What is up with Cost Plus?
Ever since I have been in this industry, I have always been asked “what is up with Cost Plus?” They are attached to almost every benefits plan, whether requested or not. Some of the advisors we have spoken to even have a Cost Plus plan for the owners “for when they exhaust the insured plan and spending account.” I get that they are used differently in the industry, however, I have two questions:
Are they really that different by intent?
Or has the industry seemingly turned a blind eye to them?
Spending Accounts/HSA/HCSA, whatever you want to call them, were set up back in the 80’s as a methodology to self-insure plans when paying an insurance company to assume the risk did not make sense. They were, however, set up assuming the same principles of which insurance is based on. So, what is with Cost Plus? It is usually brought up in the same context as spending accounts, however, when I ask advisors/insurers/competitors to tell me why they are different the answer is the same……they just are. Unfortunately, there is not a lot of literature as to the background of where they came from and what makes them different. As I have had the opportunity to talk to hundreds of people about them, I can see why people are misinformed or simply just don’t know. So, as a blog is meant to create conversation, I am hoping that those who read it, don’t just read it. I ask that if you know something about it, please explain it and explain what I am missing.
This is my understanding of where Cost Plus came from: As you know, the concept of insurance is not new. The definition, if I can remember from my days back in Mount Royal, is “the undertaking of one party to indemnify another party for UNFORESEEN circumstances for an agreed upon price.”
Employee benefits insurance with a Cost Plus provision have been placed with insurance companies for many years, dating back way before the implementation of the HSA industry and often purchased by Unions for their workers. For those who don’t know, Unions work under what is called a Collective Bargaining Agreement. This agreement is pre-negotiated, sometimes years in advance. There are many stipulations inside the agreement, and one of them is what is covered under the Union’s employee benefits. The problem is, what is covered under the collective bargaining agreement does not necessarily coincide with what is covered under the insurance plan. When it is negotiated it is done so with the policy in mind, and there are many consistencies between the plan and the policy, but what happens when the coverage offered by the insurer starts to veer away from the agreements made to members under the CBA? If the CBA is negotiated for a three year term, and the insurance company changes the coverage under the policy to correspond to a renewal term of say one year, what happens to the claims that are no longer taken care of by the insurer yet are contractually negotiated to be paid under the CBA? The mechanism to do so is one called Cost Plus. The term is used daily within the confines of employee benefits, however, I think this is because people don’t understand the background of the concept.
What the mechanism of Cost Plus was originally designed to do, (well before the implementation of a PHSP) was to a provide a mechanism of stop gap between what the insurer agrees to pay under the terms of the policy, compared to what the CBA says is owed by the member under contract. By not upholding the terms of the CBA, the members could put the Union (and the members) in an unfortunate situation.
To give you an example:
United Union for A works under a collective bargaining agreement, which re-negotiates the terms every three years and is re-signed January 1. The benefit plan, which is concurrent with the CBA, currently provides:
100% drugs, no maximum (including medical cannabis)
80% EHC No max
100% minor and major dental
The insurance company for the Union to do the contract has decided effective January 1 2021, (the benefits renewal term) that they will no longer be covering major dental and will no longer be covering medicinal cannabis. This is a major problem with the Union, as under the CBA they are required to reimburse their members for these two portions of coverage, regardless of whether it is covered under the core plan offered by the insurer. There are two ways that a union can handle this type of circumstance: One of the options is to find alternative benefit offerings that are exactly what is covered under the CBA. The other option is to implement a cost plus. The Cost Plus is an agreement between the client and the insurance company to reimburse the claims for the cost of the claim, plus an agreed upon fee as if the benefits plan was still intact. The difference would be that the insurance company would be paying a portion of the claim through their policy (if it responded at all), and the remainder would be paid through the Cost Plus program and paid for by the client, yet facilitated through the insurance company. In essence, the plan member is whole as per the CBA, regardless of whether the insurance plan responds in full or not. The operation of the Cost Plus is simple. The client sends in a payment, including the Cost Plus fee (usually a percentage) and applicable taxes. The claim is then adjudicated by the insurer to ensure it is eligible, and then the employee is reimbursed tax free - sounds familiar, right? The plan still has “rules” around what is covered based on the CBA and restricted to the deficiencies of the policy.
Throughout the years, the term Cost Plus has migrated over to an area that I as an industry outsider still can’t understand. If the original intent of a Cost Plus is to allow payment for deficiencies in the insured plan, but is not a part of the contract, how has it migrated over to available to a free for all tax free just shareholders, with no limits? If I could make a statement on this, if the CRA is going to look at any kind of structure as being offside, I would say these things would be at the top of the list. If you are an advisor currently selling any plans, just keep this in mind.
The fundamentals of an insured plan are no different than a self-insured plan, although they must have some fundamentals be in place to be considered as such:
There must be a limit. You cannot buy a policy that is unlimited (with certain exceptions, such as drugs in a group plan)
There must be an element of risk. The limit fulfills this risk. If you negotiate and/or buy a limit that is too low you cannot buy insurance after the fact.
It must be offered to everyone unless there is a logical reason to exclude certain employees to avoid anti selection.
Limits/co-pays/deductibles coverage are all looked at and negotiated on a regular basis.
If you take all of them and compare them to todays “Cost Plus” that is automatically attached to every owners policy
Cost Plus is usually “unlimited”
There is no element of risk in the plan
It is only usually available to the shareholders
There is no negotiation of any limits
How does any advisor look at this structure and say it is on side?
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