Understanding the Complexities of Employee Benefits: Managing Bundled Pricing

By BeneRe
May 14, 2024

In the complex world of employee benefits, the allure of simplicity and cost savings often leads large employers towards bundled pricing models. While these models promise efficiency, they may conceal the real performance of individual insurance lines and create hidden financial risks. This overview aims to provide education on the inherent pitfalls of bundled pricing and present a framework for navigating these challenges with an emphasis on compliance and optimal benefit management.

The Illusions and Limitations of Bundled Pricing

Bundled Pricing May Obscure True Costs

Bundled pricing may appear to offer lower costs, but it often obscures the true financial cost of each individual health insurance offering. This practice can limit carrier options and compromise the value received by employees in terms of cost, benefit coverage, and service quality. Employers are encouraged to adopt a “best in class” approach for each coverage line, which focuses on obtaining the best pricing, comprehensive benefit coverage, and customer service available, rather than accepting a one-size-fits-all bundle that may not serve their needs effectively.

The Challenges of Compliance and Stakeholder Misalignment

Navigating Compliance with the Legal Rules and Regulations

A significant concern with bundled pricing is the compliance risks it introduces, especially under the Employee Retirement Income Security Act (ERISA). If these coverages are subject to ERISA, failure to comply with ERISA’s rules and regulations can result in regulatory action by the United States Department of Labor, pose litigation risks, and potentially damage a company’s reputation. Moreover, bundled pricing can lead to stakeholder misalignment, where the interests of insurers and brokers may not necessarily align with the interests of employers and employees. This misalignment can distort the true costs and benefits of the insurance coverages, complicating the fiduciary landscape that employers must navigate.

Fiduciary Questions to Consider

When selecting employee benefit options, it is crucial to ask the right fiduciary questions to ensure transparency and compliance. Some essential questions include:

●      What is the “unbundled” price for each line of coverage?

●      Will we receive quarterly reporting of premiums and paid claims of every line of coverage with a detailed breakout of expenses every quarter?

●      Will premium cost reductions or other concessions be offered when claims are consistently lower than expected?

●      Is there contingent income earned on our voluntary benefit coverages, and if so, how is it reported to us and/or to the regulators?

●      Are the commissions structured as level or heaped? If heaped, why?

Expert Insight on Cross-Subsidization

Amy Gordon on Legal Pitfalls

Amy Gordon, a former United States Department of Labor (DOL) attorney and Employee Benefits Partner with Winston & Strawn, provides valuable insight into the practice of cross-subsidization involving ERISA benefit plans: “Insurance companies cannot take positive experience from one insurance policy and apply it to lower the premiums of another insurance policy. This practice, often referred to as ‘packaging’ or ‘bundling,’ has been investigated by the DOL and found to be an ERISA prohibited transaction when positive experience from policies paid by employees is used to offset costs in policies paid by employers.” This highlights the need for employers to carefully monitor how their insurance arrangements are structured to avoid potential legal pitfalls.

Empowering Employers with Knowledge and Tools

Lamont Thurston on the Importance of Transparency

BeneRe’s founder and CEO, Lamont Thurston, highlights the critical need for awareness about the inherent pitfalls in “bundled pricing” of insurance policies. With an exclusive focus on fostering a transparent, aligned model for both employers and employees, BeneRe stands as a pioneering group captive model in the voluntary benefits sector. By better understanding the flawed financing methods of traditional voluntary benefits programs, employers can better navigate the market and make informed decisions that align with their fiduciary responsibilities.

Conclusion: Enhancing Benefit Strategies with Informed Decisions

Navigating the complexities of employee benefits requires a well-informed approach that prioritizes transparency, compliance, and alignment with employees’ needs. By understanding the pitfalls of bundled pricing and adopting a strategic approach to benefit management, employers can ensure that their benefit strategies will enhance employee welfare while meeting regulatory requirements. This guide serves as a foundation for business leaders to optimize their benefit strategies and foster a sustainable future for their organizations.