I commented recently on the problem group insurance providers are having with drug costs. That and other matters will affect future premiums.
The concern is two-part.
- Will employers discontinue or impose low limits on amounts the plan will pay. This provides a difficult choice. What if an employee or one of their family members needs a costly biologic drug? Essentially the employer will be forced to decide between saving a life or saving the plan.
All prescription drugs are becoming more expensive. The number of exotics grows continuously. Sovaldi fixes Hepatitis C but costs more than $50,000 for a 12-week course of treatment.
No employer is fully exposed. Most group plans have an upper limit for how much is charged to them as plan experience and how much is pooled. Your particular experience drives your rate. $10,000 is a common limit for cutoff now, but that has more than tripled in the past 10 years. It will likely become more in future and those plans with high claims will suffer.
- Discontinuing coverage has a price too. Most plans are used in recruiting and are an important part of employee satisfaction. 83% of employees value it. Hard to take away.
The second area of concern is long term disability pricing. Many are already seeing this problem and it is not going away soon. Three reasons drive the significant price increases.
- People are working longer. Some plans now anticipate people being there until age 80. People in their 70s have more disabilities than those in their 30s.
- The incidence of disability is increasing. Partly because things that once killed people now just make them sick.
- All insurers have reserves for future claims. They earn income from investing that reserve and the income earned reduces the cash premiums they need. Reserves that earn 2% throw off less subsidizing investment income than they did when bonds paid 8%.
Group insurance is now or will soon become a luxury good. Both employers and employees can prepare now. Plan design is an important part of that. Trivial claims have overhead costs for the insurer and they flow through to premium. First dollar coverage and some specific benefits are too expensive. Recall that the group insurance deal eventually is, “Send us four quarters and we will send back seven dimes.”
Do not contract for coverage on small certainties, like vision care and zero deductibles. Better to have a plan that covers the improbable but expensive situations than to have an unaffordable plan that covers everything. Both employers and employees must be part of that discussion.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
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