AOL's Million-Dollar Distressed-Baby Claim: Could It Possibly Be True?

One human-resources expert says it's hard to imagine how company structured like AOL could ever pay $2 million for two pregnancies gone wrong.

AOL CEO Tim Armstrong isn't so good at conference calls. Late last year, he angrily fired a man in front of more than a thousand co-workers for recording a company call about Patch's weak performance. Yesterday, he explained why the company was changing its 401k benefits so that employees would get a lump-sum matching payment each December instead of regular payments throughout the year. The move may cost AOL employees a few thousand dollars in lost stock-market earnings. But what many found even more upsetting was how Armstrong rationalized the change on the conference call:

"We had two AOL-ers that had distressed babies that were born that we paid a million dollars each to make sure those babies were okay in general," he said, according to a transcript provided to Capital New York. "And those are the things that add up into our benefits cost. So when we had the final decision about what benefits to cut because of the increased healthcare costs, we made the decision, and I made the decision, to basically change the 401k plan."

Unfortunately for Armstrong, "AOL CEO Blames Selfish New 401k Plan on Two Pregnant Women" is a much sexier headline than "Tech Company Restructures Retirement Benefits."

It's unsavory for any executive who makes $12.1 million a year to blame his employees' sick children for the company's misfortune. But do Armstrong's actions make any sense from a corporate perspective? Let's take a fun adventure through actuarial science to find out. 

First, the type of change AOL made to its 401k plan is fairly commonplace, according to Bruce Elliott, the manager of benefits at the Society of Human Resource Management. IBM, for example, did the same thing two years ago. Elliott couldn't comment on AOL or its policies specifically, but he did point out that turnover at big tech companies tends to be pretty high. It can be good for the bottom line to hoard 401k money until the end of the year so that the employees who leave before the year's end don't get to take much with them in their retirement accounts.

"My guess is that with the turnover that they currently have, changing the methodology will save them a fair amount of money," Elliott said.

Second, we have no idea what a "distressed" baby is. That's not a precise medical term, and it could mean anything from a birth defect to an emergency C-section.

Delivery problems are all different—and differently priced. But we do have a good sense of how much the common, expensive problem of premature birth costs employers. According to the National Business Group on Health, a preemie costs about $51,500, "nearly half of which," the organization claims, falls on the employer or the insurer. On top of this, the group says that premature births cost employers another $2,766 due to delays in the mother recovering and getting back to speed at work. On average, premature births are more expensive than normal deliveries by tenfold or more.

Cost of premature vs. all births. (March of Dimes)

AOL has more than 5,000 employees, and companies of that size are usually self-insured. Self-insurance differs from regular (or full) insurance in one very important way: With full insurance, employees pay premiums to an insurance company (like Cigna or Aetna), which then spends its own money on the employees' medical costs. With self-insurance, meanwhile, employees' premiums go to the employer, who uses them to pay for medical expenses the workers incur during the year. The goal, if you're CEO, is for the amount you collect from your employees to be slightly more than the cost of all of their medical expenses added together. This is one reason why big employers are always trying to get their workers to exercise more and eat better. (I asked AOL if they were self-insured, and they responded that they had no comment.)

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Olga Khazan is a staff writer at The Atlantic, where she covers health.

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