By Jill Klibanov
Supplemental health insurance offers a way for consumers to combat rising out-of-pocket costs and provides a safety net in the form of additional benefits when medical care is needed. As health care reform continues to send sweeping changes over the landscape of comprehensive medical plans, supplemental health plans have seen a rise in popularity, particularly in the worksite, as more businesses have started to offer these types of voluntary benefits to give more choices and potential protection to workers.
There is a wide variety of supplemental health plans that offer protection in different situations. Examples include critical illness, accident, and hospital indemnity plans. Critical illness policies may pay indemnity benefits, plus often pay a lump sum benefit upon diagnosis of covered illnesses, which commonly include cancer, heart attack, stroke, and renal failure. Accident policies pay when the insured is involved in a covered accident and typically provide indemnity benefits plus the option for short-term disability. Hospital indemnity policies pay a set daily benefit for each day the insured is confined to a hospital, and may include other benefits related to inpatient or outpatient care.
To help us gain some insight into how these types of products are marketed and sold in the worksite, I spoke with two executives who have a broad range of knowledge in this industry. The first is Barb Stewart, president of Washington National Insurance Company. Prior to her current role, she was a vice president of strategy and marketing for the company. The second is Blake Westerfield, an actuary and vice president of Product Management for Specialty Products with CNO Financial Group.
Question: Let’s say a company has had some success selling supplemental health plans in the individual market and is interested in expanding to the worksite market. What are the most critical elements for a company’s success in this market?
Stewart: First, you have to understand the worksite sales process. There are multiple types of product underwriting in the worksite market, which drive different product designs. It may be helpful to start by giving some definitions as background.
True Group: typically 100 percent employer paid with buy-up options for which employees may be subject to underwriting.
Voluntary: typically 100 percent employee paid, but can be funded in part by the employer.
Group Voluntary: same as voluntary, but based on a group chassis (employer is contract owner, employees are certificate holders), offered on a guarantee issue basis, also with a buy-up opportunity contingent upon the employee providing evidence of insurability.
Hybrid: a voluntary product with an individually-underwritten and owned chassis, but offered on a guarantee issue basis subject to participation requirements.
The type of product offered in a group will vary by the employer’s objective for the overall benefits program, and often by the number of eligible employees. To be successful, a carrier must understand the unique needs of the employers and employees in the market segment in which they would like to participate, and tailor their product and service offering to that market.
In addition, there is generally a much faster selling process in the worksite. Instead of sitting down at the kitchen table and having a chat, an agent might only have between five to 15 minutes with an employee. This time limitation impacts the design, presentation, and marketing of products offered at the worksite.
The use of technology to support the application process is also unique in the worksite market. While electronic applications can be considered a nice to have in the individual market, they are an absolute requirement for worksite enrollments. A carrier’s system must be specially tailored to handle group set up and enrollment, and therefore is more complex than one developed to solely support the individual market.
Back office operations are also different for the worksite market, which requires specialized knowledge for group billing, claims management, and new business processing.
Westerfield: In some ways the worksite market is not too dissimilar from individual market, in that you need to have the basics down, such as competitive pricing, competitive compensation, and desirable products and benefits. In addition to the basics, you need to have products that are flexible in design to meet the needs of the various groups, you need to have the right mix of products, you have to have an enrollment process that is easy to use for the group members, and you need to have the right distribution channels. An agent or a broker that is successful in the individual market may not be able to transfer those abilities to the worksite market, and vice-versa.
Question: What are some key product features that appeal to companies when they are selecting an insurance carrier to offer supplemental health products for their employees? Are there any features that might be viewed as more important for a worksite market as compared to the individual market?
Stewart: From a product feature standpoint, group underwritten products have to be highly customizable to that group’s needs. Employers are the first point at which product feature decisions are made, with the employer deciding which plan options the carrier may make available for enrollment. In addition, for takeover cases, a carrier typically must have the capability to match the features and benefits offered by the carrier being displaced.
In the employer market, wellness is also very important. All employers are trying to drive down their medical costs and find wellness benefits to be an attractive product feature.
Westerfield: The single most important difference between individual and worksite is having plans that have guaranteed issue aspects to them. In the individual market, guaranteed issue is not really expected and is not practical from a risk perspective. In the worksite market, offering products that can be guaranteed issue, if certain group sizes and participation requirements are met, is a significant plus.
Another important factor is what products are being offered. If one carrier can offer several product types, such as accident, critical illness, and disability income, they will be in a better position to get the group’s business. Employers want the selling and enrollment process to be as efficient and easy as possible for their employees. Working with one carrier or one broker can accomplish that goal.
Question: How important is price competitiveness?
Stewart: Employers want to offer their employees products that offer a fair value. You don’t have to be the cheapest provider. Employers also care about the service experience. Did the enrollment process go well? Will the billing and claims processes go smoothly? Employers choose to work with carriers that provide both competitive products and high quality service.
Westerfield: You don’t have to be the lowest priced carrier, but you have to be in the ball park. If you’re not, there needs to be a clear explanation for the difference. Usually it’s due to benefit design or underwriting guidelines; something that is intended to set the carrier apart from the rest.
If a carrier is significantly different from the competition, they need to be certain the reason (benefits in particularly) is justified, and it’s something the group or group members are willing to pay for. If not, they are going to over engineer the product and price themselves out of the market.
Question: Talk about the role that distribution plays in the worksite business—do you find that the skill set for successful worksite distributors tends to be different from other agents?
Stewart: A successful worksite distributor needs to have a firm understanding of the worksite marketplace, and tailor solutions to the employer and employee needs. It’s a two-step sales process. You have to sell the employer group on the opportunity and then you have to sell employees on the product features and benefits.
Question: What impact, if any, has health care reform had on worksite supplemental health products, and are there any potential future impacts?
Westerfield: To date there have only been some minor changes to the worksite supplemental health products, but nothing compared to how it has impacted major medical products. Going forward though, I could see Affordable Care Act (ACA) having some impact on regulatory requirements, plan design, and price.
The first potential impact will be in regards to regulatory treatment of these products going forward. In general, supplemental health products fall outside of ACA regulations because they are “excepted benefits,” thus ACA regulations do not apply. However, recently there have been discussions about certain supplemental health products and ACA minimum essential coverage. Regulators and the insurance industry do not want consumers to think certain supplemental products are the same as ACA qualified health plans. Both types of products are very important for proper insurance coverage, however they are designed and priced to meet different needs.
These discussions are still in their early phases, but there will probably be some type of disclaimers required on certain products so consumers are not confused. Some states have already had these requirements in place for years.
The second way I can see ACA impacting these products is in plan design. In general, supplemental health products are designed to cover expenses or lost income that is not covered under a major medical plan. For example, there have been statistics published that say more than 50 percent of the “cost” to someone who has been diagnosed with cancer is not covered by major medical. This is not a weakness or a flaw of major medical insurance; those plans cover what they’re designed to cover, which is the cost of the medical care (less out-of-pocket amounts). What that statistic highlights is that there are significant expenses that are not always medical care in nature that are incurred when someone has a serious medical illness. Supplemental health products are designed to help with these expenses.
ACA and its essential health benefit requirements are not changing this need for supplemental health coverage, nor should it. However, some of the plans now being offered under ACA are shifting towards higher annual deductibles and narrower provider networks. And with this shift I think there will be opportunities to design new supplemental health products to expand their coverage to fill these gaps.
Lastly, and closely related to plan design is price. As most people know there has been, and continues to be, an enormous amount of consternation around major medical premium rates for ACA qualified health plans. Some people will pay more than they have in the past and others will pay less. What this price shift does is change how much people will spend on supplemental health premiums. Some people will be able to increase their supplemental coverage and others may want to buy down. As a result of this change, I think supplemental carriers will be broadening their spectrum of coverage options and price points to continue to meet the needs of consumers.
Question: What do you see as the greatest opportunity right now for carriers of supplemental health insurance?
Stewart: With rising medical costs, there’s been a trend of employer’s cost shifting benefit program expenses to employees. High deductible health plans expose employees to more financial risk in the event of a major accident or critical illness. Rising public awareness of the potential gaps has helped increase supplemental health sales over the past few years. This trend is anticipated to continue under health care reform.
Westerfield: As mentioned earlier, I believe health care reform is going to provide growth opportunities for supplemental health products, both in coverage expansion and market base.
I also think there is a change just starting, that may or may not be accelerated by health care reform, where employers are shifting from a defined benefit type model of insurance coverage to a more defined contribution concept.
What we are seeing are more and more employers providing their employees with a pre-determined amount of money that can be spent on various insurance products that the employee can choose from, such as major medical, accident, dental, etc. This is a change from where the employer picks the specific coverage and then determines how much the employee will have to contribute if they choose to enroll.
Besides the obvious economic benefit of this change, it also offers the employees more choices and flexible options that can be better suited to their specific needs. And as a result of this change in funding method, I fully expect supplemental coverage to continue to grow in the worksite market.
Jill Klibanov, FSA, MAAA is a Senior Managing Actuary at CNO Financial Group. She can be contacted at j.klibanov@banklife.com.
Disclosure: Washington National Insurance Company policies are not considered “qualified health plans” and do not provide essential health coverage as required by the Affordable Care Act. Washington National’s policies are considered “excepted benefits” policies which do not meet the individual mandate requirements of the Affordable Care Act.