reid b sandner - the lima company analysis_fall 2011

8/2/2019 REID B SANDNER - The Lima Company Analysis_Fall 2011

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The Lima Company 1

The Lima Company

Part III: Benefit Analysis

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Fall 2011


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The Lima Company 2

Introduction 3

Design Considerations and Objectives in Offering Employee Benefits

Goals ... 4

Demographics. 4-5Funding Considerations ..5

Financing Considerations5-6

Problems, Issues, Concerns and Considerations in the Design of Health

Benefits

Healthcare6-7

Dental. 7-8

Flexible Spending Account8Funding and Financing Considerations ..8

Problems, Issues, Concerns and Considerations in the Design of Other Types

of Non-Retirement Benefits

Life Insurance. 9

Work/ Life.. 9

Educational Assistance10

Regulatory ComplianceERISA.1 1

HIPAA.1 1

COBRA.1 1-12

Health Care Reform.12-13

Recommendations and Conclusion14


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The Lima Company 3

Introduction

The Lima Company is at its core is a plumbing company established in Philadelphia. Mr.

Lima, the companys founder and president, began working as a plumber out of high school with

no intentions of continuing to work in the industry this long, nor becoming a business owner.

The company started as Santa Paul and as Mr. Lima gained more responsibility he eventually

took over the company and named it The Lima Company in the early 1980s. The company

accepts just about any size contract they can, varying from larger sized jobs to single homes. The

Lima Company consists of forty plumbers between their two locations of Cleveland, OH but

mainly based out of Philadelphia. In order to maintain all the plumbers, Mr. Lima has set up an

office to accommodate to their non-plumbing needs and to find jobs.

After being in the industry for this many years, Mr. Lima has been doing business with

many of his employees for years, if not decades. Working this close together every single day for

all these years has created a family style atmosphere in the office and is a large part of the design

considerations for the companys benefits package. The Lima Company has experienced

consistent premium increases over the last few years and therefore has been looking to options of

how to save on costs while maintaining the same level of benefits.

By being a business owner for over thirty years, Mr. Lima has learned what works and

what does not work for his employees. He has made contributions to many plans through all

sorts of price fluctuations and from this he has earned loyalty and respect from his employees.


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The Lima Company 4

Design Considerations and Objectives in Offering Employee Benefits

Goals

As just about any employer will say, the objective to offering a benefits package is to

attach and retain employees. This is the same case for Mr. Lima, however he also feels it is more

personal for him. He wants to offer a package of benefits that his employees can use efficiently.

He wants them to be able to see the difference of what The Lima Company has to offer

compared to a larger employer. At the end of the day, costs drive everything. Wither Mr. Lima

contributing one hundred percent to most of his employees plans, he has seen firsthand the

impact of the rising health care costs.

A very strong advantage to Mr. Limas smaller sized employee base is that he can

interact with everyone to get a full grasp of how they feel about the healthcare plans and what is

working and what is not. With a steady number of women becoming pregnant, and previously

having children, he wants to obtain coverage that can help with that. He has a human resource

manager in the office, Judy Smith, who also helps with the design considerations of the plan. In a

family style atmosphere, employees feel more open with one another, ask more frequent

questions and make more suggestions that can tailor the plan to their needs. For employees who

still do not feel comfortable voicing their opinions out loud, an annual survey can be completed

before renewal considerations are taken into account.

Demographics

The cost of a benefit plan can vary a large amount depending on the demographics of the

company. Being aware of this factor can save an employer enough money where they may be

able to turn it around to make more significant contributions for their employees. This is an


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The Lima Company 5

important detail that their broker takes into consideration. For example, a company that

employees a majority of young males, ranging in ages from their early to late twenties, will see

healthcare costs much less significant compared to woman of the same age. In this case, a plan

can be tailored with higher deductibles, which will decrease premiums, as men visit the doctor

far less often during this time in their life. On the other hand, employing a larger number of

women at this age results in higher healthcare costs mainly because this is when woman are

pregnant. Employing a majority of woman varying in all ages from early thirties to late sixties,

The Lima Company has to make sure the plan premiums, copays, and benefits offered are

appropriate and necessary.

Funding Considerations

After considering self-insuring the past few years, The Lima Company is fully insured

with the main concern of the economy. Even though Mr. Lima has seen a steady increase in costs

over the last couple of years, including a thirty-four percent increase from 2010 to 2011, he still

insures his plan. The costliest and most terrifying aspect of self-insuring is the risk of a

catastrophic event. In this scenario Mr. Lima feels that he may not be able to cover the costs and

if he could, he would not know how far back it would set the company. We ran the numbers and

deemed it was not possible, we could go bankrupt, he stated. By insuring his plan, he is certain

of the premiums that he will have to pay for his employees and the losses are on the insurer.

Financing Considerations

After Mr. Lima reassured himself he wanted to continue insuring his plan, he had to

decide how he would finance the plan with the increasing costs. In the past Mr. Lima has always

paid for 100% of the premiums for his employees healthcare plan. It never mattered which plan


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The Lima Company 6

an employee selected, nor what tier they were placed in. In 2011, employees had to pay the

difference of the plans if they wanted an upgraded, costlier plan. Since this was the first time

employees had to pitch in, he was unsure as to how employees would act. After communicating

about the rising costs he has burdened to his employees, to his surprise they understood about

contributing. Family plans considerably cost more, which has caused Mr. Lima to exercise the

thought of requiring covered individuals with a family make contributions. This is the first time

he has given any thought to this idea but as plan costs increase year to year, he may have to

implement employee contributions towards their healthcare plans.

Problems, Issues, Concerns and Considerations in the Design of Health

Benefits

Healthcare

The concern each year that The Lima Company braces itself for is the increase in costs

just to continue with their incumbent benefits plan. Mr. Lima feels the need to offer choices to

his employees even if it requires a little more money coming out of his end. The goal is to

proceed with the plan they had from the previous with no increase in operation and premium

costs. The Lima Company has already implemented considerations from their consultan to have

employees contribute if they select an upgraded plan. A major concern that Mr. Lima and his

broker need to keep track of is creating a splintered pool. As costs rise, employees may become

more reluctant to select an upgraded plan where they need to make contributions.

Mr. Lima changed his plan offering from 2010, which offered a HMO Flex and Keystone

HMO 15 through IBC, to the POS plans and PPO. This change was brought about from an

accumulation of employee concerns with the network and out of pocket costs. The plans that he


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The Lima Company 7

now offers between the two POS plans and the PPO have seen outstanding employee satisfaction

he stated. The plan did end up costing him more money but with the healthcare inflation he was

not positive of the exact costs. The POS plans and PPO had smaller copays to see the PCP,

which the mothers in the office really appreciated. Both Judy and Mr. Lima held a meeting for

employees when the new plan was implemented to answer the questions they could about the

new plan. Most of it had been understood prior to the meeting through office chit-chat.

One concern that may be difficult to accept for Mr. Lima is that he cannot make every

issue and consideration that his employees have come true. A line needs to be drawn and

recognized as to where employees may be trying to take advantage of their employer. An

employer can only contribute and change the plan to a certain extent and this is a concern The

Lima Company needs to keep this in mind.

Dental

Dental services are one portion of the plan where The Lima Company saves themselves

some money. They are able to do this because varying aged employees could not agree to a plan

that they felt fit everyone appropriately. The oldest employees of the company were worried

about the care of their aging teeth and the possibility of dentures, while the younger employees

were worried about their children and the cost of braces. Mr. Lima stated that this is perfect

situation for the FSA.

While Mr. Lima is benefiting from not having a dental plan at the moment, he may want

to really know what it means to his employees. A dental plan can be a larger aspect of attracting

and retaining and employee. While he keeps the idea of what it means to his employees he also

needs to understand what the costs are going to be. With the FSA installed Mr. Lima may be able


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The Lima Company 8

form a small group that his employees can finance. At this point, with the FSA in mind, he is

completely comfortable no providing this benefit.

Flexible Spending Account

When The Lima Company implemented the FSA they felt they were offering a benefit to

their employees that was hip and up-to-date. The Lima Company did everything they could to

show their value but older employees proved stubborn. Judy noted that most the employees that

were taking advantage of the pre-tax dollars for healthcare goods and services were the

employees with a family. From the lack of popularity with the FSA, The Lima Company faces

the risk of failing discrimination tests. The cost of administering the plan is almost not worth due

to the lack of participation.

Funding and Financing Considerations

Both of the POS plans and the PPO are fully insured through IBC. The Lima Company

pays for the full cost of the POS 3 plan while employees who decide to upgrade to the POS2 or

the PPO must pay the different in the plans. For example, The POS 3 is fully paid for by Mr.

Lima at a price of $647.07 a month per single individual. The POS 2 costs $733.54 per month

per single individual, leaving the single individual to pay $86.47 a month.

After experiencing a thirty four percent increase from managed care plans alone last year,

Mr. Lima may have to look into slimming his plan if there is a severe price increase again. IBC

has already contacted The Lima Companys brokerand informed them there will be increases as

far as premiums. The Lima Company is currently marketing their plan with Aetna and waiting to

hear back in an effort to keep the premiums relatively the same for the same amount of coverage.


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The Lima Company 9

Problems, Issues, and Considerations in the Design of Other Types of Non-

Retirement Benefits

Offering benefits besides the typical healthcare benefits is an alluring way to attract

employees. Being able to attract and retain the right employees will increase productivity. The

Lima Company is aware it is not nearly big enough to offer the extravagant benefits that other

firms may be able to provide, but they feel they have addressed this concern. By looking into his

employees needs Mr. Lima is able to provide some benefits that increases his employees

satisfaction.

Life Insurance

When accepting a new job, newly hired employees typically expect to see life insurance

as part of the benefits package. This is one benefit that The Lima Company decided to not make

contributions for their employees. Employees, typically ones with families, that feel the need to

have their life covered in the event of an accidental death purchase life insurance on their own.

Work/ Life

As a way to keep costs down, employees happy, and maintain efficiency The Lima

Company converted an empty room into a daycare. Employees can bring their children into work

under the supervision of Mr. Limas daughter in addition to the parents. Concerns about noise

and compensation originally rose from employees who would not be bringing children in

however this was quickly mitigated. With supervision over the children, the daycare room was

able to be sound proofed. As far as compensation, an employee who brings a child into work is


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The Lima Company 10

required to come into work early or stay late to ensure they can complete their daily tasks

without any problems.

Educational Assistance

Mr. Lima stated, I love when employees ask to go back to school to take classes. He

loves it so much that he reimburses their tuition or certification classes. The way The Lima

Company sees it is if a plumber wants to continue their education, it can only come back and

help the company in the long run. Technology is constantly changing which in return in some

industries requires new training. A better understanding of the industry can offer more jobs. The

Lima Company also encourages office employees, through tuition reimbursement, to go back

and take classes. The more his employees learn, the more efficient his company can run.

Regulatory Compliance

As an employer offering benefits to employees, The Lima Company is subject to

regulatory compliance. Compliance is usually handled by the employer but in some cases the

broker for the plan may assist the employer. Many of these regulations are to protect the

employees rights and to make sure an employer does not exercise too much power. Failure to

comply with these regulatory laws can result in fines, restoring losses and even time in prison.

ERISA

The Employment Retirement Income Security Act (ERISA) is a federal law implemented

in 1974. ERISA was passed to provide protection to an employees pension plans but also

provides provisions regarding health and welfare benefits. Under ERISA an employer must make

the interest of their employees the first priority. This entails the employer accepting fiduciary


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The Lima Company 11

responsibility as the plan sponsor, communications requirements and reporting requirements to

the federal government and Department of Labor.

The Lima Company feels it has always thought of its employees first. For example, Mr.

Lima and his family have decided to practice Eastern medicine techniques, such as acupuncture,

that are not covered within hisplans network. For these services he has to pay all out-of-pocket.

Instead of finding a plan that may address his own out-of-pocket costs better, he settles on a plan

that fits well with this employees. The frequent level of communication between Mr. Lima, Judy

and the employees also ensures that everyone is understanding their benefits. Their consultant

checks in to make sure communication is effective and reviews any new plan designs to keep

them from discriminating.

HIPAA

The Health Insurance Portability and Accountability Act (HIPAA) was designed to create

a level of confidentiality for employees. HIPAA also protects individuals with preexisting

conditions from discrimination. Each individual employee has to trust Mr. Lima with any

condition they may have and with any of the claims that may arise from such ailment. Such

information is dealt with very delicately as he could be severely penalized if it were not.

COBRA

The Consolidated Omnibus Budget Reconciliation Act (COBRA) was passed to make

sure that employees that are involuntarily terminated from can still obtain health coverage from

their employer. COBRA covers an individual during gaps or the time period while they search

for a new job or for new coverage. As long as the former employee from The Lima Company

pays the premiums after a waiting period, they will receive coverage as they did before.


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The Lima Company 12

Employees can access this coverage for up to eighteen months or even thirty six months in

special situations.

Health Care Reform

The Lima Company was verypassionate about the health care reform attempt. So far,

from what they have seen, they are very unhappy. This is mostly because of the staggering price

increases over the past few years. Of the provisions that apply to The Lima Company, more of

them increase the companys costs compared to those that decrease costs. A few of the changes

moving forward with the healthcare reform do not seem as if they are looking at the first interest

of the employers.

One of the first plan changes that quickly frustrated Mr. Lima was dependent eligibility.

A dependent, as defined by The Lima Company, was a child up to the age of nineteen. Currently

under PPACA the dependent age has been extended to the age of twenty-six. Mr. Lima was well

aware of this new stipulation as he has had dependents that previously were not considered

dependents and now are re-applying for coverage again. The Lima Company said they saw price

increases from this stipulation alone and Mr. Lima was very upset about the increases. The time

is takes to re-apply the newly covered dependents will increase the administration costs for the

insurer and he will also have to take time away from his company to complete this task. A

combination of the additional administration costs plus new claims will have a direct impact on

his healthcare plan. He said that five plans changed their tier class from either single or two

adults, to single with child, or to family. He said that he would continue to cover dependents but

unfortunately the costs to cover them would come out of the plan.


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The Lima Company 13

One of the other parts to the health care reform that surprised Mr. Lima was that the

maximum contribution hat can be made into a FSA dropped from $5,000 to $2,500. In this case

he felt bad for the individuals but mostly the families who use those accounts. FSA are used by

his employees to help pay for dental and vision costs, and over the counter drugs and

prescriptions. With PPACA more restrictions are going to be set as to what exactly can be

purchased from the funds in an FSA, making it harder for employees to be reimbursed from their

FSA.

The last provision that affected The Lima Company was the automatic enrollment of

employees that may have previously opted out. Some employees take the risk of not participating

in a healthcare plan because they feel they are healthy enough to cover the losses they may incur

out of pocket. In return for this an employer usually provides compensation. A new provision

under the Health Care Reform states that all employees who previously opted out and were not

receiving healthcare benefits from a spouse will be automatically enrolled into the plan. Mr.

Lima caught a break on this provision based on the demographics of his group as the majority of

employees that choose to opt out are young males because their costs a usually much lower.

A piece of PPACA that The Lima Company had not been informed of yet was

preventative services would have the copayment waived. In an effort to keep individuals

healthier and out of the doctors office and hospital down the road, copayments will not be

required if a covered individual takes a preemptive step towards taking care of themselves. Mr.

Lima was very pleased and impressed there was something with the reform that he agreed with.


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The Lima Company 14

Recommendations and Conclusion

Any raise in healthcare costs that The Lima Company encounters in the future should be

shared with the employees. Mr. Lima already pays a large portion of the companys earnings

towards the benefits package so it should be known to the employees what kind of increases he is

facing. Many employers that began to experience the Health Care Reform feel that it is more of a

way to exert more taxes on employers and benefits than it is actually a reform. As stated

previously, the provision in the Health Care Reform that extends the dependant age, should be

taken care of by the employees. If costs continue to rise, Mr. Lima will have to decide to no

longer cover dependents through the plan.

The healthcare plan that The Lima Company administers has proved to work for his

employees. Employees are comfortable with the copayments and most of all are very pleased

with the employer contributions. Keeping the plan in place will continue the high employee

satisfaction. While costs can be saved through alternative options such as high deductible plans,

they do not fit well at The Lima Company because of their demographics.

Through offering a plan that makes their employees feel needed and satisfied, The Lima

Company has been able to attract and retain many diligent workers. This benefits package was

carefully designed to fit its employees to promote productivity and efficiency. Being able to

keep up with the changes that Health Care Reform challenges The Lima Company with, in

addition to overcoming inflated healthcare costs, are the driving factors to plans persistent

success.

reid b sandner - the lima company analysis_fall 2011

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