Getting the most from the benefits plan premium helps plan sponsors manage increasing healthcare costs.

Every business, regardless of its size, needs a competitive group benefits plan to help attract and retain employees. Employers need a group plan designed to fit with the company’s compensation objectives. Employees want a plan that is easy to understand and delivers the benefits they value. In today’s environment, it is increasingly difficult to satisfy these demands while keeping the plan affordable.

Steady increases in healthcare costs are simply not sustainable for many employers. Much has been written about the need to engage employees as partners in managing the cost of claims. Less has been written about the non-claims costs paid by employers just to operate the plan, and how employers can control them without an impact on employees.

Claims Increases Exceed Inflation

Benefits plans have become a bigger expense in the last decade, with costs increasing two to three times faster than the rate of inflation. In 1994, according to KPMG and the Conference Board of Canada, group benefits costs were about 3.7% of payroll, which increased to an estimated 7.3% of payroll by 2006. Healthcare costs—particularly drug and dental care costs—are expected to continue to rise.

Contributing Factors

Our population is aging, and as employees age, they spend more on healthcare. The government, which already spends a large percentage of its revenue on healthcare, will likely continue to shift costs to private plans by limiting and eliminating health services. Practitioners are increasingly recommending more expensive procedures, and patients are also asking for and receiving them.

Employees are now more aware of benefits, so usage is increasing. Furthermore, there is a general lack of consumer awareness among employees—they don’t really understand the value of the benefits plan or how their consumption affects costs.

Managing Plan Costs

Often, employers try to manage plan costs by changing the coverage provided to employees. The plan can be redesigned to add deductibles, increase employee cost-sharing, introduce coverage maximums or eliminate coverage for some benefits altogether. But these changes directly affect employees and should be made only if the employer fully understands their impact.

Employers hate to “claw back” benefits—it’s upsetting to employees, and it’s not the right strategy to attract new workers. Plus, if the workforce is unionized, changes can only be negotiated periodically. But the bottom line is that benefits plan costs are affecting the employer’s bottom line at an accelerating rate. So, what can be done about it?

Potential Cost Savings

The percentage of the premium that goes to pay claims may vary depending on the number of employees covered, benefits rates, how the plan is underwritten and other factors. But no matter what the ratio, there are ways to manage the non-claims portion—the costs of running the plan.

Let’s take a company with 50 employees offering a competitive group benefits plan. The plan is 100% funded by the employer, and health and dental costs are about $2,200 to $2,500 per employee per year (or between $110,000 and $125,000 total). Using the 80:20 ratio of claims to non-claims costs, between $88,000 and $100,000 goes to pay claims for employees, and between $22,000 and $25,000 goes toward running the plan.

Most brokers or advisors are paid commissions and bonuses by the insurer, which the insurer then charges to the plan sponsor as part of the premium. The Canadian Life and Health Insurance Association has issued guidelines on disclosure in the group insurance industry. Plan sponsors should ask their brokers or advisors what commissions and bonuses they are receiving, and what services are included for this fee. It’s their right to know.

Like many non-claims costs, the commissions paid by employers are negotiable. Determining whether or not a plan sponsor can save money—and if so, how much—requires a clear understanding of how the premium is determined and what can be negotiated. Here are some key steps to take:

  • Examine the claims experience to see what is driving cost increases. Is it the plan design, poor adjudication, high utilization or health issues prevalent in the employee population?
  • Understand all of the components of the plan’s premium. Ask the insurer or broker for the details.
  • Benchmark the plan with plans of similar size or design. Know what the plan costs are—and, more importantly, what they should be.
  • Look at the underwriting arrangements and possible options.
  • Get current data about the plan’s costs, claims, reserves, commissions and competitive position. It may not be necessary to shop around for a better price.

Healthcare costs will likely continue to increase. Sponsors should be taking a closer look at the costs of their group plans—there may be savings available in the plan premiums that could be reinvested in better coverage for employees or put back on the company’s bottom line.

To ensure that they’re getting the most from the premiums they’re paying, plan sponsors need to be well informed about plan costs and prepared to negotiate.

Jim Pearse is a principal in Mercer’s health and benefits business in Toronto. jim.pearse@mercer.com

 

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© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the May 2008 edition of BENEFITS CANADA magazine.