) than for others. This kind of targeting — recognizing that one size doesn’t effectively fit all workers — will serve the industry well going forward, although there’s leverage to be gained from consistency in some core practices across the workforce.
Like organizations in many industries, hospitals must find ways to overcome a scarcity of critical-skill talent while differentiating themselves in their markets. Hospital systems’ workforces include many types of employees, ranging from food and environmental service workers, to technicians, administrative staff, physicians, other clinicians and executives. It’s not easy to design a reward program that serves the needs of each of these employee groups. To do it effectively, the employer must understand the benefit preferences of the various workforce segments. Hospitals are very good at providing health care programs for their customers (the communities they serve), but they’re not as proficient at meeting the health needs of their own employees. Across the systems that participated in our study, we don’t see hospitals leveraging their own services consistently for their employee populations, which is a missed opportunity in many cases.
We’ve also found that hospital workers know how to access care quickly, and they tend to care more about medical benefits and understand the value of those benefits better than do workers in other industries. Factors such as these need to come into play in benefit design and delivery.
Health care reform brings some unique opportunities and challenges as well. For example, the pay-or-play mandate raises issues for employees who are trading benefits for higher pay. Hospitals will need to consider all of the ways the employment deal is changing and get ahead of the curve to plan effectively for the future.
How do hospitals’ challenges compare to those faced by companies in other industries?
Dizenhouse: The cost of providing health care benefits for hospital employees is higher than the cost of providing similar benefits in other industries. And while one might assume hospitals’ employee medical benefits are rich, simply because providing medical services is their business, that’s not always the case. Hospitals tend to allocate a smaller percentage of their total rewards budget to employee medical benefits than do employers in many other industries. Fewer hospitals provide enriched benefits for employees who use the hospital’s own facilities — so-called “domestic” medical services — than one would think. Only roughly one-quarter do so explicitly, so there’s an opportunity for many of the others to cut costs for the organization and employees alike by incentivizing workers to use domestic services more often.
For example, I advised a hospital that has one of the best sleep programs in the country. Surprisingly, its own employees were using more sleep medicine than the workers of a typical employer in other industries. Here was a golden opportunity for the hospital to offer its employees the best treatment at a lower cost — onsite, where the hospital could have more control over the costs and the outcomes.
Hospitals could reduce costs, while increasing employee engagement and productivity, by offering more community programs onsite and making those services available to their own employees. For example, many hospitals offer wellness programs, including blood pressure and cholesterol screening, to members of their communities, but fewer do so for their own employees. So there are some close-at-hand solutions for hospitals, and some of these relatively minor initiatives can grow to become large, cost-saving, efficiency-producing programs.
In the disability arena, the value of hospitals’ programs is comparable to what other types of employers provide. But many hospitals use an antiquated delivery system for short-term disability, by providing coverage of up to 100% of pay based on an employee’s length of service. With these programs, there’s less incentive for employees to return to work if they receive full pay while they’re on disability — to say nothing of a host of other issues, from increased accounting obligations. to administrative challenges. In other industries, employers tend to use short-term disability programs that don’t offer full income replacement.
What retirement trends are emerging that hospitals can take advantage of?
DeFelice: Employers in all industries have been shifting the financial risk and cost of retirement plans to employees, primarily by moving workers from traditional defined benefit (DB) pensions to account-based arrangements, including defined contribution (DC) plans. For many years, hospitals lagged behind other employers in that area, but they’ve been catching up recently. Cost pressures have forced hospitals to put considerably less value into retirement benefits, and many have drastically reduced retiree medical programs.
When it comes to retirement savings programs, including DB and DC plans, hospitals on average provide about 70% of the value provided by companies in other industries. Approximately 80% of the hospitals in the study offer an account-based retirement plan as their primary retirement benefit. Nearly half of these hospitals are delivering the account through a hybrid DB plan. Rather than making a full transition to DC-only plans, hospitals have adopted hybrid retirement approaches, including cash balance or stable-value retirement accounts, to a greater extent than other types of organizations.
More and more, hospitals are also offering account-based health programs, including health savings accounts and health reimbursement arrangements (HRAs). These arrangements encourage employees to access services through the employer. And some hospitals provide employees with accounts they can use to offset their out-of-pocket expenses when their care is provided domestically.
Some fairly large health care systems use account-based HRAs to enable employees to accumulate money they can use to pay for medical care after they retire. This facilitates long-term retirement planning and can also enhance retention because HRAs don’t have to be vested the same way qualified DC programs do. So the hospital helps employees save for their retirement, but at a lower cost to the employer because vesting expenses are reduced.
Dizenhouse: That’s right. With an account-based HRA, the employer not only has full control over how to design and implement the program but also may use it to create a “simulated” retiree medical program. For example, if an employee reaches a certain service milestone or age — whether or not he or she is technically “retiring” from the organization — the hospital could allow the employee to use such an account to access funds that have been accumulating throughout his or her career. And if they’re designed correctly, they don’t create additional balance sheet obligations. These programs can boost employee engagement and help workers plan for and manage their retirement, even as traditional retiree medical programs continue to diminish in number and richness — and without adding incremental cost.
Winer: Let’s shift gears to total rewards. Employers in other industries are increasingly turning to this kind of holistic approach because it gives them more control over their expenditures and helps them allocate reward dollars efficiently. It’s a tailor-made approach to help hospitals balance their need to attract and retain crucial talent with their need to manage costs. Within regulatory constraints, it also helps hospitals customize the total package for various employee groups, depending on the groups’ preferences. For example, workers in some groups might prefer flexible working arrangements to incremental merit increases. This helps improve the employer’s return on investment.
Dizenhouse: I think hospitals’ interest in total rewards will surge, especially given the requirements they face from the PPACA to dramatically alter the way they deliver health care. They’ll have to deal with new payment models, and they’ll need workers with new skills, as primary and preventive services become more important elements of the service mix. On the HR side, the recruitment of top talent remains critical — particularly physicians, who are a new type of employee for many hospital systems. Effective compensation and reward design will be crucial as hospitals look to build new care delivery models, such as accountable-care organizations and patient-centered medical homes, where effective primary care is vital to success.
The right rewards — including pay and benefits but also going beyond those to programs for career development, training and work/life balance — will be critical employee attractors. The total rewards model is an important element of the employee value proposition (EVP). Time and again, our research has found that a strong EVP supports retention and engagement and helps to improve performance. That’s one reason why hospitals designing total rewards programs need to focus more on surveying employees to understand their preferences. When it comes to benefits, beauty is in the eye of the beholder.
Using the sophisticated survey tools available today, organizations often find that employees are willing to make trade-offs, such as choosing a lower-cost benefit over a more expensive one when the lower-cost one is more important to them. This willingness can be a huge win for employers, by not only saving them money but also ensuring a better return on the expenditure because employers can give employees what they want.
For instance, many health care workers highly value flexible scheduling because it lets them work for more than one organization at the same time or care for a family member at home while continuing their career. These employees will often “trade” a small pay increase for a more flexible work schedule. On the other hand, contract employees are more likely to opt for a higher hourly wage instead of a benefit. To those workers, having a larger amount of money in their pockets makes more sense, given their schedules and lives. What matters is that the employer understands these preferences and is able to meet employees’ needs in a cost-effective way.
But here’s an important caveat: Hospitals need to make sure their programs comply with the PPACA. The law requires employers to either provide adequate health care benefits to all workers or pay a penalty of several thousand dollars for each employee who works more than 30 hours per week and meets a few additional criteria. Hospitals unaware of this provision can face unexpected costs.
DeFelice: What we’re saying is that the hospital needs to find ways of getting more bang for its benefit buck. To manage costs effectively, the employer must decide what to cut and what not to cut, factoring the employee’s perspective into the equation as much as possible. Hospitals will need to make tougher choices, but they’ll also be able to pioneer new approaches to doing more with less budget.
That’s where total rewards come in. The application of a solid total rewards model allows the organization to determine the right balance of benefit features that matter to the employee and offer good value to the business.
Winer: On a broader level, we’re seeing a great deal of merger and acquisition activity in the health care industry, which puts up a different hurdle. Because of the benefit changes occurring these days, it’s not unusual to see two organizations with very different benefit programs coming together. In those cases, the big challenge is how to combine them into a single organization, while retaining the workforce and realizing the anticipated value of the deal. There again, the importance of total rewards can’t be overemphasized.
In summary, then, data from this study offer insights to hospitals that recognize the need for change and want to get ahead of what their competitors are doing. The study results will stimulate ideas for changes to hospitals’ employee benefit programs that will support the organizations’ business and mission strategies.