Beware of Brokers Bearing GAP Plans
At first glance, it seems like such a great idea. In fact, at second glance, it still seems like such a great idea.
You raise your health plan’s deductible up in order to lower your monthly premiums, then you supplement it back with a GAP plan that will “buy down” the employee’s deductible.
Here’s an example. Employer can reduce the monthly premium by selecting a health plan with a $6000 individual deductible vs. say a $2000 individual deductible. We all know and understand that the $6k deductible plan will cost less than the $2k deductible plan each month.
But the employer recognizes that giving his or her employees a $6k deductible is also not very valuable to them.
So in walks Status Quo Joe Broker to sell the employer a GAP plan. A fully-insured product that will “cover” any amount of the deductible the employer wishes. Of course, the more of the deductible the GAP plan covers, the higher the premium for the GAP Plan.
So, let’s say the employer wants to select the $6k deductible plan, but “buy down” the deductible by $3k, making the employee’s responsibility only $3k. Employer and employees get the reduced premiums, and employees get a reduced deductible. Everyone wins…..right?
Well, not so easy.
This past week I consulted with an employer who had followed this exact advice from their current broker. Raise the deductible up high, and buy it down with a fully-insured GAP plan. The employer was paying 100% of the premium on the GAP plan, and a sizeable portion of the health plan premium as well.
In fact, the employer was paying $75,000 per year in premium, just on the GAP plan. Their particular GAP plan was set up to cover $3000 of a $6000 deductible, just like in our example.
But the one piece of data and information the current broker didn’t share with the employer is how many employees even exceed even a $3000 deductible!
Thankfully, here in Texas, employers have access to claims and utilization data, and while it isn’t the most comprehensive data in the world, it’s enough to determine this type of information.
So, we requested the data from the employer so that we could do a full analysis for the organization, which analyzing this GAP plan would be a part of our analysis. They quickly agreed, and sent us the data.
After reviewing their claims/utilization data, we discovered that only 5 employees had exceeded $3000 in medical claims for the year. Just 5! Of those 5, only 2 exeeded $6000. We also had the actual dollar amounts for these people’s claims, so we had the actual amount that would be eligible to be “covered” by the GAP Plan.
That figure? $22,800
This employer had paid $75,000 in premium to insure just $22,800 of actual risk.
The employer, had they been self-funded, or even used an HRA for this strategy, would have saved significantly. They wouldn’t have paid $75,000 in premium. They simply could have made the same deal with their employees (the company will cover $3000 of your deductible ourselves) and the company would have only spent $22,800 instead of $75,000.
I find employers doing this all the time, yet they will not even consider self-insuring! But every time I break down the numbers, and show the employers their actual claims and utilization data, the story changes.
This “raise the deductible and plug in a GAP Plan” strategy has a shelf life. At some point, the employer will not be able to raise their deductibles any higher in order to generate premium savings. If it were this year (2022), the employer wouldn’t be able to raise the individual deductible any higher than the ACA max allowable, which is $8150. So again, what do employers do when this strategy runs out of runway, when a broker can’t raise the deductible any higher?
I’ve also seen employers, at the advice of their brokers, use supplemental Hospital Indemnity plans to do the very same thing. They are paying premiums on these policies to “offset” or “buy down” high deductibles, yet in every situation I’ve ever analyzed, the employer and/or employees are egregiously overpaying in premium vs. the benefits that are paid out to offset these deductibles. Why? Simply because most people don’t meet their deductibles anyway!
The employer would be money ahead to self-insure that risk instead.
Now, I’ve explained why employers buy these types of plans. On it’s face, it seems like a brilliant strategy. Besides, most employers are also trusting their brokers to give them good advice. Moving to higher deductibles DOES lower the premiums, and that’s about as far as most employers go when vetting this strategy. But let’s discuss why brokers sell them.
Brokers sell this strategy because they can earn commissions on selling the GAP plans! Also, to brokers who don’t go the extra mile and do the claims/utilization analysis, this looks like a brilliant solution to them too. My question to those brokers is simple, “How can you sell these types of plans to employers before you actually know what the risk is within their demographic/population?”
A couple of years ago, I showed an employer who was paying 100% of the premium on a Hospital Indemnity Plan that paid out just $1000 benefit IF THE EMPLOYEE WAS HOSPITALIZED INPATIENT FOR 23 OR MORE HOURS. In total, this employer was paying over $60,000 per year in premiums on this Hospital Indemnity plan. When I asked him, “Ok, great, you have this hospital indemnity plan you’re paying for….but how many of your employees were hospitalized this past year?”, he didn’t have an answer.
Because we had received their claims/utilization data, we could answer that question for him.
8 employees had been hospitalized in his company that year. 8. Meaning, that hospital indemnity policy should have paid out $8000 of benefits ($1000 to each of those 8 people). You can imagine the look on the employer’s face when I explained he could have made a deal with his employees, that if they were to be hospitalized, the company would cover $1000 of their deductibles (same benefit as the hospital indemnity plan). Had he done that, the company would have paid $8000 out and not $60,000 in premium.
That Hospital Indemnity plan carried a first-year commission for the broker of 40%. That’s right. The broker made $24,000 in commission by selling that plan and strategy to that employer.
I’m always amazed how easily some employers will purchase expensive fully-insured products like GAP plans and Hospital Indemnity plans, but refuse to discuss self-funding and HRA’s. The reason is because employers don’t have data and information. When armed with the right information, the conversation becomes easier, and employers get to see with their own eyes just how impactful it could be to assume risk themselves vs. paying sky-high premiums to fully-insure the same risk.
Next time a broker comes knocking with this sort of strategy, remember this….if you don’t have data on how many employees exceed a certain deductible amount, you’re just “hoping” your broker isn’t selling you a bag of crap. Now you KNOW how to ask the right questions and demand more from your brokers.
