Mind the benefits gap

Health insurance spending jumps – but there’s a widening gap between premiums paid in, benefits paid out
By Liz Bernier
|Canadian HR Reporter|Last Updated: 04/20/2014

Spending on private health insurance in Canada has more than doubled since 1991 — but a recent analysis indicates we may not be getting much bang for our buck.

The overall gap between premiums paid in and benefits paid out totalled $6.8 billion in 2011, according to “The Increasing Inefficiency of Private Health Insurance in Canada” in the Canadian Medical Association Journal.

That gap between the premiums insurers take in and the amount they pay out in benefits has increased threefold over the past 20 years, found the paper. And the widening gap should raise some critical questions for employers.

“What this paper shows is the for-profit private insurance industry in Canada, in particular, does what for-profit insurers tend to do, which is to maximize revenues and minimize payouts,” said Steven Lewis, a health policy consultant based in Saskatoon.

“Over time, the profits have grown considerably and it should raise questions for both the employers and the individuals about whether or not this is a sensible way to provide, in most cases, supplementary health care.”

Who’s hit the hardest?

The widening premiums-to-payouts gap is of concern to all employers but it’s even more dramatic for smaller to medium-sized employers and individuals, according to Michael Law, assistant professor at the Centre for Health Services and Policy Research at the University of British Columbia in Vancouver.

“In particular, what we saw over the last 20 years was that the spread between premiums collected and benefits paid out has really widened — in particular for the small group market or the insured plan market,” said Law, who was the lead author of the analysis paper.

“When you look at the paper, you don’t actually see a big change in the self-insured market… But for small business and individuals, there’s pretty massive increases in the percentage of premiums that aren’t paid out as benefits. So what that suggests to us is small employers are not being well-served by this.”

In 1991, private insurers paid out 92 per cent of plan premiums as benefits. In 2011, they paid out 74 per cent. But Canadians with individual plans had just 38 per cent of their premiums paid out as benefits.

It certainly appears that small businesses and individuals are getting the raw end of the deal, said Lewis.

“In the case of large companies, they will be more disciplined in their relationship with the insurers and they will have more capacity to monitor what the ratio of payouts is to premiums collected. And they’re in a stronger bargaining position,” he said.

“If you’re an individual, you’re just buying an insurance policy and you’re at the mercy of that marketplace — the people selling the insurance and managing those claims have all the information, and you don’t have any.”

Intuitively, it makes sense that the gap is wider for small to medium-sized businesses, said Johnny Ma, president and COO of Mapol, a consulting firm that specializes in private drug plans based in Mississauga, Ont.

“(It) kind of makes sense from an insurance perspective as well, because when you’re small to medium-sized, you’re in a bigger pooled group and there’s probably more risk… insurers kind of have to hedge for that and collect more.”

Where is the money going?

So, where have those billions of dollars in premiums been going? The short answer is we don’t exactly know, said Law.

“We don’t know if that’s going to administration, we don’t know if it’s going to profits, we don’t know if it’s going to acquisitions by the company or something else. So, given these health-care dollars, I think it’s important that we have better information on where that’s going.”

In the paper, Law and his co-authors considered four potential explanations: that the cost of administering plans increased, management practices reduced the cost of the services provided, insurance firms are increasing their reserve funds or private insurers increased the markups charged on coverage plans.

But the authors weren’t able to access all the data they’d asked for — and the body of publicly available information on private health insurance is relatively scant, said Lewis.

“In the case of the for-profit sector, the disclosures are pretty minimal. And, of course, in a sense, they’re trade secrets,” he said.

“If you’re a private insurer and you want to succeed in a competitive marketplace, opening up your books entirely — either in terms of what you’re paying various providers and the prices that you’re able to negotiate or the way you manage your benefits plans — is a trade secret.”

In his paper, Law called for greater transparency and disclosure.

“I would hope that we can get more transparency from private insurers in terms of where this money’s actually going because there’s not a lot of data out there that talks about benefits costs and what’s happening with these premiums,” he said.

But Ma is unsure whether greater transparency is realistically going to occur.

“I’m not sure if it’s ever going to happen — that really happens at the individual plan sponsor level, and right now they’re looking at the industry level,” he said.

“There’s so many players in the market from an insurer’s perspective — how can you standardize that without making it anti-competitive?”

Is more regulation needed in Canada?

As part of the Affordable Care Act in the United States, the Obama administration set caps — or, more accurately, floors — on the percentage of premiums that have to be paid back to plan members as benefits, said Law.

“In the U.S., the numbers are 80 per cent for small group plans and 85 per cent for large group plans. So if a large group plan insurer takes in a dollar in premiums, they have to pay at least 85 cents back to their plan members as benefits,” he said, adding that US$1.1 billion was paid back to plan members in rebates in 2012.

“What governments could do, along with encouraging greater transparency, would be to consider imposing the same sort of percentage floors that the United States has put into play. I think it’s a pretty good model for ensuring that people get good value from these plans.”

But, at this point, Canada is nowhere near implementing percentage floors like in the U.S., said Ma.

“In the U.S., under the new legislation, (the private industry) is more regulated… we need to get there first before we can even talk about whether any type of minimum payout is required. I personally don’t think it’s going to happen,” he said.

“But then Canada has always been about 10 years behind the U.S. in terms of health-care policy, especially on the private side plan designs.”

As things currently stand, Canada tends to regulate third-party insurance very lightly compared to many other countries, said Lewis — and right now, there are no rules around the proportions of premiums insurers must pay out.

“In Canada, compared to other countries, especially the European countries, it’s much more of a hands-off approach. And I think one of the consequences is insurers are freer to vary in how they approach both negotiations with suppliers of services and their adjudication of claims,” he said.

But greater regulation may be a good move, said Lewis.

“If we’re going to have a lot of third-party insurance, I think it makes perfect sense to call for greater regulation — no greater than in any other country that has these arrangements, but sort of catching up to them in terms of oversight of these practices.”

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