The Loop

Pros and Cons of Bundled Benefits

Filed under: Benefits

Bundling is a marketing strategy made popular by telecommunication companies that sell cable, telephone, and internet services for a discounted price – at least for the first year. There are several issues related to bundling that impact conjoined offerings from the insurance industry as well.

First, customers can be so enamored with a bundled lower price – relative to contracting for three different products separately – that they don't pay a great deal of attention to the details of bundled products. On the surface, this creates a lack of transparency that can create problems related to denied claims or partial payments down the road.

Bundling insurance plans such as dental and vision with medical policies also makes it difficult to understand exactly what is being paid for. For retailers, this blurred vision contributes to one of the strategic advantages of bundling: To disguise the true cost of benefits.

Moreover, much like the cable companies, bundled plans have a way of increasing premium rates significantly in the second year. This can place employers in a quandary, as they've committed to provide a certain level of benefits within a specific budget. Reducing benefits and/or increasing an operational budget is seldom well received by workers or C-suite executives.

Bundling basically throws everything into one pot for one price. For people who use a lot of the services included, this can be a great deal. For those who don't, it may not be a good deal – but they may not realize it or even care. It's like getting a cable television package with more than 400 channels. You may watch only a handful of channels on a regular basis, so all the others could be considered a bonus or a waste depending on your point of view.

However, an à la carte option for group insurance policies may be prohibitively expensive for employers that want to offer a rich benefit package. When weighing the options, consider the following factors related to bundled packages.

Plan Design
Carefully review the plan design of each policy in the bundle to assess its level of coverage. For example, there may be hidden qualifiers such as a waiting period before specific benefits are covered. Some bundled policies may have exclusions or conditions for benefits, or feature a high deductible before coverage kicks in. It is particularly important for employers to understand the nuances of each level of coverage so that they are not caught unawares when plan limitations are discovered by workers after claims are denied.

Before purchasing, compare apples to apples in plan variations. Not all dental or vision policies are created equal, so if you're comparing one bundled plan versus another, be aware that the price differential may well be explained by the absence of certain benefits. You may be justified in selecting the lower cost plan, just be sure you understand the difference in benefit levels. Like most things in life, you get what you pay for. Insurance carriers are restricted to a precise medical loss ratio, so they are not in the business of giving away benefits precipitously.

No matter how good a deal you get on a bundled package, it's not worth the money if workers don't take advantage of the benefits. Consider for example a dental or vision plan that features a high deductible. Rather than pay the first $300 or so out-of-pocket, workers may decide to forgo a dental checkup or eye exam that year. In fact, blue-collar workers are less likely to take advantage of a dental plan, whereas white-collar employees – who may value their appearance more as a component of their career success – tend to have a higher rate of dental plan utilization.

Furthermore, studies have revealed that across all types of worker groups, vision plan utilization rates are typically low. Depending on plan structure, frequency, and network restrictions, utilization rates average a mere 30 to 35 percent.

Cost Discrepancies
Some carriers make their medical insurance premiums appear low by charging more for their dental plan. Others may offer a discount on a bundled package in the first year, but increase premiums significantly in the second year to make up for original losses.

Another cost issue arises when the plan design for one bundled policy proves inadequate. If you try to replace that one policy for another, you may get hit with a higher overall premium. Worse yet, you may lose the advantage of bundled pricing altogether, not to mention the challenge of requiring workers to evaluate new benefit plans year after year.

Before you sign a contract for a bundled plan, ask what the cost would be to change out one or more policies in the future. You also may wish to assess or even survey your worker base to find out which plan benefits are most likely to be used. If most workers would prefer a richer medical plan in lieu of dental and vision benefits, it may be worth allocating more money there and offer stand-alone voluntary plans for workers willing to pay extra for vision and dental. Without this intel, an employer may pay out a much higher ratio on cost-per-service benefits with a bundled plan.

Carrier Expertise
Another pitfall of bundled plans is the potential lack of expertise by a medical carrier in the areas of benefits administration, high performance networks, plan design, and appropriate pricing for vision or dental coverage. On the other hand, if a medical insurance carrier subcontracts these benefits to niche expert carriers, there may be inefficiencies and delays in claims administration. Moreover, outsourcing claims administration to dental or vision carriers could add another layer of administrative costs that increases the bundled premium. Before signing a bundled contract, be sure to ask the carrier whether all the claims will be processed by the same claims administration system. If not, vet the other carriers because regardless of your primary carrier, your level of coverage and customer service will be facilitated by one or more other companies.

Cadillac Tax Impact
Another issue with bundled packages is that they collectively may offer excessively rich benefits. Starting in 2020, generous employer-provided health insurance plans will get hit with a 40 percent excise tax on coverage amounts that exceed a certain threshold. This "Cadillac Tax" will be levied on all annual health plan costs that exceed $10,200 for individuals and $27,500 for families – regardless of what they cover or who pays for them.

Voluntary Benefits
To bundle benefits or not may come down to priority. If an employer has an older workforce or one with higher physical and/or stress demands, a large percentage of its workforce may suffer from multiple chronic conditions. If the majority of the population is low-wage, lower premiums and out-of-pocket costs with solid benefits may well be a priority. In these scenarios, it may be beneficial to focus firm money on strong medical and pharmaceutical benefits and offer dental and vision as voluntary benefits for workers who wish to spend more for them. An employer may offer to pay for nominal expenses, such as an eye exam or an annual dental cleaning and X-ray, but position all other ancillary benefits as out-of-pocket.

Tax-Advantaged Savings Accounts
Another alternative to bundled arrangements is to offer a strong medical plan alongside a savings account, such as a flexible healthcare flexible spending account (FSA), health reimbursement arrangement (HRA), or health savings account (HSA). These accounts enable workers to save money on a tax-advantaged basis to pay for dental or vision care as needed. Employers absorb only administrative costs while workers benefit from additional tax-advantaged income for medical services they would likely pay for out-of-pocket anyway.

Medical Bundling
For employers strictly focused on reducing the cost of providing comprehensive benefits, a bundled program may offer the best solution. Bundles lower the cost of medical insurance while offering some level of coverage for vision and dental services. Insurance bundling also can offer easier benefits administration for the employer, regardless of how the process may actually work for employees.

The important thing to remember is that regardless of how benefits are packaged and paid for, oral and vision care is important for American workers. Studies have correlated oral bacteria and periodontitis with cardiovascular disease, diabetes, osteoporosis, premature birth during pregnancy, Alzheimer's disease, and lowering the body's resistance to infection. Furthermore, eye care is a key consideration in the early detection and ongoing management of many chronic diseases, such as diabetes and rheumatoid arthritis.

Whether offered via a single or separate premiums, preventive dental and vision services are essential components of a comprehensive medical benefit package for workers.

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