Mike Craford, CEBS
David Wilson, FSA, FCIA, MAAA
Dating back 25 years it was common for employers to pay a large portion of both the employee and dependent cost of employee health and dental insurance. In many situations it was 100% of the cost for both employee and dependent. Back then there was generally just one plan of benefits offered. As HMO’s became more prominent it became more common to offer both HMO coverage and PPO coverage, many times through separate carriers. Generally, employers charged employees more for HMO coverage so that they would not impair the claims experience for their experience rated PPO coverage.
Over the years the industry has evolved. For instance, in California and Oregon, Kaiser has become the dominant HMO and many companies now offer dual choice plans either with the same company or with a couple of insurers. In Oregon and Alaska we have a unique small group rating methodology compared to most other states. In Oregon and Alaska, all carriers still use composite rates for their small group rating platforms. For many other states, the rating platform is age rated for employees, spouses, and children. At Craford, our association group plan rates are on an individual rating platform. You might ask why we have instituted individual rating for associations when the rest of the Oregon and Alaska marketplace are using composite rating. There are several compelling reasons we have opted for individual age rating for all our Association clients:
- Individual rating is more actuarially accurate – the group premium is made up of the individual rates for each individual employee. With composite rating you take snapshot in time – at renewal and develop an age/sex factor that is then used to set the rates for the next 12 months. If there is any change in the demographic makeup of the group over the next 12 months the rates are either understated or overstated based on the age/risk profile of the group. As an example, if the employer replaced a 55 year old employee with a 35 year old employee the rates should go down. If the reverse happens then the rates should go up. Using individual age rates the premium automatically adjusts to reflect the exact risk profile of the group, immediately when the employee is either hired or terminated.
- When we have a better reflection of the risk profile of the groups we are able to more accurately estimate the claims experience which results in more competitive rates. As time goes on, this can become a significant differential in pricing to the open market. If you get off track early, the rates will include an adjustment to cover past differences in actual versus estimated risk assessment.
- This design allows us to have a much lower rate for young families with dependent coverage.
- This design allows us a lot of flexibility to develop creative contribution alternatives.
- This rating design mirrors the design of the Public Exchanges but without forcing the inter-generational subsidies that hurt the risk make-up of the Public Exchanges.
Here is our most updated thinking on contribution strategies and how best to advantage our individual rating methodology for the various Associations we market:
- % - Employer establishes a % of the premium that they will pay towards the cost of coverage. This % can be based on a flat % for both employee and dependent, or it can be one % for the employee and a different contribution % for the dependent.
- Flat dollar amount – in this strategy the employer provides a flat amount they will contribute towards the cost of employee and potentially dependent coverage. With age banded rates this option is not preferred because it is difficult to communicate and administer. If it is applied uniformly across all ages, then in reality each employee has a different base contribution amount.
- Base buy-up – under this scenario at least two plans are offered and the employer funds to the base plan and then the employee has the ability to buy-up to a richer plan design. The buy-up can be a true buy-up which is the preferred method in which the employee pays the full cost difference between the base plan and the buy-up. For younger employees this cost is lower than it is for older employees and for some older employees the cost differential might be prohibitive. From an underwriting perspective this is a good thing because the younger healthier employees buy-up because it is cheap, but the older employees choose to stay with the base plan which reduces claim expenses to the plan.
- Base buy-down – a derivative of the base buy-up where you offer three plans and the employer funds to the middle plan and then lets the employee buy-up or buy-down to a less costly plan – usually an HSA. The employee can apply the premium differential to either dependent coverage costs or as contribution to a HSA side fund.
The most attractive alternative for most employers with at least 15 employees is to offer #4 which provides three choices for employees allowing them to customize the plans to their needs. From the employer perspective the net cost of all three plan sis the same regardless of the plan selected by the employee. Put another way, the cost to the employer is neutral – they do not care from a cost perspective which plan the employee chooses. This contribution strategy has been in place for many of our accounts with great success.
Deciding on the correct contribution strategy for your organization can be challenging. However, the Health and Welfare Consultants at Craford can help you strategize and communicate the correct plan. Call us today or simply send us an email for a free consultation. We look forward to speaking with you soon.
About the Authors:
Mike and Dave have been friends and colleagues for over 30 years. Over the course of that time they have worked together to craft many creative solutions a variety of stakeholders in the healthcare marketplace.
Mike Craford established the San Rafael office in 1989. Over the past 26 years, he has shaped Craford’s corporate strategy and internal culture to ensure consistent delivery of quality consulting and administrative services and sustained growth in client relationships. Earlier in his career he honed his skills in underwriting, rate making, contract negotiation and claims management at a major health insurance carrier. He has been an industry leader in identifying and being an early adopter of new technologies to drive administrative and communication efficiencies in benefit delivery. He is able to leverage his and the firm’s respect within the industry to position Craford to deliver superior financial and service results from the multitude of vendors who interface with our mutual clients.
In addition to managing the firm Mike consults to a broad range of clients from large Fortune 500 companies to smaller mid-size firms. He has extensive experience in M&A work both through Private Equity firms and corporate clients. He lead first to market initiatives in web based enrollment and administration in the late 1990’s and establishment of one of the first Private Equity Portfolio Purchasing Programs in 2004-05. He is frequently quoted in various trade publications on industry matters and emerging trends.
Representative client engagements include Safeway, Dreyer’s Ice Cream, Fluor, Sutter Health, Lockheed Martin, American Tire Distributors, Fireman’s Fund, CH2MHill, Friendly’s Ice Cream and numerous Private Equity firms. Mike attended Lewis and Clark College with a major in Communications and Journalism. He is involved in a number of professional organizations including Society of Employee Benefit Specialists, CIAB, Western Pension and Benefit Conference, and World at Work.
Mike and his wife Ardeth are the proud parents of 4 children and have resided in San Rafael for the past 30 years. In his free time he enjoys golf, water sports, snow skiing, and hiking.
David has been active in the health insurance arena for over 30 years. He is recognized as a leading expert in stop-loss insurance, healthcare reinsurance, and healthcare insurance underwriting. He has been a strategic advisor to start-up and established companies in the health insurance field. He has been a business faculty member for the Society of Actuaries Intensive Seminar in Applied Statistics from 1991 through 1999 and is a frequent speaker at actuarial and insurance industry meetings.
David is the founder and President of Windsor Strategy Partners. Windsor Strategy Partners is a specialized healthcare strategy firm helping clients develop and implement strategic growth initiatives. David leads the firm’s marketing and research efforts and acts as a senior advisor to our clients and partners.
David was the co-founder and Managing Director of the Apex Management Group, a healthcare actuarial firm located in Princeton, New Jersey. Prior to The Apex Management Group, Inc., David was Principal and senior healthcare actuary at Foster Higgins, a Principal at William M. Mercer, Vice President of the Home Life Insurance Company of New York and an officer of the Great-West Life Assurance Company.
David graduated with an MS in Statistics from the University of Manitoba. He is a Fellow of the Society of Actuaries, a Fellow of the Canadian Institute of Actuaries, and a member of the American Academy of Actuaries.