While the move to more defined contribution-style health benefits plans provides greater clarity and flexibility to plan sponsors, it would be natural to wonder whether or not the available options are limited to the two extremes alone.
The continuum of benefits plan design includes fully insured plans, fully self-insured (administration services-only or ASO) plans and hybrid plans that offer a combination of both funding models in one plan.
Although these combined funding models have been around for decades, the move to more hybrid-type plans with a focus on a DC approach for health benefits and a protection wrapper for catastrophic benefits are becoming more prevalent for small- to mid-sized plan sponsors. But what do these hybrid plans look like and who do they best serve?
Hybrid plans allow an employer to offer fully insured plan components, such as insured drug, life and disability, while also offering DC elements for non-drug extended health, vision, dental and other benefits lines. These more cash-flow oriented benefits can be offered using either an ASO-funding model or by way of a health-care spending account.
An ASO model can be tightly controlled with plan caps per elective item. For example, paramedical services (i.e., registered massage therapy) can be designed with maximum spending limits for each provider or subject to a combined maximum allowance for all paramedical providers without specifying limits for each one individually.
A health-care spending account can be established for each class of plan member with a fixed annual allowance where the member chooses the services they want with the only restriction being Canada Revenue Agency compliance.
Since today’s workforce is in transition, with millennial workers becoming a more prominent percentage of the active workforce, it would be understandable for plan sponsors to look for an easily managed plan that meets the needs of all plan members. Plan sponsors may be interested in guaranteeing a minimum standard of care for everyone, in terms of the more catastrophic risk considerations, while opting out of a more paternalistic role in the spending habits for each group demographic.
Plan sponsors may offer a fully insured drug program, with all the pooled protection possible and include an extended health-care policy protection plan, as well as industry pooling for high-cost drugs to ensure protection for everyone, including carriers. This safeguards the group and their advisor’s right to choose and move the plan to another carrier. Simple ASO plans may offer protection against high-cost drugs, but will not (as the case exists today) offer the same flexibility or portability of the policy protection plan or the industry pool.
Elective cash-flow benefits for everything less catastrophic in nature offers everyone, including the plan’s younger cohort, with individual choice and flexibility, but also recognizes they too will one day age or likely experience illness requiring high-cost drugs.
The popularity of plans with greater flexibility has become the notable playground for some of the industry’s newest digital service providers. Insurance carriers aren’t excluded from offering this flexibility, although some may have to consider size restrictions. Flexibility used to be the exclusive domain of flexible benefits plan models and their providers. Yet, these simplified flexible plans achieve many, if not all, of the attraction of traditional flex plans without the complicated enrolment and financial balancing act those plans often require.
In addition to cost certainty and the lower expenses of operating the plans compared to the complexity of traditional flexible benefits plans, a hybrid plan can achieve greater cost sustainability in a number of ways:
- Reducing certain insurance wrapper charges
Traditional fully insured plans include the cost of claims but also include costs to maintain the structure of an insured plan — the insurance wrapper. The wrapper includes risk and profit charges, an allowance for inflation and administration charges. For the non-catastrophic components, some of these charges can be eliminated and others reduced in a hybrid plan model. This will result in greater cost certainty for plan sponsors — an important consideration for the small business owner who must tightly manage the day-to-day finances of their business to remain viable.
The insured portion of the plan, which is subject to trend and demographic cost increases, will be the premiums required to maintain truly catastrophic coverage for life, disability and fully insured drugs. These factors determine the renewal premium and outline the plan sponsor’s costs in very clear and easily understood terms.
- Removing risk from the pooling component
Hybrid plans can also remove risk from the stop-loss or large amount pooling portion of the plan in general. This is because increasing the use of paramedical services creates unsustainable upward pressure on the pooled protection element of the plan. Sponsors should consider the merits of paying pooled fees on paramedical and other non-drug claims.
An attachment level of $10,000 may be consumed by thousands of dollars of paid claims for elective cash-flow benefits, which compromises the ability to sustain the pooling costs for conventional drugs, let alone high-cost drugs.
Additionally, the effects of inflation will eat into the purchasing power of the plan’s attachment level where $10,000 today simply doesn’t buy what it used to even five years ago. That trend can be reduced by simply pooling drug costs alone.
- Managing the major medical component
Major medical costs can be handled by including them in an ASO environment with suitable plan caps, directing claims to assisted device programs and using cost-plus facilities for any unpaid claims when deemed required, protecting plan members and sponsors alike.
In addition to certain carriers (subject to minimum case size considerations), the largest providers of hybrid plans are third-party administrators. Carriers leverage their unique offerings and bring market share that they may not secure otherwise.
Third-party administrators can be very creative in offering best-of-breeds product combinations where they can bundle the offerings of several carriers to build a position in the market that meets the needs of a variety of smaller plan sponsors.
They provide fully insured catastrophic protection against low frequency, high-cost events. They effectively remove any need to consider trend and inflation on a sizeable portion of the plan’s costs. And allocating fixed dollars for optional non-catastrophic health benefits gives all members a say in what’s most important to them while managing over-utilization and potentially overspending by some.
One final benefit for all plan stakeholders is greater transparency. If we break down the plan design to its most simple elements — low chance/high cost and high frequency/low cost — then it seems reasonable to concentrate on protecting the former and capping the cost on the latter by allocating an amount to each member and empowering them to make their own choices.
Using a health-care spending account, or designing an ASO plan for those high frequency/low-cost elements, effectively achieves the goal of cost mitigation and control. At renewal time, the process is easy for the plan sponsor — it knows exactly where it stands and exactly what it should pay going forward.
Allocating fixed dollars to each member also fixes costs by imposing an overall plan cap. Plan members may spend their entire allowance, especially those who were already high users. In short, plan costs in the first year of the change may indeed rise. But once members have determined how their new plans work and enjoyed perhaps a greater member experience with their newfound freedom of choice, plan costs should level out.
Hybrid plans may not be the right fit for all plan sponsors, but they are for the smaller business owners looking for greater benefits cost stability and plan design flexibility.