Posted on Dec 08, 2014 by Alexander Nellist
Pacific Prime, one of the world’s leading International Health Insurance brokers based in Hong Kong has seen Financial Service firms scaling back health insurance employee benefits in the past 24 months.
The fallout from the global financial crisis continues to leave a footprint across the globe and the International health insurance sector bears no exception. Historically, high end financial service firms offered rich and comprehensive employee benefits and in a place like Hong Kong, which is renowned for high cost medical facilities, these medical insurance benefits were considered essential to attract and retain employees. This is no longer the case today. Over the past several years, investment banks, hedge funds and private equity houses have gone through the painful process of scaling back the medical insurance benefits offered to staff.
Not all high end financial service firms have felt the need to reduce medical insurance benefits, though generally speaking, the bigger investment banks have been more likely to do so. Smaller companies that are looking to attract and retain talent or where management place health insurance high on the priority list, have had more flexibility in retaining rich health insurance plans. Due to very high costs however, the overall trend of health insurance benefits have clearly been lowered since 2009.
The way in which benefits have been scaled back varies. In some cases the changes are made by removing the more supplemental benefits such as Maternity, Dental and Wellness, which can typically save 20-35% on the cost of a health insurance plan in Hong Kong. Other companies have cut deeper and placed caps and limits on Outpatient benefits, restricted the amount of coverage on inpatient, limited the room type that can be selected and maybe introduced deductibles and excesses. Naturally, these changes have not been well received by employees who had been accustomed to full medical coverage, but most have in fact accepted the changes as inevitable, to remain in line with market practice in the sector.
Although benefits have been downgraded, many employees in the sector still desire access to the best medical facilities to manage their exposure to the risk of high medical cost. This has ultimately lead to the development of the commonly known ‘Top Up’ plan. Today, most investment banks in Hong Kong that have downgraded employee core medical insurance coverage have put in place a ‘self selecting’ plan, which allows an employee and their dependents to elect for better coverage (at an additional cost to themselves). The structure of the plans vary, although the demographic of employees typically utilizing Top Up plans are generally seeking full coverage across all benefits. In most cases the Top Up plan is offered by a different insurer; the core plan is usually from a domestic insurer while the Top Up is from an international Health Insurance provider. Employees can offset the cost of the core plan that the employer would have paid against the cost of the better plan and opt to pay the additional cost for the fully comprehensive cover in some cases.
The biggest challenge implementing these schemes is in the management of pre-existing medical conditions and the risk of anti selection. An employee could elect to stay on the core company plan and only choose an upgrade to full coverage when becoming seriously ill. If the risk of this type of anti selection is not managed, then the loss ratio of the group will spiral out of control. Employees will not join due to the prohibitive costs and the plan will end up collapsing due to a lack of new joiners, consequently leaving only the seriously ill on the plan. We have seen this many times before if plans are not set up correctly. There are several ways to avoid the problem: underwriting on entry, control of entry and exit dates, one time only options to join the Top Up, etc. Evidence from the past five years shows that these Top Up plans can be set up in a sustainable way if they are managed carefully and the Broker and employer’s HR are committed to maintaining the sustainability of the plan. (HR is often put under pressure by sick or recently diagnosed employees to allow them to change from company core benefits to the superior Top Up medical plan, and while helpful for the one employee, can have consequences for the Loss Ratio on the Top Up plan creating dire premiums for the future.)
The percentage of employees electing to Top Up varies considerably depending on the size of the company, the level of core medical benefits offered and the level of internal promotion and access given to the Top Up plan (often not all grade of employee are allowed to join the Top Up plan).
The Top Up plan offers other benefits to senior employees that elect to take it, as benefits are sometimes portable to an individual health insurance plan (from the same insurer) allowing for a seamless transfer if they were to leave the company. This has the significant advantage of continuing pre-existing medical conditions cover (some of which might otherwise make the employee or dependents uninsurable, e.g. cancer). The recognition by individual employees (typically senior management) in the ability to seamlessly transfer to an individual health insurance plan which continues to cover pre-existing conditions is growing. Historically most of these employees went home to a socialized health insurance system (Europe), or to the US where Hippa and Cobra (now ACA) would mean they would be covered to some degree. But this is increasingly not the case, employees are staying abroad as permanent expats who see maintaining continuous health insurance coverage for pre-existing conditions as an essential factor in remaining overseas.
Underlying the movement of employers to lower levels of core employee benefits and the growth of Top Up plans is the fundamental issue of health insurance costs. The global financial crisis of 2008 may have acted as a catalyst for high end financial service companies to look at health insurance costs but premium inflation for health insurance plans, allowing access to private medical facilities, is running at circa 10%, year on year. It has done so for a decade, and is anticipated to do so well into the future. The development of new treatments (drug and care) as well as the supply and demand imbalance which exists in many parts of the world between high quality private treatment and the growth in the number of local ‘High Net Worth’s’ seeking access means the cost of accessing the best health care is only going to become a more serious and expensive problem for companies and individuals. The downsizing of company international health insurance benefits and the growth of Top Up plans (part paid by employees) is likely to be a growing feature of employee benefits across all industry sectors, not just for investment banks.