Investing into an employee benefits strategy makes good financial sense as it’s a way to commute “income” to an employee on a tax-free basis while helping them maintain their health so they can be productive at work. It’s a classic win-win. However, there is another side to this coin.
Benefit plan premiums generally go up every year. As your employees age, submit more claims, inflation creeps up and practitioners charge more. You’re feel-good-benefits-plan can become a financial annoyance if it’s not set up properly at the onset.
First, know this. The big insurers LOVE to buy new business. Most of the big insurance companies are the big offenders here. Until a group plan has longevity, predictable claims experience, for small businesses; we’re not convinced these carriers are always best aligned for the needs of these types of enterprises in the early days of their benefits plan offering. Sure, some will argue this point and there are exceptions, but we see it all the time, deep pricing, 2 and 3 year rate guarantees. All of which is designed to get in only, to have premiums shoot high down the road. Then you go to your Advisor and they “shop the plan” only for this cycle to repeat. At OnPoint, we don’t play this game. Stephen Covey’s great quote: “Begin With the End in Mind” is a practice we follow when designing plans. It’s NEVER about getting the lowest cost.
Beginning with the end in mind keeps us focussed on:
- Long term cost containment
- Flexible, meaningful coverage
- Ease of use (digital access)
For this article, there are essentially 3 ways group benefit plans are priced:
- Claims Rated / Experience Rated (big insurers)
- Pooled (boutique, Third Party Administrators)
- Cost-Plus (Health Spending Account)
At the end of the year the insurance company looks at your claim trends, factors in their own Trend Loss Ratio (TLR), broker commission and provides you with your renewal pricing. All it takes is for one employee to make a bunch of claims and few employees to cross over into a new age bracket and WHAM! a 15% renewal increase. If you have 50 employees or more then it can make sense as the risk is distributed through your employee base.
For a small business with less than 50 employees, this reduces the risk substantially, as your experience is “pooled” with other business like you and cooperatively you disperse and share in the pooled risk. Over the last 12 years, companies we have in pooled plans typically have seen a 4-8% average in their renewal.
With this pricing option, the employer will simply provide a budget each year for employees and put it into a health savings account. If the claim is greater then what the balance is there is no additional “coverage” as there is with other options above. Generally, the benefits provider will charge 10% on top of the claim to make it tax-deductible and process the claim. With cost-plus there is no form of “leverage” like you have with claims rated or pooled programs, therefore while this approach contains an employer’s costs, coverage is significantly reduced and therefore the perceived value of the benefit is low too.
Many employers are now looking at Pooled-flexible-plans with a Health Spending Account component. A hybrid approach.
The fundamental decision for a business evaluating a group benefits plan should first be to find a service offer of a benefits firm that specialises in benefits that aligns with what you need. Then, decide on a per employee budget and allow them to go and design a plan and present options. Having 2, 3 and 4 “Brokers” compete is not a great process. It’s more work for you and at the end of the day they don’t control pricing, but they do control the service offer and value they extend. The final thing is to look at pricing.