Why Employee Benefit Plans Are Likely to Be Retained Amid the 2023 Budget Squeeze

Entering 2023, compensation and benefits teams face a critical test: how to offer competitive total rewards to attract and retain core talent amid economic volatility, while also dealing with the practical constraints of tightened budgets.

This tension is reflected in research from multiple organizations. A survey of 500 U.S. employers by Principal Financial Group found that although 70% of respondents believed a recession could arrive mid-year, 52% still said they would not cut current benefit levels, and 58% said they would not reduce salaries. Notably, smaller employers were more inclined than larger ones to maintain existing investments.

Cost control has long been a priority for benefits managers, and Regina Ihrke, leader of WTW's North American wellbeing business, said 2023 is no different in that regard. WTW survey data from last September shows that more than two-thirds of U.S. employers plan to make controlling healthcare costs a top priority over the next three years.

Ihrke pointed out that the core question is: "How do you build the best possible benefits program within the limits of your budget?" To answer this, employers need to ensure their benefit offerings address employees' most pressing needs—from mental health to financial security to preventive care—while also securing executive-level understanding and support for the relevant strategies.

Making the case for benefits budgets

Tony Guadagni, senior director of the HR practice at Gartner, said that in early 2023, benefits teams are especially focused on the latter part of that strategy. Companies generally expect this year to be more "cost-constrained" than previous ones, but benefits are a function where cutting costs is difficult.

"Providing benefits typically doesn't get cheaper over time," Guadagni said. "In fact, it's the opposite. Reducing costs in this area is quite challenging."

Healthcare alone is hard to reduce in cost. Employers may be accustomed to annual increases in healthcare costs, and 2023 seems likely to continue that trend. Results from a Mercer survey of U.S. employers released in December show that healthcare benefit costs are expected to rise by an average of 5.4% in 2023, compared with an actual average increase of 3.2% in 2022.

Ihrke noted that some organizations can attribute cost inflation to deferred care accumulated during the pandemic, which has led to an increase in high-cost claims. She said she has not seen many employers responding to rising costs by shifting them to employees: "That's really not a common strategy we see."

Instead, Ihrke observed, employers are working to purchase benefits more wisely and link plan design to higher-quality healthcare provider networks. She added that if cost-shifting does need to be attempted, employers might be able to do so without disproportionately burdening lower-income employees.

Ellen Kelsay, CEO of the Business Group on Health, said in an email that employers are also seeking to strengthen preventive and primary care areas, such as vaccinations, cancer screenings, and ongoing management of chronic conditions.

Guadagni said that in his conversations with employers, there has been little discussion of cutting healthcare benefit contributions. "Healthcare contributions are an extremely important part of the employee value proposition," he said. "When it comes to retention factors, relationships and core healthcare benefits often have the most impact."

Going beyond spending numbers to show ROI

Even though executives recognize the value of certain benefits, justifying spending remains a practical need. Ihrke mentioned that she recently spent five hours with a technology industry client discussing the return on investment (ROI) and value of various benefit programs. Although such conversations can be difficult, benefits teams should not shy away from ROI, because there are many ways to demonstrate this metric.

"ROI isn't entirely about money," Ihrke said. "It's also about: 'Does the service I'm providing fill a gap in the system? Do employees value and need it?' Sometimes these services reach only a small segment of the population. Only 1% use it, but for that 1%, the value is extremely high."

This is especially applicable to solutions that fill gaps in existing medical plans. For example, Ihrke noted strong employer investment in virtual care solutions covering areas such as musculoskeletal health, diabetes management, and mental health. These solutions may offer services that did not previously exist, helping employees better manage disease and control their conditions, which in turn can improve productivity. However, these services come at a cost, and the healthcare savings they generate can be difficult to calculate precisely.

"There are also programs where we clearly say you must invest," she added. "We're honest—you may not see a direct ROI."

Guadagni advised that benefits teams need to think about qualitative evidence they can present to management to demonstrate the real impact of the total rewards program. This could include employee success stories—showing how a particular service affected an individual—as context behind the numbers.

In addition, employers may have opportunities to streamline the vendor networks they have accumulated over the years. "Most employers currently manage at least 15 vendors," Ihrke said. "That's a heavy burden for small teams... They're starting to reflect: 'I bought this, but what's the governance structure and decision-making process? Should we continue?'"

Kelsay said: "Employers will increasingly expect and require their health plans and vendor partners to provide more robust quality outcome metrics and implement value-oriented solutions that address the long-term challenge of healthcare affordability. Partners that fail to meet these expectations will face greater scrutiny, or even elimination."

Beyond financial factors, Ihrke noted that benefits teams also need to assess how a particular benefit aligns with the organization's environmental, social, and governance (ESG) values. For example, if a solution has a positive impact on the company's diversity and inclusion goals, that could be a reason to keep it.

Employee voice is also a powerful tool. Guadagni said benefits teams may already be conducting employee surveys to understand which benefits are valued and why, which is a good starting point. But if employers have not yet conducted employee focus group research, "this year is a good year to make that investment."

Candice Sherman, CEO of the Northeast Business Group on Health, said: "Employers remain very focused on retaining and recruiting top talent. To stay competitive, they are certainly offering a rich mix of benefits."

Ihrke also suggested that inviting clinicians or other experts to review specific solutions to determine whether they are having the intended impact on employees could also be helpful.

Mental health stigma 'is slowly being broken down'

Ihrke said mental health has become a focus area for both employers and vendors. A WTW 2022 survey of employers found that 67% of respondents plan to make mental health and emotional wellbeing programs one of their top three health priorities over the next three years, and 88% said they had taken steps in 2022 to address mental health issues.

"The stigma around this topic is slowly being broken down, especially among the youngest generation," Ihrke said. Kelsay noted that adolescent mental health is one of the emerging areas of focus for employers in 2023, along with substance use disorder treatment and suicide prevention and postvention.

She added that employers are also concerned about whether there are enough care providers to meet demand, and the extent of employees' out-of-pocket costs.

This may explain why some employers are choosing to expand coverage for the number of visits to mental health professionals. Ihrke said employers are generally seeking to improve contract terms for related services and create better accessibility and timeliness.

"Over the past two years, there has been enormous investment in the wellbeing space, and now organizations are beginning to feel the need to prove its value to those who originally approved the investment," Guadagni said. Although total rewards professionals believe such investments are worthwhile, he continued, "connecting wellbeing programs to company profits is genuinely difficult."

However, he noted that some wellbeing solutions are relatively low-cost compared with other benefit areas, which helps strengthen the case for keeping them. Ihrke pointed out that mental health benefits in particular may improve metrics such as disability leave claim volumes.

Ihrke said that in 2023, employers are also refocusing on health benefits that had gone quiet during the pandemic, as well as navigation and advocacy services—which help ensure employees make full use of existing solutions. "That's the biggest challenge," she said of benefit utilization. "Employees simply don't know."

Addressing financial health during an economic downturn

On the other hand, Ihrke believes financial wellbeing benefits may be undergoing a shift as 2023 begins. Retirement savings may have been the focus of employer attention in this area in the past, but "now everything is about immediate needs," she said.

For example, employers are seeking solutions that ensure employees can access money faster—such as same-day pay—as well as tools to help employees build emergency funds or repay loans. Guadagni said such solutions have gained support from payroll providers and positive feedback from employees.

"We hear that this is extremely valuable to employers," he said of earned wage access benefits. "Employers know they're competing with platforms like Uber—where employees can earn money that day and use it immediately. That's real competition."

Salary increases may also be on the agenda. "We're going to see salary increases we haven't seen in the past decade," Ihrke said. Survey data released by WTW last November shows employers plan an average salary increase of 4.6% in 2023, up from 4.2% the previous year.

Even so, Guadagni noted that the rising cost of living due to inflation means many employees' real purchasing power is declining. "The upcoming performance-based salary adjustment cycle will bring a lot of disappointment," he added, because wage increases may not keep pace with inflation. "It's important to remember that benefits, while critical, must be carefully balanced against salary demands."

Beyond salary, Ihrke said employers are also looking at how to address equity issues through total rewards programs. For example, they can explore ways to help lower-wage employees cope with emergency expenses.

Another Mercer report from 2022 found that employers are considering multiple strategies to address equity gaps in benefits and health disparities among employee populations. These strategies range from specialized behavioral health support, to offering multilingual communications beyond English, to search functions that identify acceptable healthcare providers.

Tracy Watts, senior partner and national leader for U.S. health policy at Mercer, said virtual care programs are especially popular among diverse populations.

Similarly, voluntary benefits—such as critical illness insurance, hospital indemnity, or pet insurance—may help fill gaps, but Ihrke emphasized the importance of education, because employees may not be aware of the range of voluntary benefits available.

Ensuring employee awareness

To address this issue, Guadagni said employers are stepping up their efforts this year with more deliberate attempts at benefits communication. "We're entering a year where total rewards communication matters more than it has in recent years."

Time remains a key barrier to communication efforts, and employers need strategies to provide training and education while keeping employees productive in their daily work. "People aren't going to do this in the evening," Ihrke said. "You'll see employers starting to think: 'How do I give you time to do this?'"

Sherman said employers also need to consider the preferred methods of receiving information among different employee groups. Some may be more comfortable with virtual chats or internal social media, while others may prefer physical mail, email, or text messages.