Why Lower Premiums May Cost More in the Long Run

It is understandable that Employers would like to keep the cost of benefits that they provide to employees to a minimum and to keep them within their profit margin.

Some Employers are willing to go with an insurance carrier that can provide the lowest premium during policy renewals. Sometimes, switching to a lower premium may cost employers more.

Deciding to switch insurance carriers requires significant attention to a variety of factors besides the cost of premiums. Obvious ones are customer service levels, online platforms, ease of use of the systems and procedures (i.e. enrollments, submitting claims and insurer’s stability to pay claims). Often the intangible and soft factors are hidden and finding out where they are can be difficult.

While trying to find lower premiums, employers usually tend to overlook the time spent, effort exerted, and the cost associated with renewals such as the:

  • Time to gather different quotes from different insurance brokers; then examine, review, explore different options (alternatives) and arrive at a decision that they thought would be best for the company and the employees.
  • Time to train plan administrators about the new policy and administrative procedures i.e. enrollments and terminations procedures.
  • Time to communicate and educate employees about new benefits – eligibility, limits, and exclusions
  • Time to answer employees’ inquiries about their new benefits and claims.

Not only the Employers; but also, the Employees need the:

  • Time to learn the new benefits they have with the new insurance carries and learn how to submit claims, understand their explanation of benefits and set up direct deposits.
  • Time interrupted in claims adjudication and claims payment that accompanies new policies for pharmacies i.e. pay direct drug card or pay and submit a claim for reimbursement.

This can be quantified by adding up the number of hours spent multiplied by the $ per hour.

Getting a lower premium may initially look like a great deal, but it can also turn out to be the opposite. Over time the lower premium may become unsustainable in that the premium may not be enough to support the existing claims level after the first year because of high expenses. This is normally called a “Teaser Rate” just to lure the Employer to make a switch and could result in an increase in rates at renewal time.

Expenses such as cost to administer claims, taxes, commissions, printing costs etc. are added together and deducted from the 100% to determine the Target Loss Ratio (TLR) which is a % of group benefits premium available to pay claims.

For example, if an Employer pays a benefits premium of $100K with a TLR of 70%, meaning $70K (70% of $100K) is available to cover the claims and the remainder $30K (30% of $100K) are expenses. What if the actual claims incurred is $85K and there’s only $70K available to pay claims?  This substantial first-year deficit leaves the employer vulnerable to a possible large increase in premiums at the next renewal to cover the claims payment.

Also, after switching to a lower premium carrier, there’s a possibility that the claims will increase because the coverage allocations and limits have been reset.

For example, if employees are eligible for eyeglasses (vision care) every 2 years, and have used the full benefit during the first year they would have to wait until year 3 to be eligible for another pair. However, if they have a new carrier and the allocation and limits have been reset, employees can get another pair of glasses in year one with the new carrier instead of having to wait until the 3rd year had the employer not changed the benefit plan.

Sometimes, trying to get a lower premium when renewing can really end up costing more.

At Dupuis Langen, we can help Employers understand how lower premiums with lower Target Lost Ratio (TLR) would result in larger premium increases in future renewals. We also help make them aware of these deceptive low premiums and review how lower premiums can impact clients’ Benefits Plan in subsequent years, not only in the current renewal year, without costing them more.