10 February 2014


This story first appeared in Bloomberg Businessweek.

AOL Chief Executive Tim Armstrong ruffled more than a few of his employees’ feathers when he disclosed this week that two AOL workers’ “distressed” babies had whacked the company with $2 million in medical bills.

The costly children were cited—along with more than $7 million in costs from the Affordable Care Act—as the reason AOL changed its 401(k) account match to an annual lump sum payment. Workers who aren’t on the payroll at year’s end will forfeit AOL’s 3 percent matching contribution to the accounts. IBM made a similar change in 2012. If you plan to quit, management thinking goes, forget about collecting our share of your retirement savings.

Many employees didn’t react well to either bit of news, according to news reports. First, there’s the financial blow to workers, who will lose 401(k) funds if they leave AOL, as well as miss the opportunity to have the company’s match bolster their financial returns over a full year. There’s also the shock that accompanies hearing your boss tag a colleague’s difficult pregnancy and her newborn child as the reason your retirement plan was cut.

Why did two babies with special medical needs cost AOL $2 million? Most large employers are self-insured for their workers’ health coverage, given the savings such plans can yield over traditional group insurance. Self-funding means that an employer pays for health care rather than buying an insurance policy for their workers. Such plans now cover 60 percent of private-sector workers with health insurance—an estimated 100 million Americans. Financially, self-funding is practically a no-brainer if you have 1,000 or more employees, given the dramatic surge in U.S. health-care costs. The “law of large numbers” takes over and big employers’ annual medical expenses can be projected with relative precision, says Jon Trevisan, a senior vice president at Willis North America, an insurance brokerage that consults with employers on health coverage.

It’s not clear what kind of health plan AOL has; but with 4,000 employees, the company is likely self-insured. The company declined to comment Friday on that subject or the CEO’s remarks. Armstrong declined an interview request, an AOL spokesman said.

Given the astronomic costs that a heart attack, premature birth, or cancer can inflict, some self-insured companies purchase what are called stop-loss products to limit their financial exposure. Those limits can kick in for an individual employee’s claims beyond a certain level, or for an entire employee group in aggregate. Once a company has a certain number of employees, however, stop-loss insurance products may not make financial sense given the general predictability of workers’ typical annual claims, Trevisan says. But whether their worker pool warrants stop-loss coverage is a matter of executives’ risk tolerance as much as actuarial and cost-benefit analyses. Some companies may be comfortable forgoing stop-loss coverage for 3,000 workers, while others with 10,000 or more may decide to buy it. “It depends on the risk tolerance that a company has,” Trevisan says. “At the end of the day, it’s about how comfortable the employer is in assuming risks.”

AOL, the parent of the Huffington Post news site, is a media and Internet company with a workforce that may be younger—and healthier—than most employers’. If so, its annual claims could be even more predictable than a more age-diverse employee pool. That could argue against buying pricey insurance products to limit catastrophic claims—but it could at times lead to a $1 million baby bill.

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