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When the c.e.o. of Wal-Mart calls on the government to help retailers with a problem, you know it's big. During a presentation at this year's National Retail Federation conference, H. Lee Scott told attendees that the U.S. health care system is in "crisis," and that it's time for the government to step in and help companies get a handle on rising costs.
Unfortunately Scott didn't offer any solutions, but that's likely because there's no prescribed silver bullet to manage the expense of employee health care, which is expected to increase by as much as 14 percent this year for large employers throughout all industries. At the same time, most companies say they can only afford to absorb an increase of 9 percent, according to a study from Hewitt Associates, a human resources outsourcing and consulting firm based in Lincolnshire, Ill.
While dealing with these costs is nothing new for retailers -- they've been burdened with double-digit premium increases for four consecutive years -- the problem has intensified in the last few years, as many grocers' operating margins have become even tighter amid fierce competition. Food retailers were already spending a median 3.4 percent of sales in employee benefit expenses in 2002, according to data from the Food Marketing Institute. Now, thanks to the highly publicized labor strikes involving Kroger Co., Albertsons, Inc., and Safeway, Inc. in California, the issue has been brought to the forefront nationally.
"This is a problem of crisis proportions," notes Ernie Monschien, FMI's senior director of education and human resource development. "Our retail food companies have been very creative in the way they address the problem, and they've taken a balanced approach. But they can't solve the problem alone."
For now, companies are focusing on a variety of strategies to snip costs, ranging from lengthening employees' eligibility periods to implementing spousal surcharges to all-out changing plans. The trend is to pass on more of the costs to workers, but the challenge is finding a balance with which both employers and employees can feel comfortable.
In most cases, dropping health care coverage just isn't an option, especially in an industry that depends so heavily on attracting dedicated, dependable workers. "Health care is by far the most important benefit to employees across industries, according to our surveys," says Linda Cushman Ruth, senior health care strategist at Hewitt Associates.
"From the employer's standpoint, it's more important now because the job market is tighter," she adds. "If you don't have a job in this country, and if you choose not to pay COBRA or if it runs out, you don't have health care coverage. We're hearing employers say that just having the benefits is critical to employees."
FMI's Monschein observes that while employees may have taken health care benefits for granted in the past, today's workers expect it as part of their compensation. "People are asking about health care during the first interview. You can't assume that people, even a 22-year-old management trainee, don't consider it important."
Particularly in the supermarket industry, where wages for nonexempt jobs are typically modest at best, most employees feel that it's necessary to have help with higher co-pays and deductibles. Food retailers have been doing a pretty good job of keeping up, according to statistics from FMI's 2003 Employee Benefits Study. In 2002 they contributed more than 60 percent of medical costs per employee. Not surprisingly, companies spent more for their nonexempt, union full-time employees -- a median of $5,524 per employee. The median cost for a nonexempt, nonunion full-time employee was $4,647.
Yet as costs continue to spiral out of control, retailers are finding it harder than ever to maintain an equitable balance. "In a thin-margin business like this, any time you start applying double-digit rates to something that costs $10 million to $15 million, depending on the size of the plan, it gets out of hand very quickly," says Alan Vaughan, s.v.p. of benefits and insurance at Coppell, Texas-based Minyard Food Stores, Inc. "Over the years, if you look at percentage of total payroll at companies, there may have been a time when employers could afford to be more generous. Now, because of the sheer impact of managing today's costs, employers have to play catch-up. It's kind of like stepping into a cold shower."
One retailer's strategy
To help counter health care expenses, Minyard is looking at making modest changes to its health care plan design, such as higher co-pays and deductibles for employees. A new practice that has been "a little controversial," according to Vaughan, is requiring a surcharge from employees whose working spouses want coverage, if they're already offered coverage from their own employer. "In terms of the overall impact, the projected savings are roughly in the 5 percent range. But if a company has a $20 million health care plan, that's $1 million," Vaughan says.
Minyard offers its employees both a self-insured HMO-type plan and a PPO-type plan, in which employees have more freedom of choice. Giving employees more choices seems to make them feel more satisfied with their plans, according to Hewitt Associates' Ruth.
Still, roughly 70 percent of Minyard's associates use the HMO plan because of lower out-of-pocket costs, Vaughan says. "People who work day in and day out in a grocery store can't afford huge out-of-pocket costs," he observes.
As for keeping employees comfortable with plan changes, communication is key, Vaughan notes. "I think we try and do a good job of sharing information, so that they understand how much Minyard is paying and how much their portion is. That communication is very important. It's also important that individual store managers are given a higher level of understanding to communicate with employees.
"At the end of the day, how you stack up against other companies will surface when your employees chat with their family and friends about how they compare to the rest of the world. At Minyard I try and benchmark our coverage to where we're in the general average arena compared to other retailers. You have to be in that OK area to avoid problems."
FMI's Monschein agrees that open dialogue with employees is critical, particularly from an education standpoint. "The industry needs to maximize more on partnering to educate employees on cost control. We need to make sure they understand why these things have to happen by showing them some of the numbers, and explaining that one way we can maintain coverage and keep a quality health care plan is by having them help control costs," he says.
Another cost-cutting move some retailers have tried is extending the eligibility period for health care coverage, which isn't a bad idea in an industry that experiences such high turnover, particularly in the first several months of an employee's tenure. "Assuming that a lot of the turnover is dealt with in the first six months, retailers are saying if the eligibility period covers a lot of the turnover, then they're in a better position to consider programs like disease management or demand management programs like 24-hour nurse lines," Ruth notes. "We're encouraging that as a way to reduce the total size of health care spending, as opposed to just shifting costs to employees."
Salisbury, N.C.-based Food Lion has been pleased with the preventive health care programs it has implemented in recent years, according to spokesman Jeff Lowrance. "We now offer disease management and pregnancy health management programs to aid in the early detection of potential problems that could lead to higher-cost treatments and hospitalizations. The programs also have an education component to better inform employees and enable them to better maintain their own health," he says.
Internet-based tools are now getting a second look from retailers as many realize the cost savings involved, according to Ruth. "Conventional wisdom used to be that retailers couldn't depend on the Internet to offer human resources services, because employees don't have access to Internet service in the stores. We're simply finding that in this day and age most people have access to the Internet, so we're seeing a lot more interest in some of the tools to help with enrollment administration," she says.
At least food retailers can console themselves that they aren't alone in their struggles over health insurance. Health care is not only an industrywide problem, but also a national crisis that's spawning political debate, especially since the uninsured population now hovers around 44 million. "If health care cost increases continue at the rate they're going, at some point even midsize employers are going to say that they can't afford it and can't compete in the global economy," Ruth observes. "I think when we reach that point -- and the question is how far away it is -- the country will have to take a hard look at the way we're providing health care. Our employer-based system is certainly pretty unique in the world."