Some years ago, one of my employee’s children had a health crisis.
It was an emotionally excruciating time for my colleague and his wife, as you would expect. As a small and close-knit firm, we all shared the experience, getting frequent updates about the little boy’s diagnosis, treatment and - to our great relief - eventual recovery.
Neither my employee nor I had to worry about the cost of that care, however. His family was covered under our company health plan, which I had structured to have no annual or lifetime caps on benefits. Services from specialists and hospitals outside our health plan’s network were covered too, albeit at higher out-of-pocket costs, but those costs were still manageable for our employee and insignificant when measured against a child’s life.
Fast forward to 2014. Tim Armstrong, the chief executive of AOL Inc., recently had to apologize for referring on an internal call to two “distressed babies” who cost his company around $1 million each in medical bills. Armstrong cited these costs, along with generally rising medical expenses and cost increases specifically associated with the Affordable Care Act, for his decision to defer and reduce AOL’s matching contributions to employee 401(k) retirement accounts.
His comments triggered a storm on cable television, online in news and social media and, apparently, within AOL itself. In short order, Armstrong not only apologized, but reversed his decision to cut the 401(k) benefit. As the dust-up started to settle, I wondered how we went in just a few years from a country in which a boss like me could proudly say his firm provided the medical benefits that saved a child’s life to one in which a CEO has to apologize for raising the subject.
One difference was immediately obvious: My worker’s medical expenses for his child had no bearing on my company’s financial position or on the amount I was able to spend for all forms of employee compensation. All I had to do was pay my share of our group insurance premiums. My share, at that time, was the full cost of a single employee’s coverage. Employees who wanted to cover spouses or other family members (including the staffer whose son got sick) paid the difference in premiums between the single and family rate. This kept my health insurance spending consistent between employees who had families and those who did not or whose families were covered elsewhere. Other firms did things differently, but my system was fairer: Two workers doing the same work at the same level of performance received the same health benefit from Palisades Hudson. Their personal situations were their business, not mine, though I was happy to facilitate coverage under our plan.
We had around 20 employees when that little boy got sick. AOL has around 5,000 employees today. Why did two AOL employees’ family health crises affect their company’s cash flow, while my worker’s did not affect mine?
In all likelihood, as Fortune editor Stephen Gandel recently pointed out, the difference was that AOL did not actually purchase insurance for its employees. Instead, AOL opted to self-insure. It collected “premiums” from employees for their share of health care coverage, and it hired an insurance company to administer benefits, but the actual cost of medical care remained with AOL. This method is generally cheaper than buying true insurance, but it is cheaper because the risk of unanticipated large expenses remains with the self-insured employer.
It is an approach that almost no very small company, like mine, would use. It is one that very large corporations have long employed, since their large staff virtually guarantees a certain number of expensive health crises every year. But at enterprises in the middle of the size spectrum, like AOL, self-insurance rapidly gained popularity over the past decade or two because it appeared to hold benefit costs down to acceptable levels.
Note that I said it “appeared” to hold down costs. It actually doesn’t. Even at a firm AOL’s size, incidents like the two “distressed babies” are inevitable; it was just a matter of time. When they happened, AOL had to pony up all the money it saved in insurance premiums over a period of at least several years to pay the bills. The savings were illusory.
My employee freely shared information about his son’s progress. We all knew exactly who was sick, along with details of his illness, treatment and recovery. His parents never had reason to feel their privacy was violated.
Yet Armstrong was severely criticized for even anonymously mentioning the two babies AOL’s coverage helped care for. And some of the most bitter criticism came in a piece on Slate.com by Deanna Fei, a writer whose husband is an AOL editor and whose daughter was born four months premature in 2012.
Fei recounted in detail (far more detail than Armstrong offered) her premature delivery, her daughter’s precarious condition in neonatal intensive care, the risk of lifelong complications and her child’s recent first steps as now an apparently healthy toddler.
“I take issue with how [Armstrong] reduced my daughter to a ‘distressed baby’ who cost the company too much money,” Fei wrote. “How he blamed the saving of her life for his decision to scale back employee benefits. How he exposed the most searing experience of our lives, one that my husband and I still struggle to discuss with anyone but each other, for no other purpose than an absurd justification for corporate cost-cutting.”
I think Armstrong is fair game for criticism that he mismanaged AOL’s health care risks by self-insuring in a way that pinched cash flow when a major insurance claim or two came along. I don’t think it’s fair, however, to portray him as having blamed “saving [a child’s life] for his decision to scale back employee benefits.” I think Armstrong is as pleased as I was that his company’s benefits could make such a difference.
It is simply a fact that if you give most employees a choice between receiving spendable cash or usable benefits today and receiving retirement benefits, even with a generous company match, years down the road, they will take the money or benefits they can use today. Every employee benefits specialist and corporate human resources manager knows this. Companies are getting a lot of criticism for cutting 401(k) matches, but the open secret is that much of that money they offer through company matches gets left on the table, especially by lower-paid employees. As health insurance costs keep rising, companies often maximize worker satisfaction by maintaining those benefits or by paying cash, rather than by tilting toward retirement benefits.
It is not Armstrong’s fault that health costs are rising or that the Affordable Care Act has done almost nothing measurable to make care more affordable. He might be embarrassed into restoring the 401(k) benefit for now, but ultimately the money for that benefit has to come from someplace. It will come from elsewhere in AOL’s compensation budget, via lower wages, reduced benefits or smaller employee head count. There is really no place else to get it. Though AOL is doing reasonably well right now in its core business of selling ads, its competition has names like Facebook and Google, not to mention every news and video site you can think of.
As for me, I stopped paying for employee health insurance several years ago, as I have previously described. Now that our employees have a right to buy insurance on ACA exchanges, and now that I am required to subsidize that right for the entire country though higher taxes, I would rather pay my staff directly and let them choose whatever coverage method makes the most sense for them. There is, accordingly, no chance that I will be blamed for mentioning a distressed baby. Nor, sadly, is there any chance I can ever again be proud of helping one.
Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book,
The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book
Looking Ahead: Life, Family, Wealth and Business After 55.
Posted by Larry M. Elkin, CPA, CFP®
photo of Tim Armstrong by C Flanigan/WireImage, via Flickr user TechCrunch
Some years ago, one of my employee’s children had a health crisis.
It was an emotionally excruciating time for my colleague and his wife, as you would expect. As a small and close-knit firm, we all shared the experience, getting frequent updates about the little boy’s diagnosis, treatment and - to our great relief - eventual recovery.
Neither my employee nor I had to worry about the cost of that care, however. His family was covered under our company health plan, which I had structured to have no annual or lifetime caps on benefits. Services from specialists and hospitals outside our health plan’s network were covered too, albeit at higher out-of-pocket costs, but those costs were still manageable for our employee and insignificant when measured against a child’s life.
Fast forward to 2014. Tim Armstrong, the chief executive of AOL Inc., recently had to apologize for referring on an internal call to two “distressed babies” who cost his company around $1 million each in medical bills. Armstrong cited these costs, along with generally rising medical expenses and cost increases specifically associated with the Affordable Care Act, for his decision to defer and reduce AOL’s matching contributions to employee 401(k) retirement accounts.
His comments triggered a storm on cable television, online in news and social media and, apparently, within AOL itself. In short order, Armstrong not only apologized, but reversed his decision to cut the 401(k) benefit. As the dust-up started to settle, I wondered how we went in just a few years from a country in which a boss like me could proudly say his firm provided the medical benefits that saved a child’s life to one in which a CEO has to apologize for raising the subject.
One difference was immediately obvious: My worker’s medical expenses for his child had no bearing on my company’s financial position or on the amount I was able to spend for all forms of employee compensation. All I had to do was pay my share of our group insurance premiums. My share, at that time, was the full cost of a single employee’s coverage. Employees who wanted to cover spouses or other family members (including the staffer whose son got sick) paid the difference in premiums between the single and family rate. This kept my health insurance spending consistent between employees who had families and those who did not or whose families were covered elsewhere. Other firms did things differently, but my system was fairer: Two workers doing the same work at the same level of performance received the same health benefit from Palisades Hudson. Their personal situations were their business, not mine, though I was happy to facilitate coverage under our plan.
We had around 20 employees when that little boy got sick. AOL has around 5,000 employees today. Why did two AOL employees’ family health crises affect their company’s cash flow, while my worker’s did not affect mine?
In all likelihood, as Fortune editor Stephen Gandel recently pointed out, the difference was that AOL did not actually purchase insurance for its employees. Instead, AOL opted to self-insure. It collected “premiums” from employees for their share of health care coverage, and it hired an insurance company to administer benefits, but the actual cost of medical care remained with AOL. This method is generally cheaper than buying true insurance, but it is cheaper because the risk of unanticipated large expenses remains with the self-insured employer.
It is an approach that almost no very small company, like mine, would use. It is one that very large corporations have long employed, since their large staff virtually guarantees a certain number of expensive health crises every year. But at enterprises in the middle of the size spectrum, like AOL, self-insurance rapidly gained popularity over the past decade or two because it appeared to hold benefit costs down to acceptable levels.
Note that I said it “appeared” to hold down costs. It actually doesn’t. Even at a firm AOL’s size, incidents like the two “distressed babies” are inevitable; it was just a matter of time. When they happened, AOL had to pony up all the money it saved in insurance premiums over a period of at least several years to pay the bills. The savings were illusory.
My employee freely shared information about his son’s progress. We all knew exactly who was sick, along with details of his illness, treatment and recovery. His parents never had reason to feel their privacy was violated.
Yet Armstrong was severely criticized for even anonymously mentioning the two babies AOL’s coverage helped care for. And some of the most bitter criticism came in a piece on Slate.com by Deanna Fei, a writer whose husband is an AOL editor and whose daughter was born four months premature in 2012.
Fei recounted in detail (far more detail than Armstrong offered) her premature delivery, her daughter’s precarious condition in neonatal intensive care, the risk of lifelong complications and her child’s recent first steps as now an apparently healthy toddler.
“I take issue with how [Armstrong] reduced my daughter to a ‘distressed baby’ who cost the company too much money,” Fei wrote. “How he blamed the saving of her life for his decision to scale back employee benefits. How he exposed the most searing experience of our lives, one that my husband and I still struggle to discuss with anyone but each other, for no other purpose than an absurd justification for corporate cost-cutting.”
I think Armstrong is fair game for criticism that he mismanaged AOL’s health care risks by self-insuring in a way that pinched cash flow when a major insurance claim or two came along. I don’t think it’s fair, however, to portray him as having blamed “saving [a child’s life] for his decision to scale back employee benefits.” I think Armstrong is as pleased as I was that his company’s benefits could make such a difference.
It is simply a fact that if you give most employees a choice between receiving spendable cash or usable benefits today and receiving retirement benefits, even with a generous company match, years down the road, they will take the money or benefits they can use today. Every employee benefits specialist and corporate human resources manager knows this. Companies are getting a lot of criticism for cutting 401(k) matches, but the open secret is that much of that money they offer through company matches gets left on the table, especially by lower-paid employees. As health insurance costs keep rising, companies often maximize worker satisfaction by maintaining those benefits or by paying cash, rather than by tilting toward retirement benefits.
It is not Armstrong’s fault that health costs are rising or that the Affordable Care Act has done almost nothing measurable to make care more affordable. He might be embarrassed into restoring the 401(k) benefit for now, but ultimately the money for that benefit has to come from someplace. It will come from elsewhere in AOL’s compensation budget, via lower wages, reduced benefits or smaller employee head count. There is really no place else to get it. Though AOL is doing reasonably well right now in its core business of selling ads, its competition has names like Facebook and Google, not to mention every news and video site you can think of.
As for me, I stopped paying for employee health insurance several years ago, as I have previously described. Now that our employees have a right to buy insurance on ACA exchanges, and now that I am required to subsidize that right for the entire country though higher taxes, I would rather pay my staff directly and let them choose whatever coverage method makes the most sense for them. There is, accordingly, no chance that I will be blamed for mentioning a distressed baby. Nor, sadly, is there any chance I can ever again be proud of helping one.
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