RHSA eliminates the four small business risks of a traditional health plan.
1. THE PROMISE RISK
When a small business owner purchases a traditional insured group health benefit plan, the business owner is making a long-term promise to employees to pay for the benefits described in the plan.
This promises an open-ended obligation for benefits into the future. There is no certainty or ability to predict the cost of the plan for these benefits from year to year, let alone 3–5 years in the future.
An insurance company administers the plan on behalf of the small business, but the major risk of paying for benefits resides with the small business. Each year, the insurance company calculates inflation and cost overruns, and increases the premium accordingly to pay for benefits costs, as well as increasing administrative costs.
The promise risk associated with the defined benefit plans has become a serious issue with respect to pensions. Companies in the past have made pension promises, which only now are beginning to require payment. The cost risk of these pensions has never been fully appreciated. Many plans are underwater.
The promise risk associated with traditional defined benefit group health plans is only now been appreciated. With new and costly miracle drugs, which can be $100,000 or more per year, small business owners are waking up in the promise risk.
Defined health benefit promises cannot be met.
2. THE PREMIUM COST RISK
GROUP HEALTH PREMIUM = ADMINISTRATION + EMPLOYEE BENEFIT POOL + INCREASING BENEFIT USE + MEDICAL INFLATION
Group health benefit premiums reflect ongoing and increasing costs of providing benefits described in the plan.
With increasing benefit use with increasing age of employees, the certainty of cost inflation for medical services and products as well as relentlessly increasing administration cost, guarantee increasing premiums of 10–20% or more each year far into the future. This results in a doubling of group health benefit premiums every 3–6 years.
Insurance companies administer benefits on behalf of small businesses for their employees. When employees spend more on benefits than predicted by the insurance company as reflected in their premium, the insurance company adjusts the premium and administration costs upward in a process called “experience rating.”
Experience rating means that a small business pays for all costs actually incurred by the insurance company for their employees averaged over a three-year period, and funds to provide for an insurance pool for a small number of claims if people experience serious disability and/or illness.
There is little “insurance” in group benefit insurance.
Defined contribution (DC) health plans eliminate premium risk.
3. THE RISK OF COSTLY DRUGS
In the 1990s, group health benefit plans were put under strain due to increasing drug costs for treatment of diabetes and AIDS. These conditions had an increasing incidence in the population affected, the cost of medication was significant and the length of treatment was life long.
These chronic conditions were in marked contrast with the short-term course of treatment with antibiotics, painkillers, or other drugs, which were lower in cost and had a treatment lasting a few days or weeks.
In the past decade, pharmaceutical companies have produced very expensive drugs to treat a wide variety of conditions. Many conditions require lifelong treatment and products. These conditions require costly drugs, which averaged $25,000 several years ago. Now drugs costing $100,000 a year are not uncommon and some treatment regimes can approach $1 million a year.
There is no question that the risk of costly drug treatment will eventually bankrupt small business plans and make them totally unaffordable.
Catastrophic drug costs must be paid by governments through our taxes. Defined contribution (DC) health plans facilitate this cost shifting.
4. THE RISK OF INCREASING BENEFIT USE
There are several factors affecting increasing benefit use. Demographics are often talked about as the age of our workforce is increasing. Studies indicate that $1 of benefit use under age 45 becomes $2 between 45 and 55, and $4 between 55 and 65. As many workers age, this exponential increase in costs is being paid by many plans.
Benefit costs for medical products and services are rising at a faster rate than inflation. This puts an added burden on group health benefit plans of the traditional defined benefit type.
Traditional benefit plans have to try to limit increasing use of health benefits by employees by putting myriad plan rules in place, making it difficult and costly for employees to use the plan.
Defined contribution health benefit plans solve this problem by designating a limited amount of money to be spent and permitting the employees to decide how the money will be spent. A defined contribution benefit plan totally eliminates the risk of increasing benefit use.
Benefit utilization risk is eliminated with a defined contribution (DC) health plan.