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How to Fill the Gap Between Exchanges and Rising Premiums

The Kaiser Family Foundation reports that by the year 2021, health care spending is projected to be one-fifth of the gross domestic product (GDP). As a result of these increases in costs and spending, more than 50 percent of employers have stated that they will be shifting their premium increases to their employees.

Under the Affordable Care Act (ACA), individual out-of-pocket caps are $6,350 and family out-of-pocket caps are $12,700. In addition, Kaiser reports that consumer groups warn there is the possibility that employer plans may be permitted to have even higher out-of-pocket cost limits.

We know that medical insurance premiums and out-of-pocket costs are going up, so what options do your group health clients have?

The first option is to do nothing. Your employer clients’ insurance costs will continue to go up, and they may be forced to direct their employees into an exchange. Your clients’ employees will not appreciate this, as more than likely their benefits will be decreased and they would be forced to cover the entire premium with no employer contribution.

The second option is a rather popular one. Brokers search high and low within an ever-shrinking carrier marketplace, trying to find a lower-cost health plan. Most of the time, the employers either stay put and absorb the cost increase or else they raise deductibles, out-of-pocket costs and employee premium contributions to try to offset the increases.

The third option is becoming increasingly popular. Employers are implementing a strategy that is safe, can guarantee savings and can even enhance benefits for the employees.

This concept is called gap insurance, and it is completely compliant with health care reform.

The “gap” concept combines the use of a supplemental insurance plan with a high-deductible major medical plan. Together, they create a new and improved plan that can do some incredible things. You might think of the gap concept as a fully insured Section 105 health reimbursement account (HRA).

Let’s learn a little more about this concept.

First, you modify your employer client’s current health insurance plan to a high-deductible version. In order to make the strategy work, you need to use at least a $3,000 to $5,000 deductible in order to see a drop in premiums. You can even use a gap with deductibles as high as $7,000 to $10,000. After you have modified the existing group health plan, you add a secondary plan, which is the gap insurance. The gap plan pays first dollar and helps cover all the increased deductibles, coinsurances and out-of-pocket expenses so that the plan looks and feels the same (or better) to your client’s employees. In fact, in most cases, the plan can actually improve the employees’ benefits.

Again, gap insurance is completely compliant with health care reform, and, interestingly enough, gap insurance is not a new concept. However, modern-day gap insurance is much superior to similar plans in the past, with only a handful of carriers offering best-in-class coverage.

We all know people covered by Medicare who purchase “Medigap” insurance to help fill the gaps of Medicare Parts A and B. Seniors tend to use their plans more than most people. But the combination of Medicare and Medigap gives them a phenomenal health plan that has real value and provides significant benefits. Employers can benefit greatly from a similar concept by implementing gap insurance as an integral part of their group health plan offering.

So how does it work?

Each employee receives two identification cards. The first is their standard major medical card, and the second is their gap insurance card. The employee gives both cards to their health care provider every time they visit the provider. The provider has the ability to file the claim electronically. The gap insurance carrier processes the claims and will pay the provider directly if instructed to do so.

Now you probably are asking what the actual benefits look like. Let’s build a sample plan and find out.

The first step is to increase the group health plan’s deductible to $5,000, or higher if available, to lower the premium as much as possible. This is similar to what happens to a personal auto policy when the physical damage deductibles are increased.

Next, we will install a gap plan. This is where the employees can really benefit.

The gap plan can generally provide up to $10,000 of first-dollar benefit coverage for inpatient services per person per year. This benefit can be used to pay for any eligible inpatient deductible and/or out-of-pocket expense. So, for this example we will assume a group major medical plan with a $5,000 deductible and 100 percent coinsurance. The employer purchases $5,000 of gap coverage, which gives each employee enough coverage to satisfy the entire deductible if the employee or dependent is admitted to the hospital.

Next, for the outpatient benefit limit, up to 70 percent of the gap inpatient benefit can be offered.

Purchased in this example was $5,000 of inpatient benefits, so employees receive $3,500 of first-dollar outpatient benefits. As a result, employees receive a $5,000 upfront zero-deductible 100 percent inpatient benefit, and receive a $3,500 up-front zero-deductible 100 percent outpatient benefit. Gap insurance helps eliminate a large part of the medical burden that employees have today with their standard deductible coinsurance plans. In addition, deductibles can be added to gap insurance if the employer wants to further lower costs and have the employees share these lowered costs.

Now, it is important to acknowledge certain exclusions that protect the pricing integrity of gap insurance. It will NOT pay for medical costs incurred during a criminal activity, attempted suicide, or the voluntary abortion for a dependent child or mental illness and substance abuse claims (mental and substance abuse coverage can be opted out of or opted into).

By excluding these “lifestyle” claims, gap insurance can reasonably cover the majority of all insurance claims for your employees and their dependents.

Well, let’s paint that picture a little more clearly.

For inpatient expenses, gap insurance will cover up to $10,000 per year per person of the inpatient out-of-pocket expenses (deductible and coinsurance). The group health plan is modified to pay for out-of-pocket amounts over $10,000 (per individual). For outpatient services, including X-rays, labs, surgery, etc., gap insurance pays up to 70 percent of the inpatient benefit amount ($7,000), leaving the group health plan to pay for amounts over $7,000 per year per person.

Again the concept is very simple. We are giving employees coverage where they need it most – up front. Two plans can be better than one. The combined cost of gap insurance and a high-out-of-pocket group health plan, can be 10 to 20 percent less than the cost of the existing low-to-medium out-of-pocket group plan.

Take a second to let this soak in. Up-front savings and enhanced benefits.

Every company’s benefit plan is unique to the employees and their families. Using gap insurance, employers save significant premium while reducing employee out-of-pocket costs and improving benefits. The employer can simply add gap insurance as another option to look at during renewal.

If gap insurance does work, it jumps off the page with significant savings. If gap insurance doesn’t work, it jumps off the page illustrating that point, too.

 

Robert Hutt, LUTC, CGI, GBA, has 25 years’ experience as a multiline independent agent and benefits consultant in Indianapolis, Ind., with an emphasis on group insurance and workforce management systems. He can be reached at [email protected] [email protected].


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