Nobody understands the first rule of airline economics better than the 398,000 people lucky enough to still have jobs in the industry: when the economy gets a cold, the airline industry gets pneumonia.
As the national economy limped along following the combined shocks of the 9/11 terrorist attacks, the collapse of the 1990’s bull market, the failure of corporate governance at several prominent American companies, the second Mid-East War, and last year’s SARS epidemic, the airline industry shed more than 110,000 jobs—a 23-percent reduction from 2001 employment levels. Included in this group are approximately 9,000 furloughed pilots at the nation’s major airlines. Among the 14 largest U.S. carriers, only FedEx, UPS, Southwest, and Alaska Airlines did not furlough employees during this persistently slow recovery.
Fortunately for airline employees—and potential employees—the skies may be clearing. America’s gross domestic product grew at an impressive 8.2 percent in the third quarter of 2003, representing the fastest growth in 20 years. Year-end productivity growth and manufacturing activity numbers were the best in two decades. Further, corporate profits are at record highs, consumer confidence is rising, and interest rates remain low, fueling the highest rate of new home construction in 17 years.
Despite these impressive numbers, some experts express concern about emerging inflationary trends that threaten to slow the economy and derail the long-anticipated recovery in the business cycle. Foremost among these adverse trends are persistently high oil prices and a seven-year high in the price of gold. Gold prices increased 30 percent in 2003, reflecting investor concern over renewed inflation and ballooning federal spending.
Moreover, oil prices continue to hover in the $30 a barrel range—well above the optimum range of $22 to $28 per barrel—essentially translating to an immediate tax increase for all Americans. Analysts estimate that for every additional cent in the price of gasoline at the pump, discretionary consumer spending in the United States is reduced by $1 billion.
Rising oil prices mightily impact airline fuel budgets, too. The cost of jet fuel accounts for about 15 percent of an airline’s operating costs, and at the nation’s major carriers, each penny change in the price of jet fuel adds or subtracts about $170 million in operating expenses. This is real money in a business characterized by razor-thin margins, persistent over-capacity, and relentless competition.
Conversely, a number of economists express a more optimistic view.
“Not every single indicator is going to look like a boom,” Richard Berner, chief economist for Morgan Stanley, says. “Now we are getting down to a strong, but less spectacular recovery.” Continuing this positive assessment, last December The New York Times reported that 50 of 51 economic forecasters surveyed by Blue Chip Economic Indicators expect the economy to grow more rapidly in 2004 than it has so far this decade.
Regardless of who gets it right in forecasting the future direction of the U.S. economy, these uncertain times make the total benefits package associated with an airline career an important consideration during your job selection process.
Since 1900, the average life span in the United States has increased 60 percent, from 47 to more than 77 years. In tandem with increasing life expectancies, the costs of healthcare have soared like a rocket. At present, 38 percent of the federal budget is consumed by Medicare and Social Security spending, and the recently passed enhancements to Medicare prescription drug coverage will add at least $400 billion to Medicare spending in the next decade.
Meanwhile, employer health costs also have increased at an unprecedented rate in the last decade (see Table 1, pg. 6). Healthcare experts agree that the efficiencies of managed care administered through large and impersonal health maintenance organizations helped to constrain healthcare cost increases in the mid-‘90s. For instance, health maintenance organizations (HMOs) achieved cost efficiencies by restricting their plan participants to physicians within a specific network of doctors, controlling patient access to specialists, and imposing potentially onerous review requirements before authorizing specialized forms of treatment.
In recent years, however, consumers have grown frustrated with many of the inconveniences associated with managed care and are demanding a greater range of physician choices and immediate access to specialists. These imperatives have led a growing number of health plans to make available traditional fee-for-service options where employees are offered greater access to non-network physicians and more control in determining their course of treatment.
Having access to a wider range of physicians and a larger number of choices in medical services comes at a price. Employer healthcare costs increased at an annual rate of 14 percent between 2001 and 2003, while inflation (as measured by the consumer price index) has grown at an annual rate of two percent or less in recent years.
Employee healthcare costs also are growing at an alarming rate. By early-2003, The Wall Street Journal reported average annual family healthcare premiums had grown to $2,088—up from $1,656 in 2000. This trend accelerated throughout the year as employers seeking to lower overhead costs passed along a greater share of healthcare expenses to their employees. Late-2003 research by the Kaiser Family Foundation and the Health Research and Education Trust indicated the average annual family cost for health insurance had grown to $2,412. In fact, employee health insurance cost increases were key to recent arrangements by several large airlines with their employee groups as part of a coordinated effort between management and labor to return the companies to profitability.
Offering more choices seems to make employees happier. Even with the latest increases in healthcare costs, surveys indicate 70 percent of employees at large and medium size companies are satisfied with their healthcare plans. In the airline industry, monthly employee-paid health costs in many of the most popular plans tend to be about $100 to $130, or nearly half of the national average of $200 per month for family coverage.
While the range of choices, deductibles, and co-payments vary between companies, most pilots will be offered four choices for medical coverage: a standard medical plan (SMP), a point-of-service plan or preferred provider option (PPO), an HMO plan, or the option to waive coverage if other healthcare alternatives are available.
Given the financial risks of being left without coverage and the annoyance of being denied access to your physician of choice, the best decision may be to retain coverage under two plans, knowing that duplicate coverage may increase your overall cost of healthcare but will ensure the widest possible access to a range of medical services.
Standard medical plans offer the most choices to participants and are a popular option among airline pilots and their families (See Table 2, pg. 7). At some companies, SMPs may be referred to as fee-for-service plans, standard indemnity plans, or regular plans.
These plans require employees to satisfy a certain deductible before they begin paying a percentage of the cost of covered medical care, up to the annual out-of-pocket maximum. After reaching the annual out-of-pocket maximum, 100 percent of allowable medical expenses will be covered for the remainder of the year.
Standard plans typically allow the employee to use “any qualified physician” and will reimburse 70 to 80 percent of qualified expenses up to the “usual and prevailing fee limits” for medically necessary services. The pilot is responsible for the remaining 20 to 30 percent of the allowable charge. A reimbursement rate of 70 to 80 percent is the most frequently encountered reimbursement rate under standard medical plans at a large majority of major and national airlines.
In addition, supplemental medical plans are often available from airline pilot unions and other commercial vendors to cover medical expenses not reimbursed under SMPs and to provide a higher level of coverage in the event of the premature death of the employee. The cost of these supplemental plans runs a wide range, depending in the level of protection desired, a pilot’s age, and the size of his or her family. A good planning figure is $40 to $50 per month.
As with any insurance coverage, selecting a larger deductible reduces a plan participant’s monthly insurance costs.
However, potential out-of-pocket expenses are much greater with a large deductible than with a smaller deductible. For example, Plan D in Table 2 offers the lowest monthly cost to a healthy family with no children and few medical expenses. On the other hand, for a growing family with active children or a chronic medical issue, Plan A’s higher monthly cost would be offset by the increased coverage it offers.
Standard medical plans are popular because they offer choices of physicians, variable levels of annual family deductibles, and easy access to specialists. The drawbacks of SMPs include increased costs compared to other alternatives, the frequent requirement to pay for medical treatment at the time of service, and the burden to file a claim and wait four to six weeks for reimbursement.
Point of service or preferred provider option plans are normally a less-expensive alternative to standard medical plans. PPOs feature a network of physicians and hospitals that have agreed to provide medical services to plan participants at preferred rates. Participants in point-of-service plans may use physicians and other service providers who are part of the network, or they may opt to use providers who are not part of the network. However, a higher level of benefits is available when network providers are used. Additionally, employees pay only a small co-payment and often there are no deductibles when using network providers.
When an employee selects a PPO, a primary care physician, or gatekeeper, must be selected from a list of plan-approved network physicians. Primary care physicians usually specialize in family practice, internal medicine, pediatrics, or general practice. Primary care physicians coordinate all phases of a family’s network medical care and provide referrals to other network providers when specialized care is necessary.
Advantages of point-of-service plans include the option to choose a network or non-network provider when medical care is required, greater benefit levels and lower costs when using network providers, and no requirement to file claims for reimbursement when using network providers. Two of the biggest annoyances in PPO plans are the requirements to use network physicians in order to obtain the lowest cost and to obtain authorization from your primary care physician before seeking specialized care within your preferred provider network.
HMOs include a network of physicians, hospitals, and other medical service providers that supply their members with comprehensive healthcare services for a fixed monthly payment. They are regulated by individual states, and terms of coverage and plan exclusions will vary widely from state to state, even with the same employer. However, unlike point-of-service plans, HMOs cover medical care only when network providers are used.
As with point-of-service plans, HMOs provide a primary care physician to coordinate medical needs and authorize access to specialized services.
Advantages of HMOs include low cost—generally the lowest cost among company sponsored medical plans, particularly for families with chronic medical issues or young children—and no requirement to file medical claims. The greatest disadvantages are restricted access to non-network physicians and controlled access to specialized care. HMOs are a popular choice among younger families.
Regardless of the plan chosen, there are a number of common treatment exclusions that apply to standard medical plans, point-of-service plans, and HMOs.
Frequently encountered standard exclusions include alternative medicine, cosmetic treatment, contraceptives, family counseling, dietician services, eye care, infertility treatment, Lamaze classes, and organ donation. Additionally, HMO plans are typically the only medical plan covering school physicals, vaccinations, and immunizations, but exclusions will vary from company to company and state to state. Consult your printed or on-line employee benefits guide for specific exclusions and terms of coverage.
Finally, pilots should note that many company medical plans require pre-authorization for any non-emergency hospital admission. Moreover, the standard benefit package at several pilot unions includes a hospital per diem plan, which will pay $40 to $50 per day if a union member or a member of their family is hospitalized.
Some pilots elect to waive coverage completely from their airline employer and opt for a plan sponsored by a spouse’s employer. In addition, retired military officers may elect to waive airline coverage and obtain medical care under the TRICARE system, which offers military retirees and their families a range of choices including Standard, Prime, and Extra levels.
TRICARE Standard resembles a standard medical plan and requires an annual deductible of $150 per person and $300 per family. Under TRICARE Standard, a retiree must pay 25 percent of allowable charges up to a maximum of $3,000 per family per year. The federal government pays monthly premiums under TRICARE Standard and there is no enrollment fee.
TRICARE Prime—the military equivalent of an HMO plan—and TRICARE Extra, similar to a point-of-service plan, offer lower annual costs, restricted physician choices, controlled access to specialized care, and fewer forms to file.
Before electing to waive coverage in an airline medical plan, consider that some physicians may not participate in TRICARE or a spouse’s medical plan. Accordingly, access to specific physicians may be limited. Also, a change in a spouse’s employment status may disrupt the continuity of a pilot’s medical care. If a spouse’s medical coverage is terminated, most airline benefit plans will allow a pilot to re-enroll after previously opting out of coverage. However, pre-existing medical conditions may be excluded for a period of time after a pilot re-enters a company medical plan.
Military retirees are automatically enrolled in TRICARE Standard unless they specify an alternate choice. Retired reserve officers become eligible for medical coverage under TRICARE upon reaching age 60.
Demobilized reservists and separating active-duty service members will have their healthcare coverage extended for 180 days through a temporary extension of healthcare benefits approved by Congress in late 2003. Currently, TRICARE coverage for transitioning military personnel is limited to 60 days for veterans with less than six years of service and 120 days for those more than six years service. This temporary extension of healthcare benefits applies to service members who leave active duty before December 31, 2004.
Consult www.mytricare.com and www.tricare.osd.mil for complete details on the TRICARE plan.
In addition to an array of healthcare plan choices, most airline companies offer employees the opportunity to fund out-of-pocket medical expenses and dependent day care expenses with flexible spending accounts (FSAs). These accounts are funded by employees using pre-tax dollars and allow a pre-determined amount from current income to be set aside each month, not to exceed $4,000 per year in each FSA. It’s important to remember the two types of FSAs are totally separate and will reimburse for two completely different types of expenses: the medical FSA will reimburse only out-of-pocket medical and dental expenses, while the dependent day care FSA will reimburse day care expenses—including private kindergarten tuition.
Money contributed to an FSA is deducted from taxable income and offers significant tax savings. Presuming a pilot is in the 30-percent tax bracket and his or her family’s annual out-of-pocket medical expenses mirror the national average of $2,000 for a family of four, using a healthcare FSA to fund out-of-pocket medical expenses offers a potential tax savings of nearly $700.
The one caution with these accounts is that all amounts set aside must be used in the current tax year and may not be carried forward into future tax years.
Loss-of-license insurance (LLI) is designed to provide a degree of income protection to pilots who lose their ability to hold an FAA medical certificate. Plan benefits are tax free because pilots purchase these plans with after-tax income. Cost varies with age and the benefit level desired; though it seldom exceeds $40 per month for pilots under 35, while 40-something pilots will pay $50 to $100 per month.
Most plans pay a percentage of average crew pay for the lesser of eight years, until the pilot reaches age 60, or until retirement from active flight status. The precise terms and conditions of coverage vary, but most LLI plans pay approximately 60 to 75 percent of average crew pay based on earnings from the six-month period immediately preceding the disability.
Many pilot unions offer LLI protection as a service to their members. Another popular choice for loss-of-license protection is Harvey Watt and Co. (www.HarveyWatt.com), which also offers a monthly aviation medical bulletin, assistance for pilots seeking medical recertification, and a range of estate planning and insurance plans focused on the unique needs of airline pilots.
Fortunately for pilots, most airlines and pilot unions offer their employees and members a wide array of choices to ensure their medical needs and the needs of their families are adequately met—regardless of changing economic conditions.
As pilots, we have a responsibility to understand our choices, maintain a healthy lifestyle, and ensure our families are protected from unanticipated disruptions to healthcare coverage.
Jim Carman is a graduate of the MIT Sloan School of Management and served in the U.S. Navy for more than 24 years, attaining the rank of Captain in 1993. In 1998, he joined American Airlines and now flies as an MD-80 first officer based in Washington, D.C. Jim also is ALPC’s airline/military correspondent and conducts the military to airline transition workshops at AIR, Inc.’s Airline Pilot Career Seminars, Workshops, and Job Fairs.
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