Smaller employers have less leverage when dealing with providers
There can be little doubt that employer-sponsored benefit plans will continue to be an important part of the overall remuneration package for the Canadian workforce.
And yet, changing market forces and vendors constantly present new challenges for employers looking to meet the benefits expectations of staff.
This is particularly true for small- and mid-sized employers. With a smaller member base, these organizations have less leverage when dealing with providers. The smaller the organization, the fewer options and less flexibility they are able to gain from the provider.
Group insurance providers generally consider small employers to be companies with less than 50 employees. The definition for mid-market can be much broader. Some feel mid-market organizations can have as many as 1,000 employees. But for the most part mid-size is defined as any organization with between 50 and 500 employees.
Fewer options for small employers
For small employers, benefit solutions are typically limited to “off-the-shelf” solutions from the insurers. Insurers typically provide a finite number of plan design options. The employer puts together its plan by selecting the benefit schedules for the different coverages.
The lack of flexibility in plan design results from the fact that each carrier has its own “standard” contractual provisions that apply to each benefit.
For example, one insurer’s standard clause for orthotic inserts is $400 per three calendar years while another’s is $350 per year. Also, one insurer’s standard clause for nursing care is $10,000 maximum per year, while another’s is $25,000 maximum over three years.
With recent consolidation in the insurer marketplace, the trend from the carriers has been to strictly adhere to their own wording, especially in the small market segment.
This allows for efficiencies in all aspects of the vendor’s business from paying claims to the issuance of contracts and handbooks. However, when changing providers, plan sponsors may be faced with some differences in the manner in which health and dental claims are adjudicated and reimbursed, such as the paramedical claim situation as noted above. This could cause dissatisfaction for some employees or even grievances in a unionized environment if the collective agreement requires plan sponsors to provide an agreed upon benefit schedule and the new carrier’s provisions associated with the benefit schedule differs from the outgoing insurer’s provisions.
However, there have also been some improvements in service for small employers. Many insurers have made significant investments to web-based plan administration applications, so many of the tools developed for the larger markets sectors are also available for smaller employers. For example, plan sponsors have the ability to enrol and terminate employees online, and many insurers now provide online claims status enquiry tools which can be accessed by plan members.
Providers have choices to make
For mid-sized employers, there is a greater degree of flexibility from the insurers that is not available to smaller clients.
The larger the client, the more willing an insurer is to deviate from standard provisions to secure the business, which translates into greater flexibility in plan design. And while sponsors must still be careful of differences in “standard” clauses when changing providers, the willingness by providers to modify these clauses makes it more likely that adjudication and reimbursement will reflect the benefit designs originally preferred by the client.
In addition to plan design flexibility, mid-size employers have more choice about how the benefit program is funded, especially for extended health and dental benefits.
For example, experience-rated health and dental benefits can be set up with refund accounting, where surpluses and deficits are accounted for at the end of each year. Surpluses are carried forward to be used in the next policy year and, conversely, deficits are covered off through higher premium costs.
Cost increases not going away
While some of the benefits challenges for small- and mid-sized employers are unique, there are also some common threads that are having an impact on all plan sponsors — most notably, rising costs.
Rising health and dental costs continue to wreak havoc with most plans.
Even a break even claims experience situation with no changes in health or dental benefits requires increases of 15 to 18 per cent per year for extended health and six to eight per cent for dental benefits in the renewal calculations.
Rising health and dental coverage costs are systemic and not going away. The challenge for plan sponsors is to ensure benefit programs meet employee needs while still exploring ways for the costs to be shared among all stakeholders including, if necessary, the employees themselves.
Employers are attempting to mitigate the increasing cost pressures through a number of initiatives.
One idea being tried is to change from insured to administrative services arrangements (self-insured funding models), often promoted as a sure-fire tool to provide reduced employers’ costs.
In the simplest terms, the insurer is on risk for all claim liability in an insured arrangement whereas that liability is shifted to the plan sponsor in a self-funded arrangement.
In many cases, however, cost reductions are short term in nature as this type of funding model does not do anything to address the forces driving the rising costs like an aging population, for example. Rather it simply shifts a future liability (incurred but not reported claims) from the insurer to the plan sponsor. In other words, in the administrative services model, the plan sponsor will be responsible for paying claims, rather than the insurer that has that obligation in an insured funding model. Costs for the sponsor are reduced in the short term but the payment of liabilities down the road could more than cancel out the initial savings.
Exposing a small- or mid-sized plan sponsor to the additional financial risk of the self-funding model may not achieve the long-term cost reductions anticipated. Thus a clear understanding of all factors that have an impact on a plan sponsor — both short-term costs and long-term liabilities — must be carefully considered before going this route.
Privacy rules complicate STD
Many employers have also had to deal with a relatively new benefit challenge for relating to the administration and adjudication restraints placed upon self-funded, short-term disability salary continuance plans.
In essence, developments in privacy legislation severely restrict an employer’s ability to adjudicate claims due to limitations regarding access to employee medical information.
Most small- and mid-sized employers do not have trained medical personnel on staff or on contract. These employers are, therefore, ill-equipped to act as claims adjudicator, and the current regulatory environment on privacy makes them “claims payers only” in self-funded arrangements.
In response many small- and mid-sized employers have had to retain the services of an insurer or another third party professional to act as claim adjudicator. Such arm’s length providers offer two critical services that an employer cannot provide: access to confidential medical information for the purpose of claim settlement, and medical modelling expertise in order to adjudicate claims.
Unfortunately, benefit cost increases are a constant in all market segments. Plan sponsors are faced with the challenge of balancing compensation budget limitations with the level of benefits provided, and based on the variables at play, there is no magic solution. Each sponsor will have to take the time and make the effort to explore all of the factors to come up with the best possible solution for that organization.
Geoff Hendrie is an associate and Tim Witchell is a principal in the Health & Group Practice of Mercer Human Resource Consulting. They both work from the Toronto office, and can be contacted at [email protected] or [email protected].
And yet, changing market forces and vendors constantly present new challenges for employers looking to meet the benefits expectations of staff.
This is particularly true for small- and mid-sized employers. With a smaller member base, these organizations have less leverage when dealing with providers. The smaller the organization, the fewer options and less flexibility they are able to gain from the provider.
Group insurance providers generally consider small employers to be companies with less than 50 employees. The definition for mid-market can be much broader. Some feel mid-market organizations can have as many as 1,000 employees. But for the most part mid-size is defined as any organization with between 50 and 500 employees.
Fewer options for small employers
For small employers, benefit solutions are typically limited to “off-the-shelf” solutions from the insurers. Insurers typically provide a finite number of plan design options. The employer puts together its plan by selecting the benefit schedules for the different coverages.
The lack of flexibility in plan design results from the fact that each carrier has its own “standard” contractual provisions that apply to each benefit.
For example, one insurer’s standard clause for orthotic inserts is $400 per three calendar years while another’s is $350 per year. Also, one insurer’s standard clause for nursing care is $10,000 maximum per year, while another’s is $25,000 maximum over three years.
With recent consolidation in the insurer marketplace, the trend from the carriers has been to strictly adhere to their own wording, especially in the small market segment.
This allows for efficiencies in all aspects of the vendor’s business from paying claims to the issuance of contracts and handbooks. However, when changing providers, plan sponsors may be faced with some differences in the manner in which health and dental claims are adjudicated and reimbursed, such as the paramedical claim situation as noted above. This could cause dissatisfaction for some employees or even grievances in a unionized environment if the collective agreement requires plan sponsors to provide an agreed upon benefit schedule and the new carrier’s provisions associated with the benefit schedule differs from the outgoing insurer’s provisions.
However, there have also been some improvements in service for small employers. Many insurers have made significant investments to web-based plan administration applications, so many of the tools developed for the larger markets sectors are also available for smaller employers. For example, plan sponsors have the ability to enrol and terminate employees online, and many insurers now provide online claims status enquiry tools which can be accessed by plan members.
Providers have choices to make
For mid-sized employers, there is a greater degree of flexibility from the insurers that is not available to smaller clients.
The larger the client, the more willing an insurer is to deviate from standard provisions to secure the business, which translates into greater flexibility in plan design. And while sponsors must still be careful of differences in “standard” clauses when changing providers, the willingness by providers to modify these clauses makes it more likely that adjudication and reimbursement will reflect the benefit designs originally preferred by the client.
In addition to plan design flexibility, mid-size employers have more choice about how the benefit program is funded, especially for extended health and dental benefits.
For example, experience-rated health and dental benefits can be set up with refund accounting, where surpluses and deficits are accounted for at the end of each year. Surpluses are carried forward to be used in the next policy year and, conversely, deficits are covered off through higher premium costs.
Cost increases not going away
While some of the benefits challenges for small- and mid-sized employers are unique, there are also some common threads that are having an impact on all plan sponsors — most notably, rising costs.
Rising health and dental costs continue to wreak havoc with most plans.
Even a break even claims experience situation with no changes in health or dental benefits requires increases of 15 to 18 per cent per year for extended health and six to eight per cent for dental benefits in the renewal calculations.
Rising health and dental coverage costs are systemic and not going away. The challenge for plan sponsors is to ensure benefit programs meet employee needs while still exploring ways for the costs to be shared among all stakeholders including, if necessary, the employees themselves.
Employers are attempting to mitigate the increasing cost pressures through a number of initiatives.
One idea being tried is to change from insured to administrative services arrangements (self-insured funding models), often promoted as a sure-fire tool to provide reduced employers’ costs.
In the simplest terms, the insurer is on risk for all claim liability in an insured arrangement whereas that liability is shifted to the plan sponsor in a self-funded arrangement.
In many cases, however, cost reductions are short term in nature as this type of funding model does not do anything to address the forces driving the rising costs like an aging population, for example. Rather it simply shifts a future liability (incurred but not reported claims) from the insurer to the plan sponsor. In other words, in the administrative services model, the plan sponsor will be responsible for paying claims, rather than the insurer that has that obligation in an insured funding model. Costs for the sponsor are reduced in the short term but the payment of liabilities down the road could more than cancel out the initial savings.
Exposing a small- or mid-sized plan sponsor to the additional financial risk of the self-funding model may not achieve the long-term cost reductions anticipated. Thus a clear understanding of all factors that have an impact on a plan sponsor — both short-term costs and long-term liabilities — must be carefully considered before going this route.
Privacy rules complicate STD
Many employers have also had to deal with a relatively new benefit challenge for relating to the administration and adjudication restraints placed upon self-funded, short-term disability salary continuance plans.
In essence, developments in privacy legislation severely restrict an employer’s ability to adjudicate claims due to limitations regarding access to employee medical information.
Most small- and mid-sized employers do not have trained medical personnel on staff or on contract. These employers are, therefore, ill-equipped to act as claims adjudicator, and the current regulatory environment on privacy makes them “claims payers only” in self-funded arrangements.
In response many small- and mid-sized employers have had to retain the services of an insurer or another third party professional to act as claim adjudicator. Such arm’s length providers offer two critical services that an employer cannot provide: access to confidential medical information for the purpose of claim settlement, and medical modelling expertise in order to adjudicate claims.
Unfortunately, benefit cost increases are a constant in all market segments. Plan sponsors are faced with the challenge of balancing compensation budget limitations with the level of benefits provided, and based on the variables at play, there is no magic solution. Each sponsor will have to take the time and make the effort to explore all of the factors to come up with the best possible solution for that organization.
Geoff Hendrie is an associate and Tim Witchell is a principal in the Health & Group Practice of Mercer Human Resource Consulting. They both work from the Toronto office, and can be contacted at [email protected] or [email protected].
