Benefits and Compensation After the Elections

Suppose there was a presidential election this year. Just suppose. And, further, suppose that election had a winner. Just suppose.

It is extremely likely that the winner will be someone nominated by either the Democratic Party or by the Republican Party. And, it is not at all unlikely that the party of the winner will keep or gain control of both houses of Congress.

From the standpoint of tax policy, and by extension, benefits and compensation policy, what will this mean for you, the employer or employee? Should you care?

I don't think we're far enough along to do a candidate-by-candidate analysis, but I do think that we are aided by the fact (at least I think it's a fact) that the remaining viable candidates fall generally into a few small buckets from these standpoints (yes, Carly Fiorina will give us a 3-page tax code (no idea what it might say) and Gary Johnson who has declared for the nomination of the Libertarian Party is a Fair Tax proponent). In fact, I think there are at most four such buckets remaining.

Let's identify them from left to right (that is how we usually read):

• The Democratic Socialist (DS) Bucket whose main component, Senator Bernie Sanders (I-VT, but caucuses with the Democrats and running for the Democratic nomination) has recently told us, "Yes, your taxes will go up."
• The Mainstream Democratic (MD) Bucket whose main component, former Secretary of State Hillary Clinton will, according to her website today (it did say something somewhat different on this topic at the end of last year), lower taxes for the middle class (and by extension the lower class) and raise taxes on the wealthy including big business.
• The Traditional Republican (TD) Bucket that includes the likes of [alphabetically] Chris Christie, governor of New Jersey; John Kasich, governor of Ohio; Marco Rubio, junior Senator from Florida; and Donald Trump (yes he is mainstream for this purpose), businessman from New York, which generally would lower tax brackets and flatten, or make less progressive, the tax code.
• The Conservative Republican (CR) Bucket that includes Ben Carson, retired physician from Maryland, and Ted Cruz, junior Senator from Texas which would replace the current income tax structure with a flat tax.

I'm going to make things a little tougher on you here Rather than reiterating these buckets, I'll comment on how different philosophies might affect things.

We all know the health care debate. Sanders wants to move to a single-payer system. Clinton likes the status quo under the Affordable Care Act (ACA). The Republicans with the exception of Kasich want to repeal the ACA and start over again. Kasich, on the other hand, thinks that this is an impractical solution and would keep some portions of the ACA and change others.

On the pension side, Republicans as a group are in favor of self-reliance. This would tend toward a world of nothing but 401(k) (and similar) plans. Their philosophy is that prudent Americans should be able to save enough for their own retirements, especially with the benefits of an employer match. Of course, many of them will be dismayed WHEN they read my blog to know that I disagree with that.

Clinton is much tougher to figure out on this. But, we can look to her stated tax policy and work our way back. When taxes on high earners and large corporations increase, so does the value of tax deductions. So, under a Clinton presidency, we might expect to see more high earners and profitable corporations accelerate contributions to benefit plans in order to accelerate tax deductions. Could this result in somewhat of a rebirth of defined benefit (DB) plans? Theoretically, it should, but in practice, I would expect that even if that rebirth occurs, it will be very limited.

Sanders would prefer to see a single government-run retirement system for everyone; that is, we would have expanded Social Security and Medicare with smaller benefits and less availability for those who have been the highest earners. In this scenario, although I personally don't see Congress going along with it, the prevalence of employer-provided retirement plans could decline significantly. On the other hand, it would not be antithetical to his philosophy to see a DB requirement in much the same way that the ACA leaves employers with a health care requirement. Could we see pay or play here?

With regard to executive compensation (nobody is saying much about broad-based compensation other than to say that under their Presidency, there will be more and better jobs and pay will increase rapidly), we have another large rift between the candidates. Here, one of the biggest elements is the view of what has probably been President Obama's second signature bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank). (Why couldn't they have given the law a short name like Fred so that I don't have to test my typing skills every time I cite the law?) 

Sanders is a huge fan of Dodd-Frank. That said, he doesn't think the law has gone far enough. He has said many times that the reinstatement of Glass-Steagall should have been part of Dodd-Frank. Sanders, much like Senator Warren (D-MA) as well as former Senator Dodd (D-CT) and former Representative Frank (D-MA) believes that one of the most important parts of Dodd-Frank is Title IX, the section on executive compensation. Sanders is a huge proponent of tieing levels of executive compensation to that of the rank and file and of their companies as well as generally limiting executive compensation. Under a Sanders presidency, do not be surprised to see a presidential proposal that would limit CEO compensation for example to a pay ratio as defined in Section 953(b) of Dodd-Frank to something like 10.

Clinton is also a Dodd-Frank fan. But, there is a big difference here. Secretary Clinton has long had both ties and obligations to the large Wall Street banks. She periodically invokes Glass-Steagall, but knows that its repeal allowed Goldman Sachs, for example, to grow into the financial giant that it has. At the same time, though, Clinton, who I believe is still far more likely than not to be the Democratic nominee, knows that the Democratic platform will be influenced by the likes of Sanders and Warren. Expect that the compromise will be in the form of promises to scale back executive compensation. As broad-based plans in which executives participate tend to be exempt from similar scrutiny, those higher-paid individuals may look to solutions that have been proposed over time in this blog.

On executive compensation, Republicans are fairly united. All, that I am aware, would push for the repeal of Dodd-Frank and for no more (or fewer) restrictions on executive compensation. As free market proponents, they would tell us to let the fair markets determine how top executives should be paid. All that said, proposals like that will be anathema to most (perhaps all) Democrats and unless the GOP were to gain a filibuster-proof majority in the Senate, such proposals are not likely to become law. However, as Republicans without exception are looking to lower the top marginal tax rates as well as corporate tax rates, look for more emphasis on current compensation and perhaps less emphasis on deferral opportunities.

As the 2016 election process matures and there are fewer candidates, we'll be able to dig deeper. In the meantime, you have my opinion. What's yours?

And, if you think my opinions have any merit, let me help you address what will be coming with the 2016 elections.

CFO Priorities and Benefits and Compensation

CFO magazine did their annual survey of the priorities of chief financial officers recently. I read their article summarizing the findings from the survey and considered what this might mean for benefits and compensation.

Before I go on to my main topic, however, I need to bring up a few of the issues that I found near the bottom of the article. Three priorities that the article highlighted were written communication, networking with peers and presenting to large groups. Frankly, these are not just CFO priorities; they should be priorities for every professional in our 2015 world, and I was absolutely thrilled to see written communication in the list.

Returning to the main points of the article, I point out some of the top priorities that are more day-to-day for CFOs.

• Precision and efficiency in cash forecasting
• Budgeting
• Balanced scorecards
• Margins
• Risk management
• Performance management

Additionally, and in many cases perhaps more important, but less relevant for this blog is cybersecurity.

Let's also consider what some of the main elements of traditional benefits and compensation packages look like (with some grouping at my discretion).

• Health and wellness benefits
• Retirement benefits
• Other traditional welfare benefits
• Feelgood benefits
• Base pay
• Short-term incentives (bonus)
• Long-term incentives (often equity)

Health benefits are now essentially a requirement. Either you provide them or pay a fine under the Affordable Care Act (ACA). But, companies have lots of techniques that they can use to control costs. Popular today are high-deductible health plans (HDHP) where oftentimes, companies contribute fixed amounts to health savings accounts (HSAs) to help employees pay for costs up to those deductibles. Among the major advantages of these designs are that companies do a much better job of locking in their costs. In other words, more costs are known and far fewer costs are variable or unknown. 

On the subject of retirement benefits, I'm going to give you a shocker. In matching those CFO priorities, the single worst sort of retirement plan that a company can sponsor is a traditional 401(k) plan with a company match. That's right -- it's the worst! Why is that? In a 401(k) plan, the amount of money that a company spends is almost entirely dependent upon employee behavior. If you, as an employer, communicate the value of the plan, employees defer more and that costs you more. Most companies budget a number for their cash outlay for the 401(k) plan. Very few, in my experience, look at potential variability. One that does and that I worked with on this a number of years ago, estimates that between best case and worst case, that the difference in their cash outlay could be in the range of several hundred million dollars. That is a lot of money.

So, what is better?

Believe it or not, I can come up with lots of rationales (much beyond the scope of this post) for why having a defined benefit plan as a company's primary retirement vehicle is superior to using a 401(k) plan. Understand, I'm not talking about just any DB plan. But, the Pension Protection Act of 2006 (PPA) opened the door for new types of DB plans that either were not expressly permitted previously or, in other cases, that were generally not considered feasible. Think about a cash balance plan using a market return interest crediting rate with plan investments selected to properly hedge fluctuation. Cash flow becomes predictable. Volatility generally goes away. Budgeting is simple. The plan can be designed to not negatively affect margins.

I may write more in a future post, but for now, suffice it to say that this design that has not yet caught on in the corporate world needs some real consideration.

How about compensation? 

Base pay is the easiest to budget for. If you do have a budget and commit to not spending outside of that budget, base pay is pretty simple to keep within your goals. 

Incentive compensation is trickier. While many organizations have "bonus pools", they also tend to have formulaic incentive programs. So, what happens when the some of the formulaic incentives exceeds the amount in the bonus pool? Either you blow your budget or you make people particularly unhappy. There is little that will cause a top performer to leave your company faster than having her calculate that her bonus is to be some particular number of dollars only to learn that it got cut back to 70% of that number because the company didn't budget properly.

Perhaps it is better to assign an individual a number of bonus credits based on their performance and then compare their number of credits to the total number of credits allocated to determine a ratio of the total bonus pool awarded to that individual. After all, isn't the performance of the company roughly equal to the sum pf the performances of individuals and teams? And, if the company has a bad year, isn't it impossible that every individual and team exceeded expectations? Be honest, you know that has happened at lots of companies and the companies don't know what to do or how to explain it.

There is lots more to be said, but I want to keep it brief for now. If you have questions on some of the specifics, please post here or on Twitter or LinkedIn in reply to my post or tweet. And, if you have one of these areas on which you'd like to see me expand in a future post, let me know about that as well.

Statins Linked to Diabetes

In an article in the British Medical Journal, researchers document that they have found a link between higher potency statins and new onset of Type II (adult onset) diabetes. This is stunning, at least to me.

The three drugs that were defined for the study as higher potency were these:

• 10 or more mg rosuvastatin (Crestor)
• 20 or more mg atorvastatin (Lipitor)
• 40 or more mg simvastatin (Zocor)

In the US, these are all among the 50 most prescribed drugs. In fact, depending on which list you use, they might all be among the 10 most prescribed drugs. And, according to this study, they increase the likelihood of a patient developing diabetes.

That's not good news.

Often, I read data similar to this and really wonder about its credibility. The data is reported by people with no background in statistics and is published in a non-refereed journal. That is not the case here. The researchers working on behalf of the Canadian Network for Observational Drug Effect Studies include a variety of academics including some with measurement and statistical training. The descriptions of their methods and data sources are sound.

So, what did they find?

The study looked at patients who were prescribed higher potency versus lower potency statins for secondary prevention. In other words, these were patients (at least age 40) who had been hospitalized for a major cardiovascular event (heart attack, stroke, bypass, etc.) who had never previously been diagnosed with diabetes and who were newly prescribed a statin. The key metric that the researchers used is a rate ratio, a common term in epidemiology.

Simply stated, the rate ratio is the ratio of incidences. A rate ratio of 1.20, for example, would indicate that the incidence rate for the studied group is 20 percent higher than that for the control group. They reported data at the 95th confidence interval.

In the first two years post-statin intervention, the researchers found a rate ratio of 1.15 (95% confidence interval of  1.05 to 1.26). In the first four months of use, however, the rate ratio was 1.26 (95% CI of 1.07 to 1.47).

I repeat. This is stunning. the increase in the likelihood of a new diabetes diagnosis for higher potency statin users in the first four months post-intervention was 26%. Increases between four months and two years were much lower, but there were still more newly diagnosed or treated diabetics among higher potency statin users than lower potency users. And, both levels of statin users showed increases in diagnoses of diabetics.

From a practical standpoint, what does this mean?

It's a little bit difficult to tell. From a purely lay standpoint (I have no medical training), the researchers present no data that suggests if there is a similar effect for patients who have not had a major cardiovascular event. However, it is clear that the use of high potency statins is linked to the onset of diabetes. The data set is large and the confidence interval sufficiently high.

What I suspect (and I repeat that I have no medical training) is that people who have a predisposition toward diabetes are significantly more likely to become diabetic after taking statins, especially high potency statins. The researchers note that higher potency statins have not shown statistically significant better results for secondary intervention than lower potency statins.

Looking at this from a statistical and financial standpoint, I would note the following:

• The three drugs considered higher potency seem to result a statistically significantly higher rate of diabetes onset.
• Diabetes is one of the highest cost and most dangerous chronic medical conditions, at least in the US.
• Diabetes, when found in a comorbid state (other chronic conditions exist), increases medical risk very meaningfully.
• Patients with a predisposition to diabetes along with their physicians should very carefully weigh the risk and benefits of various statins and their dosages as compared to other forms of treatment.

Why Doctors Must Give in and Use EMRs

Admit it; you have a real interest in health care. Oh, you may be like most of the rest of Americans and not really care about the field or science of health care, but you probably do have a real interest in caring for your own health. Most of us do. Most of us, even if we don't show it by our actions and behaviors would like to be really healthy.

When we choose our physicians, most of us make that selection because of several factors. Among them might be these:

• Whether the physician is "in network"
• Whether we have a level of comfort with the physician
• Whether we think the quality of care will be excellent

How do we know if the quality of care will be excellent? We generally don't, but we have our ways of thinking that we might know. We ask our friends and relatives. We might go to a site like Angie's List or healthgrades.com to see what they say. 

Do you know what else is really important? According to a survey done jointly by Aeffect and 88 Brand Partners, 82% of patients believe that physicians who use electronic medical records (EMRs) provide better quality of care. (While I cannot find the actual complete survey results, you can see snippets here.)

To me, that is astounding. Many physicians that I know like EMRs, but perhaps just as many dislike them. They say that the EMRs cause physicians like them to have to spend extra time inputting a bunch of data. They say that they have to hire additional staff that increases their cost of providing care, but that insurers often provide them with nothing to compensate for this cost. But, according to the same survey, 44% of patients have a more positive impression of physicians that use EMRs (while I don't have the data, I am guessing that the number who say they have negative impressions is very small). 

While we are moving more to a value-based system, physicians still receive most of their compensation from seeing more patients. Other than scheduling on a much tighter basis and hoping that their schedules fill up, physicians can increase demand for their services. When they do that, their schedules will fill up and that will probably allow them to earn more income which most of them will view as a positive. 

So, the connection (perhaps pun intended) is that even for physicians who don't like them, EMRs are becoming a necessary part of a practice. Physicians must give in and use EMRs. Soon, they will really have no practical choice.

Can Anybody Win the ACO Game?

Suppose you invented a game that ultimately, nobody could win. Do you think it would be popular? I don't. Game players get frustrated at losing. Either they give up or they try to get better, but eventually, if their improvement doesn't lead to some more wins, they stop playing the game.

I know that accountable care organizations (ACOs) are not a game. For the uninitiated, they are healthcare organizations that choose to operate under a model in which they are rewarded for meeting metrics related to quality of care and total cost of care (TCC). Under the Affordable Care Act (ACA), those reimbursements are tied significantly to an ACO's trend in TCC being meaningfully less than the norm.

That sounds like a really good idea, in theory. The system is providing an incentive (no, I will not say it is incentivizing) to ACOs to reduce medical inflation. For an ACO to do that, however, costs money. The ACO will likely have to add to its infrastructure both from the standpoints of technology and people. Each has a cost.

Simply put then, the game is won when reimbursements (incentive payments) exceed the essentially required investment in the business. The game is lost when the converse is true.

I think we can establish that each of these points is almost necessarily true:

1. Each ACO will try to reduce its own contribution to medical inflation.
2. There are practical limits to how much that medical inflation can be reduced.
3. When many organizations are simultaneously working to control TCC, the average increase in TCC will come down.
4. If 2. and 3. above are true, then it will become virtually impossible to achieve the financial goals necessary to have reimbursements large enough that an ACO gets a positive return on their investment (ROI).

You don't agree with the fourth point:? Think about it. If the target TCC increase gets low enough (because the average does) and a particular ACO has already gotten to the asymptotic point of its efficiency, then they have likely reached the point where they cannot win anymore. Because the competition had enough room to improve and that one ACO had reached the point where it didn't have enough room for improvement, it will have lost its chance to win (at least for a while).

There are presumably good things that will happen out of this model. Notice that the game breaks down because each organization is striving to reduce TCC. That's a good thing. But, at some point, ACOs that can no longer win may just stop playing the game. When they do that, what will happen to their TCC?

Can anybody win the game?

Anther Application of Modern Portfolio Theory

Modern portfolio theory deals largely with the allocation of assets between asset classes in a portfolio. The field, grown predominantly from Markowitz's concept of the efficient frontier has been a hot topic among both investment professionals and more casual investors alike during my time in the workforce (no, that doesn't take us back to prehistoric times, just close).

Essentially, the most significant outgrowth of this concept is that there exists a continuum of allocations that maximize expected return for a given level of risk, or conversely, that minimize risk for a given expected return. All of this, of course, is based on a large set of assumptions, in this case, capital market assumptions. Oversimplifying somewhat, what Markowitz, and after him others, discovered was that you can reduce risk in a portfolio while sometime even increasing longer-term expected return.

That's pretty cool. Part of what we learned is the value of populating a portfolio with uncorrelated and inversely correlated assets. Okay, John, what does that mean?

Consider a two-holding portfolio. Suppose each holding has an expected return of 8% per year and that their returns are well correlated. In other words, when one goes up, the other is expected to go up by a similar percentage. And, when one goes down, the other is expected to go down by a similar percentage. Essentially, your diversification is not. You're not getting any additional benefit from the second holding.

Suppose instead, your tow holdings are somewhat inversely correlated. In other words, they are neither expected to perform particularly well nor particularly poorly at the same time as each other. The expected return of each holding doesn't change. But, by decreasing the overall risk of the portfolio, you are able to increase the long-term expected return of the total portfolio by decreasing volatility.

Now that we've got that straight, let's change our portfolio. Instead of looking at financial assets, let's consider the insured lives of a health insurance company. While less is known about correlations of costs among diverse populations, it seems clear to me that a homogeneous population carries with it a higher risk to the insurer than one that is not.

As an example, consider a population consisting of 100 insured lives, all of them men between the ages of 65 and 75. Without doing any research to get the correct percentage, my past reading tells me that a meaningful percentage of them are going to get prostate cancer over the next 10 years. That's a largely unavoidable occurrence, or so I read, and the claims could all come at the same time.

How would an insurer manage that risk (other than reinsuring or hedging in some other way)? Suppose they cut their population of insured age 65-75 males from 100 to 10 and added in 90 other insureds. Some of them might be of the type that represent a very low risk, say 20-30 year-old males. Some might be women in their 40s, mostly past the age that they will be in the maternity ward.

What it seems that we will find is that the more diversification that our insurer has in its portfolio, the less volatility in claims it will have over time. This is good for them.

Under the Affordable Care Act (ACA), again somewhat oversimplified, health insurers must pay out at least 85% of their premium dollars in medical claims. Suppose they develop a set of premiums whereby they expect to pay out, on average, 90% of their claims. Further suppose that the 90% average has a standard deviation of either 5% or 15%. If I am doing my math correctly, then in the case where the standard deviation is 5%, our insurer will only have to pay rebates in about 16% of all years. In the 15% standard deviation case, however, they will pay rebates in 37% of all years.

In a nutshell, here is what this means. Our hero, if you choose, the insurance company will keep its full profit in either 84% (100%-16%) of all years or in 63% of all years. Before rebates, their long-term profits will be identical, but managing their portfolio for lower risk allows them to actually keep more of their profits.

Another application of modern portfolio theory?

In Network or Out of Network -- Courts Decide

It's been the same with every health plan that I can remember being in. There is always a communication to me that I am responsible for determining whether the provider that I choose to see is in network or not. Frankly, it's never seemed fair.

Consider that health care payers don't always update their websites with changes immediately. Doctor's offices don't want to be responsible for telling their patients in which networks they are participating providers. So, the easy way out is to put the burden on the insured who really has no good way to divine the answer.

Enter Killian v Concert Health Plan. This case was eventually argued en banc (for the lay people among us including me, that means that it was heard by all the judges of the Court) before the 7th Circuit Court of Appeals (housed in Chicago). The Court, as I read it, ruled for the plaintiffs. For plan participants, this is good news. For insurers and perhaps for plan sponsors, it's not as good.

The most important (to me) facts were as follows:

• Susan Killian was a cancer patient.
• She suffered from lung cancer which spread to her brain.
• The first hospital that she went to (in network) said they could not operate, but sought a second opinion.
• The second opinion was provided at Rush University Medical Center that thought they could successfully operate.
• She was admitted for successful brain surgery, but died a few months later.
• The Killians (Susan Killian was married to James) received only out of network reimbursement for services at Rush.

This seems fairly normal, doesn't it? Well, it would be, if not for this fact pattern:

• Mrs. Killian's insurance card had on it several toll-free numbers that insureds could call to ask questions about their coverage.
• Mr. Killian called one before Mrs. Killian's surgery.
• The representative said there was no information on the hospital (Rush), but to "go ahead with whatever had to be done."

The Court cited five points in combination in coming to its decision:

1. Mr. Killian did appear concerned/interested in whether the providers were in or out of network.
2. Mr. Killian did follow the instructions on Mrs. Killian's insurance card by calling one of the toll-free numbers and inquiring about the in versus out of network status
3. Mr. Killian informed a representative (at the toll-free number) that he was looking to determine whether the surgery would be paid for as in network
4. Mr. Killian was told by the representative at the toll-free number to "go ahead with whatever had to be done."
5. Mr. Killian acted as a reasonable person would in extrapolating from that that the services would be covered as in network.

What the Court decided was that Mr. Killian may now pursue a claim against his deceased wife's health plan for breach of fiduciary duty. What Mr. Killian will actually do and how a court will rule on that matter is not clear, but this is the first case that I am personally aware of where the burden of determining in versus out of network status has been shifted somewhat by the Courts.

I'm not an attorney, so I'll leave the rest of the analysis to those with formal legal training. That said, as a health plan participant who has at times during his own lifetime been frustrated by the same determination, this feels like a step toward protection of plan participants who do act diligently.

Politics Doesn't Fix Health Care

It doesn't matter which party is making the decision. Politics doesn't fix health care.

It seemed clear to me that President Obama's November 14 decision to allow insurers to renew certain cancelled policies for 2014 was done entirely for political expediency. I have not yet found anyone who disagrees with me. So, now everything is fixed and everyone who had a policy that they liked in 2013 can keep that for 2014, right?

Wrong!

First, state regulators have to grant approval for this to happen. In a number of states, regulators have already said that they will not allow these sub-standard, non-compliant policies to be renewed.

Second, there have been increases in health care costs over the last year. The natural extension of this is that premiums must increase. This requires actuarial calculations to determine the correct increase. Actuarial work takes time. And, the actuaries who would do this may have other priorities right now. That some politicians(s) thought something was a good idea does not create more hours in the day, more days in the week, or more weeks in the year for any actuaries that I know, and I know a lot of actuaries.

Third, health insurance plans require administration. In the 21st century, plan administration requires software. Software requires time to be created or updated. And, it needs to be checked for glitches (see, for example, healthcare.gov). That some politicians(s) thought something was a good idea does not create more hours in the day, more days in the week, or more weeks in the year for any programmers that I know.

And, then there is the business decision that insurers must make. Despite a general public hatred of insurance companies, people tend to be somewhat loyal to their policies if not their insurers. Suppose you have a policy with, for example, Aetna and they decide to not reinstate it, but your friend who has a policy with, say, Kaiser, gets theirs reinstated, how will that make you feel about Aetna? On the other hand, if you find out that the Kaiser policy got reinstated with a large increase in premiums, you might feel even worse about Kaiser. It creates a frankly unhealthy guessing game.

But, wait, there's more.

According to the guidance we have received, these reinstated policies are simply a one-year fix. They will not be grandfathered, or so it seems. So, even if your policy is reinstated, come this time or thereabout, in 2014, you will be facing the same dilemma of trying to work out your health insurance arrangement for 2015. Well, at least healthcare.gov may be working properly by then.

The Hidden Side of Health Care Costs

I'm not always a fan of Employee Benefit Research Institute (EBRI) reports, but this one resonated with me. 61% of workers report an increase in health care costs. But, the bigger story is that most of them say that this increase is affecting them in other ways. In these days of half the political world touting self-reliance and the other half touting the government providing for all, this survey through my lens says that neither works on an island. We need a bit of both.

So, what does the report say? It tells us that among the 61% whose health care costs are increasing (I am reading that health care costs for this purpose are the sum of premiums and out-of-pocket costs), as a result of this:

• 32% have had to decrease the amount they are saving for retirement
• 57% have decreased the amount they are saving for other purposes
• 22% are having trouble paying for necessities such as food, heat, and housing
• 38% are struggling to pay other bills
• 1/3 have seen increases in credit card debt
• 27% have essentially drained their savings
• 16% have had to borrow money

If I were on one side of the aisle (in Congress) or the other, I would say (you know which side comes down where on this one):

• This is exactly why we need the Affordable Care Act (ACA, PPACA, ObamaCare)
• Forcing people to have what the government deems the proper health insurance cannot work

Let's consider what is happening though. When I was in my teens, oh so many years ago, most of the adults around me were retiring in their late 50s or early 60s. They looked forward to their golden years. They had defined benefit pension plans. Now, unless they are among the particularly fortunate group, their means of saving for retirement is a combination of a 401(k) plan and whatever they can save on their own. Ask these people when they plan to retire and most will laugh at you. They cannot see that on the horizon.

Also, back in my teens, by the time people retired, they owned their homes free and clear. Now? A recent survey that I read (sorry, I can't find the link) informed me that at age 65, more than half of homeowners still have a mortgage and for many of them, it has a very substantial balance.

Whatever the reason, and that's for a different day and a different post, we need some real changes. In the credit card era, people lose track of what they owe. And, much like the federal government, it's tough to make a dent in that when so much of your income is used for debt service. Unlike the federal government, however, the average guy on the street just can't borrow money at interest rates from 0% to 4%. No, your credit card company probably charges you some amount in excess of 10%.

Do I have the answer? No, I don't. If I did, you would hear me screaming it far and wide. But, in a day when take-home pay for many Americans is decreasing (higher taxes, higher employee cost of benefits) and the cost of goods, services and debt service is not, it gets really difficult for the economy to grow.

To me, this is the ultimate hidden side of health care costs. Because of the increases in personal costs of health care, the non-health care side of the economy is stifled.

We need change, but I don't see that kind of change-a-coming.

IRS and Treasury Provide Carryover Flexibility in Health Care FSAs

This came as surprise to me. In Notice 2013-71, the IRS and Treasury provided another softer version of the Health Care Flexible Spending Account (FSA) use-it-or-lose-it (UIOLI) rule, allowing certain plans to be amended to allow for limited carryovers from year to year.

As people who deal with health care FSAs on a regular basis know, back in 2005, IRS and Treasury modified the then existing rules to allow a health care FSA to be amended to provide a "grace period" for UIOLI, extending 2 months and 15 days beyond the end of the plan year. So, in English, calendar year plans could allow participants in 2013, for example, to use their HSA deferrals up until March 15, 2014, without losing them. This was done to be consistent with the short-term deferral rules under Code Section 409A (although I'm not sure what the inherent connection should be between Sections 125 and 409A).

Now this. Under the new UIOLI rule, plan sponsors have a choice. Those that have never adopted the grace period rule (most have in my experience) may amend their plans to add the new $500 provision. Those that have the grace period provision may amend their plans to eliminate the grace period provision for a year and add the $500 rule.

What are the implications of this? While the Notice is effective immediately so that calendar year plans could be amended for the 2013 plan year, this blogger thinks that is generally not a good idea if the plan uses the grace period rule.

Why? Consider your employee Betty Badeyes. Betty, like the rest of us who stare at a computer screen more than we should, has long since not had 20/20 vision. She wears corrective lenses. And, she knows that she has an appointment in late January 2014 to have her eyes examined and probably get a new prescription. These are bona fide expenses for reimbursement under a health care FSA, and they are in excess of $500. Betty knows this. So, when she made her health care FSA election back in late 2012 for the 2013 plan year, she took into account that she would be spending about $1,000 in early 2014 that she could use under the grace period role.

If the plan sponsor, amends the plan to eliminate the grace period and implement the carryover rule for 2013, then Ms. Badeyes may have to change her name to Betty Badtemper as she will only be able to pay for about half of her eye care expenses with flex dollars. What's more is that unless she can find some other qualified medical expenses before the end of the plan year, Betty may be losing $500 under the UIOLI rule.

In summary, I think this is a good option that most plan sponsors should consider adopting. But, they should communicate the change before the beginning of the plan year that it will affect.

ObamaCare Economics -- You Shouldn't Be Surprised

This may look like it's going to be a highly political post, but it's not. Instead, it's more of a primer for the ordinary consumer of health care and health insurance.

We're hearing these days about those people who have made it far enough through the Affordable Care Act enrollment website to learn their options. Remember, if you are going to enroll in an ACA exchange health insurance program, you have the choice of a Bronze, Silver, Gold or Platinum plan. They are designed to provide the consumer some choice in the matter. That's a good thing.

The big difference among the plans is the percentage of costs that they are expected to cover. While designs will vary from state to state, Bronze plans are expected to cover 60% of health care costs, Silver plans 70%, Gold plans 80% and Platinum plans 90%. Among the ways that Platinum plans will get to that threshold are by having lower deductibles, lower out-of-pocket maximums and lower co-pays. In other words, the Platinum is a more generous (and more expensive) plan.

Each plan, regardless of its associated metal must cover essential health benefits. If you get really excited by reading this kind of stuff, you can go to Section 1302 of the Affordable Care Act. But, most of my readers have better things to do with their time. So, you can find a summary here:

• Ambulatory patient services (generally outpatient services such as routine doctor visits)
• Emergency services
• Hospitalization
• Maternity and newborn care
• Mental health services
• Substance use disorder services 
• Prescription drug coverage
• Rehabilitative and habilitative services and devices (in plainer English, these are things like relearning a physical skill, e.g. walking, or learning a physical skill, e.g., speaking if you were born with a speech impediment)
• Lab tests and services
• Preventive and wellness services including chronic disease management
• Pediatric services including oral and vision care

Thus far, I have heard lots of complaints that the Affordable Care Act is not affordable. This should have been obvious to anyone who bothered to think about it. 

Why?

Suppose you as a consumer went out to buy private health insurance coverage pre-2014. Let's further suppose that you are a healthy late 20s single male who does not engage in any particularly dangerous activities (think skydiving, mixed martial arts, motorcycle racing, etc.). You don't require any prescription drugs. You are not a substance abuser and you are fortunate to have not been born with or gotten any severe disabilities.

Now, suppose you went out and bought a health insurance plan for yourself. You wouldn't pay for lots of these required coverages. Certainly, you wouldn't get maternity coverage. You would likely leave out prescription drug coverage and rehabilitative and habilitative coverage. You wouldn't get substance abuse coverage. 

And, you wouldn't pay for them. 

But, under the ACA, you have to have them. You don't get a choice. 

Further, under the various metal-type plans, the design is such that the "average" (not really an average, but perhaps typical) person will pay 60%, 70%, 80%, or 90% of their health care costs. 

Here are two more facts. 1) All of these coverages cost money. 2) Insurance companies are in business to make money (contrary to popular belief, they do not exist for the sole purpose of losing money so that you, dear reader, can have great and inexpensive health care coverage).

What this means is that healthier people who are less likely to require health services need to subsidize coverage for those more likely to require health services. Further, since people should make intelligent choices, heavy users of these benefits should opt into plans that provide more (and better) coverages and light users should elect the plans that are least expensive. This phenomenon is an example of antiselection and antiselection increases costs.

Don't get me wrong. I think it's great that children under the age of 26 should be able to covered by their parents' plans. I have kids who have made use of it. I think it's great pre-existing conditions cannot be excluded from coverage by insurers. But, you know what? One of the ways that insurers have kept premiums down is by excluding pre-existing conditions.

Think about it. If an insurer is required to provide you with chemotherapy, it is unlikely that they can be charging you enough to make up for the cost of your treatments. Therefore, they have to spread the costs among others who are not receiving chemotherapy.

It's just math.

I also think it's great that there are no lifetime maximums under the Affordable Care Act. If you don't know, many health plans have historically had lifetime maximums of $1 million or $2 million. This means that once the plan has paid out that much on your behalf, they stop paying. Why do they have these provisions? They have them to that the insurer can limit its downside risk. It's good business practice. But they can't do it anymore. Since they are in business to make money (there's that nasty word again), they will spread the costs of not being able to impose lifetime maximums across all their customers. 

Again, it's just math.

Anyone who thought that the government could provide more and better insurance coverage for less money was either 1) delusional, 2) dreaming, or 3) not very smart. 

It's just math, and you, dear reader, should not be surprised.

John's Adventures at Healthcare.Gov

Chapter 1 -- Down the Sign-Up Hole

It all started on an October afternoon. I wanted to see for myself what all the ruckus was about. Surely, finding out what it would cost to sign my family up for the Affordable Care Act (ACA, PPACA, ObamaCare) could not be too hard. After all, I am reasonably computer savvy. I understand health care and health insurance better than the average person. My IQ tests to which I was subjected in childhood and early adulthood suggest that I am at least as intelligent as the average American.

My first task was to select a username and password. That I recall, each was required to be between 6 and 70 characters -- quite a range, I would say. I chose a pretty unique username of 20 characters containing an assortment of letters, numbers, and the dreaded special characters. The system told me that this username was already taken. I tried another one of 21 characters. The system told me that one was already taken. I tried one of 34 characters created randomly by banging on the keyboard of my laptop with my eyes closed until I was satisfied. This one, too, was already taken.

At this point, I screamed that word that one screams when one does not believe what has happened. You know the word. It starts with a B and ends with a T and has a total of 8 letters. Assuming that my characters were chosen fairly well at random, the odds of this username being a duplicate were approximately 1 in 36 raised to the 34th power. Excel tells me that this is a 53 digit number.

A few minutes passed and my e-mail inbox greeted me. The Health Insurance Marketplace informed me that my username and password had been accepted. The key question was which one.

Chapter 2 -- My Own Pool of Tears

I wanted to cry. I'm not sure if they were tears of joy or frustration. Finally, I decided they were tears of laughter. I clicked on the verification link and there it was: healthcare.gov was instructing me to log in. And, believe it or not, one of my log-ins was working.

I began to enter data. I chose Georgia, this having been my state of residence for more than 25 years now. I told the system some stuff about me.

I'm curious. Why does it ask if I am of Hispanic, Latino, or Spanish heritage? The question after that asks me for my race. Why not save a question and just ask my race? Obviously, I am missing something. And, in order to insure me, why does healthcare.gov need to know my race anyway?

Chapter 3 -- Chasing My Tale

The system asked me for my Social Security Number and for the name on my Social Security card. I typed it in.

Wrong, you idiot.

The system said there is no such person.

Well, I was looking at my Social Security Card while doing this. I held one next to the other and I was not wrong. So I tried again. Failure. Alas, the third time was a charm. I guess whoever said it was correct. Try, try, and try again.

Then I had to do the same things for my other family members. Just out of curiosity, what happens if you don't have some of this information handy?

Finally, all of the required information was entered for all of my family members. As you must after each tidbit of information that you enter, I clicked on "Save and Continue."

Success?

No, of course not. I clicked again ... and again ... and again. No luck.

So, I logged out and logged back in. And, I had the same problem. And, I tried it another day. And, again I had the same problem. So, I cannot tell you yet what will happen in Chapter 4 -- Obamacare Sends a Bill.

Populating Your Web Site

So, you're in a business related to benefits and or compensation. You have this really nice website. It's pretty glossy and glitzy, but you don't have enough substance on it. You need some technical or opinion articles, but either you don't have the time or you just don't like to write.

Have you ever considered specifying what you want on there and have someone else write it for you? You're here reading my blog. You know that I write on a wide variety of topics.

So, have me do it for you.  Contact me and we'll work out the details.

Attracting and Retaining -- The Role of Employer-Provided Health Care

I read the results of what I found to be an interesting survey this morning. The ADP Research Institute did a survey entitled "The Role of Employer Benefits in Building a Competitive Workforce." The good news about the survey summary is that it provides some excellent insights related to employer-provided health care benefits. The bad news is that either that's all the survey covered, or that's all the authors of the report found interesting.

In any case, according to the survey, nearly half of employers think that the health care benefits that their company provides to employees can be a differentiator when it comes to attracting and retaining employees. Fewer than 10% think that the health care benefits they provide are not particularly important in this regard (smaller employers are far more likely to say this).

Similarly, nearly half of employers think that the health care benefits that they provide to their employees are better than other companies in their industry. Only about 10% think they are worse.

Once upon a time, I was a student of high-level mathematics. I taught math at the college level. I passed actuarial exams on mathematical topics, generally with high scores, on my first attempt. The math here just doesn't work.

Perhaps when one becomes an HR leader (respondents were intended to be HR leaders), one is awarded with a pair of rose-colored glasses. If I were to take a similar survey, but ask employees rather than employers, I think that more than half of employees would say that their employer's health care plan is worse than average.

Why? Frankly, most plans have gotten worse for employees in recent years. Co-pays have increased. The employee's share of the premiums has increased.

I'm not saying that I can blame employers. Health care inflation has far outstripped general inflation and many companies, especially in a weak economy, cannot afford to pick up the inflationary increases in costs.

All that said, I am going to draw my own conclusions. I do this based on a single data point; that is, I draw it based on what I have learned in recent years by being in a health plan, talking to other people in health plans, talking to employers who sponsor health plans, and reading survey results like those from the ADP Research Institute.

In most job classifications, the primary differentiator in influencing a potential employee's decision to work for a company or not is compensation -- cash and cash-like (think equity compensation). Beyond that, it is the impression that the potential employee has gotten about what it's like to work for the company. If it's a great place to work, pay matters a little bit less. If it's a horrible place to work, you have to pay a lot. After that comes benefits. But, think about it. What do most potential employees ask about a benefits program before taking a job?

• When do I get health care benefits?
• Do you have a 401(k) plan that I can participate in?
• How much vacation time do I get?
• How much sick time do I get?

Most potential employees are not sophisticated enough to ask about the health care plan design. Even if they ask, they probably won't understand the answer. Many employees think all 401(k) plans are the same (I never believed this, but I started asking people and that is what I learned). 

Where I think that the difference in health care plans is large is in retention and in word-of-mouth recruitment. If a company has a great health care plan, its employees will talk to their friends about it. They will not be inclined to leave the company and give them up. On the other hand, if the health care plan is not good, water cooler talk will predominate. This may actually cut into productivity and those employees will certainly not recommend the company to their friends.

It's a tangled web, and clearly, HR leaders have not figured out how to untangle it. It's just my opinion, but in my blog, my opinion gets to be front and center. If your opinion is different, leave a comment, or write your own blog.

Much Ado About a Tax

The arguments among the cognoscenti have been going on for months. Does the Patient Protection and Affordable Care Act (PPACA or ObamaCare) violate the United States Constitution?

The arguments that I heard most frequently centered around whether or not the Act violates the Commerce Clause or the Necessary and Proper Clause.

Attorneys, especially those who practice constitutional law are far more versed in these subjects than I, but they are also far more versed than most of my readers. So, when they refer to Ayotte v Planned Parenthood or to Hooper v California, many eyes will glaze over. This is intended for those glazing eyes.

For those lay people who want to know what happened, here you go. Note: I have no formal legal training and I do not practice law.

Article 1, Section 8 of the Constitution discusses the powers given to Congress. Among them are the right to regulate commerce among the several states. Many argued that this would be the point on which the constitutionality of PPACA would turn. And, most of the experts seemed to believe that forcing an individual to make a purchase was beyond the scope of the Commerce Clause. The Supreme Court agreed.

Article 1, Section 8 also contains the so-called Necessary and Proper Clause whereby Congress has the power to make all laws which shall be necessary and proper for carrying into execution the other powers granted by Article 1, Section 8. Since there was nothing in that section which needed to be executed, the Necessary and Proper Clause did not apply.

Some may recall that the Obama Administration had pledged that those families earning less than $250,000 per year would not see a tax increase. Therefore, the amount that individuals who choose to remain uninsured would pay was written as a penalty, not as a tax.

But, and now for the legalese. the Court through the decision handed down by Chief Justice Roberts, looked to Hooper v California, which says in pertinent part that "every reasonable construction must be resorted to in order to save a statute from unconstitutionality." In English, that means that if there is any way to find a law to be constitutional, then that way should be found.

So, the Supreme Court labeled the penalty to be a tax. And, the first clause of Article 1, Section 8 begins that '[T]he Congress shall have the power to lay and collect taxes ..." So, to the extent that the penalty is, in fact, a tax, Congress was within its constitutional powers to impose said tax.

Much of the law becomes effective in 2014. Of course, we have a major election coming in November and its anyone's guess as to what this will do to the inhabitants of the White House and the Capitol building. If there are big changes, we could see changes to the law. If not, then this law will stand at the very least through 2016.

Health Care Reform Year-by-Year

I've got no original material for you here, but I happened upon this government website that tells its readers what happens under the Patient Protection and Affordable Care Act year-by-year.

Here is the link.

CBO, We Have A Problem

Sometime back, I wrote, not with admiration, about the Congressional Budget Office (CBO) and the 'scoring' rules that our Congress has burdened it with. Essentially, they don't adjust for inflation and they don't do dynamic scoring. Or, said differently, they are required to treat each bill as its own micro-economy, forecast for only 10 years, and  generally not reflect inflation. This approach allows the Congress to manipulate bills so as to score them as cost-neutral, or even as cost-savers, when in reality, everyone, including both Congress and the CBO, know that they are going to cost us a lot of money.

How much money? Does the number 15 trillion mean anything to you? The federal debt, according to the debt clock is now just above that number. It's a big number. It has 12 zeroes in it. It also has two other digits to the left of those zeroes.

I would posit that these rules and Congress' manipulation of these rules are responsible for a significant portion of that 15 trillion. In fact, and I'm just guessing (no calculator or spreadsheet in action here, not even any mental math), if I had to choose an over/under amount, more than half of that 15 trillion in debt has accumulated from flawed scoring.

I'm not saying that the CBO does poor math, in fact, they are very good at it. What I am saying is that the constraints that they are required to follow have caused the United States to underprice the costs of various bills by a really big number and I am guessing (that means that I don't know, but my brain now fully caffeinated for the day has estimated) that this number in the aggregate is more than half of 15 trillion dollars!

When I try to hide my political biases, I usually work in alphabetical order and I'm going to do that here. In this case, the Democrats are incredibly guilty of having gamed this system ... and they know it. In this case, the Republicans are incredibly guilty of having gamed this system ... and they know it. Most of the public doesn't know it. There has never been a public outcry. There should be.

So, what does this have to do with employee benefits? The good folks at the Employee Benefits Research Institute (EBRI) have a nice little chart (actually it's not so little) that they call Employee Benefit Tax Expenditures -- White House Fiscal Year 2011 Budget Estimates. It shows that the tax expenditure (that's a fancy name for the amount of deductions that people and corporations get on their taxes, either through deductions or through tax exemptions) for employer contributions for health care benefits in FY 2011 is in the neighborhood of $175 billion and  similarly, for employment based retirement plans, it's about $110 billion. That's $285 billion in total. The mortgage interest deduction for the same year is about $105 billion. So, employee benefits are a really big culprit.

I bet my readers know that those numbers go up every year. Of course, they do, inflation makes them go up, doesn't it? Suppose we adjust for inflation. Then, what happens? Well, EBRI can help us out with that as well. Here is the url for a spreadsheet (http://www.ebri.org/pdf/publications/books/databook/Table 5.2 Inflation Adjust.xls), and you'll have to copy and paste this one, that shows what happens when we adjust for inflation. Look at the spreadsheet. Find me a major element that decreases on an inflation-adjusted basis. You can't do it, can you? And, therein lies a problem of just enormous proportions.

The 10-year cost of many of these bills is understated because the CBO isn't allowed to use assumptions that faithfully project the cost. And, because cost increases tend to (read that as virtually always) significantly outstrip inflation, using virtually any 10-year cost projections for a bill that is expected to last for a long time (think Social Security or Medicare, for example) represents among the most significant frauds ever perpetuated on the American taxpayers.

Yes, I said it. It's a fraud.

It's time for the taxpayers to stand up to Congress.

I haven't used song lyrics in this blog for a while, but I'm going to go back to the Vietnam War era for this one. With thanks to Jefferson Airplane,

got a revolution got to revolution 
Who will take it from you 
We will and who are we 
We are volunteers of america

Change volunteers to taxpayers and ...

Another Survey Says

The benefits community in the US loves surveys. Large consulting firms love to do surveys. Presumably, their clients like this information, or at least someone thinks they do. The benefits news consolidators (you know, the publications that scour the internet for benefits news for a daily newsletter) love to tell us about these survey results.

This is all good. Or, at least, this could all be good. These surveys, though, have their problems.

• Questions are often poorly worded
• Possible answers either cover too much territory or not enough territory
• Press releases summarizing survey results seem to disassociate cause and effect
• Survey populations may not be unbiased
• Surveys inevitably are constructed to produce the findings that the surveyors think should be produced

Questions are often poorly worded

This is a no-brainer, but the world at-large doesn't seem to mind. I saw a survey question recently (the group had not been bifurcated yet into people who liked versus those who disliked their consumer-driven health plan (CDHP)) that asked "What do you like best about your consumer-driven health plan?" The possible answers were something like:

     a. my quality of care is higher
     b. it costs me less
     c. I can choose my own physician
     d. it promotes a culture of wellness

My immediate reaction is to ask where is e: none of the above? Let's look at the possible answers. Anybody who says that their quality of care is higher under a CDHP must be hallucinating. What would make it higher? If you can choose your own physician, why would they provide better care when you are in a CDHP than they would under a traditional health plan?

If you say that it costs you less, I would ask you less than what. Yes, the premiums are lower than they would be in an HMO, for example. On the other hand, they are higher than they would be if you had no insurance at all. Isn't this like having a deductible on an automobile insurance policy? If you choose a higher deductible, your policy costs less. But, in the health care policy, you usually don't get to choose your deductible. And, in the case of high-deductible health plans (HDHP) which are typically the cornerstone of CDHPs, the deductible is typically higher than most people can effectively budget for.

If you say that you can choose your own physician under a CDHP, that is true, but can't you choose your own physician under any health plan? It's true that your care may not be covered by the plan, but for many people, if that is really the reason they are in a CDHP, I would say that they are quite misguided.

Do you really think that CDHPs promote a culture of wellness? If I were texting, I would reply "lol." According to a recent Aon Hewitt survey (oops, now I am citing a survey), 35% of participants in CDHPs are sacrificing medical care because they cannot afford their part of the cost under these plans and 28% are postponing it for financial reasons. FACT: that is not indicative of a culture of wellness.

Suppose I think the CDHP that I have been forced into just plain sucks. How do I answer this question?

Answers cover too much or not enough territory


In the last section, I managed to deal with answers that don't cover enough territory. Sometimes, they go the other way and cover too much.

I took a survey recently about automobiles. The survey asked me a series of questions. For each question, I was supposed to answer on a scale of 1-13, with 1 meaning I strongly disagreed and 13 meaning I strongly agreed. Come on, people, 1-13? Do they really think that ten minutes into a survey, I can rate things on that fine a scale. They asked me if I would consider buying a Lexus when I next purchase a vehicle. So, perhaps I went through a train of thought like this. Lexus makes a very good car. They are stylish, safe, high-performing, and dependable. They are also expensive. Would I consider buying one? Yes, I would probably consider it, but I really don't want to spend that much money on a car, so how strongly would I consider it? Hmm, is that a 5 or a 6 or a 7 or an 8 or a 9 or a 10? I don't know. If it was on a 1-5 scale, I could probably happily fill in the little button for a 3. But on a 1-13 scale, that would be equivalent to a 7 and I just don't know if I'm a 7 or not.

Press releases ignore cause and effect


I saw another survey (if I could find the actual survey again, I would cite it here) recently that said that fewer companies were funding (informally) their nonqualified deferred compensation (NQDC) plans. The headline said something about recent guidance on corporate-owned life insurance (COLI) being the reason for this. Hmm, the survey had no questions in it about why fewer companies were funding their NQDCs. And, further, I'm not sure what recent is, but I can't find any recent COLI guidance that would affect funding of NQDC plans. Perhaps the authors of the surevy had a bias?

Survey populations may not be unbiased


Suppose a large consulting firm does a survey. In my experience, they send the survey to a nice cross-section of large companies. Perhaps it looks something like the Fortune 200 plus all of that firms clients not in the Fortune 200 that generate at least $1 million in annual revenue for the firm. Of the companies surveyed, who do you think are the most likely to answer the survey? Could it be the consulting firm's large clients? Aren't they the ones most likely to actually open the survey? Who are least likely to answer the survey? Could it be the companies that have recently fired that large consulting firm?

Do you think that the results of this survey might be a little bit skewed? Do you care? I do.

Surveys inevitably are constructed to produce the findings that the surveyors think should be produced


Suppose you ran the health care consulting practice at a large consulting firm. Further suppose that you are a big proponent of consumerism. In fact, you have built your consulting firms health care consulting practice around CDHPs. You ask your survey group to do a survey around health care plans. You want to be able to make a bold statement in a press release that shows how wonderful CDHPs are and for all the reasons that you have been touting.

Do you think you will make sure that the questions have at least a small bias that will lead to your desired result? If the findings come back differently than you had hoped, do you think you will publish the results as is, or will you find a way to tweak the results? Will you tout the portion of the results that support your practice or will you be unbiased in how you release the survey results?

I don't need to answer those questions for you. You don't need to answer them either. We all know the reality.

These surveys ... they do have their problems.

The Cynic In Me Says Watch Out For the Health Insurance Industry

Yesterday, I attended the Traveling Seminar in Atlanta put on by the Conference of Consulting Actuaries. Well, actually, I instructed for part of the day and attended for part of the day. It's a really good day of continuing education and I would highly recommend it even if I am one of the instructors. You can read more about here so that you can see why perhaps you should attend a Traveling Seminar next year.

But, that's not my point in this post. I'll get to that in a second. One of the four sessions yesterday was on health care in the US, essentially health care reform, PPACA, or whatever glorious name you might choose to attach to it. As I listened, I noticed some analogues between the Dodd-Frank Act that was intended to keep the financial services industry in check and PPACA which among other things appears intended to keep the health insurance industry in check.

So, I digress. Dodd-Frank created lots of new rules. In fact, 2800 pages or so of legislation has a tendency to do this. Among other things, it restricted some of the practices of the banking industry that lawmakers had judged were pretty nefarious. The banking industry saw that its profits, especially on the retail side were declining. So, what did the banks do? They started to put more and different fees in place. Some of them, such as the $5 per month (that was usually the number, I think) fee for using your debit card even once, faced public uproar and outrage and were repealed. But, they are finding other ways that will not be so in your face. If you ever find out about them, you won't like them, but chances are that you can't find out whether they are in your bank's disclosures or not.

So, what does that have to do with PPACA? Well, the more I listened to yesterday's presentation, the more I heard about health insurers losing some of their margins. And, many of them have shareholders to report to. And, those shareholders expect profits. And, the profits may be ready to decline. So, my message to you is that since the health insurers can't easily deal with declines in their profits, they'll have to get them back somewhere ... somehow.

So, ladies and gentlemen, I don't know how they will do it. But, hold onto your wallets. The insurers need their profits. They are in business, after all, to make money.

Public Pensions Are Not the Problem

I hear it all the time: public pensions are a big problem. On TV, I hear that "we" just have a 401(k) plan, why should government workers have a pension plan? I'll answer that question and talk about the real problem that public pensions have been made to become.

Understand as I write this that I am a fiscal conservative by nature. While there is a place for some benefits that are more socialized than some others might think, I don't, for example, espouse that our employers, public or private, should be responsible for our entire welfare.

That having been said, let's consider a young potential worker, Kelly (I figured I would use an androgynous name because I haven't decided yet if I want to make Kelly male or female, or if I even care). Kelly is considering two job offers, one with a private employer and one with a public employer. This may not be an unusual scenario.

The private employer offers Kelly a nice package to start with. It includes all this:

• $60,000 base pay
• 2 weeks paid vacation and 10 paid holidays
• A consumer driven health plan (Kelly doesn't know what that means, but does know that it is a health plan) where the employer pays 75% of the total cost
• A 401(k) plan with a match of 50 cents on the dollar for the first 6% of pay that Kelly contributes

Assuming that she (I decided to make Kelly female) elects the health plan and defers at least 6% of her pay to her 401(k) plan, the total annual employer cost of the package being offered to Kelly is approximately $60,000 (base pay) + $4,615 (paid time off) + $4,500 (health plan) + $1,800 (401(k)) = $70,915.

The public employer offers Kelly a very different package. It includes all this:

• $50,000 base pay
• 3 weeks paid vacation and 15 paid holidays
• A traditional indemnity health plan for which the employer pays 90% of the total cost
• A defined benefit pension plan that if funded ratably over a full career for Kelly will cost the employer (on average) about 5% of pay

Again, assuming that she elects the health plan, the total annual employer cost of the package is about $45,000 (base pay) + $5,769 (paid time off) + $9,720 (health plan) + $2,500 (pension plan) = $67,989.

NOTE: I have taken fairly wild guesses on the costs of the health plan. They should not be used as representative of any particular plans nor should the be used as representative of the costs of any particular plans.

The values of the two packages are close enough that Kelly may have some career and lifestyle choices to make. But, we will leave Kelly for the moment as her career decision does not really matter to us.

The first thing that does matter, however, is that the two potential employers have similar costs of employment, however, they choose to allocate those costs very differently. The second thing that matters is the pension plan. Note that I said that the public employer was going to fund that benefit ratably over a full career. When this is done on a percentage of pay basis, it typically comes from an actuarial cost method known as (Individual) Entry Age Normal. In this case, the 5% of pay is what is known as the normal cost, or the annual cost of the benefits being allocated to the present year.

Wow, that was an earful. I'll slow down the technical stuff.

My point is that a public pension plan, at least in every jurisdiction of which I am aware, can be funded rationally. As part of that rational funding, the plan sponsor (whoever represents the sponsor) must first allow the plan's actuary to choose reasonable actuarial assumptions, including those for discount rate, salary increase rate, rates of termination, disability, retirement, and death, and any others that are appropriate to the plan and its population. Second, the plan must be funded using an actuarial cost method that takes into account future pay increases and is reasonable in its allocation of benefits to an employee's past service, current service, and future service with the employer. Third, regardless of the leeway allowed by the law, the sponsor must ensure that the plan is funded rationally every year. The cost is the cost. You don't take a year off from funding so that you can build a new skate park, especially since the mayor's son is a competitive skateboarder. 

The problem is that most public plan sponsors have not taken this approach. They have been neither reasonable nor rational. Much like the US government, especially under the last two presidents, public plan sponsors have taken the approach of running up obligations that perhaps could have been paid for as they were accrued, but were instead left for a future generation.

Therein lies the problem. The public pension is only its face.