We’ve received a few questions lately from clients wanting to understand insurance pooling when it comes to employee benefits. This does not surprise us as there are many nuances that goes into employee benefits pricing, and the concept of pooling is one of the key factors. With that in mind, we’re going to dive into insurance pooling in a two-part series to help explain pooled vs. experience-rated benefit plans, and pooled claims.
Pooled vs. Experience-Rated: fundamentals
When we talk about experience rating, we refer to the past usage of the group plan. With experience-rated plans, the provider reviews all claims made in the past to help determine the pricing at renewal.
Pooled plans operate in the same way except your group’s experience gets grouped (or “pooled”) together with several other employers’ usage. As a result, the insurance provider sets rates based on the cumulative experience of the entire pool, rather than just one company.
There are of course pros and cons related to both experience-rated plans and pooled plans.
Rate stability: generally better with pooled plans
Typically, experience-rated plans tend to have a lower cost up-front in comparison to a pooled plan. However, experience-rated pricing can fluctuate significantly from year to year. As a result, the employer faces the risk of a potentially high increase at renewal, if their plan usage is higher than the insurer anticipated.
When it comes to pooled plans, there are greater economies of scale because your plan is part of a larger group. Though pooled plans are more expensive up-front, typically these plans see less rate fluctuation from year to year. Rate stability is often recognized as the greatest advantage of a pooled plan.
Customization: better with experience-rated plans
That said, experience-rated plans are highly appreciated when it comes to customization and plan design. An organization can pick and choose various benefit features if they opt for an experience-rated plan. In contrast, pooled plans tend to be more rigid with a set plan design for everyone in the pool. Insurance providers do this on purpose to maintain consistency and stability within a pool, which minimizes risks and administrative costs for the insurer.
Transparency: better with experience-rated plans
With experience-rated plans, the employer will typically get reports from the insurer showing what areas of the benefit plan were utilized on a group level. For example, as the employer, you will be able to see what parts of your benefit plan are being used vs not. Having this transparency is very helpful when making plan design decisions for your group.
On the other hand, pooled plans do not typically share claims experience information with employers. Think about it: if they did, employers with “good” claims experience would be inclined to leave the pool as they’d be able to get better pricing in an experience-rated plan. The pool would be left concentrated with high-claiming groups, which would raise the rates for everyone, and the pool would eventually become unsustainable.
Not all pooled plans are the same
Limited customization options are seen as a downside to pooled plans, but if rate stability is important to your organization, then a pooled plan may the right fit. Smaller companies (less than 10 employees) in particular might feel inclined to go with a pooled plan, so they don’t have to worry about potential rate increases from year to year. That said, an important distinction I always like to make when talking about pooled plans is that they do still look at experience rating of the entire pool. This can ultimately impact your group’s rates. Depending on the provider, we sometimes see sub-pools within the larger pool, and these are partially experience rated.
Which plan is right for you: pooled or experience-rated?
You might be wondering whether a pooled plan or an experience-rated plan is the right for your company. That’s where IR Group Benefits can help! As an advisor that specializes in employee benefits, we understand the complexities and finer details of these types of plans. With access to leading insurers’ pooled and experience-rated options, we are equipped to help you make the right choice based on your specific needs. We would be pleased to discuss pooled vs. experience rated plans if you have any questions.