Healthcare and flex - a review of the issues and solutions

How do you incorporate private medical insurance within a flex plan? Many say you can't but that isn't strictly true. Here we look at the common issues and provide a range of solutions.

Introduction

Traditionally, medical insurance is offered to employees as an employer paid benefit. The insurers accept that some employees will opt out either because they are already covered by, say, a spouse’s scheme, or to avoid the benefit in kind tax bill. However in general the insurer’s risk is spread across the majority of the employees and on this basis of cover companies’ premiums are usually significantly cheaper than individual rates. Another result of spreading the risk across a large group is that employees can enter the plan with reduced or even no account taken of their previous medical history, whereas individual plans exclude treatment related to recent medical problems.

Flexible benefit issues

However, flex plans present a real problem for medical insurers. A fully flexible benefit allows an employee to either opt in to the benefit or decide to spend their benefit allowance elsewhere. Those who are likely to use the plan will opt for it whereas others who are less likely to claim may choose to spend their money elsewhere. This is the “adverse selection” fear of all insurers - the “subsidy” is no longer in place and therefore insurers find it hard to offer viable terms. The situation can become increasingly worse for an insurer as each plan year renewal can lead to those who have had cover and made no claim deciding to leave whilst those being treated privately will continue their membership, creating an ever increasing circle of claimants.

For a fully flexible benefit plan, the solution requires an acceptance that the cover is likely to cost employees more and that each person covered will need to be underwritten and medical exclusions will become part of the offering. However, the cost of cover can still be delivered with a significant discount compared to private plans assuming there are a decent number of employees that plan to join the plan. Poor take up rates will cause problems and therefore this aspect needs to be carefully reviewed before sourcing providers and devising the plan rules. It is important to note that although the benefit cost is likely to increase, the exposure to this additional cost will be borne by the employee as the amount of employer provided flex funding is normally fixed. The key here is to provide an employee with access to a benefit they want at a price they could not achieve privately.

As an alternative, most of the problems mentioned above can be overcome by offering medical insurance as a core benefit with each employee receiving a basic level of employer provided cover. The flex rules can then allow an employee to upgrade cover (e.g. to a better range of hospitals) or to include family members. The option to opt out can also be given and this will allow the cost to be spent on other benefits rather than lost. The key here is to make sure you have clear and specific discussions with your medical insurance provider so they are fully aware of your requirements.

Summary

Choosing suitable medical insurance arrangements for your employees within a flex plan requires careful thought within the context of the issues flex presents. Product providers need to be included at the plan design stage to make sure your requirements can be met. As always, the information and communication with employees will be a vital part of making this work.