Voluntary Benefits: An Emerging Force

Michael Martocci, 2nd Vice President, Worksite Markets, Group Benefits for The Guardian Life Insurance Company of America

Jul 1, 2012

Voluntary Benefits: An Emerging Force

The biggest question mark facing health care in the U.S. is the fate of reform in the months ahead.
No matter the outcome for reform, there are indications that voluntary benefits will play just as critical a role in the postreform world as they did before the debate started. Even before the 2014 launch of some of the most important facets of healthcare reform, voluntary benefits have served as a versatile way to bridge coverage gaps. They’ve filled the void as the marketplace transitions from the old, more comprehensive employer-sponsored plans to a new consumer-driven model. LIMRA reported last year that nearly 750,000 of the 1.3 million private employers in the U.S. with at least 10 employees offered voluntary options, making them available to over 90 million full-time workers. The likelihood is that voluntary plans will become increasingly important for sponsors and employees alike in the years ahead.

Setting reform aside, the continued popularity of voluntary benefits is evident. By all outward signs, premiums should continue to climb at much the same rate they did the past decade. A Kaiser Family Foundation survey last year (Employer Health Benefits – 2011 Annual Survey) found the price of family coverage premiums rose 31% since 2006 and a whopping 113% between 2001 and 2011.  

Employers are more motivated than ever to strike a balance between profitability and productivity when shopping for benefits. To protect the bottom line in a slow-growth economy, sponsors are determined to bring insurance costs under control. At the same time, they know the trade-offs. The fact is, the richer the benefits package they offer, the higher employee morale and the greater leverage they have when they need to recruit new talent. Now more than ever, voluntary benefits make sense for sponsors.

Employees are more conscious (and appreciative) of health care costs and the benefits they receive at the workplace. It’s only logical, given the fact that average health care costs per family in the U.S. have risen to $19,393 last year from $10,168 in 2003, according to the Milliman Medical Index. The workforce as a whole has become far more discriminatory when it comes to health care choices, alternative plans/treatments and ways to control expenditures on their part. For employees, voluntary benefits are a perfect fit. 

A Proven Record

There’s good reasons why voluntary benefits have staked such an important niche in the current market. In the last 10 years, they have built a proven track record as a valuable – and economical – solution, well before the advent of healthcare reform. Employers can add them at no direct cost as an enhancement to what they already offer employees. Voluntary benefits have afforded companies a chance to put their bargaining power to work in securing a lucrative incentive for employees while the range and flexibility they offer employees is well documented. Voluntary benefits are also cheaper than options employees could purchase on their own. According to a 2011 study by LIMRA, 30% of U.S. employers were considering voluntary benefits as a replacement to employer-paid and contributory benefits within the next two years. In raw numbers almost 400,000 businesses were considering adding a new voluntary plan and another 120,000 were very much interested – decisions that could affect an additional 19-46 million employees. And satisfaction has remained high, even through economic uncertainty. The same study from LIMRA found that 70% of the companies offering voluntary options were highly satisfied overall.

. . . And More to Come

Thanks to the success voluntary benefits have enjoyed, we can expect to see a host of innovative product designs come to market, whether through new products, riders or other provisions all molded to specific customer needs. Insurance as focused as cancer coverage, for instance, might work as a safety net for a family that has a genetic vulnerability to the disease. Then, “wider-net” policies such as accident coverage will help a broader range of consumers mold a comprehensive set of protections to their personal needs as well.

There’s ample reason to believe that employees will welcome expanded voluntary offerings as well. We’re all too aware of the rapid rise of healthcare costs in the last two decades. A 2010 survey by The Guardian Life Insurance Company of America found almost 70% of participants felt their families would endure financial hardship if faced with a critical illness. Ironically, miraculous advances in modern medicine can too frequently strap families with even more financial strain by prolonging treatments, recoveries and even longevity – all of which can inflate expenses. 

In the years ahead, new options and expanded coverage will help to complement employer benefits. They’ll help in myriad ways, from providing payouts to shouldering the burden for a number of costs for what were previously out-of-pocket expenses for policyholders – everything from higher deductibles, newer or cutting-edge therapies and travel to and from providers or home nursing care.

Stepping Up

In the past we’ve seen plenty of examples of how our industry has used voluntary products to respond to the changing dynamic of the healthcare marketplace. One example is critical illness coverage (CI). Sponsors have come to see critical illness as a protection that complements disability coverage in order to cover a number of small, yet significant, gaps in a sponsor’s benefit package. Critical illness is there to help families foot a number of bills traditional medical and disability plans don’t pay. A policy can pay out a lump-sum benefit to cover medical procedures, child care and even travel, as well as a number of other expenses that might fall out of the reach of “traditional” insurance plans yet could mount for policyholders.

It’s clear that the time has come to expand the voluntary portfolio further. New options can be underwritten to address very specific or even broader needs. And no matter what happens, there’s a very good chance that innovative products will be able to find solid niches in either a postreform environment or the status quo.

Cancer coverage is an example of a more focused product. The American Cancer Society estimates that in 2011, 1.6 million new cases were diagnosed in the U.S.; at the same time, survival rates have climbed markedly over the last 40 years, to 68% for all cancers diagnosed between 1999 and 2006 from 50% during the period 1975 to 1977. Higher survival rates, however, are accompanied by staggering costs. According to the National Institutes of Health, cancer’s overall costs were $263.8 billion in health expenditures and lost productivity combined. 

Here’s a case where disease-specific coverage can do quite a lot of good. Cancer policies can be designed to help policyholders protect their finances after the disease is diagnosed. The insurance can be equipped with riders to cover home healthcare, rehabilitation and any loss of income suffered by an employee or family member.

There’s plenty of room for broader solutions as well, with accident insurance being one example. Again, policies can be set up to cover a wide variety of out-of-pocket expenses that fall through the cracks in a postreform benefits package. They include the cost of an ambulance or hospitalization in addition to medications, treatments or at-home care.

The 800-Pound Gorilla

We know there are major adjustments coming when the curtain goes up on healthcare reform in 2014. One thing that is absolutely certain is that the change represents a big opportunity for producers of voluntary benefits. For one, we can expect a large number of companies to overhaul the benefits they offer employees. That, in turn, will completely alter the range of coverage choices available. Put together, those two potential groundswells represent a chance to build on the range of voluntary benefit options currently on the market and create a broad spectrum of new solutions that will make it possible for a more cost-conscious public to rein in expenses and tailor benefits to individual needs.

Change can often bring about upheaval and there are already indications that healthcare reform will in some ways turn the benefits market on its ear. A growing amount of evidence shows that companies are starting to completely re-think their employee benefit portfolios in anticipation of 2014. The reason: the very cornerstone of reform, state-run healthcare exchanges, will open up new options for employers and individuals alike to purchase health coverage. That new wrinkle in health care markets could radically alter the way companies approach the benefits they provide employees. Just last year, the consulting firm McKinsey & Co. found in a survey that as many as 30% of the companies polled were leaning toward dropping healthcare coverage in the years following 2014. 

Employers are keenly aware that any changes they make to benefits packages won’t happen in a vacuum. The U.S. workforce routinely ranks healthcare coverage, from major medical to dental and vision, as the most popular benefits offered. Companies know there will be repercussions brought about with any changes. Management will spend a large chunk of their time balancing worker morale against their bottom line in the months leading up to 2014 and beyond. Today, a year and a half before reform takes hold, both small and large companies know from experience how important employee benefits can be in competitive labor markets. The right package can work as an edge on the competition in acquiring the very best talent. Those reasons explain why the same McKinsey survey found that company decision makers were concerned about the how they would go about compensating employees in the event of major changes brought about by healthcare reform.

A New Take on an Old Maxim

Over the past few decades, voluntary benefits have earned a reputation as a stopgap. We’ve seen how they work as a malleable, adaptable set of coverages that can help both employers and employees meet their goals. Voluntary options have helped companies cut costs and offer a rich benefits package. At the same time, they’ve put the power of choice back into the hands of consumers. Preparations nationwide will pick up over the next 18 months in anticipation of healthcare reform. There’s a chance that sweeping changes will be postponed or even derailed. No matter what the future holds, it’s imperative that our industry takes notice. To slightly alter an old maxim, out of upheaval – whether through reform or market forces such as the rise of healthcare costs - comes opportunity. Here’s the underlying message to our industry: It’s time to seize the moment and not only put voluntary benefits to work, but also expand the products we currently have on the market.

About the Author

Michael Martocci, Head of Worksite Markets for Guardian’s Group Benefits division, has over 20 years experience in the insurance industry, with a focus in voluntary benefits, worksite marketing and brokerage operations. Mike is leading Guardian’s expansion in the voluntary/worksite markets, where he is responsible for product development, enrollment, service and distribution for its $800 million voluntary/worksite business.