The Truth About Insurance for Small Business
In this episode, you will learn the truth about the health and dental insurance industry in Canada and how it operates in relation to small businesses. Industry expert, Daniel Gillis, who is a licensed insurance broker, provides in-depth insights for small businesses to consider when managing employee benefits.
Jaimee Turner: Welcome to the Small Business Mastermind Podcast, presented by Olympia Benefits Incorporated. I am your host Jaimee Turner and this month’s episode is called The Truth about Insurance for Small Business. Today, I am joined in the studio by industry expert Daniel Gillis who is a benefits and insurance specialist. With over 28 years of experience working in the financial industry, Daniel is a licensed insurance broker who advises small to medium sized businesses on insurance and health benefits. Thank you for joining us today, Daniel.
Daniel Gillis: Thank you. Thanks for having me.
Jaimee: Daniel, let's start off by defining what is insurance?
Daniel: Insurance is a product that's purchased by individuals or businesses or people in general to transfer a risk to a third party for some kind of catastrophic event. An easy example of insurance would be fire insurance on your home if you own your home, pretty easy example to understand that if my house burns down today that I really cannot afford to replace that house. Most Canadians don't have that financial capacity which I would say is something that I wouldn't want to retain. So, I pay a premium, transfer that risk to the insurance company which is that third party in exchange for that premium, there's a promise to pay that if that catastrophic financial event happens. I'll be reimbursed or indemnified in the insurance world and the house will be rebuilt and I'll be able to carry on without being financially ruined.
Jaimee: So, the definition of insurance is essentially the transfer of risk over to a company in exchange for a premium?
Daniel: That's right. That's retention and transfer. Things that I wouldn't want to insure might be buying a television as an example that cost $1,000. I probably wouldn't insure that kind of a purchase because if it did break down although I wouldn't be very happy and I probably have a warranty for a year anyways. I wouldn't really be concerned beyond that. It isn't a catastrophic event so, I'd probably declined that kind of insurance.
Jaimee: That's a great example. So, in light of that definition how does traditional health insurance work for small businesses in Canada?
Daniel: Well, health insurance works in the context of insurance, the way it's sold and marketed by insurance companies to look like insurance and seems like insurance and kind of acts like insurance, smells like it but at the end of the day what it really is benefits that are purchased by an employer or what I would call a plan sponsor. Any kind of a traditional health and dental insurance plan that's set up has a plan sponsor behind it. The plan sponsor is really the employer. The employer sets up the plan with the insurer designs the plan and then benefits begin to flow in the form of a premium to the insurer and the insurer then flows money out to the employees for their paid health and dental bills in a claim and that's called health and dental insurance.
Jaimee: Okay. So, Daniel, what are some common characteristics about health insurance that employees or employers overlook?
Daniel: Well, the idea that this is insurance is a big problem in the world of health and dental benefits. This is not insurance. It's really an administrative services plan if you will, and that is a plan that's set up between that employer or that plan sponsor and the insurer and the employees and so, from an employee perspective it looks like insurance. Why wouldn't it? It's called insurance. It's called health and dental insurance. It acts that way. The employee’s perspective. They go -- I say to the dentist. They have a dental checkup they pay that bill at the dental office they may file a claim later get reimbursed back from the insurer looks like insurance getting my money back or maybe even the dental office claimed it directly to the insurer. They're getting money flowing back looks like insurance from the employer perspective also looks like insurance.
Jaimee: So, really just to summarize there are two categories of medical events. There is the catastrophic medical event that could happen. So, you're in a severe accident that alters your way of life or you're diagnosed with a terminal illness and then there are on the other side the routine medical health and dental expenses. So, when we talk about the catastrophic medical events let's also talk about provincial health care because Canadian citizens already have a level of insurance provided to them by the government for the financially catastrophic medical expenses. So, does provincial healthcare provide sufficient insurance for Canadians? And if so, how do we manage those other medical expenses?
Daniel: So, to answer that question the Canada Health Act and the provinces do a very good job of insuring for catastrophic events. If I'm disabled or I have this horrific car crash and I'm transported to the hospital and let's say I'm in dire need of health services and I'm in the hospital for a month when I'm discharged from the hospital I don't get a bill for that. So, in that sense the provinces do a very good job of covering off that catastrophic financial risk of hospitalization and the care I need immediately after that car accident. When it comes to health and dental insurance, it isn't insurance. These are different services that really the word services is what they are. I'm going to buy them. They're either planned events or they're planned maintenance events. Some of them are unplanned maintenance events like I wake up with a sore tooth today if I have a toothache, came out of the blue, wasn't planned but I do call the dentist. I go down, have an appointment and I find out I've got some kind of a problem with my tooth maybe in the root canal and it may cost me $1,000 or $2,000 at the end of the day by the time these services are done but it's not an accident that I can insure. It's what we call a maintenance event kind of like my car doesn't start and I need a battery. No, not a really perfect example but you get the idea that it's a maintenance event. I can't really call an insurer to replace my battery like I have a sore tooth, it's worn out. So, these are maintenance events. So, do we need health and dental insurance? No. What we need is how best to pay health and dental bills. And in Canada an employer can set up a plan, sponsor a health and dental plan and move dollars out tax-free to the employees for these planned health and dental maintenance events.
Jaimee: So, there are other options for employee benefits other than a traditional insurance plan?
Daniel: There are great options for that and really the intent of this whole legislation that makes these benefits tax-free is to encourage employers to provide benefits to employees for health and dental bills and making it tax-free did a really good job of encouraging plans and so, it was the insurers that jumped on that legislation and created this so-called insurance plan which looks sounds and smells like insurance but it is not insurance. It's just purely a benefit flowing from the employer to the insurer out to the employees and to make it you know, even more difficult to understand as employees are often involved in paying those premiums but it is a benefit. It's not insurance. There is some very small insurance elements built into that like maybe there's travel insurance included, that's great that is insurance. If I'm in the United States for example and I have a car crash I'm in the hospital, maybe the bill is $20,000 a day for my care. I mean that's a real catastrophic financial risk.
Daniel: So, under that traditional health, dental plan there will be a component built in for that but we can carve that out and put it on in an insurance plan and keep it out of the health spending account, do exactly the same thing and have it transparent and much easier to understand manage and pay for it.
Jaimee: So, this tax-free benefit you're talking about is the option of a health spending account then.
Daniel: That's right. A health spending account which is really what this is all about and that legislation is about it's really about providing that tax-free benefit to the employees. How to set up that plan now? We need a contract in place, the benefits need to flow out to the employees. That's really all there is to these plans. They're very simple. The under the insurance umbrella, they're very complex and complicated which confuses a lot of, most people are confused in those plans, most employees, a lot of employers don't understand them and they just create a lot of frustrations in the long run and in the short run it should be easy to operate which was the intent and that's what a health spending account does. It makes it easy.
Jaimee: So, now going back to the traditional health and dental insurance plan. Let's talk a little bit about premiums because that is indeed where people lose money, correct?
Daniel: That's correct. So, in that regard I'll talk about a health and dental traditional benefits plan with a traditional insurer and an employer and employees. So, each month $1.00 of premium flows out to the insurer for the health and dental plan. So, we use that dollar as the whole amount that's paid. That's now out the door, it's an expense for the employer. It's gone. I've now expensed that dollar. It's irretrievable. The next thing that happens is employees either claim or don't claim and so, if you have an employee that doesn't have a lot of claims or maybe they're only claim is vision and they want to have let's say LASIK eye surgery. Well, zero of that benefit is going to be paid out to the employee under that LASIK eye surgery is not included in that traditional plan. So, we've now paid a dollar at the door. You've expensed it as an employer. We wanted to pay that to the employee. The dollar's gone. The employee didn't get the dollar. The employee pulled that dollar out of their own pocket to pay the LASIKs. It would be much better to take that dollar and give it to that employee in that health spending account, not lose control of it, never expense it until it's actually demanded or required by that employee and at that time they'll make the claim for exactly what they need.
Jaimee: Right. So, on the flipside if an employee maxes out their benefits in their traditional health and dental insurance plan. Then what happens to the premiums?
Daniel: So, if the employees maxed out their benefits, the premium is likely to go up the following year but it's really going to be determined based on that overall group usage and what the insurers use to measure that is what they call a stop loss. Sorry, not a stop loss. We'll come back to that but what they look at is a loss ratio. The loss ratio is premiums paid over claims paid out.
Jaimee: Okay. So, it's actually built into an insurance business model.
Daniel: Yes. So, the insurer obviously has to have a margin on the business like any business does, there has to be some profit in there. They're not in the business for charitable reasons. They're there for a profit and so, that loss ratio is measured each year on the plan renewal date for those traditional plans and premiums are adjusted for all usage so all of the claims that are being input to the insurer and paid out by the insurer come back to the group in an adjusted cost or adjusted premium for the next year including things like trends in the industry. You know, where a drug trend costs going or as dental trending. What about the group itself? What about the, you know, the industry and demographics of the group? All those things are priced in plus usage.
Jaimee: Okay. So, typically what would be a markup that you'd be paying on your utilization?
Daniel: I'd say on average the markup is about 42%. If you looked across most small and medium enterprises, the markup on those traditional plans targeted is about 42%. What the insured charges, who run the plan. So, you're going to pay that dollar they need 42% of that to run the plan and that's their target. So, you know that we're going to come in better than target, that's the idea. That's more profit. As we're coming in that target or under target your adjusted premiums going to go up and it's going to be more than inflation. It's going to be trending in you know double digits. Isn't that happens all the time.
Jaimee: That's eye-opening. When you factor in the budget for a smaller medium-sized business, a markup that substantial can easily become unaffordable. So, is a 30% to 40% typical across the board in Canada?
Daniel: Yes, and budgets we all have them. All businesses have a budget even the big businesses that we might think have on limited budgets. They have a budget. They're going to come up with a budget and they're going to decide on what they can afford and what they cannot and why would we want to use anything other than something we can control? Every other aspect of a business and business planning model. They're going to have a budget and they're going to watch that budget and they're going to make sure they're not wasting dollars. So, let's not waste dollars in a plan like this. Let's keep control of a dollar and let's make sure it goes where it was intended. It was intended and had been put in place for the right reason, to give to the employee.
Daniel: It was a benefit designed to be provided to the employee. So, let's make sure the employee gets the whole dollar and in the end it's a win-win. It's a win for the employer. They haven't wasted a dollar. It's a win for the employee because when the employer doesn't waste dollars they have more dollars for the employee and it's a win, I guess again, for an employee because they actually get to control a dollar and decide where, when, and how it's used and it's tax-free.
Jaimee: Right. As opposed to insurance which is --
Daniel: Insurance is also tax-free in that sense under the health and dental because it's expensed by the employer but the problem is we've lost control as soon as we pay the dollar.
Daniel: So, if it does fall back to the employee and dollars do flow back in those plans to employees, it's just not the whole dollar but when it does fall back it is tax-free to the employees because it's deemed to be the same thing. It's a health and dental benefit which is that tax-free.
Daniel: So, how do you set up the plan is really what we're talking about with the differentiation, how you set that plan up? A traditional plan where I've got that slippage. I lost control of the dollar. It's going to drive my cost up but traditionally I thought hey, the insurance is good. It's easy. I can understand it because it's a fixed budget but in the end, it ends up being an uncontrollable budget because it's going to go up in the future and I'm losing control of my dollar.
Jaimee: So, I imagine that you receive a substantial amount of feedback from small and medium-sized business owners who contact you. What are some of the common pain points that they expressed to you about insurance?
Daniel: Just the things that we've been talking about. In fact, I had a call this week from exactly that and this business owner actually read off pain points that was kind of a hair-raising experience for me because I'm so used to talking about this all the time day in and day out and he read off a list of points that was exactly what we talked about. He was talking about premiums going up, tired of the premiums going up, and hasn’t got any control not using all the dollars. Employees not getting the dollars. Employees pulling money out of their pocket. He just didn't want to do that anymore. He was looking for a way to get his cost under control, to give the employee the entire dollar that he wanted to give to them. He didn't want to have any more dollars where he couldn't recover it. It was either they use it or they didn't. It costs him or it didn't. When they needed it they got it. It was exactly his frustration with was with that traditional plan. Is there a solution that I can get out of that and get into just pay the employee directly for their health and dental bills when and where they need it.
Jaimee: Right. So, you had mentioned just a few minutes ago, the health spending account. Let's talk about that just as a comparison for a moment here. So, when people talk to you about a health spending account, do they often understand what it is?
Daniel: Often, they have an idea. Some people do understand what it is, they’ve done their own research to kind of get it you know, a lot of employers do understand. This is flowing like this. They don't necessarily like it. They don't know there's another option around it. Some people have no idea what a health spending account is. They really don't. Yeah.
Jaimee: So, can you give a brief definition of what it is?
Daniel: Health spending account is a tax-free dollar provided by an employer to an employee and technically under the Income Tax Act. It's called the private health services plan. That's the umbrella legislation that governs these plans.
Daniel: That's you know, technical term. I try never to talk about PHSPs. I mean who really cares what a Private Health Services Plan is. What we really want to know is how does it work? How does it benefit me and my employees?
Daniel: But under that legislation that's governing all plans. They're all deemed to be the same thing. They're deemed to be a traditional insurance health and dental plan, is deemed to be a private health service plan. It really is nothing more than a tax-free dollar able to flow from the employer to the employee flows through the insurer and back out. So, the insurer puts a template plan design in place certain amount of dental, certain amount of health may be some paramedical practitioners like massage and chiro and then dollars flow to the employees if they hit the rate for the right claim. Some things are claimable. Some things aren't. Some things have big co-payments, some have small but they're all capped to a certain dollar amount. That's why this is not insurance. It's really tax free health and dental benefits.
Jaimee: So, fundamentally every dollar that you put into a health spending account is going to go directly to the employee and not be lost in a premium.
Daniel: Correct. There's never a lost dollar in a health spending account. There's only a dollar claimed or a dollar unclaimed.
Jaimee: Okay. That's fantastic and so, why do you think not many people know about health spending account? Or do you in fact believe that people are gaining knowledge about this? What's your take on that?
Daniel: Yep. Well, you know, health spending accounts, they aren't new. They're just not well understood because we are conditioned really in Canada. We grow up with health and dental insurance. I mean when I was a kid that's what my mom had for me. She had a plan with her employer she had a Blue Cross plan. You know, and it was health and dental insurance and so, that's the way we were kind of conditioned but we learned through experience that there is something different. You know, this really isn't insurance. I mean there's not a hard concept to understand picking up the phone and making an appointment from my dental visit. That's not hard to understand. That's not an insurance event. An insurance event is my house burnt down or my car was written off on the way to work. Well, that's an accident. I can insure that. Going to the dentist. There's no insurance company on the planet that's going to insure something that I could pick up the phone, make an appointment and go do plan to spend money. That's not insurance. That's spending money on maintenance.
Jaimee: So, Daniel, what would you tell a small or medium-sized business owner who enquires about health and dental insurance and says for example, “I have an employee who has very high expenses with prescription drugs. How would I manage that with a health spending account as opposed to traditional insurance?”
Daniel: Well, the provinces in Canada, each have a plan to look after prescription drugs. Some of them are income tested. Some of them are not but typically there's a plan available for residents of each province to look after high-cost prescription drugs.
Jaimee: Okay. So, also with a traditional insurance plan, are there restrictions on prescription drugs?
Daniel: There are always some kind of a restriction. There's what's called a drug formula. So, inside a traditional health and dental plan with drug coverage there's going to be a drug formulary that will dictate what's eligible to be claimed and what's not if we go by din numbers or you know, brand name or type of drug. So, they will pay generally speaking the drugs that are common and they're they may not pay some of the drugs that aren't so common or specialty drugs. It's a managed program. There is a formulary. There are co-payments and things that happen and there are caps and limits on those plans.
Jaimee: Okay. So, with a health spending account if you employed a health spending account to cover your employee benefits, that in conjunction with a provincial drug plan could indeed cover an employee with high expenses in that area?
Daniel: Yeah. The problems just do a very good job of that. Ontario has a plan just for kids that will pave drug for kids as an example.
Jaimee: Okay. How comprehensive is that plan?
Daniel: Very comprehensive plan. It was out I think in the last budget or two but the plan is available. Drugs for kids is covered. Another example would be let’s say BC Pharmacare. That's an income tested plan. You know, the resident of BC would pay their drug bills up to 3% of their income and then there's a cost-sharing and then at 4%, I believe. Don't quote me on this but it's around 4% the province pays 100% but there's a formula that they use and anybody that wants to go online and look at BC Fair Pharmacare as an example can see how the program works.
Jaimee: Okay. So, in Alberta is it a different structure or?
Daniel: Yeah. Alberta is a little bit different again. It runs on now Alberta health and wellness non-group drug plan is what it's called.
Daniel: That program can be piggyback the same way. So, I call that a drug stop loss program with a health spending account. I mean it's just what a stop loss means it means it stops the high cost of drugs. What am I doing with them? I'm transferring that cost see to the provincial plan. So anybody, any resident of Alberta that has a prescription drug can join the non-group drug plan and they'll pay a monthly premium and it's $118 for a family as an example and $65 roughly for a single person but now I've got the support of the provincial drug program. There is a formula there. Most drugs are covered. The person claiming the drug will pay 30% of the costs of that drug to a maximum of $25 at the pharmacy and the balance is paid for by the province.
Jaimee: Okay. So now, this may be a slightly touchy topic but why are people not made aware of that?
Daniel: They don't know until they need to know and so, you know, most if you look at the average person, the average person doesn't have necessarily an expensive maintenance drug cost. You might have a maintenance drug cost that's not expensive. You might -- let's say a blood pressure. It's a common prescription. If I have that cost you know, it's not prohibitively expensive. So, I might just go along my way and pay that bill and it may be handled very well under a spending account. It's not a really high cost drug. So, the problems come in where I do have a high cost drug let's say for an illness or a cancer or something like that and now, I have this drug that's expensive. Well, that's what the province is for. They pay for those drugs they pay for them under the Alberta drug program in Alberta and the other provinces work similarly in their own drug plans.
Jaimee: Daniel, you mentioned earlier the concept of stop-loss. Now, can you elaborate a little bit about what that means and how that framework is applied to a traditional group insurance drug plan?
Daniel: Yep. Stop-loss sounds complicated is really quite simple. What it is in the traditional plan, is there is a typically a $10,000 limit per employee. So, all of the employees claims for a dental provision for prescriptions and those things are going to come back to the group in the premium adjustment the following year for usage up to $10,000 per person. So, if you imagine the employee and their spouse and their kids, that person whatever they're going to claim together as a family or that single employee either way, their claims that they're using the first $10,000 that they use is what is the experience that's coming back to the premium to the group to be adjusted for next year. So, the group is going to pay for the first $10,000 of usage per person in their group before the insurance concept even kicks in.
Daniel: Yes. It's going to be an expensive program and so, when we talked about driving costs I think I said that earlier that you know, what we think is a budget it's fixed, easy to understand, going to be controlled, is really a cost driver because the insurance concept doesn't kick in till $10,000. That's the stop-loss which kind of self-descriptive isn't it?
Daniel: It’s you're stopping my loss at $10,000 but until I get to $10,000 I'm on the hook for all the bills.
Jaimee: Right, and typically people do not pay that amount for health and dental expenses.
Daniel: No. That's why it's set at $10,000. The typical family a person you know, they're probably not going to get there unless you have a high-cost drug and there might be one or two of those persons that are there and that's fine. That's what the plan is for but that's where you get those cost drivers built into the plan. So, if my prescription drug bill is $20,000 every year, we're coming out of pocket the first 10,000. The balance above that is pooled that goes above the stop-loss limit. Now, it's pooled amongst the insurers groups. So, until we hit ten we're going to absorb or what I call retain that cost. Remember what insurance is I'm either transferring risk away or I'm retaining. So, certain things I'm going to not want to insure I'm retaining it. Okay. The cost of replacing the tires of my car the cost of things like that. Well the cost of going to the dentist. This isn't insurance. I'm going to retain that cost but when it comes to drugs there could be a really high cost and that's where we can build things in like the provincial drug plan and there's where the stop-loss comes in under the traditional plan.
Jaimee: Right, okay. So, in light of what we've just talked about here what are some tangible takeaways that you would give a small business owner who is listening to us right now?
Daniel: Look carefully at the plan design and think about your budget and what you want to do. I think for any business owner you know, your dollars come hard earned like every other person and business owners dollar. What you don't want to do is have that built into your benefit plan that slippage in the premium. You want to retain your dollar. I'm sure you built your business with budgets in mind. You probably did it smartly that's why you're in business and if you're that kind of a person, you're smart enough to look at this and go, Well, I think you know, there's maybe a better way to do this than just slipping right into that traditional plan, getting on that treadmill and now I've lost control of my dollar.
Jaimee: So, what is a good way to calculate what you need insurance for?
Daniel: You want to have insurance for things that are going to be catastrophic in nature. So, if we look at traditional benefit plans we want to look at things like disability insurance. If you have your employees working together in your group and you're thinking about benefits and you're discussing this together as an employer employee group, where is the catastrophic risk? The catastrophic risk is always the same. If somebody dies or becomes critically ill or disabled you know, maybe it even happens while they're working for you or at work if you got employees traveling around but we want to cover those risks. Those are catastrophic events. We don't want to retain any of those costs. We always want that transfer to an insurer under a smart plan. That's not expensive. We can insure for these things controlled, premium, not expensive for the group. It’s those maintenance and day-to-day events, health and dental that are all where all the claim action happens. We want to make sure we have a plan that's smart, that's flexible, that's going to flow to the employee when we need it and it only costs when the employee an on-demand plan, when they claim now we've got dollars flowing out where and when they're needed and the whole dollar. We haven't wasted a dollar.
Jaimee: Well, thank you so much for being in studio with us today, Daniel.
Daniel: Thank you.
Jaimee: It has been a pleasure having you on the show. If any of our listeners would like to contact Daniel directly you can reach him at firstname.lastname@example.org. Thanks again for tuning in to this episode of The Small Business Mastermind and if you like what you hear be sure to subscribe for monthly episodes.