ANALYTIC SOLVER – Health Claims. A large manufacturing company self-insures its

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ANALYTIC SOLVER – Health Claims. A large manufacturing company self-insures its employee health insurance claims. It would like to estimate its total health care payments for the coming year.….

A. What is the expected cost to the company of covering employee health care costs in the coming year?

B. What is the maximum cost to the company of covering employee health care costs in the coming year?

C. What is the probability that costs will not exceed $20 million?

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6. Health Claims. A large manufacturing company self-insures its employee health insurance claims. That is, it collects a fixed amount each month from every employee for health care costs and then it pays the entire claim amounts using its own funds to make up the difference. It would like to estimate its total health care payments for the coming year. The total number of employees at the start of the year is 11,124. The firm expects the number of employees to change each month over the coming year by a percentage that is uniformly distributed between -2 percent and 5 percent. Employees contribute $125 each per month toward their health care costs, while the average claim is $250 per month. The average claim itself is expected to grow by an amount given by a normal distribution with a mean of 1 percent and a standard deviation of 2 percent. a. What is the expected cost to the company of covering employee health care costs in the coming year? b. What is the maximum cost to the company of covering employee health care costs in the coming year? c. What is the probability that costs will not exceed $20 million?

Explanation / Answer

The financial crisis has changed many a paradigm and has compelled business entities to critically assess their business strategy, organisational dynamics and their impact on its human capital. A need for cost rationalisation has pushed organisations to freeze or reduce their benefits programme budget. Consequently, the issue of managing increasing costs of healthcare benefits has emerged as one with far reaching implications, both for the employers and employees alike. Paradoxically, these very benefits often play a crucial role in differentiating the perceived employee value proposition and progressively compliment an organisation’s ‘talent management strategy’; to attract and retain a skilled and productive workforce. Therefore to remain competitive and yet efficiently manage costs, it is increasingly important that employers develop a strategic and considered approach towards managing their health benefit provision.

In order to precisely understand the perceived value that employers and employees associate with healthcare benefits and their resulting liabilities, Towers Watson recently conducted a comprehensive survey in the second half of 2009 covering 125 of India’s largest employers. The respondents represent a cross section of industries, mainly from the private sector, reporting average revenue of more than Rs 400 crores. The survey titled “Healthcare benefits in India: changing landscape” provides insightful information on current trends, issues on hand for employers providing health benefits and best practices for cost control.

In India, healthcare benefits are an essential part of the benefits package provided by employers. While in absolute terms, healthcare benefits do not account for a significant part of an employee’s cost to company, the proven potential to insinuate higher associated value among employees is profound. A Towers Watson benefits trends survey, published in mid 2009, reported that almost 46 percent of employers in Asia believe that health is the benefit to which their employees attach the greatest importance.

The findings of the “Healthcare benefits in India: changing landscape” survey indicates that almost 96 percent of the companies provide medical coverage of some form to their employees and approximately 17 percent provide Post Retirement Medical Benefits (PRMBs). Usually these benefits are insured and employers have not experienced the full impact of the increasing costs until now. Historically, health insurance has been subsidised by other general insurance portfolios; but, with continuing de-tariffication, any further cross subsidies are not sustainable. In the recent past, the cost of such insurance cover has been increasing to the extent that medical cost inflation is expected to be around three to four times the general price inflation, in the future. Employee health care provision is at an interesting cross road trying to make ends meet - need for better benefits on one hand and cost control on the other. As a result, companies will have to apply serious thought to health care issues in the foreseeable future.

KEY FINDINGS

FUTURE DEVELOPMENTS

Moving forward, we could expect a joint sharing of health care expenditure between employers and employees; an initiative which is known to have brought substantial improvement in the coverage and quality in many countries, notably China. There is a similar opportunity for the Indian corporate sector to consider innovative approaches in controlling health care costs and at the same time provide valuable health care benefits to its large workforce in organised employment.

Employers in India are also likely to find interest in health saving plans which are offered with varying degrees of success in several countries such as Hong Kong, Singapore and South Africa. Health saving accounts is accepted as a viable form of financing long-term health care expenses.

We also envisage that a major component of health care initiatives in India is likely to be in the form of preventive and wellness-based health programmes. As suggested by a research report published in September 2007 by a leading think tank, the Indian Council for Research on International Economic Relations, a well-designed employee wellness programme can lead to a 25 percent reduction in health plan costs, sick leave, disability pay and worker’s compensation. The report quoted that 98 percent of employees who have undergone preventive health check ups, found them beneficial in terms of higher productivity at work and better quality of life. Buoyed by favourable regulations, there is the possibility of having more stand-alone health insurance companies to be licensed in India in the next few years. Such companies specialising in employee health plans in other countries could develop health insurance as a viable business proposition in India.

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