Growing deductibles, greater co-insurance shares, largerco-pays. The result? Higher out-of-pocket medical costs foremployees. To help employers lessen the impact, more brokers areturning to a tried and true solution—gap coverage.

David Fesmire had a problem. He had just received the renewaloffer on a client’s major medical policy. It wasn’t good news—a 34percent rate bump. He knew his client and his client’s employeescouldn’t afford such an increase so David, owner of CoverageSolutions Group in Nashville, Tenn., reviewed hisoptions.

His client said he didn’t want to do what 53 percent ofemployers expect to do in 2012—increase the percentage thatemployees contribute to their plan’s premium.¹Increasing the annual deductible was another potential cost-savingoption, but it was already at $2,000. Increasing it even more couldcreate a financial hardship for participants if they requiredsudden, unexpected medical care.

So what did David do? He did what a growing number of brokersare doing today as out-of-pocket costs continue to rise forparticipants. He turned to a tried-and-true solution—gapcoverage.

HRAs and HSAs

Gap coverage is nothing new. It’s simply a funding arrangementor insurance policy designed to mitigate out-of-pocket costsassociated with high deductibles, greater co-insurance shares andlarger co-pays.

Funding arrangements include health reimbursement accounts andhealth savings accounts. If you don’t think of these as “gap”coverage, you’re not alone. Many brokers don’t, even though thepurpose of the accounts is to fund the cost of medical care beforethe major medical plan’s benefits are paid.

In the case of an HRA, the employer funds and administers theplan for the benefit of participants. The employer can determinewhat benefits are paid, how much is paid and to what extentparticipants share in costs not covered by the major medical plan.The employer also retains control of its funding of the plan, withany unused dollars being recaptured at year-end. HRAs are a usefultool for employers who have the positive cash flow to fund theexpenses and the ability to administer the plan or pay a third-party administrator to do so. However, the percentage of companiesoffering HRAs remains unchanged over the last five years and is notexpected to increase in 2012, according to a 2011 Towers Watsonreport.

With an HSA, the participant owns the account and makestax-deductible contributions that can be used for qualifyingout-of-pocket medical expenses. Participants must be covered by aqualifying high- deductible health plan and must follow governmentguidelines on contribution limits and use. Right now, 41 percent ofemployers offer HSAs, with 31 percent contributing funds toencourage 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—oncemade, the contribution is out of the employer’s control.

HRAs and HSAs both have their merits, but not all employers findthem practical. Some turn to insured “gap” coverage instead.

Traditional gap plans

Traditional gap plans are structured much like a major medicalplan, paying expenses up to a yearly maximum, which typicallycorrelates to the major plan’s deductible. Some gap plans alsoinclude co-pays, co-insurance and deductibles of their own, addingfurther complexity to the overall plan design.

Before suggesting a traditional gap plan, brokers mustthoroughly understand how it works so they can effectivelycommunicate the plan’s pros and cons to the employer andparticipants, paying particular attention to how it functions whena claim is filed. Under most traditional gap plans, participantsmust file a claim directly with the insurance company, requiring acopy of the major medical plan’s explanation of benefits as part ofthe claims process. This can be cumbersome and time-consuming asthe participant must first wait for the major carrier to completeprocessing the claim before submitting it to the gap carrier. Thiscan result in delayed reimbursement for out-of-pocket costs.

Additional considerations around traditional gap plans includepre-existing conditions limitations and excluded conditions. Suchfeatures dilute the value of the plan as participants pay forcoverage that may not provide a benefit, yet still have to payout-of-pocket costs.

Major medical carrier concerns

The use of gap coverage has drawn the attention of the majormedical carriers, and rightly so. Improper use and design ofa gap plan can cause utilization issues with the major medicalcoverage.

In Fesmire’s client’s case, the gap strategy included loweringthe premium cost by increasing the deductible. When participantsare responsible for more of their initial medical expenses, they’remore prudent when it comes to using their health care. This worksfor major medical carriers because they historically have seen lessutilization in plan designs with higher deductibles and are willingto offer the lower premiums. It also works for employees as far asthe premium amounts are concerned, keeping their costs at a moreaffordable level. According to PricewaterhouseCoopers, employeescontinue to shift to high-deductible plans with 17 percent ofemployers reporting their most-enrolled plan for 2011 was ahigh-deductible plan (up 4 percentage points from the previousyear).

Many major medical carriers are instituting measures todiscourage the use of gap coverage. Some of these measures includeraising the rate of plans where a gap plan is in place; countingonly half of the gap coverage payments toward the deductible; andlowering or eliminating commissions. Even if the major medicalcarrier doesn’t initially impose some restrictions, the plan mayrun the risk of a rate increase at renewal.

Health care reform won’t do much to eliminate this concern. ThePatient Protection and Affordable Care Act outlines essentialcoverage, which includes four plan designs—platinum, gold, silverand bronze. Each plan requires higher cost-shifting to theparticipant (the lowest cost bronze plan would shift 40 percent ofthe total costs to the participant). While many aspects ofessential coverage and these specific plan designs are still to bedetermined, the need to provide options for out-of-pocket costswill remain.

This is where a well-designed gap plan comes into play. The ideabeing to help offset some of the employee’s out-of-pocket exposurewithout eroding the cost containment and utilization advantages themajor medical carrier realizes with the high-deductibleplan.

Fixed indemnity limited benefits

Aware of the issues, Fesmire was concerned using a traditionalgap plan would be a short-term fix, and he’d have to make furtherchanges at the next renewal. Instead, he turned to a different gapcoverage solution—a fixed indemnity limited benefit plan.

Fixed indemnity limited benefit plans are increasingly beingused as gap coverage. Brokers are finding that the flexibility ofthese plans addresses many of the issues associated withtraditional gap coverage.

Fixed indemnity limited benefit plans pay a fixed-dollar amountper covered event. Participants have a better understanding of whatbenefits will be paid and how the plan fills in under theirdeductible.

Coverage can be designed to provide a first-dollar benefit thatfills the gap if a covered event, such as a hospitalization orsurgery, occurs. By providing benefits for such unexpected events,the plan design can diminish the financial impact of a highdeductible. In the current economic climate, with many dual-incomehouseholds reduced to a single income, this provides a meaningfulbenefit to participants who may not have savings or may havemaxed-out their credit cards. The goal is not to cover every gap,but to cover those that may have a larger and more immediate impacton participants.

Coverage can be designed to retain some out-of-pocket costs forthe participant. This can help reinforce the cost-containmentaspects of the high-deductible plan and be provided for onlynon-elective events. This design’s value is twofold: thepremium of the gap plan is lower since it doesn’t include coveragefor outpatient (elective) services; and by not covering electiveservices, the plan encourages consumer-driven attitudes withparticipants.

Claims handling can be simplified and expedited. Depending onthe carrier, benefits can be assigned to the provider. That meansthe participant is removed from the claims process as long as theprovider is willing to bill both the gap provider and the majormedical provider. If the carrier doesn’t allow assignment or theprovider won’t bill both carriers, the participant can submit aclaims 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 newdeductible and the gap coverage is equal to or less than therenewal offer on the lower-deductible plan. The flexibility of thefixed indemnity limited medical plan provides a benefits brokerwith an effective tool to achieve this efficiency. The ability to“dial in” a benefit design to a specific premium makes the fixedindemnity plan a good option for providing the gap coverage.

An added value of a fixed indemnity limited medical plan is theability to go beyond providing just gap coverage. A single plandesign also can provide critical illness or accident benefits aswell as life insurance and short-term disability insurance.

A solution

In Fesmire’s case, he proposed an increase on the major medicalplan’s deductible to $5,000, resulting in a net decrease in theplan premium. He then designed a fixed indemnity limited medicalplan, which included fixed-payment coverage for outpatient surgicalfacilities, daily inpatient hospital stays and hospital admission.The combined premium for both the major medical and limited benefitmedical plan was only $20 greater than the previous year’s singlerate, and the family cost was $150 less than the projected renewalpremium.

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 fullyinsured—provides benefits brokers with a valuable tool in anincreasingly complicated employee healthcare arena. By being asolutions provider, the broker can effectively address the concernsof the employer, the participants and the major medical carrier. Afixed indemnity benefit plan provides a flexible alternative totraditional gap coverage, giving brokers an important new tool intheir sales arsenal.

Tim Adkisson is assistant vice president for select benefitssales in Symetra Life Insurance Co.’s benefits division. He can bereached at (425) 256-6334.