Are you wondering what your Group Benefits costs will be for the upcoming year? If so, you're not alone. We get this question all the time. Many Plan Sponsors with premium-based plans are concerned about the unpredictability of their costs. In this blog post, we’ll explore the different types of Group Benefits plans and how they impact your costs for the upcoming year. From premium-based to claims-based and contribution-based plans, we’ll go over them all!
What are the different types of plans?
Let’s start at the beginning. There are essentially three ways of setting up health and dental coverage through a Benefits Plan. The style of plan you choose has a direct impact on how you need to budget and prepare for Group Benefits costs.
- Premium-based: instead of paying the actual cost of health and dental expenses, Plan Sponsors cover these expenses by paying a premium set by their benefits provider.
- Cost-based: lets Plan Sponsors set the budget, make fixed contributions, then give Plan Members the freedom to reimburse any eligible expenses.
- Claims-based: the Plan Sponsor sets a ceiling on how much they’ll pay in each category, then only pays for claims plus an admin fee.
If you want a full breakdown, you can check it out here, but for now, let’s dive into how these plans affect your costs.
The nature of your costs
Premium-Based Plans
Premium-based plans are the most unpredictable when it comes to estimating costs for the upcoming year. If you have just signed up for a plan, there’s a good chance that the insurer will offer you a steep discount to win your business. However, insurance companies are businesses, and they can’t offer discounts forever. For the second year of your plan, you can expect the insurer to try and recoup their costs and get back to a profitable position. As a result, there is a good chance your premiums will go up.
Additionally, if even one, yes only one, Plan Member with high claims joins your plan, your premiums can skyrocket. This is because insurance companies calculate premiums based on the cost of reimbursing claims for the entire group. If one member has high healthcare costs, it can mean higher premiums for everyone.
Claims-Based Plans
Claims-based plans offer more transparency and efficiency when it comes to estimating costs for the upcoming year. Your costs will depend on how much your team claims, but at least you can track where your money is going. With a fully transparent cost structure (claims plus an admin fee) you can make informed decisions about your plan and know exactly where your money is going.
One advantage of claims-based plans is that you can still put in a hard cap to minimize risks. By working with an experienced provider, you can create categories and limits that ensure your costs won't surpass a certain amount. This allows you to know the maximum cost for your budget, then be pleasantly surprised when the actual claims come in.
Over here at Blendable, we call this plan an Enhanced Health Blend (EHB)!
Cost-Based Plans
Cost-based plans give you total control over your costs. You set the budget, so your costs are entirely up to you. This gives you a lot of flexibility in terms of how you manage your plan, but it also requires you to be firm in your decision-making. With this type of plan, you can adjust your benefits based on your budget, which can be especially helpful if you're facing financial constraints.
Cost-based plans are commonly known as Health Spending Accounts (HSA) and provide the ultimate in cost control and flexibility.
Show me the numbers!
Talk can be cheap, so let’s break it down with some examples. We’ll take a premium-based plan where we have premiums, claims, and renewal data, then compare that to how the plan would be managed using claims-based and cost-based models.
The plan
This plan has 10 members, 5 with single coverage and 5 with family coverage.
Their health and dental coverage includes:
- 80% drug coverage
- 100% of major health services covered
- 100% paramedical up to $500 per practitioner
- Semi-private hospital rooms
- $150/year for vision
- 80% dental coverage
- 50% of level 3 drug coverage with a shared $2000 maximum with levels 1 and 2.
Last year the Plan Members claimed $22,773 in health and dental expenses.
Premium-Based Budget
Let’s start with the numbers we have already. For this kind of coverage, the insurance company is charging the Plan Sponsor monthly premiums of:
- $167.34 for single coverage; and
- $415.35 for family coverage.
That’s $2,193.45 per month or $34,961 per year.
The main thing to note about that cost is that regardless of the claims for the year, the Plan Sponsor will pay the full amount.
But what happens to this plan in year two? Well as we mentioned, Insurers are still a business, and they need to make money. So, they’ll take a look at your claim volume and hike your premium as they see fit.
This plan was hit with a renewal the next year, and they found that their premiums were now:
- $209.62 for single coverage; and
- $543.46 for family coverage.
This totals out to $3765.40 per month or $45,185 per year.
That’s a 29% jump in your benefits costs in a single year alone. Believe us, we’re not cherry-picking a bad example. Premium hikes like this are all too common – we run into them every day.
But what about the other ways to pay for benefits?
