Recently, we took on a client who was going through their first renewal, 15 months after having established their first plan. The rate increase required by the insurance carrier was over 50%. It was a rich plan with 100% of claims costs paid and a multitude of benefits including orthodontic coverage. The employees and their families used the plan as it was intended and costs escalated accordingly. Their former broker had not explained how plans were funded and they thought they had been duped. They came to us seeking the same plan design but for less money. That, however, was just not going to be possible. Once we helped educate them, we worked with the client to reduce the benefit offering of the plan, and we were able to help them keep to their budget.
What Elements go into Calculating a Renewal?
For some employers, their plans renew with an increase. Ideally, if there is going to be an increase, you want that increase to be at or below inflation. Good plan management helps employers keep their benefits costs to a manageable level. For some, it’s easy, for others, it is a challenge. Knowing what elements go into calculating a renewal can make the outcome easier to understand and internal management strategies more effective at keeping the plan affordable.
There are essentially two parts to a benefit plan.
- The insured products such as Basic life and disability
- Rated or claims-based products such as drug, extended health and dental
The insured benefits are to cover catastrophic events such as serious illness, injury or death and, therefore, claims have little to do with determining rates at inception or renewal. For the health and dental products, the insurance carrier or claims payor pays employee claims on behalf of the employer. Claims have everything to do with determining renewal rates.
The Nasty LTD Renewal
Insured products are priced based on risk to the insurer. The risk they assess includes the demographics of an organization, the insured volume (amount of insurance) and the risks associated with the overall industry sector, combined with how much the insurer can earn through investing premiums. Employers have very little control over these factors. Sometimes, however, they will include an excessive claiming premium in the calculation for LTD.
Insurance companies assume that there will be no more than about three LTD claims per 1,000 employees insured. In some sectors, that number is much lower. When an employer starts to exceed that assumption, the insurers will increase rates. As an example, a 125 employee organization focussing on rehabilitation has amassed seven open LTD claims over the past five years which works out to double the insurer’s assumption. Their rates have tripled over the last six years, increasing the cost to an average of $170/month per employee or $255,000 annually.
Solution: Last year, they brought in a Disability Consultant. She reviewed available documents and the types of claims that were being made in order to determine what might be done to reduce them. The solution was early intervention. Our HR consultant found that employees, as a group, were older than average. They worked hard and, due to stress, among other factors, were becoming ill. Many were not returning to work as their illnesses, such as heart problems, prevented their return. She proposed a health awareness campaign that encouraged employees to be more aware of stress in their work and home life as well as to be more vigilant of their overall health. Initially, the number of sick days increased and the EAP program became over-subscribed. But, the employees were either coming back to work sooner or not off in the first place.
So far, there are no employees heading towards a long-term leave, the insurer has promised to begin lowering the rates at the next renewal if the trend continues. As claims age past five years, they are no longer considered a factor. If, in four more years, there are no claims on the books, the rates will drop below half of their current levels.
As well, an EAP program, such as the Family Services EAP we offer or the POSACTION Plus program we include in our Co-operators LTD plan, can reduce stress, reduce sick leave and the risk of longer term disabilities.
The Nasty Health and Dental Renewal
More often, the source of a nasty renewal is increasing health and dental claims. The Nasty renewal can build over years as premiums don’t keep up with increasing claims or a nasty renewal can be a result of a spike in claims (which sometimes can become a permanent level). Usually, the first reaction is to take the plan to market to see which carrier will take it on (with no changes) at a lower cost. It is important to be clear that the health and dental benefits costs are directly related to claims. Benefits plans are not a commodity like buying a mattress or a TV. Most often, a carrier or two will come in with a saving but that saving will dry up at the next renewal when the high claims will, once again, require a big increase. This is important to note.
Rated products have more flexibility in management. The health and dental benefits are much more costly than the life and disability products but the list of individual benefits is much larger. The place to start when receiving a nasty renewal is to find out where the claims are. Depending on the size of the organization, there are reports that that can isolate (anonymously) how many employees or dependents are claiming high, as well as the category of the claims and the value.
For example, the report could show that an employee has made hospital claims; in that case you might be confident that the claims are non-repeating. The report could show one individual with high drug claims. Further reporting could identify the drug. If it is a biologic drug, there is a possibility that it could be managed out, without affecting the employee. Other things that could be revealed include consistently high paramedical or health service/product claiming. These can be an ongoing trend (see our August Newsletter report on Extended Health Claim Trends) and can be alleviated with plan changes such as reducing maximums, combining maximums or capping. These can be short term actions that can be reversed at a future date. Often, making plan design changes to reduce claiming is short term pain to keep costs under control. The plan is a part of the compensation earned by employees. Including them in the communications process and ensuring they understand the reasons for plan changes make it easier to do and can make employees more mindful of their claiming and how they can keep costs down.
Moving to a new carrier can help but more often than not, greater problems are created when quotes are better only because they include marketing incentives. The fundamentals of a plan are the claim and administrative costs. Finding a plan with lower administrative costs allows more premium dollars for claim payment; keeping claim costs under control is the single biggest way that costs can be saved.
If you receive a nasty renewal, speak with your advisor about strategies and solutions to manage your plan now and for the future.
ASSOCIUM Benefits is a very unique employee group benefits provider, focused on supporting benefits advisors and their employer clients. We provide Brokers and Plan Sponsors with a range of solutions from traditional group benefits to more customized, cost and tax effective employee compensation. Let’s connect to find out how we can help.