Focus on Benefits – How Much Do I Need to Save in Order to Change Insurers?
With the recent slowdown in the Alberta marketplace, more employers are looking at every possible angle to save a dollar. Many insurers capitalize on this by “massaging” the numbers to present a good front for the first year of a new plan, followed by a very messy subsequent year. This leads to the question of how can we achieve truly sustainable savings for now, and the long run? In our experience you have to do things differently. As the famous quote by Albert Einstein goes, the definition of insanity is doing the same thing over and over expecting different results. The same goes with a new insurance company (i.e. simply marketing for rates without a fundamental adjustment to the plan). The following article will share a few of our different ideas on fundamentally shifting the cost performance of your benefit plan:
1) Plan Design
Your plan design drives claims, and those claims make up 80-90% of your costs in respect to your Health, Dental, and Vision benefits. You have to ask yourself, do you clearly understand where you spend your money on your plan? Sure, you may know your plan design, but within those limitations are you aware that you may be spending money on claims that are fraudulent? Do you understand that you are providing benefits that address both an employee’s needs and wants (I need a prescription vs. I want a massage)? Based on your philosophy, do the employees understand these benefits are in place for possibly just their needs and not wants? This is where communication and discussion on plan design play a key role in what is offered and how it is used.
2) Pooled Benefit Options
Life and Disability benefits are often priced with two year rate guarantees meaning that the premium is frozen for that period. The catch is that these benefits are often priced with significant discounting, and in many cases there will be significant increases at the end of the guarantee period. Now, however, we have seen the emergence of a product that guarantees rates for a longer period without applying detrimental discounting. The pricing often remains competitive as the insurer does not quote every company or industry, which in turn produces a stable book of business. After the first three year rate
guarantee comes off, renewals are completed every 2-3 years as opposed to annually. This assists in employers holding rates longer. When adjustments are made, they are based on demographic shifts alone (claims experience is factored in for groups with over 400 employees). Recently, we worked with a company with rising Disability premium. We were able to reduce their premium by 20%, and guarantee that for three years, without discounting. The end result will be a 50% savings by year three of the rate guarantee, in comparison to the former carrier.
3) Funding Arrangements
A Funding Arrangement is an agreement a company has set up with their insurer to determine who will be responsible for funding Health, Dental, Vision and Short Term Disability claims during the year. There are two common arrangements, which apply to Health, Dental and Vision.
A) Fully Insured
The first arrangement is referred to as “fully insured”. In a fully insured plans the insurer is responsible for the claims throughout the year. They are essentially a banker. The insurer is responsible for paying all of the claims that are adjudicated by the policy, regardless of the amount of premium charged to the employer. At the year-end reconciliation, or “renewal”, the insurer will project where the funding should be for the coming year, and will adjust the rates up or down. The projections that they make are dependent on the claims, administrative expenses, and inflation adjustments versus the premium paid on the plan. The administrative expenses, inflation adjustments, and other charges are worked into a breakeven for each given client. This is referred to as the target loss ratio. The claims are then divided into premium to determine the actual loss ratio. If the actual is higher than the target, an increase is required. Alternatively, if the actual is lower, a decrease can be offered for the coming year. Simply put, did the premium paid cover the claims and expenses? This arrangement is very common with companies that provide coverage for fewer than 100 employees.
B) Administrative Services Only (ASO)
The second option commonly used is referred to as Administrative Services Only, or “ASO”. In this scenario the employer takes on the role as the banker. The insurer is retained to simply administer the plan. This includes adjudicating and paying claims (drug cards, direct deposit, direct billing etc.), providing plan documents, and anything else you would expect under an insured plan. In regards to remittance, the employer can pay premium in the same way as a fully insured plan (rates per single & family member paid monthly). Having said that, claims and administration charges are deducted from these premiums, and any short fall or deficit is the responsibility for the company in-year. Conversely, when claims and administration are less than premium paid, the correlating surplus is set aside for the company to recoup at years end. With this arrangement, you pay for what you use. Typically employers are comfortable paying for what they use. ASO is the best strategy we have found to achieve this. Although commonly put in practice for groups of 100 or more, we are now seeing companies with as few as 25 employees utilizing this method.
The two main key advantages to ASO are:
I) Transparency – Often we find a level of mystification when it comes to employers understanding premium adjustments, and in turn trusting them. Under an ASO plan, costs become almost black and white. Claims + administrations expenses = premium. There is no inclusion of inflation and trend factors or weighting applied to the past three year’s history.
II) Permanent Cost Reductions – With ASO premiums from the plan that are not essential are removed from the rate calculation. Typically this saves employers 10-20% in premium permanently. The savings comes from the removal of the trend factor from your premium and the reduction of expenses to use the insurer.
If you are comfortable taking on the responsibility for your claims, and looking for an option that adds transparency to your benefit plan, while reducing costs permanently, ASO is an option worth exploring.
About the Author
Matt Fraser has spent the last 14 years as a Group Benefits Consultant at Silverberg Group. Having continuously challenged the status quo Matt has pushed past the normally accepted results many employers and insurers have considered the standard. This has allowed Matt to become a leader in the area of claims and expense management. When you work with Matt employers will receive transparent information about the industry, they will be informed as to the innovative products and solutions in the market place, and they will have an advisor who focuses on guiding them away from risks and towards the opportunities that align to their employee benefit plan philosophies.