Are You Really Buying Insurance?

Traditionally, small to mid-sized Canadian businesses have offered group health benefits to their workforce by utilizing insurance carriers. During the last decade, consolidation in the market has resulted in fewer carriers within the insurance industry, limiting the choice for the Canadian employer.

Benefit Plan Sponsors generally assume that the responsibility of health and dental claims will be taken on by their insurance providers in exchange for paying a premium. Upon closer review of the average group health benefits policy for small to mid-size businesses, only 65% of the overall premiums are ear marked to be paid out for eligible claims. The remaining portions are used to pay administrative cost, unforeseen risks, commissions and insurance carrier profits.

The cost of healthcare in Canada is growing by at least 15% per year. It is widely believed that our aging population, the de-listing of government funded services, rising costs for advanced pharmaceuticals, and new appreciation for alternative therapies are driving these costs. Employers are finding it harder to control and predict the costs associated with providing these benefits. In response, employers have tried to curtail these costs by introducing annual limits, co-insurance, deductibles and exclusions to their health and dental plans. This has been a major source of friction between the employer and the employee. If you are the business owner, you probably already feel the pain, but think you have no options. If you are the business advisor or the external accountant you can now suggest an affordable solution that will provide more value for the money currently spent on employee benefits.

As an alternative to traditional group insurance for health and dental, innovative companies are choosing to move towards a self-insurance or Administrative Services Only (ASO) model. With ASO, the employer assumes the cost of all claims paid as per an established plan design. When an employee incurs $600 of annual claims for health and $800 for dental (average spending), the entire cost is borne by the employer. In order for CRA to allow the cost for health and dental claims to be tax deductible for the employer and the benefits to be non-taxable for employees, the administration of these plans must be handled by a third-party. But what if an employee has a large drug claim or hospital claim? Can the plan sponsor afford the risk of self-insurance?

To reduce the likelihood of incurring a significant claim from an employee, insurance is still a wise purchase. Statistically, most employees spend less than $1,000 on eligible health claims. Therefore the premium for insurance over this amount is reasonably affordable. In this case, insurance is truly insurance. The company is assuming the cost of predictable claims, and purchases insurance for the catastrophic risk of unpredictable large claims. This type of insurance is referred to as stop-loss insurance.

For companies with less than 150 employees, the key factor is selecting the appropriate stop-loss attachment level. As the deductible or stop-loss attachment level increases the corresponding premium is reduced. However, the level of risk increases should the company incur a major claim.

Regardless of the cost of the stop-loss insurance, the company will only tolerate a certain level of risk. The key is understanding claims activity and choosing a level of stop-loss insurance where the risk tolerance and savings are in harmony.

To illustrate the savings from the ASO model with stop-loss insurance, we will use a 10 employee company. The total health claims for the previous 12 months were $9,000 and the total dental claims were $7,000.

  • Traditional InsuranceHealth premiums – 13,000
    Dental premiums – 11,000
    Total cost – 24,000
  • ASO with Stop-Loss ($1,000 attachment level)Health claims – 3,800
    Dental claims – 7,000
    Stop-loss premium – 6,000
    Administrative cost – 1,680
    Total cost – 18,480

SAVINGS – 5,520 – 23%

In the example, the company would save $5,520 or 23% by converting to a self-insurance model with a stop-loss policy. In the unlikely case that all employees have high health claims, the company would limit their exposure with a $1,000 attachment level per employee, or $10,000 for the year. If this was the case, the total cost would be $25,300. However, while the likelihood of such an event occurring is extremely minimal, the impact on the following year with ASO would still be less than with traditional insurance that reimburses from the first dollar.

The cost of ASO is claim driven and therefore employers need to review their plan designs and understand where employee spending is occurring. A good third-party administrator will report all claims by certificate and category (drug, dental, paramedical, hospital, vision) to the employer. The certificate holder's names should never be disclosed due to federal privacy laws. With this information, employers together with their administrators are equipped to respond to increasing health and dental costs. If an employee or their family has high drug claims, a drug cost management program can also be initiated.

Employers have no control over the direction of government policy towards healthcare or how the Canadian economy will perform. However, they do have complete control over how they keep their employees healthy through these challenging times. The ASO model with stop-loss insurance, coupled with detailed claims reporting and ongoing management, is an excellent option of delivering a superior health and dental plan while controlling costs. As business advisors are looking for value added services to provide their clients, or tools to help retain good clients, the ASO solution with an appropriate level of stop-loss insurance is changing the way Canadian business thinks about health insurance.

Written by Peter Merrick

Peter Merrick, FMA, CFP, FCSI, Instructor at George Brown and Seneca Colleges, President of Merrick Wealth Management, a boutique financial planning, employee and executive benefit consulting firm.

One Response to Are You Really Buying Insurance?

  1. Which carriers or TPA’s are willing to do a $1000 stop loss? So far I haven’t come across a carrier willing to go below a $10,000 SL and the lowest I’ve found with a Third Party Administrator has been $3000. A reasonably priced $1000 stop-loss would be phenomenal for my small company (~130 ee’s).

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