Why a logical approach to health plan design can be financially disastrous
Yesterday, my CBIZ Retirement Plan Services colleague and I led a benefits strategy meeting for a mutual client. As I described a health plan design strategy, my colleague interjected, “Wait, that doesn’t make any mathematical sense!”
I laughed, turned to her, and replied, “Right – in the world of group health insurance, in order to reach the best financial outcome, you often have to depart from the realm of logic, reason and actuarial principles. It may make your head hurt, but it’s part of the job.”
When I first entered the employee benefits business in 1997 as a group health insurance company representative, no one explained this nuance to me. Or, maybe someone tried, and I refused to listen. Either way, as a freshly minted economics major, the idea of dismissing mathematical logic was the farthest thing from my mind. Then, one day, I serendipitously noticed that our premium rating software was creating a tantalizing 25% reduction in premium by introducing a modest $250 deductible with 90% coinsurance as compared to a zero-deductible, 100% coinsurance plan. It wasn’t just 25% off the claims component; it was 25% off of the entire premium! This decrement was actuarially wrong – very wrong. However, from the insurance company’s perspective, the premiums were 100% correct and approved for sale. Having discovered this exaggerated premium discount, my renewals became easier, and my sales suddenly jumped.
Surprisingly, almost 20 years later, much of these mathematical inconsistencies continue, if you know where to look. While sometimes these irregularities are underwriting mistakes, most often, they are intentional financial incentives geared to move employers away from historic plan designs, networks and platforms.
When I find these inconsistencies, start digging and find the hidden pathways health insurers create, the 22-year-old economics major in me often wants to call the insurer and exclaim, “Good grief – if you really want your clients to move off this platform and onto this other platform, why don’t you just say so? Why must we go through this actuarial corn maze to understand your new business direction?”
For employers with benefit advisers adept at exploring this corn maze and finding these inconsistencies, everything works out just fine. However, when a logical approach is taken and the corn maze is left unexplored, here’s what can happen:
1. The benefits consultant or broker logically states that the employer has done everything possible via plan design and networks offered to control the cost of the plan.
2. The employer, agreeing with this logical advice, elects to maintain the current plan designs and network arrangements, indefinitely.
3. Each year, instead of discontinuing the plans the employer is offering, the insurer heavily increases the underlying premiums, desperately trying to incentivize the employer to change plans.
4. The health plan premiums and employee contributions rise like a runaway freight train, creating extreme pressure on budgets, 4980H(b) affordability standards and the overall sustainability of the plan.
Let’s take a quick look at a recent example. Just this year, my CBIZ consulting team and I were hired by an employer that sponsored these three fully insured plans:
As frequent explorers of this insurer’s corn maze, we quickly proposed this new plan lineup (changes in bold italics):
Thought process and observations:
· Because 95% of the employees reside within the local network area, paying a premium surcharge for the national network is not advantageous.
· Because the in-network plan design remained essentially unchanged, the 31 percent decrement in premium doesn’t make actuarial sense. The 31 percent decrement is a financial incentive designed to move the employer off both the national network and the historic platform.
· This plan was already on the discounted flagship platform and functions well as buy-up option for those employees willing to pay more for a national network. Because of the buy-up arrangement (aka defined contribution methodology), the employer’s net cost is the same regardless of which plan the employee selects. If/when the Affordable Care Act’s Cadillac tax arrives, this plan can easily be discarded.
A 36% reduction to introduce a $300 deductible? See what I’m talking about? This actuarially unsound discount is simply the insurer’s way of implicitly telling the employer to move to the flagship platform.
Now’s a great time for financially motivated employers sponsoring fully insured plans to double-check to see if this type of low-hanging fruit is readily available.