Traditionally, employers have purchased group benefits plans — including life, disability, health, travel, medical and dental coverage — through insurers. This arrangement made sense for potentially catastrophic claims, such as life insurance or disability insurance, where the large claim amounts necessitated insured coverage. However, large employers in particular began to question the value of insuring relatively predictable claim amounts for items such as dental checkups and routine medical exams.
Taking into account a plan’s claims and pricing changes year over year, it became apparent the premiums being paid to insure health and dental coverage were exceeding the paid-out claims — sometimes substantially.
As inflationary renewal trend factors, claims reserves, advisor commissions and other insurer administration fees were tallied, employers saw, in some cases, only 65 per cent to 75 per cent of each premium dollar paid was actually funding employee claims.
Self-funding of employee benefits was born when plan sponsors realized if they funded the claims, while paying an insurer or third-party administrator (TPA) to manage the claims- paying mechanisms, there was a potential for savings.
As companies look for additional or creative ways to cut costs, self-insured plans have become increasingly popular and awareness about flexible plans such as health spending accounts (HSAs) and private health services plans (PHSPs) has been growing.
Administrative services only plans
Typically, employers with at least 100 employees will consider administrative services only (ASO) plans as an option for part of their benefits plan, especially if they have a stable employee base and a history of favourable health, dental, vision care or short-term disability claims. Most businesses continue to insure the life, long-term disability and out-of-province medical portions of their plans.
In addition, it’s recommended they implement stop-loss pooling protection against large medical claims.
ASO fees range by the size of the group, the gross volume of claims submitted, the insurer’s administration costs and the advisor’s fee.
The total of these will be less than the plan’s current administration fees, as savings are made in exchange for the additional risk taken on by the employer.
If claims increase from estimated levels, an employer will be required to fund those overages. However, if claims decrease from expected levels, the surplus building in the ASO account belongs to the employer. This surplus could be kept in the account as a buffer towards future claims or the plan sponsor could enhance the plan design or take the surplus out of the account.
ASO plans can be implemented without members even knowing. An employer can adopt an ASO funding structure and employees will use the same ID numbers, drug cards and other claims reimbursement tools, such as forms and online portals, which saves on administrative hassles.
Health spending accounts
Variations of self-insured benefits, such as HSAs, have become a powerful tool for employers wanting to offer health coverage without the risk of a stressful plan renewal process.
An HSA is a pre-funded account that gives employees access to a set annual amount of benefits dollars, decided in advance by their employer, towards medical or dental services of their choosing. If employees wish to use all their allocated credits towards massage therapy, laser eye surgery or orthodontics, it is up to them. Claims are adjudicated and managed by an insurer or TPA. Often, HSAs are offered in conjunction with an insured plan.
Initially, these types of plans were available only to large employers. But, in the past 10 years, many group insurers have begun to market HSAs specifically to the small business market.
The additional flexibility for employees and the cost stability for small business owners have made HSAs a valuable tool in designing a benefits program.
HSA fees range from five per cent to 15 per cent on paid claims, depending on the total number of employees and total volume of credits allocated. The bonus for plan sponsors is if an employee does not take advantage of the benefit, the employer does not have to pay fees for that person.
Private health services plans
A PHSP is set up by a business for the tax-efficient reimbursement of personal medical and dental expenses.
It’s frequently adopted by the self-employed and small business owners as a benefits solution in lieu of a group plan and is fast becoming one of the most popular methods for entrepreneurs to manage health costs.
An expense that qualifies for the medical expense tax credit will qualify under a PHSP. This includes a wide variety of items that range from prescription drugs and paramedical specialists to dental work and medical equipment.
Purchasing benefits coverage as an individual, family or very small business can be a challenge, especially where a pre-existing medical condition or treatment is a factor. But with a PHSP, there are no requirements for medical underwriting as the claims are self-funded, so existing treatments can be covered.
A PHSP can be set up for sole proprietorships or incorporated businesses.
Under Canada Revenue Agency (CRA) guidelines, sole proprietors have specific restrictions on the total amount of claims that can be submitted through the plan each year: $1,500 for the employee, another $1,500 if they have a spouse, plus $750 per dependant child.
To set up a PHSP, expect to spend between $200 and $400 initially, depending on the supplier selected. Going forward, administration fees in the area of 10 per cent are charged on paid claims, in addition to funding the claim amount. Most providers offer catastrophic claim protection and travel medical coverage for plan holders to purchase.
The appeal of self-funding
Control over costs is at the heart of self-funded benefits plans. For larger businesses, ASO plans allow full-spectrum benefits coverage with reduced administrative fees.
Small companies and the self-employed are availing themselves of HSAs and PHSPs for their cost control and flexibility.
Employers of all sizes can take advantage of the many options offered in the benefits marketplace.
Rachel von Sturmer is a senior insurance advisor at True Benefits in Vancouver. She can be reached at Rachel@truebenefits.ca or (604) 872-2866. For more information, visit www.truebenefits.ca.