moneyFYI
Financial Freedom Is Merely Organized Common Sense
The Price of Employee Group Benefits Does Not Describe Value Very Well
Group insurance has become a significant expense
For those who receive the benefit of group health and dental insurance, it is possible that the price has not come to your attention recently. Employers on the other hand, are becoming quite sensitive. Employees and employers need to reach some accommodations before the price becomes prohibitive.
How is the premium determined?
The fabric of health and dental coverage is quite different. If a plan does not cover, orthodontia or implants, it is difficult to have a huge claim. There are only 32 teeth to deal with after all.
Health plans have no such limit. There are drugs and procedures that can cost hundreds of thousands. While rare, and while many are pooled so an individual employer is not hit with the whole thing, the cost per employee can be startling.
The carrier takes incurred claims and works from there to determine a necessary premium. It usually looks like claims plus the margin for overhead, profit, contribution to the pool and a trend factor. Probably something in the range of claims times 1.35 is realistic. Reserves built over long relationships can influence it a bit too.
So if your group consistently has claims of $1,500 per employee, you could expect to pay around $40,000 per year for 20 employees.
Some employers are finding that distasteful.
Group insurance is a conduit
The carriers are pretty much indifferent to anything but their formulas. You send them 10 dimes, they send back 3 quarters. A cost conscious employer must discover ways to use the formula to minimize their costs. The first thing they discover is plan design matters. A lot.
Reassess plan design
An employer must avoid covering certainties. Like the first $100 of dental costs. Remember the incurred to premium formula. The first $100 of dental care costs about $135 of premium. So too, the first $100 of healthcare.
Some of the healthcare claims will be for massage therapy, psychiatric care, orthopedic appliances, chiropractic care and so on. Often with a small upper limit. Those are acceptable and probably valuable to at least some of the people. These “para-medic” costs are to some extent at least, optional. Know if they are valuable to your employees.
It is acceptable to have an upper limit on dental but not with health. The cost saving to put a cap on spending in the health plan saves very little premium, but exposes the employee to a catastrophic, if improbable, possibility. I might grumble about paying the first $100 or $250 for prescriptions. I would do a lot more than grumble if I had a $150,000 bill and a plan with no deductible and a $25,000 cap.
The insurance philosophy
Insurable things have two characteristics.
- They have a high cost if incurred
- They are improbable.
The $150,000 drug claim fit nicely. The $100 to have teeth cleaned does not.
Dental and a lot of the healthcare is near certain. When you “insure” certainties you increase your cost by the price of the insurers overhead. That’s why you use meaningful deductibles and careful selection of benefits.
Employees and employers can understand what happens.
No employer cares about the individual price of salary, benefits, government costs, travel costs, miscellaneous perks, space used and the like. The total cost of an employee matters, the breakdown is not important.
Employees need to know that the overall package is what the employer sees and they are indifferent to the distribution. Employees should be consulted about group benefits so they get the best mix of salary and benefits. They will need to know the options they have.
Employers need to notice that when they substitute a large but unknowable cost for a saving in another area, bad things often happen. If an employee values a plan and the employer takes it away to save some money, the employee will leave. For the price saving in the benefits package, the employer chooses to accept the cost to find, hire, train and acclimatize a new employee. That process is error prone and much more expensive than people think.
The takeaway
- Group health and dental benefits are a valuable part of the compensation package. If the employer does not know how valuable they cannot make a rational decision about price.
- Avoid turning your benefit plan into a prepaid expense plan. Insurer overhead will eat you up. Use significant deductibles.
- Do not take away the long end. Understand the insurance value idea. Huge medical and out of country costs are not affordable for most employees.
- Use a consultant who can help you find the mix of benefits, deductibles, and premiums that make the plan efficient.
- Communicate to all of the stake holders.
This is an area that needs continuing review. Most older plans are needlessly expensive. Don’t even get me started on vision care and short term disability coverages.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.
In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. don@moneyfyi.com 866-285-7772
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