1997 RISK MANAGEMENT: CONSOLIDATION, LEGISLATION LEAD BENEFIT NEWSPosted On: Dec. 21, 1997 12:00 AM CST
Consolidation and legislation generated the top employee benefit stories of 1997.
The No. 1 benefits story of 1997 is the wave of acquisitions and mergers that swept across the employee benefits consulting industry.
The new year had just begun when Mellon Bank Corp. announced it would buy Buck Consultants Inc. Two weeks later, Coopers & Lybrand L.L.P. said it would buy Kwasha Lipton L.L.C.
Also in January, Aon Corp. completed its takeover of Alexander & Alexander Services Inc., and through that transaction integrated The Alexander Consulting Group, A&A's benefit consulting unit, into its own consulting operations.
In March, Marsh & McLennan Cos. Inc. announced it would purchase Johnson & Higgins. Through that transaction, J&H's benefit consulting division, A. Foster Higgins & Co. Inc., would be folded into M&M's benefit consulting unit, William M. Mercer Cos. Inc.
Although all these acquisitions and mergers were unprecedented in scope and size, the reasons for them varied.
Buck, for example, was looking for a strong parent to help finance an expansion of its benefits outsourcing business, while Kwasha Lipton feared its relative small size was hurting its ability to compete against benefit consulting behemoths.
Whatever the reasons for the deals, the new combinations presented opportunities and problems for benefit managers (see story, page 25).
The No. 2 story of 1997 is the remarkable turnaround of the Pension Benefit Guaranty Corp., the federal agency that guarantees basic benefits for employees and retirees in pension plans.
Only a few years ago, the PBGC's financial position had so deteriorated that some believed that only a bailout from the U.S. Treasury would be able to keep the PBGC afloat.
But a combination of factors -- especially the passage of legislation in 1994 ending loopholes in federal law that had allowed employers to underfund their pension plans -- has put the PBGC on a sound financial footing. Last year, the agency recorded its first surplus in 22 years of operation.
That's good news for employers that support the PBGC through a premium assessed on their defined benefit plans. A financially secure PBGC means stable or perhaps eventually lower PBGC premiums (see story, page 26).
By contrast, the No. 3 benefits story of 1997 -- the introduction of the Patient Access to Responsible Care Act -- is not something employers are cheering about.
PARCA, ostensibly intended to curb what its sponsors see as abuses by managed care plans, would force virtually all health care plans to overhaul their practices. For example, plans would have to cover services by all state-licensed health care professionals, even, for example, those offered by massage therapists.
The price tag would be steep. Actuarial consulting firm Milliman & Robertson Inc. estimate that premiums could shoot up between 7% and 39% if the bill passes. The fate of the measure rests with several congressional committees, which are expected to consider it next year (see story, page 27).
Ranked as the No. 4 employee benefits story of 1997 is the waning stability of group health care costs.
From 1994 through 1996, group health care costs for many employers have been virtually flat or even declining, a welcome change from the late 1980s, when costs were rising annually by double digits.
Key reasons for those years of price stability were the shift of a high percentage of employees to lower-cost managed care plans from expensive traditional indemnity plans, as well as rate cutting by health maintenance organizations as they battled one another for market share.
But now rates are climbing again, though still at relatively modest levels compared with the last big surge of cost increases in the late 1980s.
Reasons health care costs are increasing include HMOs seeking to bolster earnings after more than a year of lackluster results and rising medical costs (see story, page 28).
The No. 5 story of 1997 also has a legislative focus: the drive to assure greater quality of services provided to enrollees in managed care plans.
For example, early in the year, Sen. Edward Kennedy, D-Mass., and Rep. John Dingell, D-Mich., introduced legislation to give health care plan enrollees a "Bill of Rights."
Among other things, health care plans generally could not deny coverage for emergency room treatments but would have to give patients with serious medical conditions direct access to specialists.
At the same time, state legislators got into the fray by passing a flurry of bills, which, among other things, ban so-called gag clauses that had prevented providers from discussing all treatment options with patients.
These efforts were a response to what legislators saw as a public backlash against certain managed care practices (see story, page 29).
The employee benefits story ranked as the sixth most important of 1997 is President Clinton's strategy to expand health care coverage gradually rather than seek massive reforms in one fell swoop.
Nearly five years ago, President Clinton began a crusade to overhaul the U.S. health care system when he named a task force to develop a plan to achieve universal coverage.
The plan emerged in September 1993 but was dead just a few months later as Congress rejected a package that would have herded much of the population into government-established buying cooperatives.
While some congressional Demo-crats, most notably then Senate Majority Leader George Mitchell, D-Maine, blamed special interest lobbying for the defeat of the president's plan, Mr. Clinton accepted responsibility for the debacle.
The failure to achieve health care reform was because he tried to do too much at once, he said. The only way to achieve change in the health care field, the president said, is incrementally.
That is a strategy the Clinton administration has stuck to with success. For example, at a key juncture last year, the administration lent its support to legislation curbing the ability of health care plans to deny coverage for pre-existing conditions.
The administration also backed two pieces of legislation that passed last year. One requires health care plans to offer at least 48 hours of inpatient care to mothers and their newborns after a normal delivery and 96 hours of coverage after a Caesarean section. The other measure bans discriminatory annual and lifetime dollar limits in group health plans for coverage of mental disorders.
This year, President Clinton also has pursued a modest health care agenda. He jumped into the quality debate by establishing a 34-member commission to come up with quality standards for managed care plans.
In November, President Clinton embraced the commission's recommendations, which include requiring health plans to provide more information to enrollees about covered benefits and the experience of professional staff, and to establish procedures for resolving complaints.
And President Clinton made clear that in the year ahead he will be doing more to try to expand coverage -- gradually. For example, the administration is interested in getting legislation passed to ensure coverage for employees who retire before 65 and are not yet eligible for Medicare.
The president said something should be done -- possibly through federal subsidies -- so that lower-income workers who lose their jobs can afford to pay for COBRA health care continuation premiums.
In addition, the president said he wants legislation passed to ban so-called drive-through mastectomies. President Clinton described as "horrifying" situations in which women are denied coverage for an overnight stay in a hospital after a mastectomy.
The seventh most important benefits story of 1997 involves a unanimous Supreme Court decision that opens the door to lawsuits against employers by employees who charge that their dismissal was motivated to prevent them from receiving health care and other employee benefits.
The justices ruled that a section in the Employee Retirement Income Security Act that bars employers from discharging or discriminating against employees to prevent them from receiving benefits applies to all types of employee benefit plans.
That decision in May overturned a 9th U.S. Circuit Court of Appeals ruling that held the intent of Section 510 of ERISA was limited to pension plans in which participants' benefits vest after a certain period of service.
The impact of the decision is that employees' suits charging dismissal or discrimination to prevent them from obtaining benefits can't be "knocked out of the box" just because the actions involve benefits, such as health care, that do not vest.
Some experts feared the decision could lead to an outbreak of suits against employers who have aggressively outsourced traditional functions to cut benefit and other costs.
But other experts cautioned against such an interpretation. They said that Section 510 would not apply if there were "fundamental business decisions" for corporate actions -- such as companies deciding to concentrate on core businesses -- that resulted in employees losing their jobs and their rights to benefits.
The No. 8 benefits story of 1997 is the enactment of legislation opening the traditional Medicare program to more competition, a development employers and retirees alike welcomed.
Under the new law, retirees will be able to choose coverage from preferred provider organizations, indemnity plans offered by commercial insurance companies, or provider-sponsored organizations -- HMO-like plans established by providers -- and Medicare itself.
Retirees also will be able, as they are now, to receive coverage from Medicare HMOs as well as from the traditional Medicare program.
Each type of plan will receive the identical capitated payment rate from the Health Care Financing Administration, the federal agency that administers Medicare. If they are run well, many of these plans will be able to offer far more generous benefits than the traditional Medicare program and at a very low cost.
With so many choices of health care plans available to retirees, employers may be able to save a considerable amount of money by cutting back or even eliminating plans they sponsor that now supplement Medicare. And retirees may end up getting more generous benefits than they do now.
In fact, the benefits story ranked as ninth most important of 1997 is the decision of Sears, Roebuck & Co., to cut back on its retiree benefit plans.
Employees who retire after 1999 no longer will be eligible for the company's premium contributions for a supplemental health benefits plan when they become eligible for Medicare at 65, while life insurance for many current retirees is being sharply reduced and is being eliminated for those retiring after the turn of the century.
Sears portrayed the move as a way of keeping the costs of its benefit plans in line. Even with the cutbacks, its benefit plans are much more generous than those of other retailers.
While Sears is not the first company to slash retirees' benefits, it was a jarring development from a company famed for the generosity of its benefits' programs. The retailer is facing litigation from retirees challenging the legality of the retailer's actions.
Rounding out the Top 10 benefit stories of 1997 was the multiemployer pension plan implications of the International Brotherhood of Teamsters strike this summer against package delivery company United Parcel Service of America Inc.
UPS proposed to leave multiemployer plans -- many of which are underfunded -- covering its 185,000 Teamster-represented employees. UPS said it wanted to leave the plans at a price of $700 million in withdrawal liability payments and set up its own plan because it was tired of paying benefits for employees and retirees who never worked for UPS. That referred to situations in which companies in multiemployer plans have gone broke, leaving the remaining employers, like UPS, picking up the benefit obligations for retirees and employees of bankrupt companies.
But UPS's multiemployer demand led to a Teamsters strike. Union negotiators called the UPS demand a deal-breaker, and in the end, UPS caved and dropped that demand.
That decision, while perhaps costly in the long run to UPS, is a victory for multiemployer plans and the employers that contribute to them.
Had UPS succeeded in leaving the plans, that would have delivered a devastating blow to some of the Teamster plans to which UPS contributes. In all, UPS contributes more than $1 billion a year to the plans, and those funds represent roughly 15% to 18% of all contributions to the plans.
If UPS had been able to pull out, trustees of some of the multiemployer plans would have had no choice but to raise contributions for the remaining employers in the plans.
That could have caused more employers to withdraw, leading to a possible death spiral for some plans in which the withdrawal of one or more employers triggers the withdrawal of more until there remains an insufficient number to support the plan.
The fear of such a scenario developing explains why the Teamsters labeled the UPS demand to leave the plans as a deal-breaker.