I’ve worn different hats in the human resources space for the past 11 years. When I’m wearing the benefits hat specifically, I’ve noticed that benefit financing tends to trip people up because it’s usually presented as a gigantic report that’s not very intuitive. In order to get the most out of my finance managers, I’ve trained them so that they can support me. I really enjoy seeing financial models from these folks, and their charts and forecasts usually leave me mesmerized, so I want to take full advantage of their talents. What I don’t want is a duplicate chart I’m already receiving from one of the insurance carriers. Here’s what I’ve learned about how to get the most out of your finance manager and how you can educate them about the world of benefits:
1. Fully insured or self-insured. A fully insured plan is where an employer will purchase a plan from an insurance carrier off of the shelf. Plan design is usually in the carrier’s court because the financial risk (i.e., claims incurred) falls on the carrier. Costs to the plan should be predictable month over month unless there is a change in employee count since the monthly premiums are based on the number of lives on the plan. From the employee perspective, a plan with a lower deductible is going to be a higher premium; and a plan with a higher deductible is going to be a lower premium.
A self-insured plan is where an employer takes on the financial risk to become the insurer. Plan design is in the employer’s court, with some governance under ERISA, because the employer can decide how much financial risk (i.e., claims incurred) they wish to take on. Costs to the employer will be variable month over month because actual claims are being paid (versus premiums). It takes 15-18 months for a plan to mature. For most employers, I would suggest giving the plan three to five years before settling on the plan design that strikes a balance between organizational culture, financing, and risk tolerance.
2. Stop-loss insurance. This insurance is applicable to self-insured plans. In summary, this is where an employer will only insure high cost claims and/or claimants. It’s designed to protect an employer’s cash reserves. For example, if you set your stop-loss threshold to $100,000 per claimant and you have 1,000 lives on the plan, your worst case scenario from a cash perspective – if everyone on the plan has a catastrophic event – is $100,000,000. Once the $100,000 ceiling has been reached, then the stop-loss insurance will activate.
Claims will always be variable. However, benefit managers can do a couple of things to arrive at an educated guess.
3. Claims experience. It never fails, a monthly invoice will come in and it’s 20% higher than the prior month or 20% higher year over year and the finance manager will ask how to get spend down and anticipate claims for better cash planning. We’re not predicting lottery numbers, so we’re never going to get it always right and hit a jackpot. Claims will always be variable. However, benefit managers can do a couple of things to arrive at an educated guess.
· When forecasting, build a cushion above anticipated claims. I would suggest 15-25% to start. That way you can build a reserve and invest the extra cash so that it can collect interest.
· Data, data, data. Know your population and leverage data that your carrier is providing to you. Know basic demographic data: Age brackets, percentage of individuals in child-bearing years, percentage of individuals approaching Medicare-eligible, percentage of claimants complying with their wellness exams, etc. so that an underwriter or actuary can model probabilities to predict potential claims. For a finance manager, they should only be able to see aggregate information and not individualized data for private health information reasons.
· Plan design. During your renewal, have a look at premium contributions, deductibles, copays, and covered benefits to see if there are any obvious areas for improvement. Note: Cutting benefits is not always the best solution – take a holistic approach.
4. Contract re-evaluation. This is an area I think many plan administrators undervalue. During the renewal period, it’s a natural place to re-evaluate existing contracts to see if they need to be repriced or renegotiated. This might be due to lower than expected participation, client satisfaction, or claims experience. Pay attention to allowances, per employee per month (PEPM) fees, and administrative costs. These are usually the areas where carriers will hide some of their costs in a contract.
Start with these suggestions and see where the conversation takes you with your finance manager. I have found that taking a transparent and informative approach will enhance the finance and benefits partnership.
