Does It Pay to Offer Health Benefits?

Nov. 3, 2016

nurse bandaging woman's arm

Over the years, I have had a number of mid-sized business leaders ask me if it “pays” to provide employees with health insurance. This has always been a complex question, with an answer that inevitably includes the words “it depends.” With the Affordable Care Act, this has become a far more complicated question. The costs associated with not providing health insurance are increasing. And, as more companies and individuals opt for health insurance, the costs of providing insurance should decrease – at least this is the theory.

Yet even with these changes, the fundamental reason for my response “it depends” remains the same. It comes down to the value you place on employees and retaining good employees. Beyond non-monetary compensation, health insurance provides a “stickiness” factor that helps retain employees who don’t want to lose their insurance or primary care physician. When retention is important to your business strategy, health insurance can be a tool to boost retention. Starbucks’ business strategy rests on customers being greeted daily by the same smiling faces of baristas who remember your order, where you work, and so much more. Retention is obviously critical to customers seeing familiar faces.

But what about a mid-sized business that is competing in an industry where the competitors don’t offer any benefits, pay minimum wages, and often use temporary labor? One company I work with exists in this space and has continued to offer health insurance (and vision and dental) for decades. Their margins are thin and their costs are higher than their competitors. So why do they do it and how do they compete? The brief answer to “why” is because they feel it is the right thing to do. Employees deserve benefits from their employer. The more complete answer is that they reduce turnover, which reduces training costs, and increases production quality. Although this is low skilled work, experienced workers are faster, more accurate, and present lower safety risks. If their industry should face a major recall, they have much tighter controls than their competition, and will weather the storm better.

These factors play into their strategy and help address the question of “how” they are able to compete. Because of their tight controls and use of experienced labor, they have the highest quality in their industry. Although quality is not typically rewarded in price, they are able to compete for the best B2B customers, who pay invoices on time and maintain commitments to orders.

The culture that is created when your fundamental philosophy is to invest in people means that you often get greater innovation from those people. Through their strategic planning processes with their experienced managers, they have been able to align divisions more efficiently and execute their strategy better than their competitors. The bottom line is they have higher costs and yet higher profits in an industry that doesn’t tend to reward quality through price differentials.

Do you see why it is a complex question? When asking about the costs and benefits of employer sponsored health insurance, people are looking for a spreadsheet answer to a question that involves culture, strategy, and execution. Although there are certainly exceptions, I believe that many companies could successfully compete and win by investing in people. Research backs my beliefs by demonstrating that investments in human capital (the knowledge, skills, and abilities embodied in people) are positively associated with financial measures of firm performance. Investing in people pays off, but you have to capitalize on those investments by drawing innovation, experience, and commitment from your people.

This is a simple answer to a complex question. The processes of aligning interests and capitalizing on the investments in people are not as simple. But these investments can provide the basis for sustained competitive advantage.

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