Employer-Sponsored Insurance: Can Companies Make Up for Taking it Away Simply by Paying Their Employees More?

McKinsey Quarterly recently published the results of a survey they conducted of over 1,300 U.S. employers on the impact of recent U.S. health care reform legislation on their plans for dealing with employee benefits. Take a second to digest some of the key findings of this survey:

• 30% of employers (and 28% of large employers) report that they either definitely or probably plan to stop offering employer-sponsored insurance (ESI) after the year 2014, when many of the provisions of the recently passed Affordable Care Act take effect.
• 45 – 50% of employers say they will either definitely or probably pursue alternatives to ESI, such as using defined-contribution models or offering ESI only to certain employees.
• Among employers who report a high awareness of health care reform, the proportion who plan to stop offering ESI jumps to 50%, and the proportion who plan to pursue alternatives to ESI jumps to 60%.
• Although 85% of employees surveyed (and 90% of higher-income employees surveyed) indicated that they would stay at their current jobs if ESI was no longer offered by the company, 60% would expect increased compensation if ESI was removed from their benefits packages.

Given these findings, McKinsey expects that there will be a general tendency for employers to stop offering ESI altogether or to offer alternatives to ESI instead; the report also predicts that employers will offer increased compensation in order to “make employees whole” and to continue to attract and retain top talent at the same rates they did when they were offering ESI as a part of their benefits packages.

But are the implications of this kind of decision really purely financial? Does a pay raise necessarily make up for cutting ESI out of an employee’s benefit options, or is ESI worth more than just its absolute monetary value? For example, take a look at the CNNMoney.com 100 Best Companies to Work For in 2010: the top-ranked company, SAS, was cited for several of the supportive benefits it offers to its employees, many of which were health care-related – including unlimited sick days, a company medical center that employees can use free of charge, and 90% coverage of health insurance premiums (view the full story here). While the company was also commended for several non-health care related factors, such as its on-site library, affordable high-quality child care, and a children’s summer camp, compensation was not included on the list of reasons why this is a great place to work (in fact, on CNNMoney’s accompanying list of the 100 “Big Pay” U.S. companies, SAS did not even rank. The second-ranked Best Company to Work For of 2010, Edward Jones, was praised for its commitment and loyalty to its employees during the recession: in fact, while this company actually froze salaries during this difficult economic time, profit-sharing continued and no layoffs were made (full story here). The stories behind many of the other companies on this list follow a similar pattern: compensation in and of itself is not mentioned, and the focus tends to instead be on the steps each company takes to provide support to its employees.

This seems to suggest that a simple hike in employees’ salaries may not be enough to offset the impact on employee perceptions of the organization that could result from discontinuing ESI. It may also be detrimental to a company’s image to stop offering these programs as a benefit. While the McKinsey report predicts that many companies will elect to make these changes and such decisions will not necessarily put an organization at a disadvantage compared to its competitors in terms of attracting and retaining top talent, it does seem that the absence of such options on an organization’s list of perks might have at least some small effect on both current staff and general public perceptions of the organization.

Companies may be able to substitute the supportive benefits of an ESI program by not only adjusting salaries to compensate for the removal of this option from benefits packages, but also investing in other measures that communicate a similar kind of whole-person support and offer additional convenience and work-life balance to its employees. Options might include increasing opportunities for flexible work hours and telecommuting, offering extra rewards for employees who demonstrate positive health behaviors (such as the “cash for health” program offered by Paychex), or by adding on-site perks such as daycare centers, fitness centers or libraries, like those offered by SAS.