A Comparison Of Funding Options Available For Health & Dental Plans
In the employee benefits industry, there are several different funding methods available for health and dental plans. Let’s explore the funding models and what considerations you need to take into account before deciding which is best for your organization.
Also known as fully-insured, traditionally funded benefits plans are a method of funding where your premiums are set out ahead of time, based on projected usage. Which is determined by a set of standard calculations used to form an ‘educated guess’ of future claims for your group. Throughout the year, you will pay a set rate for each employee covered under your benefits and will be subjected to an annual review and respective premium adjustment (up, or yes even down).
This funding method is a great solution for many small to medium-sized businesses. On a month-to-month basis throughout your benefit year, your premiums won’t fluctuate unless you are actively removing or adding employees to the plan.
ASO (Administrative Services Only)
In this model, the company is still responsible for fulfilling the cost of health and dental claims submitted by their employees. Essentially, the difference from traditionally funded to ASO is that your plan costs are based on actual real-time claims, coupled with an administrative fee to a third party who will administer said claims as set out by your custom built plan design and in accordance with CRA guidelines. One of the benefits of an ASO model is that your fees and taxes are paid based on the actual claims paid, whereas with traditionally funded plans you pay taxes and fees based on your premiums paid (the fee percentage is typically lower with ASO than with fully insured).
There are a few considerations to be made before deciding if ASO is the right fit for you. ASO is geared towards companies with a comfortable level of cash flow, as you will need to be able to cover the cost of claims. You also need to be comfortable with ebbs and flows in monthly costs as it pertains to health and dental claims. There is a big rumour that you open yourself up to more risk by going ASO, however, the risk level is the same as traditionally funded programs. The only difference is you pay for the claims as they happen versus potentially having to pay for increased claims in the following years’ renewal.
Alternatively, if you’re a small business looking for true stability and predictability for premiums not being impacted by your claims, then the Chamber of Commerce Group Insurance Plan is a great contender. Your premium is calculated using some of the same formulas mentioned above in traditional funding, but the risk is applied to the pool as a whole vs. your respective group. This creates a smoothing effect that has in-turn created a 40-year history of sustainable, predictable renewals for Chamber Plan clients.
The fully pooled funding option is of great value to any small business without sacrificing the fully customizable plan design that you would see with other funding methods.
What Method Is Right For You?
All funding options have their own unique pros and cons. Which funding method is right for you? This will depend on your overall organizational objectives. When implementing a benefits plan, it’s important to talk with your benefits specialist about your budgeting needs, the number of individuals to be covered, how much risk you can tolerate, opportunities for risk mitigation and stop loss, etc. to come up with the solution that works best for your unique needs.