An Introduction to Employee Benefits with Keith Foot | E004
How corporations, and owners, are taxed.
In this episode of Financial Planning for Canadian Business Owners, Jason Pereira, award-winning financial planner, university lecturer, writer, and host interviews Keith Foot, CEO of Ralph Moss Insurance. Jason Pereira and Keith Foot discuss employee benefit plans, the different components of the plans, and tips on how you can contain cost.
● 01:00: – Keith Foot introduces himself and what he does.
● 01:41: – What are the reasons for group employee benefits?
● 03:53: – What is the cost of setting up a group employee benefit?
● 04:58: – What kinds of ‘target loss ratios’ can companies be looking at?
● 12:04: – People need more than what is offered through a group insurance plan.
● 15:22: – How does accidental death and dismemberment insurance work?
● 19:48: – Who is paying for these employee benefits?
● 23:27: – How does dental insurance factor into group employee benefits?
● 31:28: – What is involved in extended insurance plans and reimbursements?
● 37:02: – Keith Foot’s company audits the claims of their clients every year.
● 41:41: – There is a period of stability required before traveling with travel insurance.
● 44:48: – What can employee assistance programs, spending accounts and wellness accounts look like?
● 53:15: – What is the benefit versus cost for vision care?
● 57:36: – There are fewer and fewer stop-less providers that are willing to ensure a stand-alone self-insured plan.
● 1:00:53: – So many employers don’t know the cost of their employee insurance benefits.
3 Key Points
1. Keith Foot is seeing group employee benefits as averaging about 10% of payroll. In real dollars to an employee it comes to about $3000-$4000 per year for a benefit program with life, accidental death and dismemberment, some form of disability, some health and some dental. 2. Dependent life benefits are adjunct plans to the employee benefits that are
usually around $5000 for a child and $10,000 for a spouse.
3. The various tiers of dental insurance are basic dental for x-rays and
cleanings, level two that covers fillings and levels three and four which are crowns and bridges.
● “Any dollar that the employers pays out in benefits, is a total write-off to the company and the employee gets the benefit tax-free, with the exception of life insurance where there is a tax on the premium.” – Keith Foot
● “Our job as a consultant is to allow the insurance company to make money, because if they don’t make money, we don't have anyone to ensure our clients or to ensure our companies. – Keith Foot
● “The thing with group life insurance to remember is it is not portable. When an employee leaves, if he has $100,000 of coverage and he leaves the company, it is gone.” – Keith Foot
● Facebook – Jason Pereira’s
● LinkedIn – Jason Pereira’s
● FintechImpact.co – Website
● jasonpereira.ca – Website
● Linkedin – Keith Foot’s
● RalphMoss.ca – Website
Speaker 1: Welcome to the Financial Planning for Canadian Business Owners podcast. You will hear about industry insights with award winning financial planner and entrepreneur Jason Pereira. Through the interviews with different experts with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success and make the most of your business in life. And now your host, Jason Pereira.
Jason Pereira: Hello, and welcome to the Financial Planning for Canadian Business Owners podcast. I'm Jason Pereira, your host. Today I have Keith Foot with me CEO of Ralph Moss Insurance. And what we're going to talk about today is employee benefits plans, the different components of them and some tips on basically how you can contain costs. And with that, here's my interview with Keith.
Jason Pereira: Hello, Keith.
Keith: Hey, Jason, good to see you.
Jason Pereira: Keith, good to have you. And so thank you for coming and taking the time. Before we get started on today's topic of group insurance. Let's see just tell everybody who it is you are and what it is you do.
Keith: What do I do? I wear many hats.
Jason Pereira: Yes, you do.
Keith: I was once told that what is your business? What business are you really in? So I always tell people I'm in the business of employee benefits. That's pretty boring. So what we intend to say is that we're in the business of helping employers provide financial security to the employees in times of need. So that begs the question from you, how do you do that? What is that?
Jason Pereira: So what is that, absolutely?
Jason Pereira: [inaudible 00:01:25] the question.
Keith: So that's my elevator speech, for example, is that we provide financial security to employees, assisting employers with time in need.
Jason Pereira: Okay, excellent. So basically, we're going to be talking about the group benefits which provides that so let's talk about why people do this because many listeners, of course, may already have plans in place or maybe considering it. So first off, the reasons we do this are pretty straightforward, but let's hear from you.
Keith: Okay. Well, there's many reasons unlike the US whose benefits in health care system is totally different. In Canada, most of our health care is covered by the government. We're pretty lucky that way. So the group employee benefits to traditional benefits that you think of the life, the health, the dental, The Accident Death and Dismemberment and disability, they really round out the government offerings because we have CPP, and we have unemployment insurance. So we're rounding out those things that the government doesn't cover.
Keith: So in the case of life insurance such as a death benefit under CPP, there's nowhere near enough to cover anything so the group life insurance would cover off that portion of it.
Jason Pereira: The biggest one always is two things well, disability one and then also drug plans. There's discussion of having a national pharmacare program where we'll see if that ever happens. But yeah, you see some of the costs of medication, they're pretty astounding.
Keith: And that's not going to abate unfortunately, with my illustrious coming in and the high cost of drugs and medications. Well, there's two things to that we've jumped the gun from life and AD&D and disability straight to health, which is by far is the biggest mover for people but it's also the biggest cost driver in your health plans today in your benefit plans today.
Jason Pereira: And we'll cover that. We're going to go down one piece at a time. But so from employer standpoint Of course, we're providing a solid benefit, we're also doing so in a tax efficient manner. Because end of the day, if you pay a highly paid employee and other dollar of income, they're going to lose 40, 50 53%, depending on the province they're in to taxes. Whereas something like this, the entire group basically can benefit to a larger degree than they would if you were to pay that dollar.
Keith: 100%. Any dollar the employer pays out in benefits is a total write-off to the company. And the employee gets the benefit tax free with the exception of life insurance where there is a tax on the premium as a benefit and with disability depending who pays the premium, then the benefit is tax which-
Jason Pereira: We're definitely to talk about that there because I hear so many misguided opinions on that one. But so before we go any further in traditional terms, we always talk about attracting, retaining and rewarding. So before we get started on that we're going to talk about I want you to give me a ballpark so someone's that comes to you for a new group and says they want to start off in a new group, what kind of cost are they looking at as a percentage of salary of payroll?
Keith: Well, it depends who you ask. I believe it was Robert Hat. They came out with a survey where they said that benefits is 35% of payroll. That was their survey, but that encompassed the CPP EI the whole gamut of including employee benefits.
Jason Pereira: Which in their own right are like 5% Plus?
Keith: Our own surveys of our own client base, et cetera that we've done over the, I've been in business for over 35 years, we've seen averaging about 10% of payroll. What does that mean in real dollars to an employer? If he comes to us and says, I want to put a plan and what's it going to cost? Well, every group is different, different demographics, different industries, different number of employees on the plan, but as a ballpark figure, you can estimate that benefit program with life, Accidental Death and Dismemberment, some form of disability, some health and some dental without any other ancillary benefits would be approximately three to $4,000 per employee per year, which is a good ballpark figure.
Jason Pereira: And I've seen similar numbers of that in my own practice. So one of the myths I want to dispel before we get started on benefit by benefit analysis on this is the myth that this is people treat insurance like it's free money.As the employer, if you've been through one renewal, it's not end of the day this is money to an insurance company is going to pay for all these benefits take the taxes and the associated fees for managing all this. But really they're hoping to keep some of this. And the term for that's called what a target loss ratio.
Jason Pereira: So what are we looking at, small groups versus large groups? What kind of target loss ratio going to be looking at?
Keith: That's really difficult one to answer because every insurer has their own expense factors. And again, you're talking about fully insured plans, there are plans where there's no insurance company and for our administrative Services only aka ASO-
Jason Pereira: Which we'll talk about [inaudible 00:05:32]
Keith: So it's not as clear cut as that. But our job as a consultant is to allow the insurance company to make money because if they don't make any money, we don't have anyone to insure our clients or insure our companies. But our job is to let them make money but to make sure that they're not gouging your back end and that the plan is priced correctly. So to put that into context, if you have a bad year on your health and dental plan, and the insurer comes to you with an increase of 20% or 15% or 10%, we go back and do a complete analysis of all the medications which Drugs have been paid out to that plan, look at that, and then come back with a counter offer to the carrier.
Keith: What the carrier is trying to do is that if they did not meet their target loss ratio, so let's say for example, your loss ratio is 82% means-
Jason Pereira: Try to hold on to 18 cents on the dollar.
Keith: Every dollar that you paid premium, they want to pay no more than 82 cents on a claim.
Jason Pereira: And so they keep waiting. To be fair part of that is also taxes associated, premium taxes, fees, expenses. So this is not 18 points to the bottom line to the dividend.
Keith: Exactly. It's their expense factors. So if they don't meet that what's on a fully insured plan we're talking about now true insurance. When they come into the renew, they're not trying to recoup what they lost. All they're doing is take a look at your experience, you claim $100,000, but we only collect in 98,000 in premium they're adding on inflation trend on health right now to about 11.2% on dental is only about 9%. They're looking at the utilization, what's the increasing claims, what's the increasing employee population-
Jason Pereira: Perfect trends.
Keith: -trends, and they're projecting that in the next 12 months if your claim stay the same person per head with those factors added onto it that they would need 115,000 in premium to cover off those same 100,000 in claims.
Jason Pereira: So at the end of the day all they're trying to do is make sure, always when I talk to clients about this, I say look, the honest truth is, is that in a world with time machines, this will be perfect because they would know what you would spend travel back in time and price accordingly with their amount over. But this is why renewals happen. Renewals happen because we're making they make the best guests they possibly can and then they adjust. But they also, let's be honest, they come back with price increases that sometimes aren't fully justifiable, at least in my eyes we go back and negotiate these things.
Jason Pereira: It's very important to have an agent sitting in the middle doing that for you because otherwise, that gives confidence over time.
Keith: Well, that's part of our job. The carriers also have various modalities of doing a calculation or renewal calculation, depending on the size of the group. Like for example, a group of 10 lives is not going to have the same modality as a group of 100 lives. Yeah. 10 lives that will take your group and pull it with all the other groups of 10 lives look at the experience of the claims of the whole block and Rachel according to that, so although your claims may be way below the TLR they may have paid $6 but then they look at the whole group of five or six or 8000, 10,000 lives, you're now blended in without you get an increase that really is not attributable to your own claims.
Jason Pereira: Yeah, then people realize it's almost that there's actually levels of insurance on the insurance. Like, if you go beyond a certain threshold of claims that goes towards the charge towards the giant group, not just your group, as you said, You're being pulled in together. So the good thing is that yeah, if you have a terrible year and you're double what you should be, you're not going to be double on the increase.
Keith: It's full of re stabilization. So but again, our job as consultants that look at that increase and say, okay, we know that Jason your group this year, your claims were well within the target, if you were standing alone, you will not be given that kind of an increase, we then go back to negotiate that back with the carrier and again, that also looks to our block of business with the carrier and our relationships with the carriers. And that behooves you as a client to say okay, if I go directly I can go direct as a client to Great- West Life, some life, man your life and your companies and by the benefits directly.
Jason Pereira: Or renewals come back you don't know what's what.
Keith: Exactly. So when the group rep comes to you and says, okay, Jason, you've been with us now for two years, your increase is 26% you have no way the many lives rates are valid in the market-
Jason Pereira: Short of getting on the phone and calling them all up as opposed to having an agent do that for you and negotiate for you and then shop the market when it's necessary.
Jason Pereira: So Okay. Now one of the big concerns amongst clients, of course, and you just kind of hit on one was cost containment. You don't want these things getting, when we hear trend rates in a double digits, like no one wants to be paying double digit increases on what's already 10% of their salary on a regular basis, that compounds very quickly. So part of a cost containment is not just usage, but how you design these plans. So I want to keep that in mind as we go benefit by benefit will benefit by benefit I'm going to explain what it is how much you can expect to get coverage for or what your options are. And then this enough for your clients or for your employee, should the focus be there, and we'll just add some color around that.
Jason Pereira: So let's start off with the most basic one life insurance. So everybody's entitled to life insurance, and it's a mandatory benefit under group plans? Correct?
Keith: Correct? Yes, if you put a group plan in, you usually cannot put in just health and dental. The carrier looks for the benefits where they can make some money as well. Let's be honest. And they look at that spread of risk. So mostly-
Jason Pereira: But then again at the same time employees appreciate the fact they have life insurance.
Keith: Yes, especially if they don't have anything else. It's usually guaranteed issue. There's no medical questionnaire up to a point so if you've got an employee who's sick and couldn't get coverage by himself being part of the group, he can get some it'll be minimal coverage, but it's something. And traditionally, you'll see depending on the type of classes, I use the world class very loosely class, not as in class structure as I pick up class being executive level.
Jason Pereira: It's interesting, they've done surveys on millennials when it comes to benefits and the term class plays so bad poorly with them that you're seeing a lot of the startups and in the space start to refer to them around other things like hives and whatever else is using.
Keith: The insurance we still use what classification is what is short for. So you have the executive level one classification, maybe A, the star classification B warehouse classification C-
Jason Pereira: Will have different levels of benefits.
Keith: Exactly. So you'll see traditionally usually at the classification of executive level was would have higher life insurance maybe two three times salary, annual salary.
Jason Pereira: But we're typically looking at the options are typically flat some that's like five, 25, 50, 100 or multiples of income. And typically, what's the what's the biggest big ticket VCs like this like half a million? I don't think I've seen [inaudible 00:11:26].
Keith: Yeah, we have some groups, we've got a couple of groups that there's only 10 employees and they have a half a million of life insurance on the executive level, which is pretty rare. You see about 200,000 will be the cut. When you get into companies with 2, 3, 4 100 lives, then you see the higher maximums available. Again, it's because of the spread of risk.
Jason Pereira: Absolutely. And on top of that, the pricing on this is also is largely based on the average age of the group, right so that younger groups can afford larger ones at lower cost. Whereas older groups it's the opposite.
Keith: It's a blend of the mix of male and female-
Jason Pereira: Yeah, that too, gender also matters.
Keith: Gender matters and also the age bands that they fall into. That's how they calculate their rates based on the mortality tables.
Jason Pereira: Now, I will say I do have a mixed opinion on this being individual financial planner, because when I hear, "Oh, I already have a benefit at work, it's like, well, first of all worked in check on your life to see is there sufficient insurance in place... So I always encourage, more often than not we don't encourage people to rely on this sort of thing. Also, let's face it, these things can change, they can change employers, these benefits, don't follow them. I would say, in most cases, this is not a full replacement for standalone life. This is especially when they're younger, it's a great benefit to have because their odds are they're not going to go out and get it elsewhere.
Jason Pereira: But more often now, people need well beyond what's what's offered on basic life policy at insurance company, but through group plan, and oftentimes this is also offered to the spouse as well as a spousal benefit.
Keith: Correct. And the thing with group insurance life insurance to remember is that it's not portable. Nobody's at least if he's got 100,000 of coverage and he leaves the company, it's gone. There is a conversion option in our group policy-
Jason Pereira: But it may be subject to health?
Keith: Where you can convert that policy to an individual policy and the thing going rates? Which is not necessarily great depending if I'm leaving the company at the age of 55 term rates at someone age 55-
Jason Pereira: Well, compared to the average age of the company being say 30 something right now you're paying a much higher rate. And there again, there's also caps on how much they'll issue to you without a [inaudible 00:13:23].
Keith: Exactly. Plus now I'm paying the premium personally, which is after tax dollars.
Jason Pereira: Exactly. So yeah, so they'll also offer spousal benefits, like I said, typically a flat some, also some child's benefits, but those are usually pretty small like 5000.
Keith: Yeah, you usually see it's a quarter dependent life benefit as an adjunct to the employee life and it's usually 5000 child 10,000 spouse, we've seen it as low as two and a half thousand child 5000 spouse. It's really a nominal amount. It's usually in the range-
Jason Pereira: Final expense.
Keith: 2000.36 a month is the usually average premium something like that.
Jason Pereira: To an employer-
Keith: It's a give away.
Jason Pereira: Yes. So it's a giveaway. It's kind of a final expenses. Unfortunately, someone passed away. Here's some money to be With those expenses.
Keith: Now what you can do though a lot of plans but also what's called optional life which is the employee can buy up the life insurance themselves and pay it through payroll deduction. Okay. Now again, depending on the company approaching it from some of those are affordable. We have a product for our clients which is optional life parent adopted by the need the employer, they then take that coverage with them through to age 65. And pay the premium annually at the same rates as if they were still part of the group.
Jason Pereira: But those are all wonderful and they can leave but again, whenever doing planning for people. First of all employers, you have to offer this benefit. Secondly, it's a good thing to have your employees right especially helps take... the good thing and I want to say. One of the things I talk about when it comes to benefits, it's being a little bit paternalistic quite honestly you're doing things that maybe they're not going to be diligent to do themselves, and they'll be thankful when they're there. So life is one of those things, they may not take the time to go out and get the proper life insurance, but at least they have something through work.
Keith: But you find it you use a little paternalistic, that's when we sit down with a prospect or a new client, even our existing clients every year. We asked them, what's the corporate culture? What's the reason to put it back on this planet? Do they want to be paternalistic and take care of their employees?
Jason Pereira: Are they won't stop complaining? They just want to check the box.
Keith: So they just want to say we have an employee benefits plan. So depending on your reason, that's going to drive the plan design and the pricing.
Jason Pereira: I typically encourage them to be paternalistic, because then you design a plan the best interest of the longevity of the employee. Anyway, that's what that another point. So let's move on to the next benefit, Accidental Death and Dismemberment. So describe about that.
Keith: That one's really again a giveaway that will pay, we used to call a Double Indemnity. So if you die from an accident and you have a life insurance of 100,000, then The Accidental Death and Dismemberment is also 100,000. So your beneficiary will get 200,000
Jason Pereira: It's much cheaper than the life insurance because-
Keith: It's usually in the range of two, three, four, five cents per thousand coverage.
Jason Pereira: It's funny, I see this type of policy sold on a standalone basis a lot around travel, I see clients buy this specifically because I'm flying. It's like, Yeah, I know you're afraid of dying while you're flying, but the probability of someone dying in an accident is infinitely smaller than the probability of dying to health. And I know we don't like to think that way. But the reality is or we knew someone who died in a car accident, whatever it was not an airplane one, but a car accident. But the reality is, is that this is you want to see how low the odds of it happening are. Look at the difference in price between AD&D and life, for the exact same benefit. It's like five fold or something like that.
Keith: That's the reason the actuaries know the numbers. They work hard on those tables. That's why the AD& D rates are so low. Because the odds of dying in an accident are fairly low. And the dismemberment portion of that benefit because it's an Accidental Death and Dismemberment let's not forget that that pays a portion of the face amount. Say in this case, 100,000 pays a portion depending on the loss. So a loss of your pinky, maybe 5% of the face amount. Loss of an eye may pay out 70% depends on the severity of the loss.
Jason Pereira: Yes, which can be valuable because it can be one time costs associated with getting that treated more really remember those pamphlets being handed out when I was in school take things to the parents and it's just like really if I lose an arm I get that kind of money? This does seem like a laughably small kid but even I know that. Let's move on. So I'm going to move on to what I consider the single most important benefit in the benefits plan which is disability. And the reason I say that is because for the average person, especially younger ones, the most valuable asset they have is their ability to continue to earn an income and without that you're in trouble.
Jason Pereira: And disability typically takes the form of covering you after 120 days is typically what we end up doing after EI stops paying and depending on the plan can be two years, five years or at age 65, 65 being the most common. So let's talk about what some of the key points around that are. So one of the big ones is who pays for it?
Keith: Well disability no one thinks that we're going to become disabled.
Jason Pereira: And the odds state the opposite like even between 25% to 33% will experience disability at some point in their lifetime.
Keith: And I agree with you when you say some most important benefit. However, if you ask any employee, they'd say to hell with the Health plan because that's where they see the dollars coming back to their pockets every time they go to the drugstore.
Jason Pereira: And the problem is I'll tell you when I sit down and I see a plan that already doesn't have a EI plan and the employer is not willing to pay for it. I say you should really make the employees pay for it. The pushback they give because they only see the dollars out.
Keith: Well, the thing with the disability program is that God forbid you were disabled today at the age of 30. Could not work for the next 35 years. How do you put food on your table? The disability program will not cover replace any of your salary.
Jason Pereira: For the record, the Ontario Disability Support benefit will only pay you a grand total of about 14,000 a year. And then CPP disability as well as what another thousand-
Keith: If you can qualify for it this much strict how to get CPP.
Jason Pereira: Absolutely. So there's a government cushion there. There's not much [inaudible 00:18:44].
Keith: And in fact, the disability programs will have what's called an 85% of all sorts limitation, the reasoning behind that, for example, so if I have-
Jason Pereira: Does is make you richer when you're disabled versus-
Keith: You don't need more money sitting at home doing nothing so that will cut you back. So disability will give you a general thing. We only see is two thirds of your income to a max of 5000 or 6000 a month.
Jason Pereira: Now the challenge here, though, is that those caps, I've seen caps now up to 10,000 a month, I believe. Yeah. So and that's more I don't know when that started to happen, but I remember seeing them 20 years ago. But the big issue here is that disability is actually we'll call it almost "discriminatory against higher income earners" Because two thirds of your income up to five or $10,000 is great for most people. But if someone is a highly paid executive earning multiple hundreds of thousands of dollars, and the maximum you could give them is 120 grand, that can be a fraction of their earnings or earnings. That's a massive dip in income. So we often put in place top ups, individual policies for clients, on high income earners, well beyond what they have at work.
Jason Pereira: Now, that being said, so the employer versus employee let's go back to who's paying for that because there's an impact here.
Keith: Yes, it just goes school of thought. The premiums are not cheap for disability. If it again, depending on your age and the demographics of the group, you can see someone with a 5000 a month disability benefit, maybe paying 80 to 90 bucks a month of their paycheck at the paying get themselves employees pushback, why am I paying $90 a month for disability? What they don't realize is if their benefit is 5000 a month, if they're paying the $19 a month premium, if they do go on cover, they get the full 5000 tax free. If the employer pays the premium, okay? When they get that $5,000-
Jason Pereira: Even a portion of it.
Keith: Even one penny towards the premium, when they get that 5000 a month benefit, it will be 100% taxable.
Jason Pereira: Yeah. I don't know about you, but if I become disabled, I want to make sure as much after tax income as possible. So therefore tax free works out a lot better.
Keith: Yes. So we usually advise employers to have the employee pay the premium. That way the benefit is tax free. And what the employer can do is use that money that they would have used to pay the Ltd premium to beef up some of the other benefits maybe increase the life insurance coverage of maybe putting some critical illness.
Jason Pereira: So and that's the next one. Let's move on to critical illness. So critical illness differs, I know it confuses people because it differs from disability in that the disability definition is you cannot work. You medically cannot work whereas critical illness the definition is you've had this condition and can survive 20, 30 days. So yeah, the biggest culprits here are cancer open heart surgery, heart attack, stroke and surprisingly, MS is like 1% of claims. And then they'll cover depending on the plan, it'll cover like another 20 conditions or something like blindness or whatever.
Jason Pereira: But those are really small. We look at all the claims on this 66% are cancer, but it's a lump sum. Now, what kind of lump sums are we looking at in terms of a payout on these?
Keith: It's not very high against group basis, it's very difficult to get usually, but usually you see 25 to 50,000 as a lump sum payout.
Jason Pereira: which isn't bad.
Keith: It's not bad.
Jason Pereira: It goes back to some studies, the out of pocket cost of recovering from cancer and say Ontario is not far from that number over the course of two years.
Keith: Yeah, and very money doesn't preclude you from still claiming WI, EI LTD, it's a separate payout.
Jason Pereira: Yeah, with that being said, here's the interesting thing and people get confused about this. Well, why do I need both? Well, There's plenty of people who have a heart attack and get an increased cost of living but go back to work inside of 120 days-
Keith: Before 120 days.
Jason Pereira: Exactly so they may get zero dollars miscibility because they were back at work, but they now have an increased cost of living. So that's really what it's there for. It's to help you cover that cost I would argue to especially younger people, that's insufficient, we like to see amounts in the 100,000, 250 range, but it's better than nothing quite honestly. And some of these benefits it's like you know what? Life doesn't fit the envelope amount is not looking at your life and making sure it's the right amount. This to see the critical illness is the same thing. This is really probably is okay.
Jason Pereira: But may not but you always to make sure that the employees first off as an employer, this is great. You're providing this but the employees need to make sure that always it's adequate to fit their lives. And if it's not, they need to create an agile
Keith: Yeah, you're essentially just putting a base plan to cover something that you can't cover off. It's the old 80-20 rule. Trying to put something in that's going to please the masses as they can and it's always going to be someone who falls through the cracks or it's not enough. That's when the individual advisor comes in. And my Job is strictly group benefits. That's what we do for the last since 1976. So part of our job when we go into a renewals or we look at the plan designs, and we look to say, Okay, well, these particular employees, the executives or this office class of employee, they need to have an individual agent coming to speak to them. And we will then call the agent or the sub agent who is on that case and say, Look, they've got six employees and some top-up going. Because we don't service the individual that well.
Jason Pereira: That's not what group is designed for. This is designed for, like you said, the 80-20 rule not the exceptional cases. So dental moving on to one of the things that people think is the most important benefit they could have here. And there's an old joke about dental I heard for years is that it's not really insurance. It's basically money in money out cash flow. Because basically, most the vast majority people go to the dentist, the dentist know how much money they can take out of these things and literally as money in take out the fees and taxes, money out.
Keith: It's a cash flow benefit.
Jason Pereira: Yeah, the argument is the reason it's in there is because unions are good for back in the day.
Keith: For that and a few other benefits to on the health care plan.
Jason Pereira: Fair enough. So let's talk about dental specifically first though. So typically there's three tiers of benefits. So let's go through what all those three are.
Keith: You've got your basic dental which will be your X-rays, your examinations, et cetera. And then there's level two, which would cover fillings and so on. And then you go onto level three and four, which would be your grounds, your bridges, your orthodontia and more expensive items.
Jason Pereira: And one of the key terms we're going to talk about here is going to be called co-insurance and the other one's going to be deductibles. So the deductible is pretty straightforward. You have to pay a certain amount every time every year before the rest of it is covered. Co-insurance is that the employee is on the hook for a percentage of the total expense. And these are designed to contain cost or share some of the risks with the employee?
Keith: Correct. It's also put in there to mold consumer spending. The way that we utilize the plans.
Jason Pereira: Don't just go to the single most expensive option every time.
Keith: Exactly. And it also helps to reduce the premiums. So the difference is deductible. Usually you would see a deductible for 50 single and 100 family. So not much. If you're single, you go to the dentist, the first $50 in any one year with this account in the year, a policy is out of your pocket. If you're a family, you spent $100 per family. We are seeing these deductibles increase to 100 and 200.
Jason Pereira: Well, they're not correlated to inflation. So they're sticky. It's one of the reasons why I always preferred co-insurance amounts because if from benefit, the cost goes up and we'll sell it as the other person at the out of pocket costs. So which one works better in your opinion? I have my opinion, but-
Keith: I personally believe that co-insurance works better. The co-insurance for the uninitiated is where if you go to the dentist and your claim is $100 if you have an 80% coinsurance, it means that the insurance company would only pay back $80 out of the 100 you're on the hook the other 20.
Jason Pereira: So doctor says that, Hey, you could do this optional thing. You stop and think about, wait a minute, that's 1000 bucks, 200 bucks out of my pocket. Maybe I don't want the optional thing.
Keith: Also, what happens is the employees that use the plan are paying a portion of it. If you never use the plan or that portion of the plan, then you don't pay anything. It's a bit more fair in the way they spreads the risk. And it does do quite a bit to reduce the premiums.
Jason Pereira: But in fairness, and this is the thing with most group plans, the vast majority of benefits are consumed or the dollar spent or consumed by a smaller percentage of the overall group.
Keith: 80-20 rule.
Jason Pereira: 80% of the money goes to 20% of people [crosstalk 00:26:12] no. So the reason I bring this up is because dental is the first of these benefits where this is in impact. We have to make a decision around that. So dental will come, we can design whatever coinsurance or deductible amount we want, but typically you're going to see, co-insurance is between 50 to zero?
Keith: The average we see as an 80% co-insurance. The average-
Jason Pereira: Doesn't really feel like a benefit. That's not a balance. I always talk to people about the psychology of this.
Keith: The other thing that you'll see some companies do is that they will give a 100% co-insurance, no deductible. They have the employee pay some of the premium.
Jason Pereira: I'm not a big fan of that.
Keith: So they could do a 50-50 split on the premium.
Jason Pereira: I'm not a fan of that because to me, seeing that come off a paycheck every month is a reminder that you need to spend it.
Keith: It's a school of thought again but it's an option. We see that less and less.
Jason Pereira: Oh, you know what? I'll be honest with you. I find that when I go in to cases, to me that reeks of the agent was trying to sell the biggest policy he possibly could because, Oh, I can only afford X. Well, you can only afford that. But if you put 50% of it onto the employees, 100% benefits, the biggest possible premium, I get the biggest possible comp. So I'll tell you, well, as you can guess, none of my policies have zero co-insurance. But this impacts dental different ways because of the three different tiers, they all have their own kind of maximum maximums.
Keith: Exactly. What you will usually see is that level one and two may have a combined maximum of say $5,000 per person per year. And then when you get to measure that, it's usually a reimbursement of only, it could be a reimbursement 50% and then when you get to orthodontia it's usually a lifetime max of maybe 3000 or 5,000.
Jason Pereira: But it's still subject to a 50%.
Keith: Accepted to a deductible and also usually only covers children up to the age of 19. Very rarely is it for adults.
Jason Pereira: Adults who want the braces are not going to be[inaudible 00:27:54] smile direct club.
Keith: But dental is strictly dollars in dollars out. With the dental association is one side of the problem. One of the issues is that the fee guy goes up every year. The dental association dictates what the fees will be. So you can't go to a dentist and negotiate the fees. Okay. So what sometimes we'll do-
Jason Pereira: Unless you're paying out of pocket, then it's a different story.
Keith: But then you're using your plan. So what some plans will do another tactic to reduce your costs is to what we call lag at the fee guide. So right now my plan where we work our plan is on the 2019 fee guide. Okay. So if I was to say to our broker, which is myself, the Reno's kind of high, what if we lag the fee guide by three years? Man, let's go back and use the 2016 fee guide.
Jason Pereira: And will still pay on a benefit. It was a number from three years ago.
Keith: Which could be 6% less than now. So it's a way of shifting some of the costs back to the employee. So now I'm getting 80% of the 2019 fee guide. If I liked the fee I'm going to 80% of the 2016 this is 60% less.
Jason Pereira: The real question is, does the dentist actually charge the whole amount.
Keith: This the thing, the dentists-
Jason Pereira: They notice this game. The other dentals just want to make as much money. And they come with their fee guide. And the insurance companies want to keep this under control. So it's like, okay, you can come with our price, but these people opt to use the lower one. It's your choice as to whether you want to charge them out of pocket or not.
Keith: 100% and that's what happens.
Jason Pereira: Unfortunately, when you have indirect payer systems like this, it's not a true free market. And unfortunately you don't get true clearing prices. You get some distortions and then this is one of them.
Keith: It's a battle every year. We've seen things whereby a record examination included your X-rays, you're scanning and cleaning and your examination about the dentist years ago, every year. Now it's unbundled. You see the hygienist, that's one code. You did the X-rays. That's a different code. And now I'm bundling it what used to be $108 now may be 100 depending on which province you're in, could be $150.
Jason Pereira: I think we've all experienced this as subjects of going in and getting this done. So I bite my tongue when I see it sometimes-
Keith: One thing I'd say is that if you as an employee now as the end user go to the dentist and you walk out there with a claim form in your hand when you put it or an explanation of benefits and EOB from the receptionist that and you look at it and it says that you had six units of skating for example. Think to yourself were you in the chair for an hour and a half?
Jason Pereira: Well, let's discuss it. What's the unit of scanning it.
Keith: Yeah. So will you in there for deep scanning for an hour and a half, then you questioned the dentist or you see it's three fillings, MOD, there's different codes. I'm not expecting everyone to be up on the code. But if you're looking at anything, I was only in the chair for an hour.
Jason Pereira: One of my client says [inaudible 00:30:22] insurance fraud. Yeah. That's always an interesting conversation.
Keith: But if you use us as the end user, ask the consumer to question the claim. Question what's being done. We're scared to ask questions about doctors and dentists and we should ask those questions, substantiate the bill. If you go to a restaurant, you check the bill before you pay with your credit card. If it's wrong, Oh I didn't have this oh, dah take it off the bill.
Jason Pereira: Yeah. This goes back again. It's an indirect payer system. We have something called moral hazard essentially, which basically means that you know you consume for lack of better term, if you're not the one paying for it, you do not care about the risk anymore.
Keith: But at the end of the day you are paying because if the premiums go up, this is the employer paying, the premium is less money for you to have a salary increase next year.
Jason Pereira: And it's interesting because in very small groups when I've gone and set these up, I said typically there'll be a bunch of partners or something like that, maybe three, four or five. And the conversation has had like, listen guys, this is not a blank check. You guys want to keep this beyond the first 18 months. You gotta respect it and use it when necessary and make sure you're paying for what you should be, not just every fancy... none of you here need a gold tooth anytime soon. So let's move on to the health benefit, which I will argue is the second most important benefit. Even though everybody thinks dental is so important.
Jason Pereira: So this entails a lot of different sub benefits when we break it down. So extended healthcare, let's talk about the big one. Pharmaceuticals.
Keith: That by far is the biggest portion. If you look at a graph they spend on any health plan, we normally expect to see the drug portion of around about 80% of the total expenditures on a group plan for the health plan. 80%, which is huge. And what you will then also find is that out of those medications being used, only about 20 to 30% of them now are the acetaminophen.
Jason Pereira: The routine stuff-
Keith: Is tiny stuff. It's now the largest dollar amount is the biologics. These other big blockbuster of drugs, which are 60, 70 $80,000 a year, but they only benefit 20% of the population.
Jason Pereira: Now let's go back a step here. So the important thing for employers to know is that they're not getting hit with this full 60,000. This is being shared amongst all the premiums you're putting in for the entire group. And then beyond a certain threshold, it basically is applied to the pool of other businesses that you were in there with. So you're helping carry, this is all about risk sharing. That's what insurance is. So that risk is being shared throughout the entire group. I've heard VCs talk about how the price of these things that I wanted to punch him in the face, but their line of thinking, but these things are only going to get more expensive.
Jason Pereira: And you're talking about only benefiting 20. There's some of these things being developed only benefit in one.
Keith: And that's the whole issue with the national Pharmacare, because some blockbuster drugs that may only benefit one or 2% of the population-
Jason Pereira: is we don't pull together and buy that.
Keith: Pharmacare system going to be paying that would be putting $3 million, for example, to cover three people versus at 3 million going to cover a lot more people for lesser disease.
Jason Pereira: Let's just say, we switched her from three people. It's to say it's 300 right? It's far more cost effective for the single buyer. That would be the country to negotiate down the rate with the insurance. This is why we pay less for drugs in this country in general because we have fewer buyers. Whereas in the States, the same medication you would buy here for, you can sell for 10X what it does elsewhere. And it's been pointed out in several sub-committee meetings. So pulling together does have, it's like Costco.
Keith: The insurance companies have realized over the years that the increase in medications are going up and also we're an aging population. So the usage is going up, not just the cost utilization. As we get older, we use more medication. So to offset that, that affects premiums. It's dollars in dollars out plus their expenses. That's just like the dental, the health drugs is the same thing is a cashflow benefit. And as I mentioned earlier on, when you get the Reno and not trying to cover what they lost, they're trying to project in the next 12 months that they won't lose it again.
Jason Pereira: So this is why those trend lines are always up on the drug.
Keith: What the carriers have done is they would take you and your plan and you've got 100 employees and they'll say, okay, we're going to put in what's called a polling charge or a stop loss. He used the word stop loss is all different acronyms they use-
Jason Pereira: But again, insurance on the insurance.
Keith: Exactly. So what they was saying is, okay, Jason, for your company, we'll have a stop loss of $15,000 because that means when any employee claimed above $15,000 in a year, only the first 15,000 gets attributed to your experience. The balance goes to the pool. So if an employee claims $30,000 only 15,000 goes in your experience, the other 50,000 is forgiven from your rates and is charged back to the pool. That was fine for many years until these blockbuster chunks came out.
Jason Pereira: They started blowing out. The stop loss was may be used rarely. Now it's being used much more frequently. So therefore the money's got to come from somewhere.
Keith: So what they've done now is that that banded together at the top 24, 25 insurance companies to clear and they've put together, it's called EP3.
Jason Pereira: By the way, we're going to include in the show notes a link to a document that Keith gives us, it's a cheat sheet on all these terms that basically agencies use so that you can basically have some idea of where we're coming from and some of this terminology.
Keith: So you'll hear that what's called a EP3 certification under group plan. That's for fully insured plans. And what the major insurers have done is a band together and they've set up what's called simplicity a super pool and that is protect the insurance company from going broke from high claims. So let's take-
Jason Pereira: So it's insurance on the insurance on the insurance. Now insurance cubed.
Keith: Yeah. So for example, if I claimed $60,000 okay, as an employee, the first 15,000 goes to my employers experience. So he gets a rate increase based on that. The second and 15,000 goes to the pool. Next year I claim another 60,000 okay. The same thing the third year, if I claim 60,000 I can now attribute that claim to the super pool. So the insurance company is not on the hook for the full amount. They're only on the hook for, I can't remember the exact percentage of it. So they're reinsuring themselves.
Jason Pereira: So they're making sure these things are going to be around for a long time.
Keith: Their reason is not because my claim of 60,000 is going to make them go broke and look at the population as they get a 1000 people at that its going to be-
Jason Pereira: If you're going to look at company that has several of these, you're going to be in worst case. So again, this is one of those areas where that's how the insurance company's keeping things under control from their angle, which is good. So they're not just passing along 100% of usage to you guys basically they're there making sure that they're pulling risks themselves. So from the employer standpoint, this is another area we're coinsurance and deductibles apply as well. So what do you most commonly see is still the 80% of reimbursement?
Keith: We still say 80 is the most. We see some plans at 75 usually we'll see a 100% reimbursement on things like paramedicals. [crosstalk 00:36:49]. But they have an annual limit, usually $500 per year per person.
Jason Pereira: And everybody loves to get their massages done. One tip for you, employers do not have a massage therapist day where they come into the office like you're just guaranteeing a bad renewal. If that's the case. I had to tell some people to stop doing that.
Keith: Actually, I have been in business for over 35 years and they have a few anecdotes. One of them I can say is that we audit the claims of our clients every year, not the individual names we don't get that at all. [inaudible 00:37:17] in general. We identified a few things. One thing that I identified was one client that there was an influx of tens machines. These doctor who? We couldn't figure out why, so they go back to the employer at the Reno. What time has it gone through the claims, they analyzed, the increases, read it, but it's attributed to this shooting that dollar amount. Like it's crazy what happened?
Keith: Oh, we had a health fair. We called in the chiropractor and he said that these tens machines were covered under the plan. So everybody got one.
Jason Pereira: They are, but again, this is the problem. People think it's free money. And I had a group where basically they had massage therapists in every Thursday and I first went will come up and I'm like, you have a what now? Okay, so tell them never to come back. Because here's the thing, this is meant for people who need it. If you basically need routine massage because whatever you're in a stress position, posture, you've had an injury, whatever it is, you're going to seek that out. And that's what it's there for. It's not meant to be there for, Oh, this is convenient and it's kind of nice. So I'm going to totally do this.
Jason Pereira: So let the people who basically need that benefit, utilize that benefit. Don't try to come in and sell it to everybody because again, it's not free money.
Keith: It's not free. And people don't rent us. If you read the booklet, you're in playability. It wasn't medically necessary. So the insurance company could come back and say, Oh 15, 10s machines was sold to employees from this doctor Jane blah blah blah.
Jason Pereira: I have 30 employees of this company.
Keith: Were they necessary? Let's see now that they can then go the, I don't know whether they've done that but they have the right to come back and shout that to you.
Jason Pereira: And yeah, it's important that again, we use these things appropriately-
Keith: Because it's fraud. Is it benefit fraud.
Jason Pereira: I always see fraud more and more in the news these days. So all said and done. So we're looking at the big ones. We also talked about paramedicals I see some employers get into thinking no it's just massage whenever like no, a lot of stuff in their chiropractic orthotics, they're things that-
Keith: Speech therapy, social worker, psychiatrist, psychologist, acupuncturist, I kind of say that would probably acupuncturist.
Jason Pereira: Yeah, these things are important to those who basically have those conditions.
Keith: Naturopath is another one. What's that? Medicine. And we find the millennials go a lot more for that because rather than taking a drug, they will soon to go to a naturopath. Oh, that would sooner go to physiotherapy rather than.
Jason Pereira: Well we should fix a problem because anyway, the point is, is that... And so physiotherapy I do can do it and that's your naturopath I'll bite my tongue. Anyway. So let's move on. Also, one last thing and there's also hospital visits are in there and it's nice to know that.
Keith: Here's the thing with hospital, it's actually semi-private coverage or private coverage. Okay. There's a premium for that. The question is, as far as I understand it, if the doctor recommends that you as a patient require private or semi-private room, Oh he pays for it. So really you're now only covering semi- private or private for those are deciding to have it and usually it's for pregnancy. If you can even get a room-
Jason Pereira: In fairness, I've seen the four different room systems. I'm just like, yeah. Or six different systems. There's a lot going on here. I would never be able to sleep. I know I value somebody private and private more.
Keith: If you can get the room.
Jason Pereira: if you can get the room. Well, yeah we can get into the good and bad of that. So one of the things that's separate from this, but well, part of an adjunct is travel. So there isn't a year that goes by where I don't see something on the news about someone saying no to travel insurance when they bought the trip to the Dominican and then they get injured and then there's gotta be a GoFundMe campaign to get them back the candidate. Okay. So first off, always have travel insurance even when traveling between provinces. Okay. Because we have provincial healthcare, you go to another province and you will incur a bunch of costs that are not covered because you're non-resident of that province. They're going to whack you with it.
Jason Pereira: There was a case a couple of years ago with an air ambulance where they had to move a woman because of a high risk pregnancy. It was a $160,000 bill. She was an Ontario visiting from Alberta. Once the news got involved, they split the bill, but they were going to stick her with a $160,000 bill. You go shopping in Buffalo for the day, you're traveling out of the country. So what's the conventional limits we see on these things in the-
Keith: The plan used to be 1 million, 2 million lifetime and they would usually be back then up to 180 days out of the country. Well the Carrier's got, why is that? You've got the executive who's now taking four months in Florida, technically not working. So now most plans now a 30 or 60 day trips out of the country, which is-
Jason Pereira: So they come back for a couple of days and then go back again.
Jason Pereira: Now, one important thing to note here. So first off, it's important that everybody's got this. So group plan is great for providing because that's where most people get it from. So if you have this on your group plan also do not check yet. You're the only person who's allowed to check it until... do not check yes to the travel insurance on the purchase. So one of the things that people aren't aware of, you have to be careful of is that there's a period of stability required before you go. And that's another thing I see. I knew it was where someone will like, Oh I had this, but then you know, I had surgery on the Tuesday and then I went to the Caribbean the next day and Oh lo and behold there was a complication.
Keith: That's true. But with a group plans, usually because there is no health requirement on the group as a whole, usually you'll see wording such as not traveling against the advice of your doctor. Unforeseen medically, unforeseen emergency for example. So from that point he was so whereas if you get the individual products, I won't name any carriers, but they would actually have a clause in saying if you have seen a doctor for this disease or this thing in the last 30 days or whatever, you're considered and is much more restrictive. But the route plans are not quite as restrictive around. It doesn't mean they don't have a pre X rule.
Jason Pereira: You still have to basically be stable before you travel but you know you're not going to have that question to qualify in the first place.
Keith: I would say to anybody as a caution, when you're booking online with nothing in say Canada or WestJet or any of the airlines, they always come up with that window. Do you want travel insurance, you check yes. And they send it to the policy.
Jason Pereira: Talk to your advisor and make sure they have it amended.
Keith: The problem there with that type of policy you're buying even any of these ones which are online is that they're not underwriting you. You get underwritten at the time of claim. So you think you've got coverage because you purchased it, but when the team comes through, that's when they delve to your-
Jason Pereira: There were a couple of ones [inaudible 00:43:11] agents that you can't like we do that basically are underwritten. The other one I will say too is the number of times people say, I have it through my credit card.
Keith: Same as the ones you buy online. The best thing for your travel insurance, if you're not covered under your group plan, contact a company like ours or an individual agent who would actually underwrite you. The premium may be higher, but you knot exactly your coverage. We've got coverage for someone who had a heart attack 30 days prior and we got them coverage.
Jason Pereira: And they're going back to their credit card one last thing to be beat up on there. And if you're an employer, listen to this and say, Oh, I have it through my credit card. Here's the reality of it. Have you ever read the terms on your credit card? I've seen "travel cards" that had travel insurance totally and grand total benefit of guess what? $25,000. I've seen them lower to 5,000 but a travel card one time, $25,000. 25,000 in the US won't even get you to the hospital. It's astonishing that they had the audacity to market as such. Typically, when we do these plans, we see either no mention of a cap, but reasonable and customary amounts being acceptable or lifetime caps in the one to two to three $4 million range.
Jason Pereira: And anyone who's looked at the cost of medical care in places like the US understands why. So going back over the plans. Okay, there's a couple of mandatory benefits, which were life and AD&D. Everything else is kind of basically optional, but of course you're going to want to do at least health is pretty much the biggest reason employers put this in place. The rest of it comes out there. There's a couple of other smaller additional benefits that are valuable and nice to have. One of them is an employee assistance program. So let's talk about what that is.
Keith: Okay. Employee assistance programs are well no one said they're fairly new. They're one of those things which are in the background and really don't know what the ROE is. They say for every $3 you invest, you get $5 back at the end of the day and in play assistance program would be a hotline and went 100 number. I'm feeling depressed. I don't know where to turn. I can call the 100 number. They would do some form of an intake and then maybe recommend a therapist for me to go see or course of action.
Keith: It could be a smoking cessation, treatment, or it could be, I've got an elderly parent and I can't go to work because I'm so stressed out. It's causing me issues or whatever. They can guide me through to an elder care program, things like that. So these things are more of preventative measures and they're not expensive for an employer to put an EAP in anywhere from, depending on whether you go on a standalone product or one with an insurance company that's built into one of their health plans, anywhere from $2 to $5 per month per employee.
Jason Pereira: Yeah, I think they're valuable. The number of times I've had people who needed to some psychological counseling just because of whatever was going on in their lives at the time and being able to say, okay, look, first off you have navigation services through the AP at work and in addition to that, you also have X number of hours paid for through this program. So do not hesitate to use it. We take out the cost factor and you'd take out the, I don't know where to go. It becomes incredibly valuable.
Keith: Well, the offset here is the thinking is that if you can get somebody to use an EAP, you've got someone who's coming into work every Monday with a hangover. After four months, you have to have, maybe there's a problem on a Sunday night, they're drinking too much and if the supervisor and get them to go to the EAP alleviates that, it may prevent health claims and also disability claim down the road. So that's where they come up with this idea of you put $3 in, you get $5 back on [crosstalk 00:46:25].
Jason Pereira: Workplace productivity and basically just your ability to attend.
Keith: You get away from this presenteeism. I'm showing up for work but I'm not really working because it's a background issue.
Jason Pereira: Yes, it is. So in other newer, nicer to have is a second opinion services. Yes. So let's describe what those do.
Keith: Okay. Second opinion services are even an embellishment on an EAP in that they take various forms, but essentially if I go to the doctor and I get a diagnosis of say I'll use cancer for example, and he refers me to an oncologist and now I've got a three month wait for an oncologist. I can then go to the second opinion provider and they will then assign a nurse to me who will then get all of my records from my existing doctor, go through that and usually send it off to one of their centers of influence. Depending on the provider, could be the Mayo clinic, could be the Treatment clinic, it could be Sloan Kettering-
Jason Pereira: But typically one of the top ranked individually is one company specifically that actually surveys everybody in every specialty field and says if you can, if you have to have that specific thing that the specialist that open heart surgery, if there's one doctor that you would put your life in the hands of, who would it be? And they basically rank them based on that. And then the person who wins that poll ends up getting on my case.
Keith: Exactly. So they send all the case files to that doctor who may have seen your case 60, 70,000 times in his lifetime, may have done.
Jason Pereira: So you're getting a second opinion from probably the biggest expert in the field.
Keith: And then they will come back and say, well your oncologist was recommending that you do this. However, we know that this is what's needed.
Jason Pereira: Oh some of the crazy cases they have from like people being diagnosed with cancer and it was just an acute allergy, your Parkinson's and it was just a nerve issue in the neck can be rendered surgery. Like it's some of the stuff that they've had in the past. I tell you, we always hear, you should always get a second opinion. Typically, that means going to see another doctor. But frankly, if I can get literally a second opinion from the best authority in the world I'm getting it.
Keith: We have one, a second opinion for that provider that we deal with whereby if you can't get the opinion or referral, I think it's within 30 days in Ontario, they will pay to get you to the next province to get the [crosstalk 00:48:32].
Jason Pereira: Really? Fantastic. So, and that's also a very nominal cost or we're talking a couple of dollars.
Keith: Again, five, six bucks a month per employee. Again, there's always buy ups if they want to buy out the actual insurance to actually pay to go to the Mayo clinic after the fact that you can buy insurance for them. It's like anything you start with the base. [crosstalk 00:48:49]. Again, it depends not for everybody. It depends on your stage in life.
Jason Pereira: Oh no, no. We have a great system in this country and frankly, no one has to worry about going bankrupt for getting sick. But for those who want alternatives outside of what we offer, maybe faster service more. There's options and there's policies, that'll pay for that.
Keith: Or everybody likes to jump the line. We will think we're special. In Canada we can't jump the line like they can in the US.
Jason Pereira: I know I'm talking about that later. So the next one I want to talk about this health spending accounts. So this is not really so much of a benefit. This is something that gives employees discretion. So tell me about it.
Keith: There's two schools of thought here. We've had employers come to us and said they want to put a spend accounting. a spending account is a bank of money that you've put aside for an employee to spend how they wish on benefits up to a certain level. So for example, I might say, okay, I'm going to give every employee $2,000 a year to spend on healthcare as they see fit. There's certain rules around it under revenue Canada [inaudible 00:49:46]. It has to be items that will generate a credit and medical credit on income tax.
Jason Pereira: Like for example, vitamins are the big ones, excluded from.
Keith: Over the counter medication drugs will not be covered. And also there has to be an insurance element in there. So you think, well hang on a second, if this is money the employer is getting to me in order for it to remain tax free, to me as an employee has to be an insurance element. How do we get that? The definition of the insurance element is risk. So if I say to you, Jason, I'm going to give you $2,000 a year to spend on healthcare as you wish. The risk is that if you don't have $2,000 worth of expenses, you don't get to use the $2,000.
Keith: The other risk is, is that you have 4,000 of expenses you can only claim it back too so there's the risk. So that kind of handles covers off the risk factor. And to ease that as well what revenue kind of allows you to do is that if I give you 2000 a year to spend on healthcare and you spend 2000 no, so you spend 4,000 you can carry forward the 2000 that you couldn't claim into the next year up to one year and the same with the money. If I've spent only 1500 out of my 2000 I have found it left. I can carry that forward to next year, but only for one year.
Keith: If I don't use it, I lose it. So there's the risk. If you do that, then you can set it up.
Jason Pereira: But to an employee standpoint. Basically its discretionary money that can be used to say cover off co- insurance, deductibles, whatever it might be. Or sometimes I see it just replacing outright benefits. I've seen it replaced dental benefits. I see it replace paramedical benefits. It's not an apple to apples comparison. Because once he wants to use it's like well that's the end of that.
Keith: Well, here's the thing. We've had employers come to us and say, we want to put a spending account. Everyone wants to spend any account, we want to put one in. Can we cut out the dental plan and use your spending account? Give everyone $2,000 I said don't shoot. You can do that.
Jason Pereira: That's fine. But the dental plan covers more than 2000.
Keith: I said here's the thing, you have a family full people each with $5,000 each. That's 6,000 a year on dental. If you only put a $2,000 spending account in, you've just cut that in these benefits. So we'd say a spending account is not a replacement for, it's an add-on. It's a per, it's a bonus.
Jason Pereira: And that's a health spending account. Now what starting to see is some providers provide spending accounts for basically non health related illness.
Keith: A wellness account.
Jason Pereira: A wellness account. So you know you want to cover wellness related things such as your gym membership or you've run a basically other things.
Keith: Okay. Stick scarf shoes, anything.
Jason Pereira: Dog walking, I've seen that and the other day, while this is an interesting term used for that, but that people don't realize that is a taxable benefit to them. So really it's not much better than the employer paying them more cash, but it's got this nice little stigma of like, Oh my employer's paying for my gym membership.
Keith: It's the optics.
Jason Pereira: Like literally if you explain, I've had people come to me and say, Oh yeah, that's great. They pay for all this. I'm like, well let me explain how this works. And I'm like, Oh so they could just pay me more money. But now you can only spend it on this guns of sorts.
Keith: That goes as a taxable benefit.
Jason Pereira: That is good though because it can encourage certain actions. It encourages, Oh I can only spend this on my gym and recreation. Because you can limit the type of things.
Keith: Yeah. Some companies do, some companies don't.
Jason Pereira: They limit it to recreation solely. Then you're basically saying if you're going to live an active lifestyle, I'm going to support that active lifestyle.
Keith: And the differences too, by putting into a spending account, you're not actually physically giving the employee an increasing pay. You're giving them an allotment of money to spend. Again, the same you don't spend it, you haven't paid for it. And just one caveat with the spending account, the health spending account we can do structured or unstructured. Structured means that we will cover only certain out of that. So for example, our plan does not have vision care. So we said, okay-
Jason Pereira: Also, we'll talk about vision in a second.
Keith: So you can use it for vision care or you can use it to top up your dental, but you can't use it to go to the chiropractor six more times.
Jason Pereira: Yeah. So vision is typically embedded in the health expense. Sorry, health benefit. And I too hate vision because I know it's a profit center. So what are we typically looking at in terms of benefit versus cost?
Keith: Okay. So, so vision care, most plans will cover an eye exam once every two years up to a reasonable cost, which I think is about $85 in Ontario.
Jason Pereira: But then when it comes to glasses-
Keith: If you want the glasses and the contacts, that is a separate benefit. They call it vision care. And it's usually structure that would be 150 to $200 every two years. But meanwhile every year for children under 18.
Jason Pereira: But what's it costing the actual[inaudible 00:53:59]?
Keith: And so premium could be six $7 a month per family. And bearing in mind you can only clean once every two years. So it's cyclical. So what happens is the premiums are going to show that every year you're going to get an increase because again, it's dollars in dollars out. Quite often the employee is better off to self insure that portion.
Jason Pereira: It actually paid for years. It's nice if you pay for your glasses, you want to play for the glasses, but you're better off just giving them the money.
Keith: Quite frankly. What glasses can you buy for $200 every two years or even contacts? But even contact lenses, they cost you 100-
Jason Pereira: Don't get me started on the monopoly that is Luxotica and how this actually exists in this world. It's astonishing. But yes, this is why I shop at Queerly or what's the other one? It's [inaudible 00:54:41] Parker. Okay. So we've talked about traditional, all the different benefits and that's fantastic. One of the things I want to talk about is the concept of almost like acting as the insurance company yourself to some degree. And this is called something called an ASO or administrative services only plan. So when we think about it, the money goes to an insurance company and for all your employees, they paid money out of the benefits out of that amount and they hope to hold onto a certain amount of it and they have a stop loss ratio on top, or sorry, stop loss insurance in case things get ugly.
Jason Pereira: The employer has the option to do with the same thing. So let's talk about that. Looks like what the benefits are.
Keith: Usually we're talking self-insurance, is only on health or dental?
Jason Pereira: Yeah, you can do that with life.
Keith: You don't want[inaudible 00:55:21] life insurance-
Jason Pereira: Or disability.
Keith: Because one claim would devastate you.
Jason Pereira: Or disability claims.
Keith: And also this is a threshold. There are companies out there that will do a self-insurance for companies as low as nine or 10 lives. For me it doesn't make any sense. You're better off to say fully insured. Self- insurance essentially is saying, okay, let's look at the premium that an insurance company wants to charge us for the year for health and dental. Say it's $300,000 we say fine. Okay. What our expected claims based on our population? So we go back and look at the history of your claims for the last five years and based on the current trends and the inflation factors, we say, okay, your claims for the current year projecting forward are going to be 230,000.
Jason Pereira: So 70,000 wiggle.
Keith: We've got 70,000 left. So we say, okay, for $70,000 can we purchase the service of an administrator to process and pay those claims-
Jason Pereira: Because you can do that as an employer violation of privacy. I see that happened several times where people were like, what if I just give them money in exchange? Every time they bring me a receipt? I'm like, well, he just broke the law. Too messy.
Keith: Yeah. So you would hire a company. One of the outcomes is does this, well, we actually administer that and pay the claim. So just like an insurance company, but so they've given the money to the insurance company. Every year you're putting into a trust account and every month, so the employee sends in their claims just like they would to an insurance company process. At the same with the drug comp, the same way they claim will come into our office or a company like ours, we then pay the claim out of your trust account and deduct all the expenses and taxes from that at the end of the year do a reconciliation.
Keith: So if you had 300,000 in the trust account, the only three 80 came out change and expenses you as the employer, a better off by $20,000.
Jason Pereira: And make that contribution the next year.
Keith: Exactly. The Caveat is if the claims are more than projected, you've now got to pay up the money, that's the risks.
Jason Pereira: There's such a thing as stop loss.
Keith: We can put stop loss in there. Again, stop loss at the same as insurance company, but it's usually based on a per employee. So an employee say claims 15,000 but the stock is 25,000 gets paid by the stop loss insurance company.
Jason Pereira: So yeah, so they're not insuring the pool. They're ensuring each individual.
Keith: Exactly, up to a specific limit.
Jason Pereira: But nevertheless, it still protects you from the massive claims from... so if everybody uses the basic benefits up to the threshold of the stop loss to a greater degree than expected, then yeah, you're on the hook for that. But that being said, I mean that's, again, this is how insurance companies work, but the reality is that if your workforce is relatively stable and you have a large enough population that those things even out, then you're okay to do that with very little risks.
Keith: There's a few caveats. One of the caveat is that there are few of your stop loss providers to ensure a standalone self-insured plan. When the insurance comes to it to a self insurance plan they using their own stop loss, they're their own insurer. So by going to a third party, you've now got to find a stop loss provider. We have providers in place that we can use, but they drop in and out of the [00:58:06].
Jason Pereira: We've got 1.1.
Keith: Where we were back up to about three now, but the problem is, as they incur claims at the stop loss level, their fees go up and the rates go up. [crosstalk 00:58:15]. So that throws the whole mechanics and the estimates out of the window.
Jason Pereira: Here's the thing, it's not perfect, but still could be a cost saving measure for employers where it's the right fit.
Keith: The other major issue as is this, we talked about the EP3 protection in the beginning that does not apply to a self-insure. Correct. Only applies to fully insured because insurance companies have the risk.
Jason Pereira: Which is a risk that people don't understand. And frankly, if you're not an industry, nor should you actually understand it, but you're not getting an apple to apples comparison.
Keith: They exclude them from the firm so you're on the hook for those employees directly.
Jason Pereira: Yeah, so it's not without risk.
Keith: ASO is good for the log in my eyes is to get my opinion as good for the companies where a thousand to three, 4,000 employees where they can mitigate the risk at the smaller level I personally don't agree with it with [inaudible 00:59:44].
Jason Pereira: Here's the thing, those drugs are not an everyday occurrence but when they happen, and again this is an employer risk. I was at a conference recently and someone got talking about how he was doing it for as a group, the smallest three. And I only think I like to respect the guy, but I don't think this is something that they thought out quite the way they should have because frankly, if it's a three person group and let's say one member is not family or two members aren't family and the one person gets on the hook for like you said, 50,000 a year in insurance claims, you're on the hook. That's pretty rough. So I mean this is, of course it has been used by large companies like the banks and whatever for internally for years. Because they're large enough they can pull them.
Keith: So we've had groups of 30, 40, 50 lives on it and we shut it down at once EP3 came in to us. It didn't make prudent sense to put the employer that kind of risk.
Jason Pereira: Yep. Well good on you for being stewardly in that regard. So yes. So before we close up any design tips? Any tips for cost containment? To me it's all about risk sharing. When I talk to clients, people about this and spending money on what is necessary. Not the stuff that's more fancy for us.
Keith: For us, it's still a few minutes we didn't touch on group RSPs, profit sharing plan.
Jason Pereira: The retirement savings is another conversation. I'll bring someone else in for my friend. Sorry, you got the insurance, okay, you got the risk side.
Keith: But there's so many things that you can add into it. And as far as cost containment. one of the biggest things that we like to do is educate the employees, hold lunch with those with the employees, telling them what the benefits cost them. They have no idea how much he-
Jason Pereira: It is astonishing. And here's a tip for employers. Okay. One of the things that we do here is when we do their salary renegotiation every year, we're basically, we give them their increase. We actually break down the total expense to the company on a one sheet of paper. It says, okay, yeah, here's your salary. Here's our end of CPP, our end of EI, your costs of your benefits. Anything else we do and any things where they're like kind of perks, we put them down as intangible benefits whatever. I'll tell you, it's a very different conversation when they think, Oh, I'm making 50 grand, you guys should be paying me more to, Oh, wait a sec, let me shift the grand. But with everything else, it's like $58,000. Really? Like, okay, so I'm technically costing you more than I thought?
Jason Pereira: So it's a very different conversation come the time at, and it's the number of people I've met who've left their employer and said, yeah, I want to place my benefits. And I give them the quote and they're like, are you out of your mind? You're crazy. You're trying to get me. I'm like, no, no. This is what your employer was paying roughly.
Keith: Yeah. It's very important I believe you have to educate the employees because there's the consumer, they need to know what you're paying for and how to use it. We teach the employees how to look for themselves and their providers, I'm not saying every dentist and every pharmacy is fraudulent. You can go to some pharmacists where the markup is much higher or the script fee is much higher, so why would you do that? Because that all affects the plan.
Keith: And we had one client many, many years ago was a nursing home and their physiotherapy and massage therapy was unlimited and you can guess they're all nurses, massage and physiotherapy. It was a union plan. Most plans at the time OHIP covered physio-therapy you had to wait to get into a clinic, so we recommended to the union and to the employer in order to contain costs, limit the physiotherapy to 500 that they plant the employee, go to OHIP, they use the 500 boat waiting for the OHIP clinic and that would have saved that plan. I'm trying to think of the numbers back then.
Keith: I think it was something like $40,000 a year.
Jason Pereira: [inaudible 01:03:03] the union fought back.
Keith: The union said, no way. They would not do it. We've met with union three times. They wouldn't budge on it. That nursing home was out of business. That saving they could've hired another nurse, no savings. It was jobs they said, union is no.
Jason Pereira: Thankfully everyone's union [inaudible 01:03:20].
Keith: So I think it's important to educate your employees on what they're covered for and how to use it wisely. That's the reason you have the benefit program and making sure that they understand enough so they don't treat it like a blank check. That's a frustrating thing.
Jason Pereira: Perfect. So, where can people find you Keith now we're wrapping up. If they want to talk to Keith Foot.
Keith: Okay, well that's the goal. And we have a website. Is it ralphmoss.CA R-A-L-P-H-M-O-S-S.CA. That's our consulting side. Been around since 1976 and administration companies, automated administration, which is A-A-S-I-N-C.CA and that's been around since 1985.
Jason Pereira: And there'll be links in the show notes and the transcripts so people will be able to find it. So thank you very much for taking the time.
Keith: Thanks Jason. Anything else? Just give me a call.
Jason Pereira: Will do.
Keith: So that was my interview with Keith Foot of Ralph Moss insurance. I've been working with them for several years and I highly recommend them, although if you want to talk to me about your benefits, I'm also here as well. So, as always, this is Jason Pereira and this has been the Financial Planning for Canadian Business Owners podcast. And if you enjoy this podcast, please leave a review in iTunes, Stitcher, or wherever it is you get your podcasts. Until next time, take care.
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