Growing deductibles, greater co-insurance shares, larger co-pays. The result? Higher out-of-pocket medical costs for employees. To help employers lessen the impact, more brokers are turning to a tried and true solution—gap coverage.
David Fesmire had a problem. He had just received the renewal offer on a client’s major medical policy. It wasn’t good news—a 34 percent rate bump. He knew his client and his client’s employees couldn’t afford such an increase so David, owner of Coverage Solutions Group in Nashville, Tenn., reviewed his options.
His client said he didn’t want to do what 53 percent of employers expect to do in 2012—increase the percentage that employees contribute to their plan’s premium.1 Increasing the annual deductible was another potential cost-saving option, but it was already at $2,000. Increasing it even more could create a financial hardship for participants if they required sudden, unexpected medical care.
So what did David do? He did what a growing number of brokers are doing today as out-of-pocket costs continue to rise for participants. He turned to a tried-and-true solution—gap coverage.
HRAs and HSAs
Gap coverage is nothing new. It’s simply a funding arrangement or insurance policy designed to mitigate out-of-pocket costs associated with high deductibles, greater co-insurance shares and larger co-pays.
Funding arrangements include health reimbursement accounts and health savings accounts. If you don’t think of these as “gap” coverage, you’re not alone. Many brokers don’t, even though the purpose of the accounts is to fund the cost of medical care before the major medical plan’s benefits are paid.
In the case of an HRA, the employer funds and administers the plan for the benefit of participants. The employer can determine what benefits are paid, how much is paid and to what extent participants share in costs not covered by the major medical plan. The employer also retains control of its funding of the plan, with any unused dollars being recaptured at year-end. HRAs are a useful tool for employers who have the positive cash flow to fund the expenses and the ability to administer the plan or pay a third- party administrator to do so. However, the percentage of companies offering HRAs remains unchanged over the last five years and is not expected to increase in 2012, according to a 2011 Towers Watson report.
With an HSA, the participant owns the account and makes tax-deductible contributions that can be used for qualifying out-of-pocket medical expenses. Participants must be covered by a qualifying high- deductible health plan and must follow government guidelines on contribution limits and use. Right now, 41 percent of employers offer HSAs, with 31 percent contributing funds to encourage their use and to offset the employee’s contributions. However, much like contributions to an employee’s personal IRA, employer contributions to the employee’s HSA are irrevocable—once made, the contribution is out of the employer’s control.
HRAs and HSAs both have their merits, but not all employers find them practical. Some turn to insured “gap” coverage instead.
Traditional gap plans
Traditional gap plans are structured much like a major medical plan, paying expenses up to a yearly maximum, which typically correlates to the major plan’s deductible. Some gap plans also include co-pays, co-insurance and deductibles of their own, adding further complexity to the overall plan design.
Before suggesting a traditional gap plan, brokers must thoroughly understand how it works so they can effectively communicate the plan’s pros and cons to the employer and participants, paying particular attention to how it functions when a claim is filed. Under most traditional gap plans, participants must file a claim directly with the insurance company, requiring a copy of the major medical plan’s explanation of benefits as part of the claims process. This can be cumbersome and time-consuming as the participant must first wait for the major carrier to complete processing the claim before submitting it to the gap carrier. This can result in delayed reimbursement for out-of-pocket costs.
Additional considerations around traditional gap plans include pre-existing conditions limitations and excluded conditions. Such features dilute the value of the plan as participants pay for coverage that may not provide a benefit, yet still have to pay out-of-pocket costs.
Major medical carrier concerns
The use of gap coverage has drawn the attention of the major medical carriers, and rightly so. Improper use and design of a gap plan can cause utilization issues with the major medical coverage.
In Fesmire’s client’s case, the gap strategy included lowering the premium cost by increasing the deductible. When participants are responsible for more of their initial medical expenses, they’re more prudent when it comes to using their health care. This works for major medical carriers because they historically have seen less utilization in plan designs with higher deductibles and are willing to offer the lower premiums. It also works for employees as far as the premium amounts are concerned, keeping their costs at a more affordable level. According to PricewaterhouseCoopers, employees continue to shift to high-deductible plans with 17 percent of employers reporting their most-enrolled plan for 2011 was a high-deductible plan (up 4 percentage points from the previous year).
Many major medical carriers are instituting measures to discourage the use of gap coverage. Some of these measures include raising the rate of plans where a gap plan is in place; counting only half of the gap coverage payments toward the deductible; and lowering or eliminating commissions. Even if the major medical carrier doesn’t initially impose some restrictions, the plan may run the risk of a rate increase at renewal.
Health care reform won’t do much to eliminate this concern. The Patient Protection and Affordable Care Act outlines essential coverage, which includes four plan designs—platinum, gold, silver and bronze. Each plan requires higher cost-shifting to the participant (the lowest cost bronze plan would shift 40 percent of the total costs to the participant). While many aspects of essential coverage and these specific plan designs are still to be determined, the need to provide options for out-of-pocket costs will remain.
This is where a well-designed gap plan comes into play. The idea being to help offset some of the employee’s out-of-pocket exposure without eroding the cost containment and utilization advantages the major medical carrier realizes with the high-deductible plan.
Fixed indemnity limited benefits
Aware of the issues, Fesmire was concerned using a traditional gap plan would be a short-term fix, and he’d have to make further changes at the next renewal. Instead, he turned to a different gap coverage solution—a fixed indemnity limited benefit plan.
Fixed indemnity limited benefit plans are increasingly being used as gap coverage. Brokers are finding that the flexibility of these plans addresses many of the issues associated with traditional gap coverage.
Fixed indemnity limited benefit plans pay a fixed-dollar amount per covered event. Participants have a better understanding of what benefits will be paid and how the plan fills in under their deductible.
Coverage can be designed to provide a first-dollar benefit that fills the gap if a covered event, such as a hospitalization or surgery, occurs. By providing benefits for such unexpected events, the plan design can diminish the financial impact of a high deductible. In the current economic climate, with many dual-income households reduced to a single income, this provides a meaningful benefit to participants who may not have savings or may have maxed-out their credit cards. The goal is not to cover every gap, but to cover those that may have a larger and more immediate impact on participants.
Coverage can be designed to retain some out-of-pocket costs for the participant. This can help reinforce the cost-containment aspects of the high-deductible plan and be provided for only non-elective events. This design’s value is twofold: the premium of the gap plan is lower since it doesn’t include coverage for outpatient (elective) services; and by not covering elective services, the plan encourages consumer-driven attitudes with participants.
Claims handling can be simplified and expedited. Depending on the carrier, benefits can be assigned to the provider. That means the participant is removed from the claims process as long as the provider is willing to bill both the gap provider and the major medical provider. If the carrier doesn’t allow assignment or the provider won’t bill both carriers, the participant can submit a claims form with a copy of the bill.
Premium efficiency is the key to a successful gap strategy. Ideally, the combined cost of the major medical plan with the new deductible and the gap coverage is equal to or less than the renewal offer on the lower-deductible plan. The flexibility of the fixed indemnity limited medical plan provides a benefits broker with an effective tool to achieve this efficiency. The ability to “dial in” a benefit design to a specific premium makes the fixed indemnity plan a good option for providing the gap coverage.
An added value of a fixed indemnity limited medical plan is the ability to go beyond providing just gap coverage. A single plan design also can provide critical illness or accident benefits as well as life insurance and short-term disability insurance.
In Fesmire’s case, he proposed an increase on the major medical plan’s deductible to $5,000, resulting in a net decrease in the plan premium. He then designed a fixed indemnity limited medical plan, which included fixed-payment coverage for outpatient surgical facilities, daily inpatient hospital stays and hospital admission. The combined premium for both the major medical and limited benefit medical plan was only $20 greater than the previous year’s single rate, and the family cost was $150 less than the projected renewal premium.
Although the gap plan was a voluntary election for participants, 30 percent signed up for the coverage.
Gap coverage in its many forms—self-funded or fully insured—provides benefits brokers with a valuable tool in an increasingly complicated employee healthcare arena. By being a solutions provider, the broker can effectively address the concerns of the employer, the participants and the major medical carrier. A fixed indemnity benefit plan provides a flexible alternative to traditional gap coverage, giving brokers an important new tool in their sales arsenal.
Tim Adkisson is assistant vice president for select benefits sales in Symetra Life Insurance Co.’s benefits division. He can be reached at (425) 256-6334.