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Group Insurance
Group Insurance, and in particular the medical benefit part, is becoming a material payroll cost for many businesses. How does a responsible business owner deal with that reality?
W. Edwards Deming, the American quality expert, has said that defects in manufacturing are often designed in. There is a large cost to defective product. In essence, you need to build the thing twice to get one salable piece. Changing design to remove that cost, when possible, is a cost saving tactic.
Similarly there is a large cost to employee benefits and again, some of that cost is designed in. Plan redesign may not cost much in the way of lost benefits but may save significant amounts in the monthly billing.
Here are some underlying things that you need to consider:
- Insurers have overhead and they expect to make a profit. That means that over the entire spectrum of their clients and over a reasonable length of time, what they pay out in benefits is less than you as employer pay in premiums. Actually quite a bit less. The essence of the deal is you send four quarters, they will send back eight dimes. Maybe three quarters.
- In a given group over a long time only a few employees will have claims greater than the premiums paid on their behalf. I know of a group with 250 employees where 3 employees and their families account for more than 75% of the claims over the past three years.
- The price of some parts of the plans increase faster than inflation.
- Not everyone needs the same things in a plan. Some parts are not used.
- Insurers worry about anti-selection. Only the medically risky employees are covered. Reassure them with strong participation rates and possibly with lower no evidence maximum amounts
These and some other issues should be considered when you design your plan. A competent group insurance specialist can point out some things that will help keep your premiums reasonable. If you have not visited plan design recently, you should do so.
Some things to consider.
Creating small maximum annual or lifetime claim limits for medical expenses is a poor choice.
Most people cannot afford the far side of the expenses. There are drugs out there that sustain a condition without curing it. Many cost more than $50,000 per year. There are some that the industry now pools rather than charge individual group experience that cost ten times more. The real insurance is in covering the improbable but expensive things. Be sure to provide that. The price difference between $100,000 limit and $1,000,000 limit is not prohibitive. Know that what you are doing is providing insurance not merely convenience
Given that insurers have overhead, it is not smart to insure certainties.
Everyone will have a little dental work or a little medication or a little massage/chiropractic/orthotics. Your premium will be at least $1.25 per $1 of claim. Try to eliminate the tiny claims by using deductibles. For example, my wife has a prescription for antibiotics that she fills before visiting the dentist. The drug cost is less than 20 cents with the pharmacist fee on top. It is not smart business to allow a claim like this to go through your drug plan.
Communicate the coverage and the cost of the benefits to the employees.
Explain how they work. Try to help them understand that the cost goes up if they are abused. The money that pays for employee benefits is not available for salary and wages. You would be amazed how many massage therapy claims there are in the last month of the group’s fiscal year. Use it or lose it is the attitude. Really, it is lose it or lose it.
Pay attention to plan usage and permit the insurer to audit the claims.
Your billing depends on your plan usage. You should know that you are paying only for legitimate claims.
Try to avoid benefits that cost far more than they are worth.
Vision care comes to mind.
Other plan parts like long and short term disability matter. So does life insurance. So does the way you share costs with the employees.
A small percentage decrease in the premium can make a meaningful difference, but be a little careful changing carriers. Over a long time you build up reserves that can be lost when you move.
This kind of plan and the changes that are possible is detailed and subtle. Talk to competent professionals.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com
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