Why choosing the lowest price employee benefits plan may not be best.
When you are presented with different benefits provider options, are you tempted to choose the one with the lowest premiums? Or, when it’s time to renew your employee benefit plan, and you see a high increase in premiums, do you wonder whether or not you should change insurance providers?
Have you made choices based on the lowest cost, only to find that those lower premiums only last until the first renewal and then you are right back where you started?
The promise of a lower premium is often just smoke and mirrors, and won’t lead to long-term cost savings. There are a few reasons why your premiums can change after your first year, and to understand your real long-term benefits premium costs, you need to take these into account.
Your benefit plan may include some benefits that are “pooled” such as life insurance and long-term disability. Pooled benefit premiums are based on the industry, occupations, and demographics of your group. Some groups will be more likely to use life insurance or long-term disability benefits because of increased job or age-related risks. As a result, these types of premiums will change as your demographics change. This is why there is a lot of discussion about the aging work force, and how it can affect the cost of employee benefits.
Experience Rated Benefits.
If the plan includes short term disability, health, and dental benefits, these “experience rated” benefits can also impact your premiums. With experience rated benefits, the business must pay a high-enough premium to cover the insurance carrier’s of plan management, as well as the actual costs of your employees claims.
How your Experience Rated Benefits affect your Premium:
To give you an example, if a company pays a $10,000 annual premium for Health benefits, the carrier’s fees for managing your health benefits plan are taken out, leaving $7,500 to cover employee claims. If the company’s employees submit $10,000 in employee Health claims in the same period; then the company will see a significant increase to their Health premium to cover that difference. Otherwise the insurance provider is in a position of loss. Businesses do not last long if they operate at a loss and it is no different for an insurance company.
If the same company decided to change carriers at this point because a different carrier offered the same Health benefit plan for $8,000, but employee claims of $10,000 continued in the next year, then the premium increase at first renewal would be even higher than it was with the last carrier.
Consequences of choosing the lowest price employee benefits
We posted a past blog explaining why you should work with a benefits specialist. A specialist should be able to explain these potential consequences of choosing the lowest premiums.
If anyone tries to convince you to buy solely on price, then their interest is to get you as a client without considering the specific needs of your business, or without offering any education around benefit plans and how the premiums are determined.
Basically, there’s no free lunch. In our example above, if your company’s actual Health claims remain at the $12,000 or higher, then your premiums would have to increase to cover those claims as well as pay the insurance provider’s expenses. In other words, eventually those fees would catch up with you, one way or another.
How to actually lower your premiums
To have a positive effect on your premiums, you will have to find ways to lower your company’s health claims. If your company is hit with a large premium increase at renewal, it may be an indication that you need to change your plan design.
Most businesses do not want to take things away from their plans and employees. Some insurance providers offer cost containment options that will help contain claims without reducing the benefit plan. The right benefit specialist should be able to offer you suggestions and alternatives.
We hope we’ve given you a better understanding of why choosing the lowest price employee benefits may not be as good for your business as you think. If you need help analyzing your plan and looking for alternative ways to lower prices, we’d love to talk to you!