Small business health insurance can be a confusing landscape. The concept of insurance and the terminology are overwhelming for small business owners. Moreover, alternatives are often difficult to idenitfy.
Read our survival guide and sharpen your understanding of small business health insurance in Canada.
How does insurance work?
Let’s take a look at a formal definition. Investopedia defines insurance as “a contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools client risks to make payments more affordable for the insured.”
In essence, insurance is the transfer of risk from one entity (you) to another (the insurance company) in exchange for a payment. Therefore, insurance is about risk sharing. Specifically, the risk is (usually) an unexpected financial loss.
For example, there is a risk that your home may be damaged from a natural disaster. You transfer the risk to the insurer (along with thousands of other home owners), and in return for the insurance company absorbing that risk, you are charged a premium (a form of payment).
What is the difference between an insurance (pooled) and an administrative (experience) event?
An insurance or pooled event has three primary characteristics:
Uncertainty - you don’t know where or if there will be a claim
Low incidence of claim – claims occur rarely
Expensive claim amount
Example: Home Insurance
You, as well as your neighbors and friends, insure your respective homes. You transfer the risk of damage to your home to the insurance company. In exchange for the transfer of risk, you pay a premium to the insurance company. All of the premiums are put into a pool. As there are more people contributing to the pool than there are making a claim, the insurance company is able to pay claims.
An administrative or experienced event has three primary characteristics:
Certainty – you expect there will be a claim
High incidence of claim – claims occur regularly
Less expensive claim amount
Example: Maintenance and Planned Medical Events
We all visit the dentist for annual or semi-annual checkups. Perhaps we occasionally see a chiropractor, physiotherapist, or other service professionals. All of these routine, maintenance, and planned events are experienced (administrative) events. This means your premiums are established by the usage of your benefits.
Why would you insure an event that you expect to happen? There is not much risk with an administrative event yet you are paying a significant mark up (in the form of a premium) to the insurance company.
What should you always insure and what should you never insure?
Dental services are a prime example of administrative events. Dental services are almost exclusively planned events. You will have a dental checkup. You will have an x-ray. You will have scaling and polishing. You may have to have that root canal if you have an abscessed tooth. These procedures fall into the category of maintenance events. Coincidentally, dental premiums represent upwards of 70% of a health and dental insurance plan.
Conversely, let’s say your son dove into the pool at the local recreation centre and broke his front adult tooth on the bottom of the pool. This was an unplanned emergency dental event. This event can be insured under an accidental dental insurance policy. This falls into the pooled insurance event category (no pun intended on the “pool” word).
The point here is that you should question the validity of insuring an event that you expect to happen. Visits to the dentist, a paramedical practitioner, and other events based on your “experience” (or usage) are questionable events to insure. You are essentially paying the insurance company a premium to perform administrative duties on your planned events.
If we take a historical look at insurance premiums versus payout in claims, an insurance company is essentially marking up the cost of your planned event by 32-40%. An insurer’s objective is to maintain claim costs equal to a fixed percentage of a premium. This is essentially the break even position for the insurer and is referred to as a target loss ratio. The remaining percentage is reserved for “adjustment” expenses. Adjustment expenses include the cost to collect premium, cost to process & monitor claims, agent commission, taxes, inflation, plan design, overhead, and profit.
Let’s say your premium is $100 and the target loss ratio is $70. The remaining $30 is the amount the insurer needs to stay profitable. If you spend more than $70, there is a strong likelihood you will receive an increase in your premium the following year. If you claim less, the chance of receiving a reduced premium will depend on how the insurer feels about the adjustment expenses. In short, if you spend $70 on medically related events out of a premium of $100, this represents a 42.2% markup.
Hopefully, you have a more complete understanding of small business health insurance in Canada. Let’s take a look at some common terminology.
Navigating those confusing terms
The amount paid to an insurance company to keep your policy in effect. Premiums are often assessed on an annual basis but may be paid monthly, quarterly or biannually depending on your insurer.
The amount you have to pay out-of-pocket for expenses before the insurance company will cover the remaining costs.
A type of insurance policy where the insured pays a specified amount of out-of-pocket expenses for health-care services such as doctor visits and prescriptions drugs at the time the service is rendered, with the insurer paying the remaining costs. However, unlike coinsurance, where the insured is required to pay a certain percentage of the covered costs, co-pay plans require the insured to pay a specified dollar amount.
A co-sharing agreement between the insured and the insurer under a health insurance policy which provides that the insured will cover a set percentage of the covered costs after the deductible has been paid. Similar to co-pay insurance plans except co-pays require the insured to pay a set dollar amount at the time the service is rendered.
Items your health insurance plan will not cover. An example of commonly excluded service is laser eye surgery.
Annual limits on services
Health insurance companies often limit the amount they will pay for some covered services. Using chiropractic care as an example, a health insurance plan might include coverage but limit you to 20 visits per year.
Moving Forward: An alternative
Insurance is about risk sharing. Insurance involves the transfer of risk from one entity to another in exchange for a payment. Specifically, the risk is usually an unexpected financial loss.
Today, there is widespread confusion on what constitutes an insurance event and an administrative event. An insurance event is characterized by a high degree of uncertainty, a low frequency of claims, and expensive claim payouts. On the other hand, an administrative event is typified by the exact opposite: a high degree of certainty, high frequency of claims, and less costly payouts.
When you purchase small business health insurance for administrative events, you are essentially paying a significant markup to the insurance company to perform these events.
You might improve your financial position by paying for your administrative events (health and dental expenses) through a Health Spending Account. Go ahead and insure your home, but think twice before you purchase insurance for your health and dental procedures.
What is a Health Spending Account?
A Health Spending Account is an alternative to traditional small business health insurance in Canada. Used by tens of thousands of small business owners across Canada, a Health Spending Account is a special account that is established to exclusively pay for healthcare services for you and your family members.