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Small Business Employee Benefits and HR Blog

In Defense of Defined-Contribution Employee Health Benefit Plans

November 27, 2012
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The following is a guest post by Dale Petersen. Dale Petersen served as the director of benefits at Darden Restaurants Inc. from 1988 until 2000 where he directed benefit and HR programs for the $5 billion Fortune 500 company with 160,000 employees in US and Canada. You can connect with Dale on linkedin.

Darden Restaurants Inc. has always been a pioneer in employee benefits. It has wrestled with the inherent conflict for businesses in the restaurant or hospitality industry generally. Darden genuinely cares about employees and provides an industry leading benefit package to prove it. At the same time, they operate in a world of extremely low margins and an annual profit per employee number that barely exceeds $2,000. Think about that. After all employees and bills are paid, the company profits amount to about 2.5 dinners [per] week for each employee. The point is it’s easy to see how Darden and other restaurant and hospitality companies feel the pressure of being sandwiched between wanting to do good things for the people who control the business success and the pitiful amount of after-tax profit to do it with.Darden defined contribution resized 600

Like everyone, they have tinkered with cost-sharing, cost-shifting, benefit innovation, and, when all else fails, cost-cutting.

There are factors that went unmentioned in “Selling defined contribution health plans: benefit-cutting vouchers in ‘employee choice’ clothes.” There’s another sandwich on the table. First, by controlling eligibility, Darden now struggles with the burden our total healthcare system faces — the aging population. The older the insured population, the higher the claim experience. At Darden, the overall pool of the insured population has grown smaller as a percentage of the total workforce. As a result, when a young worker finally becomes eligible (after a year of averaging 30 work hours per week) to participate, he is joining a pool that is skewed toward the older and sicker participant. The premium charged reflects that.

By providing a defined contribution option, Darden is allowing that employee to save a boatload on their healthcare costs. Now the employee may use their allowance for any healthcare expense deemed eligible by the IRS (See IRS Pub 502) including out-of-pocket medical expenses. The premium for a single male or female of the average age of a typical restaurant company employee — about 30 — is less than $175 per month for the best plan option available (in Florida). That’s less than $45 per week and close to affordable for this population. Of course, some things will change for the better by 2014, such as no longer discriminating against women just because they bear children. Likewise, with guaranteed issue coverage, the boogaboo of pre-existing condition goes off the table.

Like everyone else, Darden employees want three things: choice, affordability, and healthcare that is easy to understand and simple to use. Taking responsibility for choosing and using the healthcare plan that best meets one’s needs is a big win for employees.

Darden wins too, though. As a self-insured, self-administered benefit program with over 185,000 employees, [their insurance] burden carries a tremendous cost. Darden is a restaurant company. To be most profitable for its stakeholders, improving the quality, value, and service of the restaurant experience should always be the primary focus. Getting out of the insurance business certainly allows this to occur more readily. But to their credit, they did not leave their cherished employees without benefits. Instead, they will give them the money to choose their own program. Hopefully, everyone will make good choices in the future. My sense is you will see many other companies following Darden’s lead. They always do.

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