The answer is “both”! Most employee benefit plans include Group Life and Accidental Death (AD&D), Group Long-Term Disability (LTD), Group Critical Illness (CI) and Extended Health and Dental.
The “insurance” components are Life/AD&D/LTD and CI. For these risks, the insurance company collects a very small premium each month, and the expectation is that there will rarely be a claim. When there is a claim, the insurance company will pay it from the pool of premiums collected from the employer, plus from premiums collected from all the other employer group insurance plans the insurer administers.
The “budgeting” components are the Health and Dental plans. The difference between Health and Dental and the Life/AD&D/LTD/CI, is that with Health and Dental, many small claims are being processed constantly. For example, most employees see a dentist twice a year, and many employees have ongoing regular prescriptions or massage/physio/chiro etc.
How does the insurance company make money on Health and Dental? Every employer wants to pay less in Health and Dental premiums than is paid out in Health and Dental claims. But it can’t work that way. Because claims are paid often and regularly, a firm’s employees’ usage of the Health and Dental plan is fairly consistent and the insurance company knows roughly what to expect from year-to-year. As well, the insurer knows that there will likely be higher costs next year (for most groups) because costs of health and dental care increase annually out there in the real world. Not in each employer/employee group specifically, but for everybody. For example, healthcare costs in Canada are increasing at between 10 and 15% per year, and dentists are regularly increasing their fee guides. Not to mention that dentists and other practitioners such as physio/massage/chiro are becoming more entrepreneurial and creating more demand for their services.
Add it all up and the premium paid by the employer must reflect the amounts that are paid out regularly to dentists and pharmacists (and other practitioners). Plus a factor for expenses incurred by the insurer for managing the plan. Plus a profit margin for the insurance company. And in many cases, plus a factor to allow for expected claims costs increasing just because of the overall health and dental cost increases for everybody. So in the end, the employer’s premium will generally be higher than the Health and Dental benefits paid-out.
If Health and Dental is not true insurance as we know it, why would an employer implement a Health and Dental plan? First, when an employer provides a Health and Dental plan they are telling their employees that they support maintaining good health. Second, there is advantageous income tax treatment of Health and Dental premiums. Under the Income Tax Act, premiums paid by an employer for Health and Dental are tax-deductible as a business expense, and there is no “taxable benefit” added to the employees’ incomes. Providing a Health and Dental plan is another form of compensating employees.
Within the Health and Dental plan, the exception to the “budgeting” concept is the Out-of-Province Emergency Travel Medical coverage. Similar to the Life/AD&D/LTD/CI, this is an insurance risk, since claims are large, but occur infrequently. Claims from employees for Out-of-Province medical expenses do not reflect themselves in higher Health and Dental premiums for the employer.