The employee benefits staff at auto parts manufacturer Simpson Automotive is preparing estimates of the costs of health plans that will be offered soon. Most options will be substantially more expensive because employees and family members received health care. The higher priced options include the fee-for-service plan, the HMO, and the PPO plans. Only the price of the high-deductible plan will remain the same.
The team of employee benefits analysts completed their evaluation in time for meeting with Yufei Wang, director of Human Resources, to discuss pricing. Lead analyst Nolan Hedrick announced that the total insurance costs will be 15 percent higher next year. He went on to explain that the cost estimate assumes that employees will remain in their current plans. Finally, Nolan indicated that 90 percent of employees are enrolled in the costly fee-for-service, HMO, and PPO plans because out-of-pocket costs are much lower than for the high-deductible plan.
Yufei anxiously replied, saying that the employee benefits budget for next year will be cut by 10 percent and, consequently, the higher health insurance costs are unsustainable. Nolan indicated that the best possible prices were negotiated with the insurance companies, but high employee utilization led to higher prices. Yufei pondered the cost concerns and came up with a solution: Encourage employees to switch to the high-deductible plan in exchange for a $1,000 bonus and those who do not will forfeit receiving a bonus and cost-of-living pay increase, the first offered after a five-year pay freeze.
Question:
1. Why do most employees prefer the HMO or PPO over a High Deductible plan? Are there some employees that may prefer the High Deductible (if so, what characteristics define those employees)?
2. Do you think Yufei’s plan is an ethical thing to do? Why or why not? Consider both the employer’s and employee’s perspectives.
3. What other options would you recommend Yufei consider that could help lower the overall employee benefits budget despite increasing costs for the health care plans?