Most CEOs are all too familiar with the nearly 15 percent average annual increases in the direct cost of health insurance and the subsequent impact on the company’s bottom line. It’s when companies begin expanding through mergers and acquisitions that the indirect costs and the inflexibility of most health insurance plans become apparent.
With vast regional differences among health plans and coverage provisions, health insurance issues often impact on business expansion initiatives.
Mike Lutosky, employee benefit broker with Westland Insurance Brokers, says that there is no need for CEOs to become victims of the business cycles of the health insurers a situation which has been further exacerbated by industry consolidation, causing average HMO premiums to double over the last few years. He says that what CEOs need is an effective strategy that provides an alternative to traditional health insurance.
“What’s your current strategy to control health coverage costs? If you are waiting until 60 to 90 days before your current renewal and then merely reacting to the increase that your health insurer dishes up, you aren’t strategically dealing with the issue,” says Lutosky.
Smart Business spoke with Lutosky about how CEOs can incorporate self-funding into their overall strategy for controlling the cost of health care.
What is self-funding?
Self-funding is an alternative to fully insured group health insurance plans. Instead of an insurance company collecting premiums and paying your claims, the company funds the program, sets the rules and has control over paying claims. More than 60 percent of U.S. companies offering benefits use a self-funded program.
What are the qualifications for offering a self-funded program?
Companies in any industry with as few as 50 employees should consider implementing a self-funded program. Frequently, CEOs who want to establish their firm as an ‘employer of choice’ prefer self-funded programs because they have greater flexibility in terms of plan design, claims payment thresholds and claims processing speed.
Because consumer satisfaction with health insurance is based upon personal experience, employee satisfaction is much higher when companies offer a self-funded program that avoids yearly swings in premiums and coverage limits. With greater consistency, employees feel more secure and have fewer reasons to look for new opportunities.
How can CEOs benefit from self-funding health coverage?
CEOs will regain an enormous amount of control with a self-funded program. Financially, there is an increase in cash flow through the ability to recapture the use of plan reserves, and the company will earn interest on the money held in reserve. Self-funded plans comply with federal guidelines instead of state-mandated laws, and there is a reduction in most of the state-imposed taxes. Not only are the administrative fees lower through a third-party administrator than through traditional health insurance plans, but with a self-funded plan you see where every penny spent on health care goes.
I worked with one company that wanted to make an out-of-state acquisition. There was a key employee in the new firm who was vital to the business, but because the plan offered here in California was more expensive and did not offer a comparable level of benefits, the acquisition was impacted. With a self-funded plan, this kind of scenario can be avoided. You have the flexibility with self-funding to design a separate plan for a group of key employees when merging or acquiring.
How can CEOs limit risk with a self-funded program?
We protect against catastrophic loss by purchasing reinsurance from an A+ rated carrier. Because the market is plentiful, there are numerous choices for CEOs when selecting a reinsurance company. With the average monthly HMO premium standing at $250 to $300 for each employee, self-funding your benefits program makes more financial sense than ever. In more than 20 years, we have only had a handful of employers move back to a fully insured program for financial cost reasons.
What are the steps to initiating self-funded health coverage?
Self-funding is a much more proactive way of dealing with the issues associated with providing employee health coverage than the reactive process of soliciting competitive bids 60 days prior to renewal. We start by educating CEOs about self-funding. Then we provide a financial analysis, to see if it is financially viable for your organization to consider self-funding. Next, we design a comprehensive transition plan for the company and its employees.
Self-funding gives CEOs a strategy and a plan to better understand and deal with the financial impact of escalating health care costs. This strategy gives CEOs a large measure of financial control and understanding that does not exist in a fully insured program.
MIKE LUTOSKY is an employee benefits broker with Westland Insurance Brokers. Reach him at email@example.com or (619) 641-3276.
Timing in business is everything, and Dick Heckmann’s success at K2 Inc. serves as proof that good things can happen when a CEO with the right background and experience comes into the role just when that expertise is most needed.
Such was the case in 2002, when Heckmann was serving as nonexecutive chairman of sporting goods manufacturer K2.
At the time, K2’s stock was hovering around $8 a share and was stagnant, but the retail side of the industry was anything but stale. The industry was quickly changing to a big-box retail model as expansion moves by Sports Authority and Modell’s were forcing single product manufacturers to expand or be acquired.
When Heckmann received a call from K2’s incumbent CEO warning that he might choose to file bankruptcy rather than supply the security needed to comply with the covenant terms required by the banks providing K2’s lines of credit, Heckmann sprang into action, calling upon his contacts and experience to quickly resolve the problem.
“Why play chicken with your vendor?” says Heckmann. “It’s a huge stain on the record of your company. I called the banks and said that I would not only give them security, but I would commit to raising more money.”
Within weeks, Heckmann had become chairman and CEO of the company, shoring up the financial foundation and raising the necessary capital to make the acquisitions that would position the firm to compete in the evolving retail environment.
Establishing the foundation
Heckmann began his career as a stock broker, and he used his knowledge of what captivates Wall Street in formulating his strategy and planning his first moves.
“My lead card was to shore up our financial situation, so I called a friend and raised $25 million,” says Heckmann. “Following the change in leadership and business strategy, the company’s stock price began to rise upward toward $10 per share, enabling me to raise even more money.”
In 2005, K2 had sales of $1.3 billion, but just three years earlier, in 2002, that number was around $580 million. The company needed to diversify its product offerings through acquisitions to be competitive in the new retail landscape.
Heckmann set his sights on acquiring legendary baseball glove manufacturer Rawlings because the ensuing merger would significantly increase the size of the organization.
“I wanted to find the biggest, highest-profile deal that I could find because I wanted to get the attention of Wall Street,” says Heckmann. “We were a one-trick pony, we were snow farmers. With Rawlings, we achieved visibility, and they were counter-seasonal.”
Heckmann says that the Rawlings acquisition began to build a portfolio of brands providing K2 with marketing synergy opportunities, and the additional product lines established an expansion platform that could be enhanced through future acquisitions, such as the addition of baseball bat manufacturer Worth.
Besides repositioning K2 as a player in the minds of investors, Heckmann says that the Rawlings acquisition began to cause a shift in the attitude of the company’s employees.
“The most important thing about the Rawlings acquisition is that it gave our people a reason to feel proud again and a reason to believe,” says Heckmann. “Now it was fun to be with the company again.”
He says that his predecessor at K2 was paralyzed by the thought of risks, and the company stagnated. Heckmann, rather than avoiding risk, uses a methodology for evaluating the pros and cons of each deal, looking for conditions that he says often correlate to success.
In addition to evaluating the opportunity for increased marketing synergies, he looks for companies that are manufacturing domestically so that he can shift that function overseas and further leverage K2’s excess capacity in China a move that instantly increases margins. Since beginning this practice, K2’s employee base in China has increased from 2,000 workers to almost 10,000.
“I also look for companies who are underdistributed on their brands because what we bring to the marriage is additional reach,” says Heckmann.
The additional sales through the expanded distribution network help to pay the cost of the acquisition, and he often uses the increased margin from the outsourced manufacturing to offer incentives to retailers, which further increases sales.
His pre-acquisition analysis includes running numerous financial models that reflect the worst-case scenarios that might occur after the purchase so he can avoid a fatal error.
"Every decision you make in business is fatal to something,” says Heckmann. “You just never want to make the decision that’s fatal to the company.”
That type of review has caused Heckmann to pass on acquiring ski makers Rossignol and Salomon. With K2 now owning a dominant share of the ski market, he says that the potential downside outweighed the upside, and should the ski market become soft, it could be the tipping point from which the company could not recover.
This customer is king
Heckmann says that he spends up to 50 percent of his time in front of customers and relies heavily on their advice on everything from potential acquisitions to price points, product consolidation and new product development.
For example, he says he was calling on Target, which leans heavily toward the women’s sporting goods market, when the customer suggested that pink baseball gloves might potentially be a hot-selling item to young girls. While the Rawlings representative at the meeting was not initially keen on the idea, Heckmann says that the customer has a finger on the pulse of what the buyers want, and so the pink baseball glove was born.
“Discussions with customers provide the checks and balances for me,” says Heckmann. “I won’t do anything unless the customer tells me that they want it.”
His customer-driven attitude also plays a key role in fashioning his philosophy and attitude toward assimilating new acquisitions. Counter to some thinking on cost reduction as part of post-acquisition strategies, Heckmann refuses to consolidate functions and reduce headcount in administrative areas that might have an impact on service or the customer experience.
“I build the business around what the customers want,” says Heckmann. “We only have 22 people in our headquarters because no one at headquarters should be making decisions that affect customers. We don’t consolidate accounting after an acquisition because that’s not customer-friendly. We run at a higher expense, but we also have the highest margins in the industry, and we are the industry leader in seven categories. The easier you make it for customers to sell stuff, the better it will go.”
While acquisitions can have financial benefits, getting people to work cohesively when merging different corporate cultures, pay plans and personalities can be a challenge for any leader. The assimilation of people into a shared mission and vision is so vital to the outcome that many companies fail because the balance sheet starts to reflect the internal struggles.
As an owner of the Phoenix Suns, it seems natural for Heckmann to use sports analogies and philosophies as part of his people management plan. This was the case when he discovered that the previous K2 CEO had all of the division managers competing for capital bonuses, a practice that was contrary to his vision of teamwork.
“There was no recognition of the other companies when we were out in front of customers,” says Heckmann. “Now we go in as a group to the customers and ask how we can get more business.”
Heckmann says he gives strong support to his managers by allowing two to three years to get their numbers on track following an acquisition. However, he has little tolerance for those who resist the new company direction and appear to be working against the changes.
“I believe in the lead-elephant theory,” says Heckmann. “You shoot the lead elephant, and all the other elephants run off into the woods until a new lead elephant emerges from the group. A good example occurred after the Rawlings acquisition. They thought that everyone would love them forever because they were Rawlings, and it was very hard to get them to buy in to the fact that they were going to need R&D.”
After terminating the CEO and making other major managerial changes, Heckmann says that today, Rawlings has a successful R&D function, complete with a technical center staffed by 26 engineers.
Although acquisitions can mean the occasional need to perform an elephant execution, Heckmann says that one of the positive sides of the process is that, along with a new company, he often gets great new managers.
“One of my greatest accomplishments was when we acquired Worth, we got Robert Parish,” the CEO of Worth who was promoted to president of Rawlings, says Heckmann. “He struggled mightily, and he did some things that I wouldn’t have done, but I continued to back him until it worked. “I think you need to back off as a manager and let the numbers be the litmus test.”
Given the continued retail consolidation and the lack of overall growth in the sporting goods market, Heckmann plans to continue to make strategic acquisitions according to the model he has honed while pushing for continued new product development to facilitate growth from the stable of brands that K2 has collected. But he says that no matter how much planning and experience a CEO brings to the table, each acquisition brings its own unique challenges.
“Every acquisition ends up being a giant headache,” says Heckmann. “Rawlings was a struggle for a year-and-a-half. But once you get the process finished, you can reap the rewards. I’ve learned from every acquisition that I’ve done, and I’m still learning.”
HOW TO REACH: K2, www.k2inc.net
Brothers Mark and Scott McMillin had little time to think about the majority interest of their father’s company, The Corky McMillin Cos., they had just acquired back in 1989, because they spent the next several years trying to save it from bankruptcy.
The privately held real estate company had fallen victim to one of the industry’s vicious down cycles, and it took everything the family could muster to save it.
Its financing was arranged through a handful of local banks and savings and loans. As the financial institutions began to fail and were taken over by the government, loans were called and the company found itself in crisis mode. “We were cutting overhead and managing cash flow daily on a set of 3-by-5 cards on a huge conference table,” says Mark McMillin, who shares chairman and CEO duties with his brother, Scott. “Our loans were being called, and we couldn’t draw on our lines of credit.”
It was through a legal contact in San Francisco that they finally found financing in Taiwan and avoided bankruptcy. “From that experience, we learned to diversify our sources of equity,” says Mark McMillin. “We now borrow from more then 15 different sources.”
Spread your risk
From that experience, the brothers learned that the future of the company would lie in greater diversity of the business model, and they began fashioning directional changes, including the decision not to develop all of the land that the firm acquires. “Over the last five or six years during the housing boom, our core business is now more focused in land development and investment,” says Scott McMillin. “We don’t build on all of the land that we invest in. We understand that in good times, there are two profits to be made one from the property and one from the building improvements. In bad times, there is only one profit to be made.”
The company, which was founded by their father, Corky McMillin, doesn’t disclose revenue, but Hoover’s estimates revenue at $464 million, while Reed Business Information puts its housing revenue at $593 million, with other revenue adding an additional $287 million.
The brothers have also learned to take a more pragmatic approach to deal-making. “When the economy is good, it appears that there are too many good deals out there,” says Mark McMillin. “Interest on our money is our biggest line item. Every deal that comes through now, I put some realism and conservatism into it.”
Learning to reduce the financial risk associated with the building industry by buying and holding land was one change that the brothers implemented as a result of the lessons of the 1990s; the other was that expanding beyond the San Diego real estate market when staying local posed growth limitations for the first time. “In order to grow, we needed to look outside of California, and we also wanted to look at markets that are counter-cyclical to San Diego,” says Mark McMillin.
That decision has resulted in acquisitions in Bakersfield, Visalia, Imperial Valley and now San Antonio, Texas. For a family-owned business, bringing outside companies into the fold can be a challenge, and to do it successfully, the brothers didn’t stray too far from the core beliefs and values that are part of the company’s foundation. “First and foremost, when we look at a company for a potential acquisition, we want the firm to be operating under the same parameters as our own, so they have been built by other entrepreneurs,” says Mark McMillin. “We have to have a comfort level with their people.”
One of the main points of emphasis is on the people who come with the company. “Real estate is a local business, so we really are making that acquisition for the express purpose of buying their intellectual capital and knowledge of the local marketplace,” says Scott McMillin.
Before making acquisition decisions, the brothers complete their financial due diligence and then spend time with the top two or three managers from the prospective acquisition, as well as with the departing owner to assess the staff’s market knowledge level and cultural compatibility. Once the acquisition is made, the McMillins have learned from experience that effective assimilation is vital. “In order to teach our method of quality, we send people in from San Diego,” says Mark McMillin. “We’ve learned that you can’t just throw the manual at them.”
Executives from the acquired company are brought to the headquarters, shown the new processes with hands-on training and are assigned a coach.
The methodology for effective acquisition assimilation was perfected following the Bakersfield purchase and is one that Scott McMillin says is transferable to other industries. “Initially, we consolidate financially and get a pulse on the cash flows and projections,” he says. “Then we involve them in our best practices operationally, and jointly we develop a business plan after some due diligence and by using their local knowledge. We continue to support them the first six months and begin the co-training process.”
Cumulatively, organic and acquisition growth have resulted in about 1,000 employees. It has been important for the brothers to lead by example with their consensus-building abilities, because the company is structured on the philosophy of teamwork, with much of the decision-making conducted by committee and the real estate development work conducted by project teams.
Success through teamwork and culture
The Corky McMillin Cos. uses an executive committee to determine strategic direction and resolve differences.
The executive committee structure was put in place by Corky McMillin, and the group participates in strategic planning and corporate decisions, including land acquisition and development, homebuilding construction, sales and marketing, and customer service. “We make group decisions here, and we move slowly,” says Scott McMillin. “Even if we are going to terminate someone, that decision is reviewed by a group of people. It works for us because our business units work together to bring products to market.”
Projects are also managed by teams. For example, in developing communities and neighborhoods, the project teams include managers from sales, marketing and planning. All of the team members understand both the overall project objectives and the individual components of the project, eliminating decision-making in silos. “You take the typical real estate executive, and they allow the project manager to make all of the decisions,” says Scott McMillin. “Our company project managers don’t have that type of authority. Everyone’s open to listen to ideas, and we’ve never stopped anyone from providing input or being involved.”
The committee structure also serves to spread accountability for the end result, something Scott has carried on from his father. The compensation plan also supports the team-work philosophy and group accountability, with all employees potentially able to receive a bonus each year based upon total company performance.
In addition, the firm sponsors an off-road racing team, and employees have the opportunity to work with the crews as a real-life example of the correlation between teamwork and success. The racing team is also used as a marketing vehicle, as a way to maintain the family culture of the organization and to provide some fun along with the growth.
The concept of earning opportunity was part of their succession planning curriculum and was instilled in the brothers as they progressed through the ranks. Mark McMillin started with the firm in 1979 and Scott McMillin came on board in 1981. Both started at the bottom of the organization and worked their way up, earning the respect of managers and co-workers by living the culture that favors hard work and hands-on involvement.
“I went through all the chairs,” says Scott McMillin. “Being an owner, I came to understand why decisions are made and to support the managers and become personally responsible.” Today, the same practice remains in place. A manager brought in from outside the company is required to take a rotation through the chairs and will not be promoted until the new person impresses the managers with his or her abilities and earns their respect and confidence. In addition to continuing the culture established by their father, the brothers have kept a close watch on staff morale through the transition when Corky McMillin passed away in September 2005.
“We have formal feedback sessions with the managers three times per year,” says Scott McMillin. “We bring together about 80 people for half-day sessions just to receive feedback. I also measure the morale by being out on the front lines and talking to people. I spent time in sales and marketing, so I think I can pick up on the vibes.”
HOW TO REACH: The Corky McMillin Cos., www.mcmillin.com
Just as CEOs are struggling to cope with the need for increased corporate accounting compliance resulting from a deluge of complex regulations, the task has been made even more difficult by a shortage of experienced accounting professionals. While businesses and accounting firms scramble to fill many newly created jobs, baby boomers are starting to exit the workplace, creating an increasing gap between supply and demand for seasoned accounting practitioners.
“CEOs need to know that they aren’t just competing with other companies for the necessary talent they are competing with CPA firms,” says Joyce Salter, a senior manager in the Audit and Business Advisory Services Group at Haskell & White LLP.
As evidence of the problem’s severity, a recent survey conducted by the American Institute of Certified Public Accountants revealed that “finding and retaining qualified staff” was the top issue among 35,000 participating CPA firms. Companies in a wide range of industries certainly will have experienced this shortage as well.
Smart Business spoke with Salter about how CEOs can compete for talent when experienced accounting professionals are receiving multiple offers as they seek new opportunities.
Why is there such a demand for experienced accounting professionals?
The biggest contributing factor is the governmental regulatory requirements imposed by the Sarbanes-Oxley Act of 2002 (SOX). In particular, Section 404 of SOX imposes a significant increase in the internal and external financial reporting requirements by public companies.
Most public companies, especially the smaller ones, don’t possess the internal resources to handle compliance with Section 404. Therefore, businesses must hire new staff or retain outside consultants. In either case, these professionals are the same people that public accounting firms are attempting to recruit to handle the added external audit requirements, as well as the waterfall effect of new rules spilling over to private companies and not-for-profits.
What are the best sources for candidates?
Executives can turn to familiar sources for candidates, such as executive search firms. However, those recruiting services can come at a fairly hefty price. Being a CPA, I always suggest that CEOs look at the cost-benefit of using search firms.
A more cost-effective solution is to build a pipeline of candidate referral sources from among former employees, current colleagues and friends. Who better to provide a referral than someone you already know?
With all of the competition in today’s marketplace, it is critical to develop creative, alternative sources for recruitment. Accounting industry professional associations provide fertile ground for new talent.
Also, don’t overlook college students they are tomorrow’s business leaders. Start planting seeds now to build your company’s reputation as a premier employer by maintaining an active presence on college campuses.
What are the top reasons that candidates might decline an offer?
First, they might decline if your offer is not competitive with the marketplace. Do your homework and know what the competition is offering before you draft and extend your offer.
Second, a candidate might decline if he or she is unfamiliar with your company or its brand. In addition to ongoing marketing activities, be sure to communicate the advantages of your company throughout the courting and interviewing process. Companies that are effective at recruiting have finely crafted value propositions and well-honed branding.
Finally, your offer may be declined if the candidate doesn’t feel that his or her needs are being met. Recruiting is a highly personal business. Find out what is driving the candidate from his or her current position.
What can I do to make certain that my company is viewed as an employer of choice?
The individuals you are recruiting likely have worked in the accounting profession for up to 10 years and have a pretty good idea of what they want in an employer. Achieving better work-life balance often tops the list of desired attributes, so integrate this concept into your operating philosophy as much as possible.
Another major consideration for experienced candidates is career progression. I can’t overemphasize the value of having a formal career-planning process in place and introducing candidates to prospective co-workers who have ascended in the organization.
Have serious candidates meet with several employees at various levels in the company. This benefits both the candidate and the company, as it allows both sides to evaluate the interpersonal chemistry and the ‘fit.’
Lastly, actively demonstrate that you care about the candidate’s decision. Little things do count, so don’t be afraid to send that basket of flowers.
JOYCE SALTER, CPA, is a senior manager in the Audit and Business Advisory Services Group at Haskell & White LLP in Irvine. One of the largest independently owned accounting and business advisory firms in Orange County, Haskell & White provides a full complement of tax, accounting and auditing services to public and private middle-market companies. Reach Salter at firstname.lastname@example.org or (949) 450-6200.
Most consumers don’t think much about the brand of canned tuna that they toss into their shopping carts. When product quality and packaging all seem the same, most shoppers base their buying decisions on price.
There was also a lackluster perception of tuna, and recent press coverage alluding to potential mercury contamination of the fish further complicated the matter.
“Consumers didn’t have a strong sense of differentiation among the brands,” says Signorino. “We were losing money, and the market had changed.”
Chicken of the Sea has been around since the early 1920s and the company generates an estimated $400 million in annual revenue and employs 2,500 workers.
As the industry matured and demand for the product leveled off, the company assumed a commodity-driven marketing posture, and the brand was no longer touted through continuous television advertising. Sales were flat, and margins were low.
Signorino was hired to put the company back on a growth track. Here’s how he did it.
A quick return to profit
Signorino started revamping the company by finding money in the existing operations.
“I needed to make quick decisions,” says Signorino. “My focus was to make money. Most of the time, there is money to be had in the operating budget. You just have to find it.”
Signorino found the majority of the funds that he needed to return the company to a positive bottom line in a few areas. For instance, he reduced the sales and marketing budget by $4 million after scrutinizing the advertising frequency.
“We kept on advertising, but by switching from 30-second spots to 15-second spots, we increased the frequency while reducing the cost, and the reach is about the same,” says Signorino.
He also identified excess capacity in the production plant in American Samoa. This change was vital to the swing in the bottom line because by reducing the cost of processing, he also increased the product margins.
“We increased our output and throughput by altering our work weeks in the plant when possible,” he says. “We reduced some of our work weeks from five days down to four days, which also helped reduce our energy costs.”
Productivity measures were put in place that increased the amount of product being produced using the same workforce.
The end result was more cash and a more efficient operation.
Creating a new value proposition
Signorino says the only way to a healthy bottom line in the long term is to restore healthy growth to the top line. To increase revenue, he drew on his knowledge and experience from his tenure at consumer products giant Nestle.
He began by examining the lack of customer enthusiasm for tuna, looked at consumer data at the macro level and asked how people’s lives could be improved from the identified trends, what products could be used to address those need, and what vision was needed to carry it all out.
“I started by looking at consumer research data that was available through A.C. Nielsen,” says Signorino. “I wanted to understand what the consumer was thinking. What I found is that health and fitness were important, as were time constraints.”
He also found that consumer tastes had changed. Buyers were looking for more sophisticated products to accompany a more refined palate. The notion of increasing product sophistication fit well with the need for improved margins, and his next move was to speed up the creation and release of new products by realigning the priorities of research and development.
He also brought in a new manager to oversee its project.
“The decision to create a separate position for new product development was made after reviewing the industry, its growth patterns, segment profit potential and consumer trends,” says Signorino. “When looking strategically at this landscape, I quickly saw the need for new and innovative products to drive profitable growth.
“I gave them new goals focused on product development. We want to have new products out on the shelf every time the store resets in order to keep the category fresh and exciting.”
One of the first new products to hit grocery store shelves was a gourmet smoked Pacific salmon fillet. Signorino says that this product appeals to consumers’ desire for more sophisticated, healthful seafood without the mercury contamination concerns.
Since the introduction of the line in 2005, the product has grown to 8 percent of the firm’s total sales, and Chicken of the Sea is now one of the nation’s largest purchasers of salmon.
“The vision was to create restaurant quality and convenience for the consumer,” says Signorino.
The new salmon offering has been joined by a line of flavored ahi tuna steaks, and the next new release will be a line of tuna and salmon cups.
The data showed that an increasing number of employees eat lunch at their desks and want healthy foods that can be eaten under tight time constraints. Chicken of the Sea responded with the tuna and salmon cups to fill that need.
Uniting sales and marketing
Signorino says he found that the sales force had a great deal of knowledge about what consumers were looking for as a result of their experience on the front lines. The problem was that the information and ideas weren’t going anywhere.
He needed to find a way to break down the internal silos.
“Sales and marketing didn’t overlap a lot,” says Signorino. “I wanted sales to bring ideas to marketing. They have great ideas, and I wanted those to flow both ways. In a company the size of Chicken of the Sea, driving profitable growth through the base business and new products requires seamless sales and marketing execution.
“When these functions are split, it is more difficult to achieve such execution. Since the margins in this business are tight, you need your marketing to stay close to your customer to make sure everyone is effectively building that relationship and gaining insights at the consumer and customer level.”
He hired a new vice president for sales and marketing and combined the departments. In addition, he realigned the priorities of the marketing function to allow people to spend more time on promoting new product releases.
In the food business, packaging and product presentation on the shelf are major contributors to successful sales and market share. Signorino also saw it as an area where the company could gain an advantage over the competition.
“I think that the shelves in the seafood isles look cluttered,” says Signorino. “We are redesigning our packaging and graphics so that the products work synergistically with each other. In some cases, our products are separated into different areas of the store, in other cases, they are clustered together. We are using common color trays so that we stick out more, whether the products are displayed in a singular fashion or collectively.”
Successfully managing shelf space is a major responsibility of the sales force, and Signorino went back to the fundamentals to ensure that the team would be competent at transferring the concept from the training room to the store shelves.
“We went back to the basics and retrained our sales team on blocking and tackling,” says Signorino. “We created a new manual that covers the basics on where we want to be on the store shelf in order to achieve market share.”
For many years, Chicken of the Sea relied on television ads featuring the mermaid logo to help drive brand loyalty. After a hiatus of almost 14 years, Signorino developed a new television ad that uses humor to create brand familiarity with a younger base of consumers while driving home a message that equates tuna with healthfulness.
“There is equity in our brand, but we need to bring it back,” he says. “There’s a whole new generation that didn’t grow up with the mermaid jingle and doesn’t know the brand.”
The people equation
Advertising, systems and processes weren’t the only things that changed. The people in the company had to start thinking in new ways.
“There were lots of good people on board, but the people were very comfortable in the situation, and the market had changed,” says Signorino.
To revitalize the employees and reposition them to relate to a more modern set of consumer sentiments, Signorino brought in new ideas and an outside vision, and changed the variable compensation plan for managers.
“I added more upside driven by meeting performance hurdles, with the idea being that the plan is designed to drive performance,” he says.
Being able to assess the team is a critical skill for any CEO.
“Once a team demonstrates they can work together, a CEO or president needs to assess the players,” says Signorino. “In doing that, I look for intelligence, integrity and imagination to see the business not only as it is today but as it could be, and they need to have the initiative and drive to make it happen.
“I look for team members that take their work, but not themselves, seriously. To be a true team member, people must not have overly large egos, and they should have a sense of humor, so they are fun to be around. We work long hours, and people like that make the job interesting and rewarding.”
Signorino’s goal is to take the firm from its annual revenue run rate of approximately $400 million to double digit growth within three years on the top and bottom lines, with the bottom line outpacing the top line. In addition to a more financially sound organization; Signorino wants to leave behind a new culture as his legacy.
“What I’d like to build is a culture, because cultures perpetuate beyond any one person,” says Signorino. “It’s how we act, go to market and how we behave. You outline it like a blueprint, and then you deliver on your commitments, seek change, focus on people and on quality.”
HOW TO REACH: Chicken of the Sea, www.chickenofthesea.com
“I realized we were in trouble,” says Van Gorder. “In retrospect, I probably did not do enough homework before coming into the role.”
There had been a major blow-up between the administrators and the physician groups that day, and Van Gorder says that he soon discovered that patient numbers were declining, as were the contributions from philanthropists. As it turned out, those were not unusual occurrences, and neither was the mounting red ink.
Today, Scripps Health is a $1.6 billion, nonprofit health care system with more than 10,000 employees that treats close to 500,000 patients annually. Composed of five hospital campuses, a network of clinics, physicians’ offices, outpatient centers and home health care services throughout San Diego County, Scripps has been a leading health care organization since its founding by philanthropist Ellen Browning Scripps in 1924.
But in 1999, things were coming to a head just as Van Gorder joined the staff. Within 90 days of his hiring, the CEO left Scripps following a no-confidence vote from the doctors. Thirty days later, Van Gorder found himself in the CEO’s chair of a large health care organization that appeared in need of life support.
Van Gorder, who also is the company’s president, describes himself as generally being a very lucky man, and perhaps he is. However, it would take much more than luck to turn this organization around.
Resolving the people problems
Van Gorder says he found several fundamental issues at the core of the problems at Scripps.
“There was a very good strategic plan in place when I got here, but they were trying to implement it in a linear fashion,” says Van Gorder. “The plan might have been a little ahead of its time, but there was no flexibility and no collaboration with the professional staff.”
When the business plan implementation style was combined with a centralized management team that did not reside on any of the health care campuses, the the professional staff, particularly the physicians, felt that the administration was out of touch with their problems. And they wanted to be included in the key decisions that affected them.
After initial assessments, and given the history of the lack of confidence from the staff, Van Gorder met with each Scripps board member one-on-one to make certain that he had their backing to begin instituting the changes that needed to take place. Armed with the go-ahead consensus endorsement from the board, Van Gorder began attacking the personnel issues that he had identified as crucial to improving the business.
“The leadership of the physician groups had been put in place by the previous management,” says Van Gorder. “I dissolved those and let them appoint their own leaders.”
Van Gorder placed a management team on-site at each of the health care locations to improve communications and speed up the problem resolution process. He also created a Physician Leadership Cabinet that represents the doctors on key matters and gave them a unified voice to air their grievances.
This initial move helped to ease tensions by allowing physicians to regain some of the control they were seeking. Strategically, that was a wise decision, because Van Gorder also had to draw some lines.
“They also demanded to be an official board with power, and I had to say no,” says Van Gorder.
One of the keys to taking the next steps in building positive relations with this group was using management transparency and an open and honest style to work with the group to resolve key issues.
“They provided me clinical information, and I gave them business information,” says Van Gorder. “The previous administration was very secretive financially. Together, we solved the problems. I opened up the balance sheet, showed them the numbers, and asked them what they would do.
“A good example was, we were paying $8 million per year for emergency room on-call physicians; they wanted $4 million more. Well, that happened to be the budget for the nurses’ raises. I showed them the numbers, and they formed a task force to solve the problem. They came up with some cost reductions elsewhere and ended up only asking for half of what they originally wanted. I empowered them to think as businesspeople.”
Managing professionals whether they are engineers, lawyers, IT developers or accountants can be a challenging task for any CEO. With a continued shift to a greater number of knowledge workers in most organizations, Van Gorder has some advice that he says is a best practice for engaging high-level staff in any industry.
“From a philosophical perspective, administrators must listen very carefully to the clinical professionals when they provide input and counsel on patient care and their area of expertise,” says Van Gorder. “At the same time, administrators being responsible for the health of the organization must translate input from various sources and professionals into decisions that benefit the patient, the organization and the community. I believe in involving our various professionals in all aspects of the operations the cross-education builds trust and, ultimately, the best decisions for all.”
In this case, arming the staff with information and involving them in the business decisions was vital to securing the endorsement of the professional staff for the business plan and to accepting the “capital expenditure diet” that he put in place to begin to get the losses under control.
Van Gorder says that he continues to give the group a financial report each month to keep its members informed.
Making tough decisions
Reversing the loss position was not easy. By 2001, Scripps Health was losing more than $20 million annually. In addition to resolving the personnel problems, Van Gorder made some tough financial decisions to improve the bottom line.
“I prioritized patient safety when deciding where to spend money and where to hold back,” says Van Gorder. “Unless it affected patient safety, I decided to hold back.”
Van Gorder sold two skilled nursing facilities that were losing money so that he could narrow the focus and put the small capital expenditure budget toward the needs of the hospitals and clinics.
“I had to close a hospital that was losing money in east San Diego County, and that was a tough decision because it was the last hospital going east with an emergency room,” says Van Gorder.
While he made progress with the physician groups and the employees, not everyone was on board with his strategy, and Van Gorder says that he had to change out some of the executives who did not agree with his plan to return to a strong balance sheet. This type of tough love is part of his philosophy when it comes to managing the financial performance of the campus managers.
Van Gorder says that the trend in health care is to have a good year followed by a bad year, and that trend contributes to a sense of instability among the staff and exacerbates their anger about budget cuts. He says he had to impress upon his management team that he was serious about the need for performance.
“When it comes to hitting the financial plan, I tell my executives, ‘You may miss it once, but if you miss it again, you won’t be here,’” says Van Gorder. “I need for them to make those numbers.
“I have three core beliefs when it comes to performance management. You have to want responsibility, authority and accountability, and as a leader, you have to give them all three.”
Building internal competencies
As Van Gorder continued to identify the issues and problems that were standing in the way of profitability, he noticed that Scripps had been spending a great deal of money on external consultants without measurable results.
“I created an internal project management team because I felt that we were poor at deploying business plans,” says Van Gorder.
One improvement realized by the project management team was the acquisition of Scripps Clinic, a move that angered independent physicians across the system because it involved the investment of their money. To make matters worse, the clinic was losing more than $2 million per month when it was acquired.
Van Gorder says the internal project management team coached the clinic leadership team to make tough decisions and to use data analysis to develop service metrics and to benchmark their performance against comparable clinics. When held to a stronger set of performance marks, the clinic’s bottom line reversed, and it is now making $1 million per month.
The development of an internal talent pool has been another part of the strategic plan aimed at building internal competencies. Van Gorder accomplished this by creating the Scripps Leadership Academy, which provides training programs for middle managers. The school has graduated more than 150 new leaders since its inception six years ago.
As a testimony to Van Gorder’s work on personnel problems, Scripps has been recognized as a top employer for workers over the age of 50 by AARP, a recognition that Van Gorder says he wasn’t seeking but that has come as a result of the improved work environment.
Van Gorder still has challenges to overcome. In the last year, he and his team have instituted a reinvestment campaign, armed with the rejuvenated financial support of $30 million from their base of philanthropic constituents and the consummation of a $150 million bond transaction that received an “A” rating from Moody’s, Standard & Poor’s and Fitch based on the strength of the financial balance sheet.
There are still labor problems to deal with, and a state-mandated seismic upgrade will require an investment of $280 million to meet the new compliance standards.
Van Gorder is now leading a campaign that includes $1.6 billion in facilities and technologies upgrades over the next decade to be financed through operating revenue, philanthropy and borrowing.
And he still insists that he is a lucky man. Perhaps that mindset will continue to be one of his keys to succeeding in a difficult industry.
“I would never have anticipated being able to get this position,” says Van Gorder. “It’s a combination of hard work, smarts, but also a lot of luck. Any executive who doesn’t say that isn’t being honest.”
How to reach: Scripps Health, www.scrippshealth.org
A crisis of confidence has overtaken employees and employers alike, but that’s where the similarity ends. In one corner, employers are insisting on cost control and maintaining the flexibility to initiate further pay and benefit cuts should a tepid economy take a turn for the worse. While employees want financial and emotional security after surviving a decade of layoffs and declining real value of their total rewards package.
Perhaps its time to seek middle ground as 52 percent of U.S. employers say it’s already difficult to attract employees with critical skills and 25 percent say it’s hard to retain top performers, according to Towers Watson’s “Global Talent Management and Rewards Survey” of 1,176 companies conducted earlier this year. The study highlights substantial gaps between the perceptions of employees and employers regarding the influence of security and flexibility on employee engagement and retention. Unless steps are taken to close the disparities, employers risk losing valuable employees who no longer believe their current employers offer viable opportunities for growth, security and wage gains.
“Realistically, most companies have already cut to the bone, but may be caught flat footed if they don’t come up with a game plan to reward and retain top performers and employees with critical skills,” says Rick Beal, consulting director for the Rewards, Talent and Communications Practice at Towers Watson.
Smart Business spoke with Beal about the secrets of balancing employer flexibility with employee desires for security.
What’s the best way to retain high performers and critical-skill employees?
Salary freezes and reduced increase pools have made it difficult for companies to recognize top performers by awarding them larger shares of the annual merit budget or variable incentives. Pay differentiation is essential to controlling fixed costs and maintaining flexibility while giving vital employees the security and real wage growth they crave.
There is some movement in the right direction as organizations have started awarding top performers larger raises and incentives. Global companies are delivering approximately 1.5 times more in short-term incentives to those exceeding performance expectations and two times more in merit increases.
Leading edge employers aren’t stopping with pay differentiation; they’re also turning to non-cash improvements to retain core employees. Nearly 86 percent of the 22,000 employees surveyed in the 2010 “Towers Watson Global Workforce Study” cited improved work-life balance as a retention factor, so now’s the time to offer flexible schedules, telecommuting and the chance to work in convenient locations.
But more can be done. It doesn’t cost a lot to recognize employees or offer them opportunities to enhance their skills, yet only 33 percent of employers view skill enhancement as a retention factor compared to 62 percent of employees.
What else can employers do to promote security in an unpredictable economy?
Develop a clearly defined employee value proposition (EVP) and harness its retention powers through an internal communications program. Only 25 percent of employers have a formal EVP and many view it strictly as a tool for attracting external candidates. But our data show that among high-performing companies 42 percent have an explicit EVP that conveys the total benefits of employment, and market its value internally and externally. Employment deals should not be left to the interpretation of employees, since ambiguity erodes engagement and makes top performers vulnerable to competitors.
The best news for employers is that value extends beyond monetary rewards in the eyes of employees. Thirty-nine percent of U.S. employees value the opportunity to develop innovative products or services and 55 percent value a wide range of jobs and work experiences. So tout job rotation, formal mentoring programs and the ability to work in global locations or serve on cross-functional teams when authoring a comprehensive EVP. Talk to employees about the unique tangible and intangible benefits of employment with your company.
How can employers satisfy a large group of diverse employees?
Certainly employers want to uncover the general needs and preferences of employees through surveys and focus groups, but savvy employers tailor their offerings and rewards by understanding the unique desires of employees in specific geographic regions and professions. Wide gaps between what employees want and what they believe is attainable can lead to disenchantment and an unwillingness to devote discretionary effort to the job. For example, highly coveted software engineers may favor an innovative environment and the opportunity to work with emerging technologies, while employees in a European subsidiary may favor a generous time-off allowance. Don’t settle for a one-size-fits-all approach. Employers should target vulnerable groups and diverse cultures by creating a series of unique, customized compensation programs and EVPs.
What’s the best-kept secret of high-performing companies?
Savvy employers work hard to turn managers into leaders so they can help the company retain and motivate critical employees during economically challenging times. While managers play an important role in helping the organization run efficiently, it takes leadership to catapult the company into a winning position in this kind of an environment. Leaders are expert communicators who build relationships with employees, understand their needs and effectively convey the company’s EVP. Sparse funding for training and development can be an impediment, but employers should exhaust every low-cost option to grow managers into leaders so they aren’t bemoaning the loss of critical employees and institutional knowledge after they’re gone.
Rick Beal is the consulting director for the Rewards, Talent and Communications Practice in Northern California at Towers Watson. Reach him at (415) 733-4310 or email@example.com.
To combat the rising cost of employee health care, companies made bold statements about the importance of proactive health management, investing in employee wellness programs and incentives to reinforce their commitment. But just when employees have embraced the wellness doctrine and experts are touting encouraging returns on initial program investments, a perilous economy has forced executives to make decisions that create organizational stress and seem to contradict their public support for employee well-being.
Work force well-being, which encompasses employees’ physical, social and emotional health, has been linked to reduced absenteeism, improved outcomes and sustained engagement, according to studies by Towers Watson. Unless executives balance their concerns for the bottom line with the need for employee well-being, recent gains in controlling health care costs could be in jeopardy.
“The social and psychological fabric of the organization is just as delicate as its balance sheet,” says Kathleen Drummond, senior consultant for the Change Management and Communications Practice at Towers Watson. “The wrong actions and messages can undermine employee well-being at a critical time.”
Smart Business spoke with Drummond about executive messages and actions that nurture healthy profits and people.
How is employee well-being linked to profitability?
When stress is injected into the environment over a prolonged period of time, our research shows that engagement, productivity and health suffer. Highly engaged employees with a poor sense of well-being are more likely to quit, while employees with lower engagement levels and a positive sense of well-being are more likely to stay, leaving employers with a less-productive work force. And when employees work long hours, they often cancel doctor visits, skip workouts and eat on the run, which can exacerbate chronic illnesses like diabetes. Now that a team of Harvard physicians has documented returns of $3.27 for every dollar spent on wellness programs along with a decrease in absenteeism costs of $2.73, it’s imperative that executives continue their commitment to wellness.
How can executives demonstrate support for employee well-being?
Start by holding a mirror up to the executive team, because employees will draw conclusions from your actions and behaviors. If executives regularly work 18-hour days, e-mail the staff at midnight and seem to disregard their own health, employees will conclude that they must adopt a similar work style and emulate your behavior. Participate in on-site health screenings, weight loss or smoking cessation meetings to prove your commitment. And after a stressful period, set the right example by showing employees that you’ve resumed a normal pace and are recommitting yourself to your health.
How can executives fulfill their commitment to employee health during stressful times?
When you ask employees to do more with less, acknowledge the impact of your actions to show employees that you’ve taken the human factor into account. Convey your consideration for both sides and rally the troops by assuring them that the company is doing all it can to make this is a short-term situation. Keep your finger on the organization’s pulse during stressful times by walking the halls and engaging in face-to-face discussions with employees. One CEO routinely handwrites more than 100 notes to various employees every week, thanking them for specific actions they’ve taken to improve the company’s business results or make the organization a better place to work. Employees will support your decisions if you communicate your awareness of their situation and show concern for their well-being.
How can executives mitigate the impact of stress?
Executives are often isolated from the work environment or receive filtered information, which prevents them from making honest damage assessments. To remedy this situation, many companies have installed a cadre of wellness champions, who serve as a sounding board for executives and even suggest ways to enhance productivity without compromising employee health. They also aid executives by communicating their dilemmas as well as their ongoing support for wellness when employees are asked to work longer hours or assume extra duties. Committee members may even let you know when organizational stress levels have reached a tipping point.
But overall, front-line managers are in the best position to convey the reasons behind executive directives and mitigate the impact on employees’ workloads, personal lives and day-to-day activities. Train managers and supervisors how to support a culture of well-being and give them mitigating power by allowing employees to work flexible schedules or take time off for medical visits.
What other actions should executives take?
In addition to surveying employee attitudes to gauge the effectiveness and sincerity of your messages, it’s critical to align total rewards with performance. When people believe they are treated fairly and are appreciated, they are willing to give more of their time and creative energy. Aligning pay with performance will also help to retain and motivate high performers who make consistent contributions to key goals. In fact, this may be the perfect time to re-evaluate your employee value proposition. In the absence of bonuses and pay increases, employees will respond to recognition along with career development and collaborative opportunities that foster a sense of well-being and reinforce the organization’s commitment to their success.
Kathleen Drummond is a senior consultant for the Change Management and Communications Practice at Towers Watson. Reach her at (858) 523-5663 or firstname.lastname@example.org.
One positive side effect of the recession is that human resources is better poised to fulfill the strategic role long desired by executives, since taking care of talent and people issues is, more than ever, a key leadership issue. Human resources’ long-awaited metamorphosis from process-driven overseers to business plan enablers was born of economic necessity, but it’s gaining momentum thanks in part to renewed investments in technology and expanding self-service, according to The Towers Watson 2010 HR Service Delivery Survey, which annually examines the HR service delivery and technology plans and priorities of global companies.
The change couldn’t come at a better time, as savvy companies need holistic talent management and a real-time view of work force analytics to thrive in a rebounding economy.
“Executives can propel the evolutionary process by helping to define HR’s strategic mission and related data requirements,” says Courtnay Sotelo, senior consultant for the HR Service Delivery Practice at Towers Watson. “Once the vision is crafted, an HR task force can align priorities, technology and the service model to meet the company’s broader business objectives.”
Smart Business spoke with Sotelo about the evolution in HR service delivery and how executives can support the transition.
Why has talent management re-emerged as a priority?
HR leaders were sprinting toward holistic talent management before the recession but were forced to refocus in the short term amid layoffs and budget cuts. But the downturn only reinforced the need for better talent management, including real-time data and analytics, as companies struggled to quickly identify top performers and align reward programs and career paths to keep them from disengaging or defecting.
Also, disparate systems for performance management, compensation, training and development, and career management can occasionally impede HR’s ability to analyze bench depth and talent pipelines. Among other factors, the advent of a more integrated approach to talent management technology is contributing to a resurgence in talent management, with 20 percent of the 456 companies in our survey citing it as their No. 1 priority, while another 13 percent list it second. Cumulatively, this makes talent management HR’s top service delivery goal in 2010.
How is technology changing HR’s role?
Technology is no longer a discretionary expenditure; it has become the enabler of HR’s strategic vision because it provides the data to make informed decisions and creates efficiencies that maintain high service levels with less staff. Although many companies continue to rely on enterprise systems, 29 percent are now using software-as-a-service (SaaS) for some HR functions. Another 11 percent plan to use SaaS in the future, citing a desire for quicker implementation, lower costs and improved functionality. In 2010, 54 percent of companies plan to invest in HR technology in order to streamline business processes or deploy additional self-service functionality, which will further reduce processing costs and allow HR to take on a more strategic role.
Are companies turning to shared services?
The U.S. currently enjoys a competitive advantage as it leads the world in the adoption of HR shared services, which drives efficiencies through self-service and outsourcing. Shared services creates a scalable model that allows companies to adapt to changing business conditions while eliminating redundancies and creating standardized processes that have previously stymied HR productivity. Companies continue to build out shared services capabilities in 2010 and expand the roll out of manager self-service, which requires supervisors to initiate online personnel transactions, such as pay changes and performance management evaluations. HR had to persevere through a difficult change process, but once they recognized managers have accountability for their data and were able to convince them to participate, HR relinquished some control. Companies in our survey say they benefitted from a 73 percent decrease in administrative work, thanks to the initiative.
Can Web 2.0 technology benefit HR’s new agenda?
Although social media is here to stay, companies have been slow to embrace its functionality and use it to their advantage. Opportunities still exist to create efficiencies by using Web 2.0 to attract new employees, enhance corporate communications or train workers though online chat, Wikis and virtual classrooms. In contrast to e-mail, social media offers executives real-time communications functionality and opportunities to bolster employee engagement. Executives can reap the benefits and add velocity to the process by championing the cause and demonstrating an affinity for the functionality.
What else can executives do to support HR’s strategic transformation?
Although HR leaders are eager to embrace a strategic role (27 percent cite involvement in business issues as a priority), many need support crafting a complementary vision and structure. Once those elements are in place, they may finally become executives’ long-awaited strategic business partners.
Courtnay Sotelo is a senior consultant for the HR Service Delivery Practice at Towers Watson. Reach her at (415) 836-1011 or email@example.com.
After months of haggling on Capitol Hill, it’s Corporate America’s turn to make some gut-wrenching decisions. The health care reform act carries immediate cost implications for employers that continue through 2018 with the introduction of a 40 percent excise tax on high-cost group health plans. While the costs vary by company, the compendium of mandates is projected to increase the annual tab for employee health care by 3 to 10 percent, according to estimates from Towers Watson.
Later mandates may inspire some employers to take on new roles like offering employees stipends to purchase coverage on their own. One thing is certain: Maintaining the status quo is not an option.
“Employers can’t wait until 2015 to make decisions about health care because it will be too late,” says Ron Mason, CEBS, senior consultant for health and group benefits at Towers Watson. “Cost implications loom large and will not dissipate without decisive action.”
Smart Business spoke with Mason about the need for employer decisions in the wake of health care reform.
Which decisions require immediate attention?
Employers need to forecast increases through 2018 to see if annual costs may possibly exceed the threshold for high-cost group plans. A strategy change or plan restructure might be needed to avoid the excise tax, and a longer wait may necessitate more draconian changes. The elimination of the lifetime benefit cap and the extension of dependent coverage to age 26 could also have an immediate impact on employer costs.
Employers should investigate whether their stop loss carrier will provide unlimited coverage to protect against catastrophic losses. Finally, a new reporting requirement in 2011 and a slew of additional reports in 2014 calls for quick action regarding data collection or possible outsourcing.
What other choices await employers?
Some significant mandates in the bill:
Mandate: Pay or play requires large employers to provide health coverage for employees working 30 or more hours per week or pay an ‘assessment’, which may impact companies with large flexible or seasonal work forces.
Decision: Offer coverage, amend staffing models or pay the assessment. In the past, employers avoided this problem by extending coverage waiting periods. The bill imposes a maximum wait of 90 days by 2014 and requires large employers to automatically enroll employees in health plans.
Mandate: Community Living Assistance Services and Support (CLASS) allows employers to offer coverage for a long-term care option through the government.
Decision: Employers must decide what role they want to play and either enroll in the CLASS program and make necessary payroll deductions, or not administer this option.
Which decisions impact retiree coverage?
After reviewing the promises made to retirees, employers should revisit health plan designs in light of the new mandates. For example, it may not make sense to continue sponsoring a drug plan given the changes to Medicare Part D. These changes have already resulted in new accounting rules, closing the infamous ‘donut hole’ over 10 years, and new mandates that require manufacturers to offer a 50 percent discount on brand-name drugs and biologics in the donut hole. A three-year initiative to lower provider reimbursements through Medicare Advantage plans beginning in 2011 could diminish retiree participation and, possibly, plan availability, ultimately forcing an estimated half of retirees into more costly plans. Would offering Medigap coverage or a stipend be prudent now or in the future? Should employers continue to sponsor retiree coverage? These are just a few of the questions employers must answer.
Can employers mitigate some of the cost increases through strategic decisions?
Employers who proactively invest in wellness incentives will receive an extra boost in 2014 when the HIPAA limit is raised from 20 to 30 percent. The incentives become more powerful when combined with a decision to offer preventive services without co-pays or deductibles, which adds only half a percent to health care costs, but ultimately can yield a 5 to 10 percent increase in the number of people using preventive services, according to the U.S. Preventive Services Task Force. The final piece of the cost savings puzzle is helping employees to be wiser consumers of health services. The key decision is whether employers wish to hold employees accountable for their health management and to what degree. Other cost savings measures touted in the bill are wild cards. Will allowing carriers to sell insurance across state lines lower premiums? Will regulating insurers’ margins inspire employers to move away from self-insured plans? There’s only conjecture to consider when making decisions because the only givens at this point are cost increases.
What’s the biggest decision facing employers?
Certainly the introduction of the pay or play mandate might entice some employers with lower-wage work forces to pay the penalty and offer employees a wage increase to purchase coverage as state-run insurance exchanges come online. Considerations include the reaction from clients, competitors and, of course, current and prospective employees, who generally expressed anxiety about purchasing coverage on the open market in a recent survey by Towers Watson. However, 67 percent said they expected to pay more for health benefits in the future, so altering plan designs or total rewards to mitigate rising costs while continuing to offer group coverage might be a wise decision.
Ron Mason, CEBS, is a senior consultant for health and group benefits at Towers Watson. Reach him at firstname.lastname@example.org or (949) 253-5203. For more information about health care reform, visit www.towerswatson.com/health-care-reform.