Over the last number of years, the cost of employer-sponsored health and dental plans has become an important consideration for business owners. Most of the plans in the marketplace are structured with an annual renewal, at which point the insurance company has the ability to increase premiums for the next year. The cost of a benefit plan is based on something called ‘claims experience,’ or ‘claims made versus premiums paid.’ If an insurance company has unfavourable claims experience, the premiums at renewal will be subject to a significant increase.
Ideally, brokers and clients design employee benefit plans together. Ultimately a coverage decision is based on various provisions such as paramedical services, prescription drugs, vision, dental, and hospital coverage. There are a number of control tactics that can be employed to manage ongoing plan costs. Some of the more common solutions are annual coverage maximums, co-insurance factors (requiring the employee to pay for a portion of the claim), and Large Amount Pooling (LAP) coverage. For most groups between two and 100 employees, the LAP stop loss limit is usually set at $10,000 per person. This added layer of coverage protects employers from the risk of large premium increases as a result of heavy users of health benefits, particularly drug claims.
As the drug landscape changes, employers need to look closely at their drug coverage programs. There are currently a number of brand name drugs that top the list of highest claimed drugs amongst employer plans; for example, Nexium, Lipitor and Plavix. These drugs are all facing patent cliffs, where either they are or soon will be competing with low-cost, generic equivalent substitutes. With many plans now either forcing generic equivalents or putting incentives in place for employees to use generic drugs, prescription claims should be trending lower. However, at the same time, there’s an influx of cutting-edge biomedical drugs created to treat a variety of illnesses and conditions that presently have no other treatments available. Not surprisingly, their prices range between $20,000 and $40,000 annually. Assuming that a plan has LAP coverage with a limit of $10,000, any claims made for one of these drugs above the stop-loss limit would not have any influence on the plan renewal rates.
The stop loss pooling provision works well with groups that pay at least $30,000 to $50,000 in health premiums per year, as they can absorb the claims under the pooling limit based on their size. But for smaller groups, a $10,000 stop loss may not be enough to protect its premiums from increasing 40 to 50 per cent, especially if they are only paying under $15,000 annually for benefits. In this situation, it may be necessary for the employer to impose an annual maximum on drugs which is well below the drug pooling limit. For example, instead of having unlimited drug coverage, the employer plan may only pay up to $2,000 per year for claims. This type of limit is suitable for most ongoing drug claims that are not in the biologic category. When an employee exceeds this amount, a few possibilities are available: First, an employee can pay out of pocket for claims above the maximum amount and claim the expenses back on their tax return as part of the Medical Expense Tax Credit (Line 330). However, if the claimant is faced with the expenses of a biologic or other high cost drug, there’s coverage available in Ontario through the Trillium Drug Program. This is a solution which should be considered carefully, as the Trillium Drug Program has its own deductible based on household income and only covers certain drugs.
The increasing complexity of employer-sponsored benefit plans makes it important to work with a knowledgeable broker who can advise on all options available in the marketplace. Strong representation will help ensure that a plan is designed to meet the specific needs of an employer, regardless of group size.
Michael Wortsman and Brett Okorofsky have over 25 years of experience in the insurance industry, providing advice to high net worth individuals, successful professionals and business owners. Their areas of expertise include life, disability, group and business insurance and they also specialize in wealth accumulation and preservation strategies. Mr. Wortsman can be reached at email@example.com and Mr. Okorofsky at firstname.lastname@example.org.