Rethinking Benefits, Consumerism and Incentives Strategies with Wendy Lynch

LYNCH
Consulting LTD
Saving your business
and your people
Who Survives?
How Benefits Costs are
Killing Your Company
Wendy D. Lynch Ph.D.

Every day,
employees make hundreds of
choices that affect business
directly

© 2013 Lynch Consulting LTD
Daily choices
 At work Do I come to work today?
 Motivated Do I give my full effort?
 Effective Do I acquire new skills?
 Healthy Do I make healthy choices?
 Stay Do I look for another job?
These are all connected

IF your employees have the
opportunity to
1) lower expenses
2) be more productive
Do you want them to?
Can they?

We’ve been led to believe the problem is……
Unhealthy lifestyle and illness

3 companies, 3 health cost stories
$3,536
$2,705
$4,981
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
Company #1 Company #2 Company #3
Predicted Medical Costs
Three companies:
Same gender, age, tenure, salary.
Healthiest
Most Wellness

Predicted Medical Costs by
Company
Predicted Medical Costs
$3,536
$2,705
$4,981
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
#1 #2 #3
Three companies: Administrative Workers. Modeled as same age,
same gender, same tenure, same salary, same # diagnoses,
same co-morbidity, same region of the country
Not health

Us versus them…..
Usual Approach: It’s the employees fault.
 They aren’t healthy
 They have bad attitudes
 They don’t have good skills
We need to change employee behavior!
________ management
pick one: case, care, disease, absence,
stress

Face the facts
 Health-related costs are not simply
due to health problems
 Employers won’t be solving the
wellness problem any time soon.

Do you really want to know?
If things don’t work
like you THINK they do……

opportunity to
1) lower expenses
Will they?

Imagine that…a company is a
river….
Optimal
Performance

When things go wrong…..
Inefficiency,
High Costs
and Low
Performance

Currents aligned with optimal
human capital performance

“Currents” are incentives
Aligned with optimal
High Job Performance
Optimal Benefits Use
High Engagement in Health Protection
Job Mobility
Financially Self-Sufficient
Capacity Growth

Currents misaligned with
optimal human capital performance

Currents are incentives
Low Performance
High Benefits Use
Low Engagement in Health Protection
Job Lock
Financially Limited
Capacity Stagnation
Misaligned with optimal

The reservoir of capacity each
human has to contribute to the
well-being of his community,
job and family.
Comprised of three types of
assets:
•Skills
•Health
•Motivation
Health Motivation
Skills
Human Capital

Human Capital
Human Capital
Assets
How you
choose
Work,
Leisure
You Spend
Money
Recognition
Travel
To Get
Something
Useful or
Satisfying
Rewards
Intrinsic,
Extrinsic,
Monetary,
Intangible
Health Motivation
Skills

Less earnings… more benefits
and other benefits

Compensation as Motivation
Who Survives: Lynch & Gardner, 2011
60.0%
3.0%
3.0%2.0%
1.0%
13%
11%
7.0%
Wages
Performance Bonus
Retirement
Training
Health Accounts
Health Insurance
Paid Time Off
Taxes
Misaligned rewards for
Low Performance
Absence
Health care utilization
Rewards for
High performance
Attendance
Health

Currents aligned with optimal

Currents are created
through incentives
Shared
Rewards
Short-term rewards
Longer-term human capital investments
Something to Gain1

Shared Rewards
Does this condition exist for most employees? Check if Yes
Eligible for performance bonuses
If yes, employees know exactly how their bonus is determined
Bonus is at least partially determined by individual performance
Total amount employees can earn in bonus or profit sharing is >10% of salary
Can cash-in some unused paid time-off at 100%
Cover prevention/screenings at 100% (no deductible)
BOTH: Offer training/tuition allowance worth at least 2% of salary
AND >10% of employees use it
BOTH: Offer a HSA with $2,000 or more in employer funds
AND at least 30% of employees choose this option
Match a 401K deposit at 4% or higher
All workers have multiple opportunities to increase skills and advance

Implications
Score Result Implication
0 to 3 Misaligned Productivity 30%-40% below achievable.
High turnover of top performers.
4 to 6 Neutral Productivity and turnover will depend on
other factors. When business climate is
good, performance will be better. When
climate is difficult, performance will
suffer.
7 to 10 Aligned Strong productivity. Retention of high
performers.

Data on shared rewards
Variable pay
 35 - 44% increase in output
 15 - 25% increase in average wage
Profit sharing
 Three studies: productivity increased by
◦ 5% - 9%
Ohkusa, Y. Journal of the Japanese and International Economies, Elsevier, vol. 11(3), pages
385-402, September.
Cable, J.The Economic Journal, Vol. 99, No. 396 (Jun., 1989), pp. 366-375.
Lazear. The American Economic Review. 2000. Vol 90. No.

Reduction in absences after
implementing pay-for- performance
Average monthly absences in department
After bonus

Likelihood of STD by Percent of
Variable Pay For Which Employee is Eligible
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
0% 10% 20% 30% 40% 50% 60%
Relative Variable Pay (Variable Pay/Total Compensation)
LikelihoodofHavinga(Non-Pregnancy)STDClaim
Likelihood of having a (Non-
Pregnancy) STD Claim, controlling
for age and gender.
Likelihood of having a (non-pregnancy)
STD claim, controlling for age and gender.

opportunity to
Will they?

Realign Compensation to Optimal
Realign and
Maximize Revenue
60%
3%3%
2%
1%
13%
11%
7%
Wages
Performance Bonus
Retirement
Training
Health Accounts
Health Insurance
Paid Time Off
Taxes
60%15%
3%
2%
3%
5% 5%
7%
Company X
Optimal Benchmark

Currents are created
through incentives
Shared
Rewards
Short-term rewards
Longer-term human capital investments
Something to Gain1
Shared
Responsibilities
Something to Lose2
Consequences
Ownership of decisions

Shared Responsibilities
Does this condition exist for most employees? Check if Yes
A pay statement clearly identifying the dollar value of all
investments/benefits the organization makes on their behalf
A PTO bank of time off, rather than separate sick leave, vacation, etc.
Less than 100% of pay during short-term / long term disability
A company-wide high-deductible health plan, with the deductible at least
$2000/$4000 (individual/family)
An out-of-pocket maximum of $3000/$6000 (individual/family) or higher
Fewer than 31 days of paid-time off per year including holidays (but
options for unpaid time)
Active use of a quality improvement process (such as lean six sigma) at all
levels of the organization
A culture encouraging independent decisions about work
Resources for financial decision-making provided
Resources for healthcare decision-making provided

Implications
Score Result Implication
0 to 3 Misaligned Avoidable healthcare utilization up to 30%
higher regardless of health status. High
absenteeism and disability rates.
4 to 6 Neutral Healthcare utilization and absenteeism
will depend on other influences, such as
business climate.
7 to 10 Aligned Prudent spending of healthcare dollars.
Minimal avoidable cost. Minimal excess or
unplanned absences.

83%
10%
7%
Human Capital
We
exchange
work for pay
The employment contract
Health Motivation
Skills
Performance
Rewards
Compensation

Human Capital
When we
substitute
benefits for
performance
rewards
Reward
What?
benefit 1
benefit 2
benefit 3
?
83%
10%
7%
Investments Safeguards
Taxes
Health Motivation
Skills
69%
24%
7%
Performance
Rewards
The employment contract

69%
24%
7%
Rewards
Business Investments
When we
substitute
benefits for
performance
rewards
Reward
What?
Unlimited
sick leave
@ full pay
Extreme incentives: Belgium
• 1.3% GNP
• Some departments
35 days/year
• 65% could be working
• Most labeled with
depression
Health Motivation
Skills
?
Performance

69%
24%
7%
Business Investments
When we
substitute
benefits for
performance
rewards
Reward
What?Health Motivation
Skills
?
Performance
Misaligned incentives: healthcare
Rewards
Rich
Medical
Benefits
• Cover Bariatric Surgery
• New employees
getting surgery
• Full coverage and STD
• Most quit in 18months

0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8 9 10
SharedRewards
Shared Responsibilities
Aligned
Pampered Partners
Entitled Disengaged
AlignedMisaligned
Misaligned
An aligned work contract
High
performance
and high
benefit costs
High
performance
and low
benefit costs

opportunity to
2) lower expenses
Will they?
YOU
YOU?

Realign Compensation to Optimal
60%
3%3%
2%
1%
13%
11%
7%
Wages
Performance Bonus
Retirement
Training
Health Accounts
Health Insurance
Paid Time Off
Taxes
60%15%
3%
2%
3%
5% 5%
7%
Optimal Benchmark

Another kind of current….
Insurance coverage….
If you don’t know what you
SHOULD be paying……..
Are you likely to be under or
over paying?
Under
Paying?

Another kind of current…..
If the real cost is hidden
And there are conflicting goals
among plan/brokers/team
Are you likely to be under or
over paying?
Over paying?

Have you ever wondered if maybe….
you aren’t getting the best deal?
Fees
Premium
Insurer’s risk
Employee
Cost-share
$2,000,000
$1,000,000
$1,500,000
$500,000
$0
$500 deductible
Fully-insured
CDHP ($3500)
Fully-insured
Fees
Premium
Insurer’s risk
Employee
Cost-share
Health
Account
Difference
< $200K

Have you ever wondered if maybe….
you aren’t getting the best deal?
Fees
Premium
Insurer’s risk
Employee
Cost-share
$3,000,000
$1,500,000
$2,500,000
$500,000
$0
$500 deductible
Fully-insured
Self-insured,
CDHP ($4000)
Fees
Premium
Insurer’s risk
Employee
Cost-share
Health
Account
Difference
< $300K
Employer’s
Exposure
$2,000,000
$1,000,000

How do you know?
you don’t.
Unless you go through an informed
coverage review process.

The typical process ignores…..
Five things in a rational coverage review
PROCESS (see all sides – and their incentives)
Design, Optimizing:
1. Level of Risk
2. Consumer selection (the right plan)
Transparency, Identifying
3. Reasonable rates
4. Add-on fees
5. Optimal negotiation strategy
Nobody tells you

What did the coverage review
process find?
Fees
Premium
Insurer’s risk
Employee
Cost-share
$2,000,000
$1,000,000
$1,500,000
$500,000
$0
$500 deductible
Fully-insured
CDHP ($2500)
Fully-insured
Fees
Premium
Insurer’s risk
Employee
Cost-share
Health
Account
Difference
< $200KOptimal RiskTransparent rates & negotiation
New (better) design
transparent
Difference
$375K moreOptimal Selection
Employer

Fees
Premium
Insurer’s risk
Employee
Cost-share
$3,000,000
$1,500,000
$2,500,000
$500,000
$0
$500 deductible
Fully-insured
Self-insured,
CDHP ($4000)
Fees
Premium
Insurer’s risk
Employee
Cost-share
Health
Account
Difference
< $300K
Employer’s
Exposure
$2,000,000
$1,000,000
What did the coverage review
process find?
Transparent rates
Transparent fees
& better negotiation
Difference
$500K more
Self-insured,
CDHP ($3000)

Of savings, percent attributable to
design and transparency elements
60%
20%
0% 0%
20%20%
0%
50%
0%
30%
25%
13%
21%
42%
0%
38%
0%
15%
46%
0%
10%
20%
30%
40%
50%
60%
70%
Risk Consumer
selection
Reasonable
rates
Add-on Fees Optimal
Negotiation
Strategy
Design, Optimizing…. Transparency identifying…
Company 1: $ 600,000
Company 2: $375,000
Company 3: $675,000
Company 4: $575,000
$1,000 to $,3000
PER EMPLOYEE

What/who gets in the way?
Would your internal team…..?
Would your health plan representative…..?
Would your broker…..?
Welcome an independent review

It will do more good for your
employees
60%15%
3%
2%
3%
5% 5%
7%
than it does giving it to the
insurance company

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Contact:
Wendy@lynchconsultingltd.com 303-949-7666

Rethinking Benefits, Consumerism and Incentives Strategies with Wendy Lynch

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