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CFOs examine health care benefits through financial lens

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CFOs examine health care benefits through financial lens

Although the chief financial officer job in most organizations has been expanding as the cost of health care benefits consumes a growing portion of corporate budgets, health care reform is accelerating this evolution.

And as more CFOs become involved in benefits decision-making, they are showing greater interest in pay-or-play financial modeling, health benefits experts say.

In some cases, benefits advisers also are discovering the need to dispel some common misconceptions CFOs have about the Patient Protection and Affordable Care Act, sometimes having to remind them why their companies have been offering health benefits in the first place.

Nancy Kelly, managing partner and human capital practice leader at Hanover Stone Partners L.L.C. in New York, likened the change that has been occurring in the CFO's role to the emergence of the chief risk officer role in organizations.

“Now that the talent market is changing and is much more competitive, the CFOs have to become more involved in (the human resources) level so that they understand that simply taking the cost out of benefits isn't always the answer,'' Ms. Kelly said. “All of the executives have to cross borders. If you look at enterprise risk management, that's the premise. They're all in it for the betterment of the corporation.”

“Initially, everybody thought this was a compliance issue for HR,” said Tracy Watts, national leader for health care reform at Mercer L.L.C. in Washington. “But then there are tax implications, filings, reporting and disclosure requirements, which starts to get finance, tax, legal and HR involved. What we're finding with ACA is it is a cross-organizational challenge. Multifunctional collaborations are needed in order to comply and thrive under the law.”

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Edward Waters, vice president and CFO at Merit Brass Co., a Cleveland-based manufacturer, said he spends “an inordinate amount of time on health care because it's become a major budget item. There is very little on our financial statement that goes up as much as health care.”

He said because of an 11% health care cost increase in July 2013 and an additional 3% “line item” to cover the cost of complying with ACA, Merit Brass has found it necessary to increase employee cost-sharing to 20% from 10% of annual premiums while simultaneously emphasizing wellness to improve employee health status.

“I'm much more involved in the wellness program,” Mr. Waters said. “Our goal is to have happy employees, which is why we're focusing on keeping costs down and wellness programs. We want them to be engaged in what our costs are.”

“I've been aware of more CFO involvement with every one of my clients,” said Tracy Perez, Denver-based vice president and account executive at Lockton Benefits, a division of Kansas City-based Lockton Cos. L.L.C. “Part of this is due to the ACA, the taxes, the fees and also the publicity, especially in the last six months. CFOs are realizing they are going to be held accountable.”

It is also because “annual cost increases have been taking up a bigger chunk of the corporate budget,” she said. CFOs are exhibiting increased interest in the tax implications of certain benefits offerings, such as high-deductible health plans with health savings accounts, Ms. Perez said.

With greater CFO involvement, “there is also more of an appetite for pay or play,” Ms. Perez said. “We have a bigger audience for our customized health reform financial modeler. They are interested in the cost and tax implications if they provide benefits versus the cost implications if they pay the penalty.”

Alex Tolbert, founder of Bernard Health, a Nashville, Tenn.-based benefits broker and administrator, said “the CFO of one company is paying us to do the pay-or-play analysis because he doesn't trust his broker. Ultimately, all decisions are financial decisions. I have heard people say that you need to ask yourself why you offer health benefits in the first place. But it's not to attract or retain employees. It's because benefits are tax-free. ACA provides a greater incentive for individual insurance than for group insurance.”

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“I've seen the models. We would save significant money,” Mr. Waters said. “But we view our associates as essential to our business. We use benefits to attract and retain employees.”

While Mr. Waters of Merit Brass remains committed to offering benefits, many other “CFOs often need to be reminded by HR that they also need to look at the employee impact, even if the employer might be better off paying the penalty and discontinuing coverage,” Ms. Perez said.

“Many of our early discussions around pay-or-play were with the CFO,” Ms. Watts said. “CFOs are generally more interested in the pay strategy than anybody else” in an organization, she said. Similarly, “CFOs are very interested in knowing about the excise tax (on high-valued benefits) and finding out if projections show the organization is going to be at the threshold and what strategies can be used to mitigate that trend.”

A CFO who “only looks at the numbers may miss the nuance of the impact on employees,” said Joe Torella, president of the employee benefits division of Hub International Ltd. in New York. “The ACA has changed how companies think about the value of health benefits, and the way they can be used to make people healthier, more productive and to attract the best talent,” he said.

Perhaps the most common misconception that CFOs have about ACA is the belief that their companies need to make major changes to comply with the health care reform law, Ms. Perez said.

“But we find that most of the employer groups offering benefits already were close to ACA compliance, and there were just some very small tweaks needed,” she said. As such, “we've been that calming voice” that many CFOs need to hear. “There are a lot of inaccuracies being reported out there,” she said.

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To more effectively communicate with CFOs, human resources managers and their benefits advisers are “having to use the language of the business,” Ms. Kelly said. “That's as close to "finance speak' as you can get. You have to speak their language.”

Mr. Waters said he has “a very good working relationship” with Merit Brass' human resources manager. “I personally speak to our HR department every day. And I spend as much time as necessary trying to follow the act. If you don't, then you're not being responsible.”