It’s hard to disagree with the idea of choice. After all, a consumer who can choose is considered an empowered consumer. In the field of benefit plans, choice among benefit options is often seen as an attractive feature by employees.
Plans that offer choice are called flex plans because they are flexible enough to be adjusted to the requirements and preferences of individual employees. One form of flex plan is the health services spending account, in which employees are given a fixed amount to purchase whatever services they need (see "How spending accounts work" below).
Choice within the private-sector benefits field involves three parties: the employer (who decides what benefit plan to provide to employees), the employee (who is the benefactor and may choose among several options), and the benefits provider (who administers, adjudicates and underwrites the plan).
However, choice is not always good, particularly when a plan design incorporates “false choice,” meaning a set of options the employees perceive is not really choice at all.
It is important to avoid a too simplistic view of why employees are presented with false choices. It is not because employers or benefits providers want to trick, confuse or aggravate employees. On the contrary, a good benefits plan is meant to meet employee needs affordably for the employer, improve employee relations and boost morale. False choice creeps into flex plans, however, when the employer does not identify the implications of a set of choices before introducing the flex plans.
Although flex plans are intended to be positive, there are three types of “false choice” that can exist: invisible choice, confused choice and irrelevant choice.
Invisible choice
Invisible choice occurs when a plan:
•has an inadequate cost structure to support the flexibility under the plan;
•incorporates choice that is unaffordable within the credit structure; or
•provides options for employees to choose what they had under the prior plan, but not to take advantage of additional choices unless they elect payroll deductions.
Examples of these types of invisible choice are the employee who chooses required medical and dental coverage and has no credits left over to take advantage of the other choices, or an employee who has no credits left over to allocate to a health spending account (assuming one exists), or an employee has to agree to a payroll deduction to access the wide range of choice being offered.
The goal of a flex plan is to better meet employees’ needs and empower employees with choice. However, if invisible choice creeps into the plan, those goals could be undermined. Employers will hear complaints like, “This isn’t really flex, this is just a way for the company to get me to spend more of my money” or, “After I buy back what I had before — there are no company funded credits to allow me to access all the other great stuff — this flex plan is just smoke and mirrors.”
Confused choice
Too much choice, poorly communicated, produces confusion. Confusion can result in some employees wanting to default to the combination of options that most closely duplicates what they had before. So, because of the complication of the overall flexible benefit offering, employees disregard the advantages in the selections being offered and prefer choices that fit within their comfort zone. The value of choice provided by the employer is not being capitalized upon by the employee.
Irrelevant choice
Some flex plans offer choices employees do not need or want. Hence, you might see very high participation in some options and very low participation in others. If this is part of the flexible benefit strategy, then this participation pattern is fine. However, underutilized options often add to the employer’s administration and communication costs without adding value to the employees.
Testing the plan
To identify and avoid false choice, a employer should model potential employee winners and losers. Modelling allows an employer to evaluate various scenarios and verify whether the majority of employees are within a “corridor” of acceptability. This corridor is defined by the employer.
For example, an employer may decide that it is acceptable for 10 per cent of the workforce to spend an additional $500 a year in out-of-pocket benefit expenses. For all other employees, the new plan should be better or, at worst, cost neutral. The process of adequate modelling involves developing several real or fictitious employee profiles that include salary, age, family status, claims experience. An employer would then determine the net out-of-pocket cost for an employee with that profile before and after change. It should be clear at this point whether or not the new plan will result in more employees being disadvantaged than is acceptable. If there are a lot of employees with a profile that might take them outside of the “corridor” of acceptability, then the plan design is yielding too many losers.
To ensure the right choices are offered, both in terms of level and range, adequate employee testing or employee focus groups are useful in verifying modelling, participation and cost assumptions.
The bottom line: when designing a flex plan, don’t inadvertently include false choice. Employees will expose it if you do. Conduct effective and appropriate modelling of the winners and losers and ask employees their opinions of the new plan to identify where, if at all, false choice exists, and then remove it.
How spending accounts work
Health services spending accounts (HSSAs) are increasingly an inherent part of a flex plan and are provided as one of the choices an employee can access. HSSAs are popular when implemented properly.
In its simplest terms, think of an HSSA like a bank account — but instead of being designed for “savings” it is designed for “spending.”
HSSAs are funded from company paid credits — how and by how much is a function of the design specifics determined by the employer.
Employees with a credit balance in their spending account can allocate all or part of the amount, on a non-taxable basis, towards the reimbursement of eligible medical and dental expenses as defined in the Income Tax Act.
For example, if the medical coverage provided by the employer reimburses drugs at 80 per cent, the 20 per cent that is not reimbursed under the medical plan can be reimbursed, on a non-taxable basis, to the employee up to the balance held in the HSSA. Another example may involve an employee who wants to have laser eye-surgery or adult orthodontia (in this example, both of these services are not covered under the employer medical plan). The employee can access the funds in the HSSA to cover these types of extra-contractual expenses on a non-taxable basis.
HSSAs are a very powerful vehicle for providing choice while at the same time managing employer costs. Don’t be daunted by the administration and communication. Carriers are increasingly adept at the administration of HSSAs and with good communication, employees have well understood how HSSAs work.
Daphne Woolf is currently a freelance writer who can be reached at (416) 469-1300.
Plans that offer choice are called flex plans because they are flexible enough to be adjusted to the requirements and preferences of individual employees. One form of flex plan is the health services spending account, in which employees are given a fixed amount to purchase whatever services they need (see "How spending accounts work" below).
Choice within the private-sector benefits field involves three parties: the employer (who decides what benefit plan to provide to employees), the employee (who is the benefactor and may choose among several options), and the benefits provider (who administers, adjudicates and underwrites the plan).
However, choice is not always good, particularly when a plan design incorporates “false choice,” meaning a set of options the employees perceive is not really choice at all.
It is important to avoid a too simplistic view of why employees are presented with false choices. It is not because employers or benefits providers want to trick, confuse or aggravate employees. On the contrary, a good benefits plan is meant to meet employee needs affordably for the employer, improve employee relations and boost morale. False choice creeps into flex plans, however, when the employer does not identify the implications of a set of choices before introducing the flex plans.
Although flex plans are intended to be positive, there are three types of “false choice” that can exist: invisible choice, confused choice and irrelevant choice.
Invisible choice
Invisible choice occurs when a plan:
•has an inadequate cost structure to support the flexibility under the plan;
•incorporates choice that is unaffordable within the credit structure; or
•provides options for employees to choose what they had under the prior plan, but not to take advantage of additional choices unless they elect payroll deductions.
Examples of these types of invisible choice are the employee who chooses required medical and dental coverage and has no credits left over to take advantage of the other choices, or an employee who has no credits left over to allocate to a health spending account (assuming one exists), or an employee has to agree to a payroll deduction to access the wide range of choice being offered.
The goal of a flex plan is to better meet employees’ needs and empower employees with choice. However, if invisible choice creeps into the plan, those goals could be undermined. Employers will hear complaints like, “This isn’t really flex, this is just a way for the company to get me to spend more of my money” or, “After I buy back what I had before — there are no company funded credits to allow me to access all the other great stuff — this flex plan is just smoke and mirrors.”
Confused choice
Too much choice, poorly communicated, produces confusion. Confusion can result in some employees wanting to default to the combination of options that most closely duplicates what they had before. So, because of the complication of the overall flexible benefit offering, employees disregard the advantages in the selections being offered and prefer choices that fit within their comfort zone. The value of choice provided by the employer is not being capitalized upon by the employee.
Irrelevant choice
Some flex plans offer choices employees do not need or want. Hence, you might see very high participation in some options and very low participation in others. If this is part of the flexible benefit strategy, then this participation pattern is fine. However, underutilized options often add to the employer’s administration and communication costs without adding value to the employees.
Testing the plan
To identify and avoid false choice, a employer should model potential employee winners and losers. Modelling allows an employer to evaluate various scenarios and verify whether the majority of employees are within a “corridor” of acceptability. This corridor is defined by the employer.
For example, an employer may decide that it is acceptable for 10 per cent of the workforce to spend an additional $500 a year in out-of-pocket benefit expenses. For all other employees, the new plan should be better or, at worst, cost neutral. The process of adequate modelling involves developing several real or fictitious employee profiles that include salary, age, family status, claims experience. An employer would then determine the net out-of-pocket cost for an employee with that profile before and after change. It should be clear at this point whether or not the new plan will result in more employees being disadvantaged than is acceptable. If there are a lot of employees with a profile that might take them outside of the “corridor” of acceptability, then the plan design is yielding too many losers.
To ensure the right choices are offered, both in terms of level and range, adequate employee testing or employee focus groups are useful in verifying modelling, participation and cost assumptions.
The bottom line: when designing a flex plan, don’t inadvertently include false choice. Employees will expose it if you do. Conduct effective and appropriate modelling of the winners and losers and ask employees their opinions of the new plan to identify where, if at all, false choice exists, and then remove it.
How spending accounts work
Health services spending accounts (HSSAs) are increasingly an inherent part of a flex plan and are provided as one of the choices an employee can access. HSSAs are popular when implemented properly.
In its simplest terms, think of an HSSA like a bank account — but instead of being designed for “savings” it is designed for “spending.”
HSSAs are funded from company paid credits — how and by how much is a function of the design specifics determined by the employer.
Employees with a credit balance in their spending account can allocate all or part of the amount, on a non-taxable basis, towards the reimbursement of eligible medical and dental expenses as defined in the Income Tax Act.
For example, if the medical coverage provided by the employer reimburses drugs at 80 per cent, the 20 per cent that is not reimbursed under the medical plan can be reimbursed, on a non-taxable basis, to the employee up to the balance held in the HSSA. Another example may involve an employee who wants to have laser eye-surgery or adult orthodontia (in this example, both of these services are not covered under the employer medical plan). The employee can access the funds in the HSSA to cover these types of extra-contractual expenses on a non-taxable basis.
HSSAs are a very powerful vehicle for providing choice while at the same time managing employer costs. Don’t be daunted by the administration and communication. Carriers are increasingly adept at the administration of HSSAs and with good communication, employees have well understood how HSSAs work.
Daphne Woolf is currently a freelance writer who can be reached at (416) 469-1300.
