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Compensation and Strategy: Controlling Benefits Costs


The system of healthcare in the United States is characterized by complexity and diversity. Private and public medical institutions offer medical services to individuals covered by individual-based, government-financed, and employment-based insurance. More recently, however, the discussions started on the issue of rising healthcare costs, which prompted many individuals to skip on paying for individual health coverage.

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The government initiated a health care reform and introduced such laws as the Affordable Care Act (ACA) to improve the accessibility of health care by expanding the reach of government-financed insurance. However, with many working individuals not eligible for Medicare and Medicaid programs, the two options available to them are expensive individual insurance or employment-based insurance.

The latter option implies insurance coverage offered by a business to its employees as a part of its benefits package. Due to the rising healthcare costs, more job-seekers are likely to look for employers offering health insurance benefits to help reduce the applicants’ financial burden. Although medical insurance included in the benefits package can be an effective recruitment and retention tool, it also adds to the employee benefit costs (Kwon, Hewitt, & Hein, 2013, p. 32).

This fact highlights the need for the businesses to consider health insurance benefits in their overall strategic goal-setting process and find ways to control benefits costs. This paper seeks to address the issue of health insurance benefit costs in real-life business settings. The impact of employee benefits costs on strategic goal setting and options to control costs are presented, along with practical examples, informed by literature review.

Impact to Strategic Goal Setting

Health insurance offered as a part of the benefits package impacts the strategic goal setting of the company in several ways.

Businesses add health insurance coverage as a part of their overall employee compensation strategy (Christianson & Trude, 2003, p. 358). Health insurance coverage is used as a tool that can help employers attract valuable candidates and retain their best employees. As such, health insurance benefits should be regarded as a reward and be aligned to business objectives (Kwon et al., 2013, p. 33). “Reward systems affect organizational performance and individual behavior largely through the impact they have on people’s beliefs and expectations about how they are and will be rewarded” (Hewitt, 2012, p. 68).

For a company to add health insurance as part of its benefits package, the company’s management has to decide what type of coverage will be offered to the employees, what ancillary benefits will be included, and whether health insurance will be provided to all employees, or individuals in specific positions or departments.

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The type of coverage implies general insurance, medical insurance, dental insurance, etc. The management is in a position to choose what types of expenses will be covered and when the coverage will begin. As a part of the company’s strategic goal setting, the health insurance coverage will impact the company’s compensation strategy by introducing health coverage as a tool to attract employees and as a part of the strategy to maintain high employee motivation and engagement. Also, due to the significant costs of health benefits, they will impact the financial strategy of the organization.

For the business to stay profitable and competitive, business owners will have to adjust their financial strategy to accommodate additional expenses, and develop cost-controlling mechanisms (Christianson & Trude, 2003, p. 359). Business owners are in a position to decide, what ancillary benefits, such as eye care or dental insurance will be included. Offering ancillary benefits may allow the company to gain a competitive advantage in the job market and attract employees with the highest market value.

On the goal-setting stage, businesses will have to decide what employees will be eligible for health benefits. Businesses may decide to offer health insurance to all of the employees or keep it as a bonus for top-performing or most valuable workers. Health insurance can be offered to top-performing employees in recognition of their contribution to the company’s performance.

A holistic approach to “assessing the level of contribution and therefore possible rewards” suggested by Armstrong requires the company not only to evaluate what employees are vital to the company’s operations but also to recognize current human resources shortcomings (2010, p. 177). Since a benefits package is not only a retaining tool but also a means to attract new, valuable employees, the company’s strategic goals may include the goal to attract top-performing professionals employing a comprehensive health insurance benefits package.

All of these nuances have to be considered in the wider context of the company’s payroll costs.

Controlling Costs

It is general knowledge that healthcare costs have been rising for the past decade, and offering health insurance can lead to a significant increase in the company’s payroll expenses (Danis, Goold, Parise, & Ginsburg, 2007, p. 236). Business owners have to calculate the appropriate amount of financing allocated to health benefits and implement cost-reduction strategies to improve profitability.

There are various ways businesses can control health insurance benefits package while being able to use it as a recruitment and retention tool:

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  • Adjusting employees’ wages to accommodate higher benefits costs. Successful implementation of the health insurance benefits package requires business owners to consider the profitability of such an effort. Businesses can keep total compensation unchanged by reducing wages and increasing compensation through health benefits. If such an adjustment process “occurs relatively quickly, increases in health care costs have only a minor, short-term negative impact on firm profits. (Christianson & Trude, 2003, p. 359).
  • Cost shifting from employers to employees (Danis et. al., 2007, p. 236). This cost-control strategy implies reducing benefits and offering high deductible plans. By shifting costs to the employees, employers may minimize the effect of rising healthcare costs.
  • Employee wellness programs. Such programs may include setting up a company’s gym or developing a smoke-free environment (Shope, 2004). If the employees are healthier, they are more likely to have lower medical expenses.

Practical Examples

Top-performing companies successfully implement health insurance benefits to attract new talent and retain their employees. One such company is Microsoft, which offers one of the most comprehensive health and wellness programs for its employees. Their health insurance benefits include not only general medical coverage, but also vision and dental care, physician house calls, free on-campus screenings and flu-shots, and 24-hour health line (Benefits and perks, n.d.).

While such health benefits provide great value to the employees, they also allow the company to control costs by educating its employees through health line and offering medical services directly at the campus. PricewaterhouseCoopers identified rising physician and hospital costs as one of the factors which contribute to high health benefits costs (Shope, 2004). Offering physician services on-campus allows the company to directly control the number of medical services offered to the employees.


Armstong, M. (2010). Armstrong’s Handbook of Reward Management Practice: Improving Performance Through Reward. London: Kogan Page Publishers.

Benefits and perks. (n.d.).

Christianson, J., & Trude, S. (2003). Managing Costs, Managing Benefits: Employer Decisions in Local Health Care Markets. Health Services Research, 38(1), 357-373.

Danis, M., Goold, S., Parise, C., & Ginsburg, M. (2007). Enhancing Employee Capacity to Prioritize Health Insurance Benefits. Health Expectations, 10(3), 209-305. doi: 10.1111/j.1369-7625.2007.00442.x

Hewitt, A. (2012). Total Rewards Survey.

Kwon, J., Hewitt, A., & Hein, P. (2013). Employee benefits in a total rewards framework. Benefits Quarterly, 29(1), 32-38. Web.

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Shope, D. (2004). Area Employers Get Advice on Lowering Health Care Costs.

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