Wanted: CEO for Turnaround. Private Jet and Great Benefits

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I got a call the other day from a head hunter looking for a new CEO.

“Look, I’m not going to lie to you.  Acirema Incorporated is a blue chip firm but it is in deep doo-doo.  The succession planning is pretty complicated so they are looking now for a CEO that can take over when the current CEO retires in 2016.”

“It seems sort of far off but okay, what’s the deal?”

“It’s a classic turnaround.” He chirped enthusiastically. “The firm is essentially bankrupt and needs a strategy to get back in the black.  The company is spending about a third more than it is generating in revenues.  The line of credit with the bank is strained and getting worse as the firm comes close to violating some of the very liberal banking covenants.  The expenses are running over from two poorly conceived overseas joint ventures and a debt refinancing that went south.  The rest of the money goes to finance active and retiree benefits and pensions, new products, customer services and interest on debt the firm has borrowed.”

His voice got low and he was whispering into the phone.  “ I shouldn’t be telling you this but these guys have about an 8:1 debt to earnings ratio – which is alarming – but the bank that holds the debt has given loose terms and has not raised too much concern about the potential for default.  Acirema has a problem looming with its pension and retiree medical benefits as the CFO made bad assumptions about how much money they would have in the future to pay for commitments to current and retired workers.  Investment yields have been bad and the lower returns mean fewer dollars to pay without dipping into principal.  They now realize they made a massive accounting error when they assumed people would draw only three to four years worth of benefits before dying.  The average worker is now receiving benefits for almost thirteen years – six times what Acirema budgeted.  The new CEO is going to have to fix that.”

“How?” I asked

“That’s why they pay you guys the big bucks, I guess.  I’m just a head hunter on a commission.”

He continued having memorized the entire terms of reference. “So, the firm is underfunded in its medical retirement plan to the tune of almost twenty-five times our annual revenues.  Management can’t honor these commitments with the union and the new CEO is going to have to break the news to the collectively bargained groups who may threaten to strike.  There’s a lot of waste – endless committees and departments.  You can work at the firm twenty years and retire and get 90% of your former salary as a pension.  You can then come out of retirement and get a new salary AND your pension. It’s crazy.”

“Jesus” I said.

The recruiter laughed. “We wanted to offer him the job but could not find his number. Your two predecessors have really messed things up. Revenues are down and many want to raise the price of company services and cut the stock dividends to shareholders but management is not sure if shareholders will go for it.  If they don’t raise revenues, they have to cut dividends deeper and lay off staff.  Acirema is heavily unionized and cutting expenses could create huge problems – even an industrial action.

The board of directors is dysfunctional and divided.  The truth is they have never made money – only made a profit five times in fifty years – but the firm is deeply respected and has done more to influence our industry in the last two hundred years than any other peer.  The board has a low approval rating from our shareholders but they keep reelecting them.  We need a Chairman and CEO that can lead.

Shareholders don’t have a realistic understanding of the economics of the industry in which the firm is now entering.  The next phase is the proverbial “Fourth Turning” – an unraveling phase that precedes a winter crisis that will eventually open up everyone’s eyes to the need to change.  Whoever joins the firm as CEO in 2016 will most likely be grabbing the helm right when the wind is at gale force and the barometer is dropping.”

“Wow, Mrs Lincoln! ” I said sarcastically “Other than that…”

“Here’s the good stuff: The job pays $400k a year plus a $50k expense account. You get to use the corporate house for free and we have a luxurious, multi-acre estate  that is available to you for meetings and weekend getaways.  You get $200k as an annual lifetime retiree benefit.  The firm will give you use of the private jet and helicopter and unlimited vacation – although you will probably never take much.

Now I won’t lie to you.  It’s not for everyone.  You have to be ideologically strong and determined with the unions, employees, shareholders and the board.  Your job is to break up cartels of indecision, pay down the debt, create a blue print for 4% growth and do not let your competitors turn you into a silver medalist role in the industry. It takes guts, charisma and a slightly masochistic personality. What do you say?”

I did not have to think long.  “It sounds like a great opportunity but I am not sure anyone could fix that firm.”

He sighed. “Yeah, that’s what everyone else has said.  You’re the four hundredth guy in the private sector I have called.  No one wants to touch this one.  Could you give me any names?”

“Well”, I said.  “You need someone who will break eggs and not care about making friends. This requires a benevolent dictator.  A “Fourth Turning “ leader is less of a visionary and prophet and more of a commander and tough guy.  I’m too empathetic and right brain. You need a Lee Iacocca.”

“Hey, not a bad idea.” The recruiter said. “He’s still kicking, isn’t he. Do you have his cell number?”

Okay Dad, Hand Over The Credit Card!

English: Federal Debt Held by the Public by U....
English: Federal Debt Held by the Public by U.S. Presidents and party control of Senate and House, 1901 to 2010; source for debt data is Congressional Budget Office, “Federal Debt and the Risk of a Fiscal Crisis”, July 27 2010, http://www.cbo.gov/ftpdocs/116xx/doc11659/07-27_Debt_FiscalCrisis_Brief.pdf (Photo credit: Wikipedia)

The front door slams and a man with graying hair looks up from his book over rimmed glasses as he sits in an adjacent room. A young woman in her early twenties drops a duffel bag on the wood floor of a well-lit foyer.

Father: You’re home! How’s grad school?

(The girl looks irritated and says nothing)

Father: What’s wrong, baby?

Daughter: (The girl hesitates and then holds her hand out in front of him) Okay. Hand it over!

Father: What are you talking about?

Daughter: The credit card. You and your kick-the-can-down-the-road generation have bankrupted my future. (The girl drops a NY Times on the coffee table and becomes sarcastic) It says in here that the Fiscal Cliff has been averted. Ha! They might as well have announced that the Easter bunny is real. I just finished Michael Lewis’ Boomerang and Strauss and Howe’s The Fourth Turning and I’m depressed.

Father: Haven’t got to those books yet. Since November, I have turned to Merlot and escapism. I’m reading a bestseller about the 16th century. (Pointing to the newspaper, smirking) Cheer up! The Paper reports that the fiscal cliff is a bunny hill and Paul Krugman says spending our way out of the deficit is the only path back to prosperity. I hear Barney Frank may come out of retirement.

Daughter (looking incredulous): Are you kidding me? They only agreed to delay the debt ceiling discussion for 60 more days. Then they are going to ask Congress to raise my credit card limit. Even if the president got all the taxes he wanted, he’d have raised what, $80B of revenues? Where’s the other $15.92 Trillion going to come from? Government made a bunch of promises back in the 1960s in the form of Medicare that they no longer can keep. We’ve known it for a while, but we are hiding it like Enron. If the US government was a public company, the executives would be in jail for accounting fraud and the country would be in receivership. In the real world, you don’t pay as you go! There is bi-partisan dishonesty about the budgets and how dire our situation is. There is a deficit, all right. It’s a deficit of honesty, vision and courage in our public officials and it’s a deficit of public willingness to accept responsibility for managing a problem that has landed in their laps. Winter has arrived and you jerks keep spending the next few generations’ money to avoid a few cold nights.”

Father: It’s not us. It’s that damn Obama. He has created more debt in the last four years than all the Presidents that preceded him. He passed socialized medicine and now he wants to raid Medicare to pay for it. He’s added at least $7B of public debt and he wants to raise the debt ceiling and spend more money. He’s never worked a day in the private sector and can’t balance a lemonade stand.

Daughter: Dad, get real. The guy inherited a nightmare and a constituency that can’t face reality. This is about facing the fact that our healthcare system is broken and literally sinking the country. At some point, no one will lend you money. Congress and the White House have never shown fiscal discipline. We have recorded a budget surplus just five times in the last fifty years. Four of the surplus years came together from 1998-2001, President Bill Clinton’s last three years in office, and President George W. Bush’s first year in office. By the way, our publicly stated debt counts only current cash obligations. The real debt we are facing is more like $75 trillion dollars because we’re not adding in $45T in underfunding for Medicare. Every politician knows this but it is a radioactive secret. Both sides keep up their “Medi-Scare” rhetoric because they want support from retirees who fear they will lose benefits. Face it, Medicare is the biggest single drain on our budget and we have to deal with it.

Father (getting mad): There’s no damn way I’m going to let them raid Medicare to pay for nationalized Obamacare.

Daughter (smiling condescendingly): Dad, Medicare is unmanaged, fee for service, nationalized healthcare. The government controls Medicare costs by rationing reimbursement to doctors and cost shifting to the private sector. It’s the greatest generational rip-off from young to old in the history of the country. Medicare was established when there were 16 workers for every retiree and the average life expectancy was age 68. In 2030, we will have only two workers for every retiree and will have 80 million retirees, four times as many as today. The math does not work. Social Security is not the problem. We have to cut Medicare and make some tough decisions about how we deliver care in the last few months of life.

Father ( getting angry): Oh, now you want to euthanize me and your mother? This is not about Medicare. It’s about a socialist President who wants to redistribute wealth. We need to elect some fiscal conservatives. The Dems won’t make tough decisions. They are give-away artists who pander to Unions, illegal immigrants and anyone who feels they have gotten a raw deal. The GOP needs to win back the White House.

Daughter: Dad, don’t hold your breath. Try running on a platform of fiscal austerity when the new majority is being told that there was a big party from 1998-2008 that they did not attend but that they must now pay for. The demographics in America are changing and a large enough percentage of the GOP’s base has seen their standard of living decline that they have begun to identify with moderate Democrats joining an increasingly heterogeneous group of pro-Democratic voters. The GOP has not been able to convince non-Caucasian voters that they would benefit under their leadership.

Father: Jesus, you’re depressing. Do you have any good news to share?

Daughter: I’m taking Mandarin and I have a summer internship with an Indian microfinance firm that is trying to expand into China and Africa.

Father (trying to appear encouraged): Well, that’s great. Although it sounds like you are going to have a hard time finding a good cheese burger. (Looking bemused) My kid’s going to have to immigrate to another country to find a decent management job.

Daughter (hugging her father and laughing): Not necessarily. We just have to show the resolve to confront healthcare spending and the weight of our entitlement obligations. If we do that, we can be competitive as a country. The way I see it, we have four choices: default on our debt, raise taxes that only delay the day of reckoning and slow down our economy, create a centralized rationing regime in the form of a single payer healthcare system or migrate to a defined contribution premium support model where people receive help buying public or private insurance. I don’t think we want number one or two. So that leaves three or four. We’ve got to get honest – fast and (looking stern at her father), we have to cut up your credit cards.

Father (grabbing his daughter’s bag): How in the hell did you get so smart?

Daughter (smiling and putting her arm around her father): Four years of economics. I have your ear for BS and Mom’s ability to balance a checkbook.

Father (nudging daughter with shoulder): So, you going to tell me who you voted for in the elections?

Daughter (grinning): Ron Paul, I wrote in

Father (making a face) : That was a wasted vote

Daughter (pretending to look offended): Hey, last time I checked, this was still a Democracy.

Alice in ACA Wonderland

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ImageAlice: Cheshire-Puss, would you tell me, please, which way I ought to go from here?

Cheshire Cat: That depends a good deal on where you want to get to.

Alice: I don’t much care where.

Cheshire Cat: Then it doesn’t matter which way you go.

Alice: —So long as I get somewhere.

Cheshire Cat: Oh you’re sure to do that if you only walk long enough.

Lewis Carroll, The Adventures of Alice in Wonderland

2013 has arrived and employers now find themselves on the other side of a looking glass facing the surreal world of healthcare reform and a confusion of regulations promulgated by The Accountable Care Act (ACA) and its Queen of Hearts, HHS Secretary Sebelius. Many HR professionals delayed strategic planning for reform until there was absolute certainty arising out of the SCOTUS constitutionality ruling and the subsequent 2012 Presidential election. They are now waking up in ACA Wonderland with little time remaining to digest and react to the changes being imposed A handful of proactive employers have begun, in earnest, to conduct reform risk assessments and financial modeling to understand the impacts and opportunities presented by reform. Others remain confused on which direction to take – uncertain how coverage and affordability guidelines might impact their costs.

If reform is indeed a thousand mile journey, many remain at the bottom of the rabbit hole – wondering whether 2013 will mark the beginning of the end for employer sponsored healthcare or the dawning of an era of meaningful market based reform in the US. HR and benefit professionals face a confusion of questions from their companions – – CFO’s, CEOs, shareholders and analysts.

How will reform impact our business? Will we take a hit to earnings as a result of penalties or the cost of having to expand coverage? Have we reviewed our strategies for modifying our employment practices to mitigate coverage risks? How will we offer benefits in 2014 and beyond? What financial and coverage considerations should guide our ultimate decisions? Do we think we can manage our healthcare costs to low single digit levels of annual medical inflation? Do we have the right funding strategy? What are our competitors likely to do?

It seems that questions only lead to more questions. For many, the future is less certain and for a few doomsayers, ACA is the final chapter in a narrative about a world of entitlements gone mad. Like Alice, benefits decision makers are asking, “Which way should we go?” – – to which the historical response for employers has been: “follow the path of least disruption”. Yet, ACA has set a new normal in motion and with it, the historical axioms of “do no harm” will no longer work in benefits management. There is no path to achieve the holy grail of affordability that does not carry some risk of delay, disruption, confusion and/or increased administrative complexity. The decisions one makes for 2013 will have an impact on costs and plan participation in 2014. It’s time to get moving but you’ll need some advice to safely cross Wonderland:

1. Think like a risk manager – Any risk management professional has been trained to first review risks, evaluate risk drivers, eliminate or mitigate the identified risks and find the most advantageous way to finance the risks. The roadmap to ACA compliance requires similar planning. Equipped with payroll, coverage and actuarial plan value estimates, any employer can quickly determine what, if any, penalties they may face associated with offering unaffordable or inadequate benefits to eligible employees. Once the risk is assessed, you can explore safe harbor and limited penalty scenarios as well as financing solutions designed to direct participants toward “win-win” scenarios that achieve savings for the employer while helping lower paid workers become eligible for more generous federal subsidies.

2. Strategy first, structure second – Planning for reform means understanding where you want to go. Do you believe providing healthcare is an essential part of the social contract between you and your employees? Are your business conditions changing – causing you to rethink what you offer to employees and how you pay for their benefits? Are higher per capita healthcare costs requiring you to think differently about providing compensation, benefits and retirement? Your total compensation strategy may require you to think differently about the road ahead. You may want to tie annual medical premiums to profits through a defined contribution approach. Strategy is essential. It dictates your direction and enables speed. Without it, you are merely running through the forest, hoping to find a path.

3. The reform roadmap requires you to either “play” or “pay” – While certain industries such as retail, manufacturers, hospitality and agriculture are already calculating the additional costs associated with reform, other employers are finding that they satisfy many of the requirements dictated under reform.

Most firms over 100 employees generally offer medical coverage that meets or exceeds ACA coverage and affordability requirements for the majority of their employees. They have little exposure to penalties. However, these same firms are plotting the coordinates of how reform may change the way they think about financing and offering medical benefits. If the Y axis of reform is “Play” (some version of employer sponsored healthcare) and the X axis is “Pay” (electing to pay a penalty either as a result of failing to meet affordability or coverage requirements), employers have a continuum of choices that range from Maximum Play (Cover All Eligible Employees) to Minimum Pay (Drop Coverage, Pay Penalties, Don’t Gross Up People For Lost Coverage). Each direction requires careful planning and an eye toward discrimination and coverage regulations dictated prior and post reform. One thing is clear: there is more than one way to navigate the Affordable Care Act.

4. Don’t feel guilty about reviewing pay or play scenarios – Reform gives any employer a rare opportunity to reexamine their employee benefits strategy. Management has a fiduciary responsibility to explore all the alternatives presented when business or public policy changes. There are obvious risks to course corrections that may steer you away from traditional employer sponsored insurance. They include the inability to attract and retain talent, effects on employee morale and one’s public image in the community. While over 85% of employers surveyed by the International Foundation of Employee Benefits confirmed their intent to continue to offer coverage, many are privately considering a different future. In the last two decades, employers have simply failed to rein in healthcare costs and have been stuck in a perpetual rut of health plan renewals that start with double digit increases and end with the shifting of costs to employees in the form of higher contribution requirements, reduced benefits or lower wages that arise out of lower profit margins eroded by health spending. The question remains: have you really tried to change? Reform will either happen for you or to you. It is essential that you openly discuss every alternative and that you have a robust multi-year dashboard that holds all stakeholders accountable to achieving low single digit medical trends.

5. Wellness is vital for any employer who desires to continue to offer sponsored plans: ACA offers expanded wellness incentives to employers who aggressively embrace health management improvement. If an employee chooses not to participate in an incentive based wellness plan, it remains unclear whether the act of having to pay a higher premium would make the employee eligible for a public exchange subsidy. Assuming that those who choose not to participate in wellness incentive plans are more likely to be less engaged employees, it stands to reason any employee that opts into a public exchange to avoid the accountabilities of a wellness based incentive plan could help an employer sponsored plan improve its own risk profile.

6. Understand public exchange benefits: Private insurers participating in heavily regulated public exchanges will be under intense political pressure to keep costs down. States and HHS have publically noted that double digit annual premium increases will be viewed as “egregious”. Most open access PPO plans continue to be plagued by double digit medical trends. It is likely that while community rated public exchange plans may actuarially mirror private plans, they will attempt to incorporate more stringent medical management controls such as mandatory primary care gatekeepers, narrower PPO networks and aggressive preauthorization oversight to limit overconsumption, fraud and abuse. Additionally, community rating will shift more premium cost to younger employees as age/sex rate bands limits exchange insurers ability to spread premium burdens to older participants. To the degree an employer is actively pushing employees toward a public exchange, the employer must understand that cost and coverage will not mirror private plans. The rules governing healthcare in the public exchanges may comes as a shock to previously coddled private insured patients while it will be a relief to the uninsured.

7. Defined contribution (DC) plans are a way to redistribute costs, not a path to improved affordability: If you do entertain the notion of migrating to a more defined contribution approach for employees, be certain to understand your options can range from a cafeteria style plan using a single insurer supported by on-line decision and enrollment support tools to a third party private exchange where employees are offered an annual stipend and a range of insurer choices. Cafeteria plans have been available since the early 1980s. Many of these plans failed because of their inability to simplify complicated administration and the natural adverse selection that arose when younger, healthier employees chose lower priced coverage options and redirected premium that might have helped offset claims into the purchase of alternative benefits. Choice will always help reduce employee heartburn when confronted with rising costs. People tend to value those benefits that they can choose for themselves. In the case of a single carrier defined contribution plan, the employer remains active as plan sponsor but has the ability to fix annual contributions while offering employees a greater range of medical and ancillary benefits choices. In the case of multiple carrier private exchange, the employer allows the group to fragment as insurers compete for participants. In these instances, it is more likely that an employer becomes an even more passive financial sponsor, defining annual subsidies but over time becoming less concerned over issues arising from excessive utilization, lack of engagement or rising costs. In a future dominated by DC plans, affordability becomes the employee’s problem.

DC is a cost shifting strategy. If plan costs grow at historical trends, employees will become increasingly disgruntled at the eroding value of the benefit dollars they receive to purchase benefits in the private exchange. Without active efforts to control costs, private exchanges will experience a similar limited life expectancy to the myriad unsuccessful state and private group purchasing based arrangements that have preceded them. Despite the risks, some industry experts view the move toward defined contribution medical plans as inevitable and a logical migration similar to the path taken by defined benefit pension plans toward the 401k savings plan.

Some firms will be intrigued with the notion of private exchanges as they allow management to refocus their energies on other strategic human capital priorities. There is increased recognition that national insurers are engaged in synchronized swimming with similar networks, unit cost contracts, and administrative services pricing. Some analysts believe that offering the choice of multiple insurers in a private exchange reduces employer leverage, undermines the ability to self insure and leads to the inevitable deconstruction of employer sponsored healthcare.The path through ACA Wonderland will invariably require crossing the bridge separating defined benefit and defined contribution plans.

8. Self-insurance is 20/20 vision– Health reform includes assessments that stakeholders will pass on to commercially insured and self funded plans. The preservation of group fully insured policies are essential to insurers profit models. The opaque practice of pooling fully insured risk often lead to the overcharging of employers. Many fully insured plans already contain inflated margin, administration and reserve charges as well as hide inflated broker remuneration. For employers under 300 lives, many insurers do not divulge paid claim data that might help an employer better direct their health management strategies. Despite ACA capping an insurer’s overall allowed loss ratio at 85% for their entire block of 50+ life insured accounts, any individual client can still run well below an 85% loss ratio and they may never know it. Self-insurance remains the most efficient method of financing healthcare – provided an employer understands its risk tolerance. Self-insurance, if structured correctly, can limit financial risk while maximizing transparency. Transparency leads to increased competition leading to lower costs. We estimate that post reform, an employer that chooses to self fund may avoid as much as 4% to 8% of additional expenses arising out of ACA insured plan fees, state premium taxes, margin loads for increased risk arising from compliance, the cost of complying with state mandated benefits and the lost opportunity cost arising out of one’s inability to understand what one’s true loss ratio is when negotiating a renewal.

Which way? The road through Wonderland will be serpentine and fraught with blind corners, misinformation, and strange characters. The future of employer sponsored healthcare and market based reform hinges on which direction employers choose to move. Those that understand where they are today and move with a blend of caution and resolve have a higher probability for making it through the looking glass. For those who remain behind, irritated by the hassles imposed by reform, the future will be considerably more complex. Will we eventually navigate this upside down world of regulation and change? Oh yes! But you have to first decide if you are looking for a way forward or a way out. How long will it take to arrive?

That will depend on whether you know where you are going…