Mckay Chpt 2 & 5 Elements Of Flexible Benefit Programs

Front 1

ADVANTAGES OF FLEX PLANS
To Employees
To the Employer

Back 1

To Employees
 Ee can choose type, level, and form of benefits to suit his needs
 Ee can compensate for cost increases by re-choosing
 Tax-advantages (HCEA’s, qualified benefits not taxed)

To the Employer
“Motivation for the Move to Flex Benefits”
“Objectives for Choice Making in Health Care”
 appeal to diverse ee demographics
 reduce inequities
 allow cost variations by geog area
 needed after a merger
 can vary contributions based on performance
 Tax advantage (Er-paid premiums tax-deductible)
 Useful for Cost Control
 clearly-defined cost mgmt mechanism
 Gives Er new ways to cut costs
 Less Duplicate Coverage to Ees
 encourage prudent use of benefits by the ees
 can include special benefits (Legal, LTC, etc.)
 Reduced pressure from ees (HCEA can be offered)
 soften the blow of benefit cuts
 gives ees a “Total Compensation” perspective
 flex choice is visible and attractive to ees (hiring easier)
 Competitivity. Ee perception of value.

Front 2

DISADVANTAGES OF FLEX PLANS
To Employees
To the Employer

Back 2

To Employees
 Ee may make wrong choice. Stuck for 1 year
 “Use it or lose it” rule for Flex Spending Accounts


To Employers
 Administrative cost
 Antiselection
 Backlash at change
 Hard to find an insurer
 Compliance with IRS

Front 3

THE 7 FLEX PLAN DESIGN CONSIDERATIONS

Back 3

“O cho ca, ti so fun coo” (“O chocolate cake, ‘tis so fun to cook”)
O = (O)ption structure
Cho = (Cho)ice level offered to ees
Ca = (Ca)tegories of Insurance offered
Ti = (Ti)ers of coverage
So = (So)urce of Insurance
Fun = (Fun)ding method
Coo= (Coo)rdination

Front 4

DESIGN “O” – OPTION STRUCTURE (TYPE OF FLEX PLAN)

Back 4

 Opt-up-or-down
 Opt-down: Ee gets cash to use elsewhere.
 Opt-up: Payroll deduction
 Core plus options & credits
 The lowest benefit option is the “core”
 Ee’s can pay for higher options with Er credits and/or ee payroll deductions

 Health Care Expense Accounts (HCEA’s) (Medical Spending Accounts) (Flex Spending Accounts)
 “Companions to flex plans”
 Employee-paid in USA; Ee or Er-paid in Canada.
 Reimburse uninsured health expenses (e.g. glasses)
 Pre-tax to ee
 Can be combined with a high-deductible, catastrophe policy.
 Encourage prudent utilization
 Ee must elect 1 year in advance. Use or Lose.

HCEA’s are Most Useful For:
 benefits that very few ees want
 benefits that ees can predict
 benefits vulnerable to antiselection

 A combination of the above.
 Each category of care (HI, MI, DI) can have its own structure.

Front 5

Considerations in Structure of Options
(Esp. for Medical Benefits)

Back 5

 When a conventional plan is converted to a flex benefit plan:
 Should current plan be retained as an option?
 Low & Hi options will diverge in price
 Hi option price has to be raised
 Ee backlash

 Competitors’ plan options
 Should Ee’s Be Allowed to Opt Out?

Problems with opt-out ability
 Uninsured ees (require proof of external covg)
 Antiselection
 especially for Dental, which is elective
 occurs mostly on introduction of the opt-out provision.
 higher premiums for participating ees


Misc. Design Considerations
 plan should be simple. Options Parallel
 clearly communicate options, provisions, tax implications
 Subsidize the er-preferred option.

Front 6

DESIGN “Cho” – CHOICE LEVEL OFFERED TO EES
Choice in the Supplemental Health Care Benefit level is critically important for ees, because:

Back 6

 most visible, most highly perceived, and most frequently used benefit
 high cost and value
 Ees concerned about large medical expenses
 Ees want choice

In the U.S, replace “Supplemental Health Care” by “Health Care.”

But, Choice leads to Antiselection
 Ees pick worst option for Er
 Antisel makes cashflows unpredictable
 Er should limit choice in Dental and other elective care.

Front 7

Antiselection Controls

Back 7

Mnemonic:
Red-faced,
 reductions in LI benefits for old ages
Open-Minded
 open enrollment period
Level-headed
“Level-of-benefits controls” for LI
 minimum amount
 specific increments only (or just “in” or “out”)
 not full rebate to ees who waive coverage
Partners
 high ee participation (e.g. by requiring core covg)
 high Er contribution
 mandatory, not voluntary (esp. Dental)
Cough on a
 Cost-sharing
 Incentives (for generic drugs or in-network dentists)
Pack of
 Package dental with medical
Cookies and
 Coordination Of Benefits with workers comp and Medicare
Defecate
 definition of eligibility and disability
Large Amounts of
 underwrite large amounts (evidence of insurability)
Excrement in the
 use exclusions (pre-existing condition, missing tooth, etc.)
Latrine.
 Handling of late and new entrants
 Examine sudden opt-inners
 Beware of self-insurers requesting outside insurance
Wait! Take a
 waiting period
Day Off!
 Don’t Overinsure

Front 8

DESIGN “Ca” – CATEGORIES OF INSURANCE OFFERED

Back 8

Health (Supplemental Medical in Canada)
Canada already provides, for all citizens:
 Physician, surgeon
 Hospital ward room
 Hospital expenses
 Out-of-province expenses
 It does not provide Drugs.

A Supplemental Medical Plan (in Canada) provides:
 private room
 drugs
 nursing
 wheelchairs and prosthetics
 Ambulance

Canadian Supplemental Medical Plan characteristics:
 Er-pays-all
 90-100% coinsurance; small deductible.
 no benefit maximum, but there are internal limits.
Life, Dental, Vision, Legal, Vacation, Stock Options, Etc.

Front 9

DESIGN “Ti” – TIERS OF COVERAGE OFFERED

Back 9

 3 or 4 tiers
 family maximums on deductibles and family out-of-pocket maximums.
 Tiers improve equity

Front 10

DESIGN “So” – SOURCE OF COVERAGE

Back 10

Sources of Coverage:
 Indemnity Plans
 fully-insure, partially-insure, or self-insure
 Managed Care Plans
 HMO, PPO, POS, Dental HMO, Dental PPO
 Health Care Expense Accounts

When moving from a Conventional plan to a Flex Benefits Plan, the Er should:
 retain similar cost-sharing to ease the change
 tempt ees to use the HMO (cheaper)

Front 11

DESIGN “Fun” – FUNDING METHOD

Back 11

Funding comes from:
 Rearrangement
 Cutbacks from existing benefits
 New Money: ee or er.

Front 12

DESIGN “Coo” – COORDINATION WITH EES’ OTHER COVERAGES

Back 12

Considerations:
 Which plan is primary? secondary?
 Children covered under ee or his spouse?
 married couples employed
 only one can enroll
 children only covered once

 type of COB
 Standard COB
 Exclusion
 Carveout

Front 13

COMPARISON OF COSTS IN FLEX PLANS vs. TRADITIONAL PLANS

Back 13

Traditional, Nonflexible Plan
Cost to Employer = Claims + Expenses – Employee contributions

Cost to Employee = employee contributions

Flex Plan
Cost to Employer = Claims + Expenses + Credits – Price Tags
offered to ees (ee contribs)
Cost to Employee = Price Tags – Credits


Done.