Employee benefit plan costs getting out of control?

As experienced employee benefits consultants, there are several key cost containment measures that we look at when analyzing a new benefit plan design, with one of the most potentially drastic options being switching to an Administrative Services Only (ASO) plan. In order to fully understand the benefits and drawbacks of an ASO plan, we must first understand the differences between Fully Insured (standard) and ASO plans.

Fully Insured Plans

In a standard Fully Insured benefit plan, the insurance company takes on all of the risk. No matter how much the plan is used by employees, the employer pays a set premium per month negotiated ahead of time, which is usually locked in for a year. The average expected usage of health and dental benefits, or the "Target Loss Ratio" that insurance companies are looking for is around 75–80% (including all inflation factors), meaning that for every $1 the employer pays in premium, they expect the employees to use about $0.75–$0.80 on health and dental services.

For example, if Company XYZ has a Fully Insured benefit plan and the premium is $8,000 per month, it doesn't matter if the employees spend $7,000 one month and $11,000 another – the premium will always remain level at $8,000. However, when it comes time for plan renewal, rates will change based on the usage of the plan. This is why we always suggest taking a plan to market every 3–4 years to ensure that an employer is still getting good value.

Administrative Services Only Plans

In an ASO plan, the insurance company manages the "administrative services" such as providing drug cards and managing claims, but the risk is mostly on the employer. Think of an ATM that the employer deposits a large sum of money into at the beginning of the year, and then money is taken out as claims are paid. At the end of the year, any money that isn't spent can either be saved by the company, or used as a float for next year's benefit claims. The benefit is the potential for huge savings, especially if the plan isn't being used as much by plan members.

There are also Stop Loss features that can be put in place to control the cost of plan members who use the plan more aggressively (e.g., those who take biologic drugs costing $3,000–$5,000 per month). Stop Loss insurance provides the employer with claim protection against large expenses – each time a member's claims exceed the limit set by the employer, the Stop Loss Insurer covers the excess amounts.

Even with stop loss measures, there still is the chance that the employer will have to pay out more premium than originally expected. This risk is mitigated by having more members on the plan. In a company of 10–20 employees having 1–2 heavy plan users can be detrimental to claims experience, whereas in a company with 100 employees, 1 or 2 heavier users wouldn't be enough to offset the expected claims paid to all employees, making budgeting much easier.

Which one is right for your company?

It really does depend! Behind every good employee benefits plan, lies effective plan design and an appropriate funding platform. We have clients with 100+ employees who are on fully insured plans because of their member usage and the employers desire to budget effectively, and we also have similar sized companies on ASO plans.

One of the phrases I hear most often when talking to business owners is "I haven't heard from my benefits broker in a long time" or "I only hear from them when I need to sign off on a renewal." Unfortunately, this is the sad reality many business owners face and it should not be the case.

Looking for a second opinion on your employee benefit plan to see if you are overpaying for benefits? Email me at michael@bogressfinancialgroup.ca or give me a call at 604-996-7464.