Ways to Share Benefits Plan Costs, Part 3: Annual Deductibles

The third installment of our sharing benefits costs series is dedicated to annual deductibles. Previously in part one and two, we covered the advantages of payroll deduction and co-insurance, respectively.

An annual deductible is a set amount that the employee is responsible to pay from their first claim of the benefit year before further expenses are paid by the plan. If the claim is less than the deductible, the benefits plan does not cover the cost of that initial expense in the benefit year.

The most common annual deductible is $25 per person to a maximum of $50 per family. These amounts can apply to medical services, dental services, or both. If, for example, an employee received physiotherapy services that cost $100, they would be responsible for the first $25. The remaining $75, as well as any following claims, would be covered by their benefits plan.

As reported by the Toronto Board of Trade’s 2012 Benefits and Employment Practices Survey, the use of annual medical deductibles is declining. In 2007, 48% of employers did not have a medical deductible, and that number has risen to 52.8% in 2012.

It is easy to see why annual deductibles are declining in popularity. When they were introduced decades ago, $25 made a larger impact on claims than it does today. Now, $25 or $50 is a negligible amount to the average claimant, relative to a single claim or as a portion of their total claims costs over a year. The deductible has lost its power as a cost control measure, as employees will not think twice about spending these amounts.

The first claim of the year would undoubtedly be greater than $25 or $50, meaning that under a benefits plan with an annual deductible of this amount, employees would have very little recognition of the deductible as a cost-sharing measure.

To combat this, some employers are setting much higher deductibles (e.g. $150 for an individual to a maximum of $300 per family) that have been adjusted for the actual costs of current medical and dental services. Others are simply eliminating annual deductibles entirely in favour of other, cost sharing alternatives (such as co-insurance).

Annual deductibles are less and less frequently included in benefits plans as employers recognize their declining impact. Compared to other cost sharing measures, many employers in Ontario are abandoning annual deductibles entirely.

Part four in our series will examine the emergence of prescription drug deductibles, and their advantages.

>> Don’t hesitate to contact us if you have any questions about customizing your benefits plan.

Mike Ignatz

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