In the world of Health Insurance for Small Business Owners in Canada, there is no shortage of complexity and skewed information that leaves you without the proper tools to decipher your best options. Whether you are a one-employee corporation, or looking for options to offer a group of employees by way of health benefits, here are the top five things you may not know about health insurance in Canada as it applies to small businesses.
1. How plan utilization drives up the premiums:
Traditional insurance plans are built with a business model around a loss ratio (premiums paid over claims paid out). The insurer builds this into the plan to guarantee a healthy profit margin is maintained for their business. If the cost of claims paid out through the plan increases, so will the premium upon renewal in order to make up for the calculated loss of paid claims. The demographics of each group and current medical trends are also factored into what the group will pay in addition to the calculated usage.
2. You will end up paying a mark-up on your health and dental expenses:
The average mark-up for one of these plans is 42%; calculated by dividing 30 / 70. The insurance company builds in a profit of $0.30 of every dollar paid in premiums meaning $0.70 of every dollar paid is their target lost ratio - or the maximum they want to pay out of every dollar collected in the premium. That's their target loss ratio -- their preferred loss ratio is much lower than that meaning their desired profit is much higher and very often the reality. A good way to test this is to look at what you pay for premiums and then subtract the amount that you utilize from the plan.
3. How stop-loss applies to your coverage:
In the traditional health insurance plan, there is a pooling limit of $10,000 per employee. In other words the first $10,000 of claims per employee is charged back to the group. At the plan renewable date the following year, the premium is adjusted upward for the claims made by the employee plus the desired profit margin --- the target loss ratio. The insurance company does not spread the risk amongst all other groups and employees until claims per employee exceed $10,000. In this type of plan the employer is on the hook for the first $10,000 of claims per employee.
4. Provincial Drug Plans:
Each province in Canada has some form of public support to help pay for high cost prescription drugs. As an example cancer treatment and drug therapy is typically paid for by the provincial government. Anyone regardless of age or condition can take advantage of these plans. Most people are not aware of these plans, so below we have consolidated a list of each plan per province. Many of these provincial plans can be used by residents of their respective province to help pay the cost of prescription drug therapy. These plans may require a monthly premium like the Alberta drug plan or maybe income tested like the BC or Manitoba drug plan. The province of Ontario as an example recently enacted legislation that pays for the cost of drugs for kids. This type of plan works well in conjunction with a Health Spending Account in the case where an employee has high costs associated with prescription medication. Additionally, the cost of drugs paid out-of-pocket as part of these Provincial plans can be claimed through the HSA.
- Alberta Non-Group Plan
- BC PharmaCare
- New Brunswick
- Nova Scotia
5. What to insure and what not to insure:
Insurance is all about managing risk. An individual or company can transfer a financial risk to an insurance company in exchange for a premium. According to the Insurance Bureau of Canada (IBC), “The premiums of many policyholders pay the claims of the few who suffer a claim. Insurers put premiums toward a mix of claims costs, investments and operational expenses.” The model works well for house fires and car accidents. However, it's a terrible model for routine, predictable expenses (such as health and dental insurance).
The basic rule of thumb for knowing what to insure is: take on the risks you can afford, insure the ones you can't. Whatever may be financially catastrophic for you to suffer the cost of, is indeed, what you should insure. Anything else that is expected/predicted should not be insured but instead planned for, in that you will save additional money that would otherwise be lost in a premium (unrecoverable cost) paid to an insurer.
If you found this article helpful, be sure to tune into the first episode of our new podcast The Small Business Mastermind, where we interview Daniel Gillis, benefits and insurance specialist, in The Truth About Health Insurance For Small Business. This podcast focuses on the Small Business environment in Canada and features monthly episodes with thought leaders and industry experts.