By Craig Santa Maria
Health insurance is a key piece
of the total compensation package you provide to your employees. But how many of them actually make significant use of that benefit?
According to Bob Stosick, the employee benefits expert at Santa Maria & Company, the answer is: a very small percentage.
“If an employer is purchasing one of the dozens of off-the-shelf, low-deductible plans, he or she is likely spending a lot more than necessary,” says Stosick. “Insurance carriers price those plans based on the assumption that every policy holder will make significant claims. Knowing that the actual claim rate is much lower makes it a little easier to understand why many of those companies make windfall profits every year.”
In an effort to save money, many large employers self-fund their employee health plans, meaning they act as the insurer paying any claims themselves. Their fixed costs are lower because they are not paying the markup that becomes profit for the traditional carriers. However, the variable costs, the actual claims, present a significant, widely variable risk.
“The good news,” says Stosick, “is that there is another option that could significantly reduce your costs and your variable cost risk, while still providing a low-deductible plan to your employees. That solution is a partially self-funded plan.”
By partially self-funding, you purchase a high-deductible plan at a much lower cost and use the savings to fund the benefit difference between the high deductible you purchase and the low deductible you provide (your variable risk). Simply, you provide a low-deductible plan at a lower cost by assuming a little more risk.
Here is a hypothetical example* to illustrate how a partially self-funded plan works:
- Your carrier offers you a plan with a low annual deductible of $2,000 that will cost you $40,000 per year (80%) and your employee $10,000 (20%)
- Instead, you purchase a plan with a higher deductible of $5,000 per year that costs you $24,000 (80%) and your employee $6,000 (20%).
- If the employee uses covered services that cost $18,000, the employee pays her deductible of $2,000, you pay 80% of the next $3,000 up to the $5,000 purchased plan deductible. At that point, you are no longer responsible for additional claims. In a typical plan, the employee will continue to pay 20% of additional charges until reaching her out of pocket maximum, with the carrier paying the rest.
* These dollar amounts are not based on actual plan rates, but are simply used to illustrate the concept.
It is not unusual for an employer to save $1,500-$2,000 per employee on medical costs by employing this strategy. In both fully and partially self-funded scenarios, companies typically use an independent plan administrator (IPA’s) to administer the company’s responsibilities in the plan.
“It’s important to note that each company’s situation is different, so there is no single correct solution for everyone,” Stosick reminds us. “Your best bet is to speak with a knowledgeable and experienced employee health plan broker who can help you determine the best solution for your business.”
Craig Santa Maria is President and COO of Santa Maria & Company (SMC), a risk management consultancy and commercial insurance brokerage in the San Francisco Bay area with deep expertise helping companies protect what is most important to them: their assets, their employees, and their futures. Contact SMC at 925-956-7600 or online at www.smcrisk.com.
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