‘Free Lunches’ and employee benefits

It’s time to come clean…The concept of “insurance” as relates to health and dental benefits for employers with more than 20 insured members is largely a ‘sham’. As we have written before, insurance is purchased to cover unpredictable, costly and usually catastrophic events. Most consumers would not purchase insurance every time they buy an item on their Visa card, but they will buy Insurance every time they buy and use a car, home or motor boat.

Clearly this calls into question the notion of insuring health and dental expenses that occur frequently, in typically low dollar amounts and in many ways are quite predictable.

None the less, employers have adopted the term ‘Insurance’ when they refer to health and dental plans. Insurance Companies on the other hand, realize that ‘Insurance’ is really restricted to life, long term disability insurance, and out of country. However, since consumers have been trained to pay premiums for health and dental benefits, the Insurers in their quest for capital accumulation; will continue to make a market for these products.

Part of the problem stems from the fact that employers think (like their employees) that Insurance implies that all losses are insurable. Hence, someone will end up with a ‘free lunch’ should they suffer some loss. That same plan sponsor believes that if they pay an Insurer $25,000 in premium, that their employees should be able to claim in excess of $25,000. The unfortunate reality is that Insurers price benefit plans such that they (the Insurer) rarely incur losses. Similar to the casinos in Vegas, ‘the House always wins’.

Yet, at every renewal, plan sponsors place their faith in a system that we believe is largely broken. Companies subscribing to the principle of “insured health and dental” benefit plans silently hope that their experience data will validate their rationale for sticking with such plans. They anxiously wait for their renewal to see whether their employees have claimed in excess of the premium they have paid to their Insurer. Mistakenly, they believe that if their employees claim less in claims than they have paid the Insurer in premium; they (the employer) have left money on the table. Employers that share this notion are looking at Insurance through the wrong optics. True ‘Insurance’, is not something that one should look forward to having to claim. Claiming an insurance benefit would have meant that the insured was in some way impacted by a catastrophic event.

Smaller employers do not have these options. In their reality, insurance for health and dental benefits makes perfect sense as they do not have a large enough group to have an adequate spread of risk. Further, as a means of budgeting and managing cashflow, a fully insured plan with an Insurer makes the most sense. This does not however preclude them from selective use of this approach for vision and dental benefits. So, even those employers should read on.

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The concept of “insurance” as relates to health and dental benefits for employers with more than 20 insured members is largely a ‘sham’.

For those employers who succeed in charging more in claims than they pay the Insurer in premium, what awaits them is usually a massive increase in premiums for the upcoming year.

After the initial shock of seeing this increase and uttering the customary statement, “I thought that this is why we bought Insurance”, their advisor is given the opportunity once again to explain to them why their Insurer prices these plan in such a way that an employer will take out less in claims than they will pay the Insurer in premium. Infact, if the employer had asked, or a good broker had done their job, they would have seen that the Insurance Company’s quotation clearly showed that the target loss ratio (the Insurer’s costs of doing business) was between 67% and 78% for a group of that size. What the employer likely did not know was that this figure meant that the total administrative costs of the plan were between 28% and 49% a year. If they cared to check, the Insurer would have also disclosed that their annual pricing assumptions were based on an inflation factor on healthcare of some 15% and an annual fee guide and inflation factor on dentalcare of roughly 10%.

With these factors laid out, one would think that an employer would at least partially see why they are not getting as much for their benefit buck as they might otherwise get if they were looking at alternative benefit approaches.

Even when these same employers are educated on the Insurer’s rationalization of their renewal calculations, they often do not have the corporate appetite to try different ways of managing the employee benefits program? So, like drones, they send their broker off on a quest to find “a free lunch”. Sometimes they don’t bother sending their broker; especially if they have just received a prospecting call from another broker with promises of that all appealing ‘free lunch’. In either scenario, they are quick to jump in the buffet line.

With no shortage of Insurer’s willing to provide the food, the employer is given the feast they are looking for and once again they invite their employees to the table to eat.
Their employees engorge themselves for 12 to 15 months, before the employer once again realizes that they are in the same position they were in the prior year.Now, on top of those exorbitant administration and inflation factors, the employer now has to contend with a reserve adjustment on both health and dental, which serve to make their costs even more expensive than before.

The good news is that this reliance on ‘free lunches’ can be beaten. There is infact a solution for employers with as few as 20 members. That solution involves self-funding vision and dental benefits by way of a Third Party Administrator. Self-funding of healthcare involves somewhat more risk and complexity than can be covered in this piece, but it can be managed with the proper direction.

The basis for this funding approach begins with the realization that there are no Insurable elements in a typical vision and dental plan. In other words, employers have to understand that there are no true, “free lunches”. For employee benefits, an employer will either pay now or pay later. In either case, the Insurer ultimately wins.

With self-funding, the employer contracts with a Third Party Administrator (TPA) who charges a set transaction fee to process claims paid for the employer’s insured members and their dependents. This fee can range from 15% to 22% of paid claims. Part of the adjudication process requires that an Insurer manage or adjudicate all claims submitted by an employee, some of those claims will be rejected as ineligible. If the TPA does not properly adjudicate both eligible and ineligible claims, the employer would just issue cheques to employees directly, without using a Third Party.

On the basis of claims adjudication costs, self-funding fees can be half of what a traditional Insurer will charge to process claims on a fully insured basis (where they accept all risk for vision and dental claims).

Unlike a fully insured program, there are no risk or profit charges implicitly built into the plan (a savings of between 2% – 5%) and inflation is not based on some conservative assumption of 15% on healthcare and 6% on dental care. Inflation is the real number as witnessed by the actual claims. If an employer were to educate their employees as to the reasons for rising healthcare costs and as a result the company were to see a net decrease in claims costs per employee, that employer will benefit directly from this employee education, as claims are incurred and charged to the plan. In a fully insured plan, this reconciliation does not occur. Lower claims costs, at least initially, will mean more profit to the Insurer.

At the end of the day, self-funding will not reduce any claims that the employer might have incurred on a fully insured basis. Those claims will still occur. What self-funding will do, is ensure that an employer will pay the lowest cost per claim that is available to them. Rather than pay an administration fee of between 28% to 49% of claims, an employer will pay an administration fee of 15% to 22% of claims.

More importantly, an employer will never again chase that ever elusive, “free lunch” again.

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2018-04-17T15:56:12+00:00