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Entitlements and the Economy: Some companies are using red ink to rewrite worker benefits

Health and retirement benefits once provided a lifetime link between employers and employees. But as responsibility for these assumed entitlements has shifted from boss to worker, that connection has changed, too. 

Consider Amy Rodgers, vice president of Rodgers Engineering, and Araceli Gonzalez, a project engineer who has worked at that company for about 16 years. Addison-based Rodgers, which makes components for the automotive industry, has always prided itself in offering workers good benefits, Rodgers says. But last year, she says, the company’s health care costs rose about 15 percent. That meant the company paid nearly $1 million in health care premiums. Like many companies, Rodgers offset that increase by tinkering with health plan offerings and shifting costs to employees through higher deductibles and drug co-pays. So far, the only change Gonzalez has noticed is the hike in her prescription co-pay. But if the day comes when her share of health care costs rises too high, Gonzalez says she will consider going without insurance. 

Still, Gonzalez is sympathetic to her employer, saying she understands all companies are facing tough decisions as the economy recovers. Meanwhile, her employer is working to keep morale up by educating the company’s 250 employees about the problem and being more flexible with other benefits, including time off. But Rodgers says the company knows it has to continue to cut costs to compete with low-cost producers in China and Mexico. “All the actions we’ve taken have been necessary to keep us competitive in a world market.” 

Rodgers Engineering isn’t alone. 

Illinois and national human resource experts say there’s been a sea change in the attitude of workers and companies toward the benefits and perks some had come to expect. Gone is the entitlement mentality that grew out of the booming 1980s and ’90s, when many employers picked up all or a substantial part of the tab of such mainstay benefits as health care and offered such sexy perks as pingpong tables in the lunchroom and in-house dry cleaning. 

Now, in the wake of the recession, companies are wrestling with the rising costs of core benefits. “Employers are realizing that they can’t shoulder all the cost of providing benefits,” says Mary Lynn Fayoumi, president of the Management Association of Illinois. “They have to get their employees involved.” 

Health care costs are the most immediate concern. Across the country, companies have seen health care expenses nearly double over the past decade. They were hit with a fourth year of double-digit increases last year, according to a survey by Mercer Human Resource Consulting, a unit of New York City-based Marsh & McLennan Companies Inc. In 2003, employers offering health plans saw an average 10 percent increase, and the expense is expected to rise again by about that share in 2004. It’s important to note that those 10 percent increases came after companies took out red pens to trim the types of plans offered and to increase the share that employees would bear. 

Last year, many companies shifted a more significant portion of the increase to their workers. As a result, the average percentage of the premium paid by workers for employee-only coverage in health maintenance organization plans rose to 35 percent from 31 percent the previous year. The average percentage of the premium paid by workers for family coverage rose from 50 percent to 57 percent. The survey found similar trends for preferred provider plans. 

Many company executives also told Mercer that continued increases will be “unsustainable” if not held to a maximum of 8 percent annual hikes. Something will have to change if workers are going to continue to get their health care coverage through employers, says Jeff Black, leader of Mercer’s Chicago health and group benefits practice.

“The unsustainable part is that health care can’t continue going up and up, especially in a day and age when companies, if they’re lucky, are only growing at a 2 percent clip,” Black says. “Some kind of change is crucial.” 

There’s no single cause for the higher costs, experts say. “It’s really a blending together of a lot of different drivers,” Black says, of which medical advances are one element. For example, many patients are demanding more expensive technology and services, such as an MRI when a less costly option, such as an X-ray, might work just fine.

Gary Claxton, a vice president of the Kaiser Family Foundation, a Menlo Park, Calif.-based independent health research group, says that rising hospital costs and higher prescription drug costs also are part of the increase. Industry consolidation, for example, has given hospitals more clout in bargaining with insurers. 

In addition, the roll-out in recent years of new blockbuster drugs, anti-cholesterol medication as an example, also has pushed costs up. 

Medical advances tend to require consumers to pay up. “Consumer electronic advances tend to let you do more for less money, but in health care you get more for more money,” Claxton says.

Pension benefits are a growing concern, too. Fewer companies are offering them. The percentage of those offering any kind of retirement plan dropped from about 64.9 percent in 1994 to 62 percent in 2002, according to a survey by the Congressional Research Service. Pension benefits peaked in 1999, when 66.8 percent of U.S. workers were offered employer-sponsored plans. 

But that shift isn’t entirely the result of the recession, says Patrick Purcell, a specialist in social legislation for the research service. He says another reason, which shows no sign of abating, stems from a change in the type of industry that is generating jobs these days. “There’s been a continuing long-term shift in the distribution of employment out of mining and manufacturing that offer these benefits to attract skilled labor and into retail and other service industries where retirement benefits are not as widespread.” 

While the congressional survey does not look solely at Illinois, the trend away from manufacturing fits similar shifts in this state. The manufacturing sector experienced the greatest annual job losses from 1998 through 2002. In addition, though a report issued by the Illinois Department of Employment Security found jobs were more plentiful in health care, retail and temporary services in November, losses continued in most sectors. Further, there are indications the Illinois recovery may be slower than elsewhere in the country. In November, Illinois’ unemployment rate, unchanged from October, was 6.7 percent, compared to a national unemployment rate of 5.9 percent.

In a sense, the slimming down of benefit packages means companies are going back to the future, says Jim Jaffe, a spokesman for the Employee Benefit Research Institute in Washington, D.C. He says it wasn’t until World War II, when labor shortages were prevalent, that an increasing number of companies began to provide retirement packages and health care coverage to win over employees. 

This occurred because of government wage controls designed to prevent inflation. Not considered wages, fringe benefits offered a way to sweeten job offers. Over the years, those benefits have come to account for an increasingly larger slice of the compensation pie. In 1970, benefits accounted for about 11 percent of U.S. workers’ total compensation, rising to 15 percent in 1999, according to the Employee Benefit Research Institute.

That has begun to change. “Employers have basically tried to transfer some of the risk in both health care and pensions to employees,” Jaffe says. 

This latest trend has accelerated for reasons unrelated to the recession, Jaffe and others maintain. In fact, some workers’ rights organizations suggest that companies are using the economy as an excuse to continue to pull back on retirement plans — as they have steadily over the past 12 years, in the booming 1990s and the sluggish post-September 11 economy. “The lesson is to listen with a highly skeptical ear when business starts bemoaning the woes of [retirement] plans,” says John Hotz, deputy director of the Pension Rights Center in Washington, D.C. 

Perhaps more surprising is the empathy that at least one union leader has for the position employers find themselves in on health care benefits. Margaret Blackshere, president of the AFL-CIO in Illinois, says health care has been taking up the majority of the time at the bargaining table as unions struggle to hammer out contracts in which proposed higher health care costs for workers threaten to wipe out the benefits of any wage increases. 

Companies such as Albertsons Inc., the parent of Chicago-based Jewel Food Stores, and Moline-based Deere & Co., maker of agricultural machinery, both won concessions over the past year that will increase some union workers’ responsibilities for their health care premiums. 

“The majority of employers are up against the wall on this,” Blackshere says. “There’s no doubt about it.” 

Mindful that there’s no end in sight to the rise in health care costs, employers, industry associations and state legislators are seeking other ways beyond cost-shifting to bring down expenses.

Some companies, including Itasca-based Arthur J. Gallagher, an insurance brokerage and consulting company, are hiring outside contractors this year to help develop programs that will encourage workers to better manage health problems and prevent new ones. 

Gallagher has already made some major changes to its health care plan offerings since it faced a steep rise in costs back in 2002, according to Janet Hoggay, a corporate benefits manager with Gallagher. Though those steps helped hold down the rate of cost increases, Gallagher hopes Gordian Health Solutions Inc., a Tennessee-based company, will provide employees with assistance in managing chronic diseases such as diabetes, cardiac problems and asthma, which could realize a savings, Hoggay says.

Hoggay acknowledges the company sought out the program in part because there is now little left to cut from its health care offerings. It also makes sense, she says. “It’s taking what a lot of plans have done in the past in terms of general wellness programs and taking it to a further significant level,” Hoggay says. 

The National Federation of Independent Business, which represents small and privately held companies and has about 21,000 members in Illinois and 600,000 nationwide, is in favor of some state initiatives that would reduce premium costs, says Kim Clarke Maisch, that organization’s Illinois state director. 

While the members are not interested in a nationalized health care solution, Maisch says they would like to increase access to affordable health care coverage for businesses. This might be achieved in part, she says, by eliminating more than a dozen state-imposed coverage requirements that boost premium costs. 

For example, she says, Illinois requires any company offering workers’ insurance to provide plans that cover infertility treatments. If some of those mandates were struck down, Maisch says that might encourage insurance companies to offer bare-bones coverage that more companies could afford. “Small businesses need options.” 

Another approach championed for several years by Rep. Karen May, a Highland Park Democrat, would allow small businesses to set up a pooled health insurance plan to share risks and help lower costs. The plan would require about $1 million in start-up costs but would be funded by the businesses thereafter, she says. About 700,000 of Illinois’ uninsured are estimated to be full-time employees, and May says she believes such a plan could ultimately help lower the cost of insurance for all because it would reduce the number of people who are forced to rely on high-cost emergency rooms instead of routine doctor care. “As a society, people are uneducated about the huge risks of not having health insurance,” May says. 

The problem is not only a concern of smaller employers, according to Black of Mercer Consulting. He says Mercer is working with about 25 large corporations from across the country, including some in Illinois, that are hoping to use their clout to attack health care costs. Black says changes already have been made by employers and employees through cost-shifting that have made patients better medical consumers.

Now hospitals and doctors must make some changes, he says. For example, they could be made to offer more information to prospective patients about the costs they face and the risks and/or benefits of paying lower or higher prices for the care they receive. “You’re really talking about a transformation in the marketplace,” Black says. “People would shop around more, ask more questions and make value-based decisions.” Such change could take as long as a decade to occur, Black says. 

The consequences of changing retirement plan offerings are less clear. The Pension Rights Center says it is troubling that companies are shifting away from offering defined benefit plans in favor of defined contribution plans. 

So-called defined benefit plans, more traditional pensions, reward workers who stay with a company for much of their lives. They offer set monthly payments after retirement. Defined contribution plans, including the 401(k), are made up of worker, and sometimes employer, contributions and are managed by the worker. 

Hotz, of the Pension Rights Center, favors defined benefit plans precisely because these typically large plans give members investment options and clout that defined contribution plans don’t offer. 

But while Hotz opposes defined contribution plans, other pension experts say the flexibility they provide can be advantageous to both worker and company. A company’s defined benefit expenses often vary according to the pension fund’s returns in the stock market because of federal mandates on management of those plans. That’s not the case with 401(k)s, where a company’s financial obligations are essentially completed each year. And David Hilko, practice leader of the employee benefits group for Deloitte & Touche’s Chicago office, says such plans also are more portable, though that benefit comes with added responsibility. 

“At the end of the day, it will put more onus on employees to make sure they know [what savings] they have,” Hilko says. Gone are the days, he says, when an employer will take care of you for the rest of your life. 

Some manufacturing companies, including Warrenville-based Navistar, are getting out of the business of defined benefit pension plans. Employees hired after January 1996 by that company, the nation’s largest commercial truck producer, were offered 401(k) plans instead of traditional plans. The move is designed to cut costs and give employees more flexibility. And it made sense, considering that the company now has 45,000 retirees supported by about 15,000 active workers, says spokesman Roy Wiley.

In the end, the trend in health care and in retirement plans could leave more workers feeling like free agents. But, despite all the talk of employee empowerment, flexibility and increased consumer choice, the rise of these fewer-strings-attached relationships between employer and employee has some workers worried. Gonzalez, the project engineer who also is a mother of two, wonders what might happen if she opted to go without insurance. “It scares me for my children,” she says. “Something like an emergency could happen. 

You never know.”


Michael H. Hudson was vice president of public affairs at Illinois Tool Works Inc. and chairman of the Illinois Issuesboard at the time of his death in 1992. In his memory, fellow board members established an annual essay to examine an economic trend in Illinois and its relationship to public policy. This feature was funded by a donor who asked to remain anonymous.

Maura Webber is a Chicago-based business writer and a frequent contributor to the magazine. Her most recent story for Illinois Issues, which looked at employer-assisted housing plans, appeared in September. She’s the co-author of Getting an Investment Game Plan, which was published by John Wiley & Sons.

Illinois Issues, February 2004

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