Getting a handle on group benefit costs

Traditional Group Benefits

Most companies that offer group benefits to their employees use an insurance company for coverage. The plan offers medical and dental coverage, life insurance, accidental death and dismemberment and perhaps other types of coverage. Most companies find that when renewing their group benefits, insurance rates always seem to increase. The reasoning by your insurance agent is usually the same:  your usage rate or loss ratio is increasing, or your usage is trending upwards and the insurance company needs to increase the rates to still maintain a profit. But what exactly should the usage be so that group benefit rates don’t increase?

Understanding usage rates

Group benefits are divided into medical and dental coverage. The insurance company doesn’t make money on dental coverage. The insurance company’s payout on dental coverage claimed by employees is approximately 80%. So insurance companies make their money on medical benefits. If your employee’s medical usage is more than 60% of the medical premiums paid, your company will see an increase in its medical benefit premiums – even if it’s just a small increase. To avoid a rate increase, medical benefit usage must be less that 60%. This 40% of medical benefit premiums is the insurance company’s actual profit. Therefore, if you’re paying $50,000 in medical benefits with a 60% usage rate, the medical benefits used by your employees is $30,000 and the remaining $20,000 is insurance company profit.

How do I reduce my medical premiums?

In the 2000s, a group of companies called Third Party Administrators (TPA) emerged as an alternative to traditional group benefit insurance. TPAs are mostly privately owned companies, unlike traditional insurance companies. TPAs don’t have shareholder to answer to, and their overhead is far less than that of large insurance companies. TPAs also provide a different group benefits model to employers called administrative services only (ASO). ASO is a cost-effective alternative to traditional group benefit insurance. Group benefit insurance is just that – insurance where you pay premiums whether or not the employee uses the group benefit plan. With ASO, you only pay for what employees use in terms of medical and dental services, plus an administrative fee of up to 15%. For example, if you have an employee who uses $500 worth of prescriptions a year and his or her medical benefit premiums under a traditional group benefit plan are $100 per month, it’ll cost your company $1,200 in coverage. Under an ASO system, $500 in prescriptions would cost your company $500 + 15% ($75) = $575. That’s a 53% savings!

Is ASO right for all companies?

While ASO is a great alternative to reduce traditional group benefits costs, it works best with younger employees because younger people don’t use many prescription drugs. As the average age of employees in a company increases, prescription drug use will also increase. While ASO has its benefits, you should first ask your existing insurance company for two years of group benefits usage history. As part of your group benefits renewal, your insurance company should provide you with a detailed breakdown of your annual usage. Usually your insurance agent will keep these documents after the renewal meeting. Bottom line: You’re entitled to group benefit utilization documents, so be sure and ask for a copy for your records. This information can be analyzed by any third-party administrator offering ASO, to see if it’ll reduce your company’s group benefit costs. Interestingly, insurance companies also offer ASO – but they reserve this for clients with more than 100 employees. However, you can always ask your insurance agent for a quote on an ASO group benefit plan.

 

Comments

Bonny Koabel CPA, CGA is President of AKR Consulting Canada a Mississauga, ON firm specializing in Government Grants, Subsidies, Tax Credits, Refunds and Rebates since 2003.