Mitigating Risk in Your Client’s Benefits Plan Design – Part 1

RiskA benefits plan is a promise between an employer and their employee. As a trusted source of knowledge to your clients, your role as a benefits advisor is to help them keep that promise. You can achieve this by advising them on the optimal benefits plan design that will best match their company objectives and compensation philosophy. A critical component of any well-designed benefits plan is a risk-mitigation strategy that protects the plan against unexpected shocks and misuse.

For this article (Part 1), we will review risk mitigation strategies discussed pre-COVID19 in one of our popular CE credit webinars. You can watch a recording of the webinar here.  Our follow up article (Part 2) will discuss risk mitigation strategies in the age of COVID19 and how benefits plans can become adaptable and resilient to sudden shocks.

Below you’ll find a summary of risk mitigation strategies for the three highest risk components of a benefits plan.

1) Drug Plans

A poorly designed drug plan poses one of the largest risks to your clients. A single ongoing claim on an expensive drug can increase premium rates significantly, year after year. To mitigate this risk, there are three possible solutions:

Implement a Drug Maximum

Drug maximums are easy to implement, easy to communicate, and easy for both your client and their employees to understand. By incorporating a drug maximum, your client decides the amount they will cover for their employees based on their own risk tolerance, by class of employee.

Though this method is simple and effective, there are a few problems that may arise. First, this may cut an employee off from their needed medication. Second, this could create a perceived reduction of benefits. Your client may not understand the importance of the drug maximum if they have never had to cover large claims before. Third, the maximum may not have any immediate cost impact.

Create a Pre-Existing Condition Clause

A pre-existing condition clause protects the employer from covering the medical expenses of a new employee or their dependent with a chronic condition and also ensures employers do not have to make up for costs by reducing their long-term employees’ benefits. By stipulating that the organization will not cover costs for pre-existing conditions for new employees and/or their dependents, the candidate will be fully informed and the decision to work for the company rests with them.

Use Restricted Formularies

Employers can decide that they want to cover routine expenses but not specialty drugs (costing in excess of $10,000 annually).  If an employee needs a specialty medication, a restricted formulary points them to resources within the province first. In the case of Ontario, the claim would be redirected to the Trillium Drug Program or the Exceptional Access Program. This risk mitigation approach reduces the Stop Loss premium by 50%. If neither of the programs cover the drug, then employers can under the company benefits plan. Even if the employer chooses to provide coverage for these drugs provide coverage, the restricted formulary still reduces the Stop Loss Premium by 22%.

These three drug risk mitigation strategies can be applied in combination with one another and tailored to specific groups within the organization.

2) Paramedical Expense Exhaustion

Frequently, a benefits plan offers maximum coverage per paramedical discipline. For an example, your client may offer employees a maximum of $500 for chiropractor sessions and $500 for massage therapy. While the vast majority of practitioners operate ethically, there have been numerous reported cases of multi-disciplinary clinics taking advantage of a patient’s benefits plan. While the employee may initially need coverage for chiropractor services, the chiropractor will switch their billing to massage therapy using the credentials of another practitioner, while still providing the same treatment.

By creating a plan where employees receive coverage per practitioner to a combined maximum per person or per family, your client will be protected from the exhaustion of employee benefits.

If your client is concerned employees will need additional coverage, health care spending accounts can be used to cover any additional costs not covered by the defined plan.

3) Life and AD&D as a Function of Salary

Accidental death and dismemberment insurance can either be covered with a flat life amount or a function of salary amount. Function of salary means the coverage is relative to the employee’s salary. Often, the increase in coverage goes unnoticed and the paperwork associate with this approach leaves room for human error.

With flat life amounts, an employee is given the same amount of coverage from their first day within the organization. It’s simple to implement, easy to understand, and reduces the risk of errors.

Maximize Value

A benefits plan is a promise between an employer and their employee. To ensure your client can fulfill their promise and keep it sustainable, it’s important to safeguard the plan with risk mitigation tactics. We can help.  For more on maximizing value as an advisor, contact us today.

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