Overview of the case
The case is about the findings of the president and CEO of Quality Auto Parts that profits and revenues of the company keep declining. The recent recession has made the situation worse, and the company seeks to contain the situation by reexamining its employees’ health benefit scheme.
After examining the scheme, the company found out that employee health benefits had gone up to twice the rate of increase for wages alone (8% yearly average increase) from 2000-2010. In particular, the total employee health insurance costs increased from $4,680 to $ 9,867 in 2010. The company, through the President/CEO expressed frustration at this development and was searching for a solution.
Background facts influencing the problem
Revenues and profits of the company do not normally have a regular pattern; they keep fluctuating. For example, from 1988 to 2000, they grew steadily until 2001 and 2002, when they went down. They then recovered and went up from 2003 to 2006. However, by 2007 it went down again. The company products were also affected by the ongoing economic recession, which began in 2008 and worsened the situation of business performance.
In a meeting attended by health care providers, insurers, employers, Windham, Schramm and DeCarlo sponsored by the Chamber of Commerce with a topic, “Implications of the health care reform legislation passed by Congress and signed by the President in Spring of 2010”, members learned that taxes on health benefits were to be increased which would make it expensive for employers.
Members agreed that it was in their mandate to control costs of health benefits; if not, the costs would be very expensive to the level of all corporations in the US by 2016.
Quality Auto Parts enjoyed a good reputation as a preferred employer, and DeCarlo was against any move which would spoil this reputation because it had enabled the company to attract and retain the best talents in the region.
Obstacles to the situation
The company cannot reduce employee benefits because such a move would demoralize employees and make the company fail to attract talented and even lose some of the existing employees.
In addition, the legislation passed by Congress, allowing the government to tax health benefits, made health schemes very expensive to employers.
The main problem Quality Auto Parts is facing is low profits and revenues, which the management has to address or close down the business. The main objective of private companies, Quality Auto Parts included, is to make profits and if they keep running at a loss, then they risk closing down as they will not meet their main objectives.
A related symptom arises from competitors who are selling their products cheaply, and the President thinks that their competitor’s low prices are a result of low salaries and cheap health policies they give their employees.
Limited understanding of the legislation passed by Congress and assented to by the President is another related symptom to the problem.
Evidence from the case that relates to each of the problems
The first evidence lies in the meeting with the topic; implications of health care reform passed by Congress and signed by the president of 2010. Those who attended agreed that the detail of the law was still unclear to most employers. They also revealed that it would make the cost of employee health care expenses to the employer. It was an expensive scheme because it led to large catastrophic-illness claims, increased use of mental health and substance abuse services, increased use of medical services, high-technology medicine, cost-shifting from government programs (Medicare and Medicaid) to private insurance, high physician fees, the AIDS crisis, the demographics of employees in the auto industry (i.e., a higher percentage of older employees), and recent premium increases by both traditional and managed care plans attempting to recoup recent losses.
Underlying causes
The existing economic recession was affecting business negatively, and managers of affected companies were doing their best to keep companies on their feet.
The wish to maintain the reputation of Quality Auto Parts as a preferred employer by not reducing employee benefits, including those of health, was also an underlying cause.
Linked related concepts and theory to the problem(s) and case evidence
The fact of the matter is that the company has not made any steady revenue and profit since 1988. The firm has taken a random pattern of growth frequented by declines in profits. However, the current performance could be related to the existing economic situation (Recession). The President is determined to increase profits by reducing the health benefits of employees and transferring them to customers through low prices for their products.
Evaluation of potential solutions
A proper evaluation of the four recommended solutions by DeCarlo reveals that none of the above solutions addresses the situation the firm is going through comprehensively. When compared to the status quo, one finds they are all expensive. The President’s reasoning is that by reducing the cost of employee health policy, the funds could be transferred to customers through cheap products. This is not workable, and even if the prices were reduced, the difference would be minor (Conaty & Ram, 2011).
Nature and causes of the employee health insurance cost problem
The employee health insurance cost problem is an economic one which arises as a result of the recession. Companies are struggling to remain on their feet and continue making profits as well by trying to reduce the cost of production, and one of the strategies to reduce it is to reduce the cost of labor (Merkle, 2005).
Information, the Employee Health Benefits Committee, should gather
The committee should seek workers’ opinions on this matter before making any recommendation. This is important because a decision arrived at without employee contribution is likely to lead to dissatisfaction and lack of morale. The committee should also read and understand congress’s legislation so that a final decision does not contradict the law.
The committee should also explore other ways of reducing the cost of production, and reducing workers’ health benefits should be the last option.
Is there any way for Quality Auto Parts to continue to attract the best employees while containing health benefit costs? Why or why not?
Yes, the company could implement an alternative pay system like paying workers according to how much they produce (Piece Work System). This will not only increase production but also raise the quality of production.
On the basis of what you know about Quality Auto Parts, which of the four specific proposals, would you be likely to recommend? Can the company adopt some combination of the three options? What do you recommend, and why?
Option 3: establish a special self-insurance fund and negotiate preferred provider arrangements (PPOs) with local providers (i.e., discounted prices in exchange for the directing of these employees to these providers).
I cannot recommend a combination of the options because this would not reduce the overall cost to the employer (Mayo, 1945). I recommend employees should be talked to about the changes to their health benefit programs before implementation to avoid silent grumbles among the workers. This would a conflict between employees and the company.
References
Mayo, E. (1945). Hawthorne and the Western Electric Company. Harvard: Harvard Business School.
Merkle, J. (2005). Management and Ideology. California: University Of California Press.
Conaty, B., & Ram, C. (2011). The Talent Masters: Why Smart Leaders Put People before Numbers. New York, NY: Crown Publishing Group.