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Why You Shouldn’t Max Out Your Benefits Plan

By: Benefits by Design | Tuesday September 13, 2022

Employees often have a “use it or lose it” mentality when it comes to their health and dental benefits plan. Many think that they should use every last dollar available — I mean, why wouldn’t you? Although it may seem that way on the surface, there are some issues with this idea that end up costing “use it or lose it” employees more in the long run.

Benefits Plan Maximums Explanation 

Most benefits plans will have specific limits to how much can be claimed on the plan by an employee in a year. These maximums are different for different medical expenses. For example, paramedical services will have their own maximums, while amounts for glasses, hearing aids and diabetes supplies will each have their own specific maximum as well. This helps keep the plan sustainable and ensures that everyone covered under the plan has an equal opportunity to utilize it. 

Benefit maximums aren’t set up with the assumption that every employee will hit all their maximums (if they were, benefits plans would cost a lot more). And since no plan is ever truly utilized 100% of the time, employers and employees would be paying for usage on their plan they weren’t accruing.  

Instead, maximums are based upon the overall usage of the plan by those covered, as well as reasonable and customary charges for different medical items or services. This ensures fair pricing that fluctuates based on employees’ actual claiming patterns. 

Everything Employers Need to Know About Group Insurance Underwriting

Benefits Plan Maximums in Action

Let’s look at an example. 

Assume you had 10 employees and they each paid $200 a month in health and dental premiums. That would be equal to $2,400 per employee per year, or $24,000 in annual premiums for all employees. Remember, premiums are the amount paid to the Insurer for projected claims and expenses. 

Now, let’s say each employee utilizes the paramedical services up to the maximum, which is $500 per practitioner. Plus, they use the dental plan up to the maximum of $1,500. 

Each employee is reimbursed $5,000 for medical and dental expenses. In total, that would be $50,000 worth of claims reimbursement.  

As you can see, the premiums simply do not cover this.  

We are not trying to discourage the utilization of benefits plans, but rather, to dispel the myth that employees should “run up the tab” as much as possible. Your benefits plan is there for medical and dental expenses, as well as emergencies. Keeping it sustainable in the long term means the plan will continue to cover you in the future. 

Infographic: Comparing Your Benefits Plan to Your Vacation Savings 

We’re going to use an extended simile to further explain this concept.  

Imagine you take an annual trip to Disneyland with your family. Each month you put money in a savings account specifically for your trip. This savings account is like the premiums you would pay monthly for your benefits plan.  

If you spend more than you saved, you’ll owe money, or you won’t have as much next year. This is similar to how your benefits plan works. If you claim more than you paid in premiums, the premiums will go up, or you will have to get rid of some benefits. 

The Costs of the Trip are like the Claims Incurred Amount*   *Total amount reimbursed for submitted claims   ex: Flights  Accommodation Food and drinks  Disneyland Passes  Miscellaneous  ex:  Paramedicals  Vision  Dental  Prescription drugs  Medical Items    Your Vacation Funds ( Total amount of money you have saved for your holiday) are like the Target Loss Ratio  (The amount of total premiums minus the fees, taxes and commissions, that is available for claims - expressed as a percentage)  The Difference Makes a Difference!   Spent exactly what you saved?    You can start saving again for next year’s trip.    Target Loss Ratio Achieved?    This means your benefits plan is sustainable and you can continue to get the same coverage as previous years.   Spent more than you saved?    You end up putting your overages on a credit card. The credit card company charges you interest, and you end with debt.    Next year, you may be forced to eliminate some of the activities, or ask your kids to help pay for the ones they really want to do.   Above the Target Loss Ratio?    The amount reimbursed for claims is not able to be covered by the premiums, and therefore, an increase in rates is usually proposed.    In order to offset this increase, employers may be forced to remove parts of the benefits coverage. Or they may increase the cost-sharing for employees   Spent less than you saved? You come home with $ in your pocket and can get a head start on your next vacation fund!   You might even be able to go for longer next year, or do more things, or both!   Below the Target Loss Ratio? This means your insurance provider could offer a decrease in rates at renewal.    Depending on how much, this could mean cheaper benefits premiums, or additional benefits.

Download the Infographic: Why You Shouldn’t Max Out Your Benefits Plan

The Costs of the Trip are like the Claims Incurred Amount*

(*Total amount reimbursed for submitted claims)

Your Vacation Funds are like the Target Loss Ratio 

The Difference Makes a Difference! 

Spent exactly what you saved?  You can start saving again for next year’s trip. 

This is similar to:

Target Loss Ratio Achieved?  This means your benefits plan is sustainable and you can continue to get the same coverage as previous years. 

Spent more than you saved?  You end up putting your overages on a credit card. The credit card company charges you interest, and you end with debt.  Next year, you may be forced to eliminate some of the activities, or ask your kids to help pay for the ones they really want to do. 

This is similar to:

Above the Target Loss Ratio?  The amount reimbursed for claims is not able to be covered by the premiums, and therefore, an increase in rates is usually proposed.  In order to offset this increase, employers may be forced to remove parts of the benefits coverage. Or they may increase the cost-sharing for employees.

Spent less than you saved?  You come home with $ in your pocket and can get a head start on your next vacation fund! You might even be able to go for longer next year, or do more things, or both! 

This is similar to:

Below the Target Loss Ratio?  This means your insurance provider could offer a decrease in rates at renewal.  Depending on how much, this could mean cheaper benefits premiums, or additional benefits

Understanding is the First Step

Employee benefits such as Extended Health and Dental are available for health maintenance like chronic back pain (physiotherapist) or ongoing dental check-ups. The reason it works is because it is spread out across many employees. So, some years you might use a bit more than others, some years you might use a bit less.  

Did you know? Insurers are allowed to terminate a contract or refuse to renew a group insurance contract just like plan sponsors are? It’s not a threat, it’s a fact. If the risk to insure a group is too great, they could find themselves uninsurable. However, there are safeguards to protect against large single claims such as high-cost maintenance drugs like biologicals, for example. This is known as Stop-Loss. 

What is Stop Loss and How Does It Keep Benefits Plans Sustainable?

Other ways employers can help employees to understand the costs of their benefits is by implementing cost-sharing (employees pay a portion of premiums) or coinsurance (employees pay a portion of each medical expense they submit.) 

It is certainly not up to employees to make sure that their benefits plans are sustainable. Yet, understanding how your claims impact the overall plan can help to ensure a healthy plan for all employees. 

Want to learn more about Sustainable Benefits Plans?

Achieve a Sustainable Benefits Plan Using Your Claims Experience Data