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Flexible Benefits

Large pharmaceutical firms are finding it cost-effective to offer greater flexibility

January 17, 2005 | A version of this story appeared in Volume 83, Issue 3

Big pharmaceutical companies are famous for offering big employee benefits. In 2004, seven of the top 10 pharmaceutical firms showed up on Working Mother's 100 Best Companies. Merck and AstraZeneca made Fortune magazine's top 100, and every single one of the top 10 pharmaceutical firms (Abbott, AstraZeneca, Bristol-Myers Squibb, GlaxoSmithKline, Johnson & Johnson, Merck, Novartis, Pfizer, Roche, and Sanofi-Aventis) made Science magazine's 2004 list of 20 best employers for scientists.

Competition among the largest pharmaceutical firms, both for employees and for top ranks in these lists, has only encouraged the practice of offering the latest health help, work/life balance tool, or retirement savings resource. In addition to generous insurance, leave, and compensation packages, other perks, such as on-site fitness and medical centers, are common in big pharma. At some research campuses, employees can even drop off dry cleaning; get the car's oil changed; and buy a subsidized healthy take-home dinner, kiddie toy included.

Such generous benefits packages are partly the result of the economic boom of the 1990s, says Kimberly P. McDonough, chief executive officer of Advanced Pharmacy Concepts, a firm that consults on pharmacy and benefit issues. Competition for workers was tight then, and firms could afford to spend generously on attracting and retaining their employee base.

But the economy has slowed down considerably since the '90s. Employees aren't as hard to come by, the cost of benefits is spiraling upward, and the number of retirees (usually large drains on benefits funds) is expanding.

Health care costs--driven in large part by rising prescription drug prices--have become especially hard for employers to bear. On average, says Jill Mueller, vice president of human resources in the pharmaceutical products group at Abbott Laboratories, health care costs twice as much as it did six years ago.

McDonough sees many companies, not just those in the pharmaceutical industry, increasing copayments and employee contributions to health care. Some firms have switched from flat copays to employee contributions that are a percentage of the real cost. And a few, especially small companies, have dropped services such as prescription drug coverage altogether.

TO ADDRESS rising health care costs, large pharmaceutical firms have focused on getting the best quality for their dollar and offering preventive care options to avoid the need for expensive emergency care later. Partly for philosophical reasons, pharmaceutical companies have done their best to retain generous health and wellness services. They have also continued to provide good prescription drug coverage. "Prescription drugs are a necessary component of treating health and treating illness," says Pat Bennett, director of benefits in human resources at Roche Palo Alto. "We address rising health care costs, but we do not single out prescription drugs."

Copays, though, have certainly gone up. At Merck this year, copays under their flexible benefits program went up $1.00 to $5.00 for generic prescription drugs and up $3.00 to $15 for non-Merck-brand prescription drugs. (Merck drugs are free to employees. Most pharmaceutical companies offer company drugs free to employees.) Yet Jan Kelly, director of benefits planning and research at Merck, says those copays are still "very, very competitive." According to a Kaiser Permanente study performed in 2003, average copayments for prescription drugs were $9.00 for generics, $17 for brand name drugs with no generic equivalent, and $26 for brand names with a generic equivalent.

At one top pharmaceutical company, instead of a flat copay, the employee pays a percentage of the cost of the drug: 15%, with a minimum of $10 and a maximum of $100.

Pharmaceutical companies are also encouraging the use of preventive care. Roche Palo Alto offers employees an optimal health program, including instructor-led fitness classes such as aerobics, cardio kickboxing, and yoga; life-safety programs such as CPR/first aid training; weight reduction and stress management tools; and flu shots. The company also has a 24-hour on-site gym with personal training, massage therapy, on-site dental care, and an on-site medical clinic with health care consultation and referral services. The company sponsors sports teams and is located on a 70-acre campus with walking and biking trails.

Merck makes sure that every flexible benefit health care plan option covers certain basic preventive services. "For example, well-child care to age six is covered under all of our benefit options," Kelly says. Merck also provides many educational tools for employees to pick high-quality, efficient health care. "We do believe that quality care will prove to be the more cost-effective care in the long run," Kelly says. Merck has incorporated an online tool from Aetna that helps employees choose physicians with good track records of "both efficiency and attaining certain clinical thresholds. We don't want our employees selecting on price alone. We want them thinking about the quality."

Some firms are offering workers more flexibility in choosing what is best for their families and rewarding an efficient use of benefits. One firm, for example, gives each employee a certain amount of benefits credits. Those credits can be used for a whole range of services, including different levels of coverage in medical insurance, life insurance, dental insurance, long-term care insurance, financial planning services, and medical spending accounts. Employees can choose comprehensive coverage or a bare-bones plan depending on how many credits they want to spend. If the benefits that the employee chooses "cost" more credits than the employee was given, the difference comes out of the employee's paycheck, on either a pretax or after-tax basis. If the benefits cost less, then the employee gets a higher paycheck.

THE PROSPECT OF large numbers of retiring baby boomers straining pension budgets has also led to a few adjustments in some pharmaceutical firms' pension plans. Abbott's Mueller says that, in 2004, to keep Abbott's annuity retirement plan "strong and viable," Abbott simplified and reduced the basic pension formula for future service, removed incentives for early retirement, and increased the early retirement age from 50 to 55 (for employees hired after 2003).

But none of the top 10 pharmaceutical firms has discontinued its company-funded pension plan. And most of them have a competitive employee savings plan supporting 401K investing. They are expanding their investment options for 401K accounts and, as federal law allows, increasing the amounts that employees are allowed to contribute.

Merck salaried employees can invest up to 25% of their income in a 401K, and Merck will match 75 cents on the dollar for the first 6%. Merck's contribution vests immediately, meaning that an employee doesn't have to work at the firm for a certain amount of time before that money drops into his or her retirement account. Pfizer and AstraZeneca also offer matching contributions that vest immediately.

At Roche Palo Alto, the company contributions don't vest immediately, but the firm matches the first 5% of an employee's income, dollar for dollar, after four years of employment. The match starts at 50 cents per dollar after the first year of employment and escalates to a full match at four years.

In addition to supporting retirement investment, some companies are looking at other ways they can support the workforce that will remain when baby boomers leave. "With baby boomers nearing retirement," Abbott's Mueller says, "the U.S. will experience a 'middle manager shortfall' with as many as 10 million managers retiring by 2010. To address this gap, companies need to attract, recruit, and train generation X and generation Y workers to be the next generation of leaders. These companies are learning, however, that generation Xers and Yers really value flexibility options. To address this need at Abbott, we've implemented flexible work programs that have resulted in a 40% participation rate among our employees."

When Abbott's CEO, Miles D. White, took over in 1999, he invested in "new people programs," including a child care center, more adoption assistance, and more tuition reimbursement.

Four days a week, Abbott employee Barth drops off her daughters, Katie (three) and Kylie (one), at the firm's on-site child care center.
Four days a week, Abbott employee Barth drops off her daughters, Katie (three) and Kylie (one), at the firm's on-site child care center.

JILL BARTH, manager of pricing accounting in the pharmaceutical products division, says many of Abbott's work/life programs have made life easier for her and her family. When Barth adopted her first child six years ago (after working three years full time at Abbott), she started working part-time: three days a week at the office and an extra half-day at home. Her managers have been supportive of the reduced workweek, and she recently earned a promotion at Abbott.

For both Barth's first adoption and a second adoption, she and her husband, John, took advantage of Abbott's adoption assistance program, at the time $2,500 per child. When they adopted their third child, the company's assistance had gone up to $10,000.

Although Barth didn't take advantage of the two weeks of paid leave for travel associated with new adoptions, Abbott offers this benefit along with a 24-hour lactation consultation service and breast-pump and formula discounts.

Shortly after the new on-site child care center, the Center for Child Development, opened in 2001, Barth enrolled her children. Barth has been very pleased with the quality of the center, one of the largest in the U.S. In addition to learning about the letter A, her three-year-old is taking a yoga class. "And when I'm done with work, in two minutes I'm there with them," Barth says.

To accommodate her six-year-old's new schedule at kindergarten, Barth recently changed her schedule to four shorter days at the office. For the past six years, Abbott's flexibility and family-friendly services have "really allowed me to have a great obtainable work/life balance," Barth says. "If Abbott wasn't flexible, and if they didn't have the day care center, I think my family would have suffered. Right now, I feel I have the best of both worlds, because I can have a fulfilling career and I can have a fulfilling family life and feel like I am spending enough time at both places."

At Merck, providing flexibility is also an integral part of the benefits package. Merck has long offered flexible work options, but in 1997, "we realized that it was working really well in some areas of the organization and not so well in other areas," says Olga Beattie, manager of work/life effectiveness at Merck. The company brought in a consultant, and based on the consultant's report, Merck overhauled how they managed flexible work programs. The firm made sure that flexibility made business sense and increased resources for employees to take advantage of it.

Merck now has a website with a job-share database and an online request form that employees can use as a template for developing a formal proposal--a business case--for their flexible work arrangement.

According to the National Compensation Survey performed by the U.S. Department of Labor, only six out of 10 workers in the U.S. had access to medical care and retirement benefits in 2003. Employees at large pharmaceutical companies are faring much better. While benefits at big pharmaceutical firms are changing as health care costs rise and baby boomers retire, not all of the changes have been cutbacks. In fact, some large pharmaceutical companies have succeeded in offering new and timely benefits for the changing needs of today's worker.



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