Critical Illness Protection: On the Road to Financial Wellness

Transcription

1 Critical Illness Protection: On the Road to Financial Wellness The Prudential Insurance Company of America (Prudential) 751 Broad Street, Newark, NJ

2 Table of contents Introduction... 2 The coverage gaps for employees are widening... 3 Critical illness insurance (CII) may help close the coverage gaps... 6 Employers should consider the following best practices... 9 Conclusion

3 Introduction The health care landscape in the U.S. has changed significantly over the last few years, impacting the health care coverage, as well as the finances, of many employees. This paper explores the role critical illness insurance can play in helping to close coverage gaps, and improve financial wellness in the event of a critical illness. Critical illness insurance Provides a lump sum to claimants diagnosed with a critical illness to cover out-of-pocket medical and non-medical costs Generally covers heart attacks, cancer, and strokes, but employers may have flexibility to customize which illnesses they want to cover Is intended as a complement to health and disability insurance, not as a substitute 2

4 The coverage gaps for employees are widening Three factors in particular are pressuring the financial wellness of employees and widening coverage gaps, particularly in the event of a critical illness. 1 Most households have insufficient savings available to meet higher out-of-pocket expenses. About half of U.S. households have savings less than $10, Moreover, nearly half of households reported that, if needed, they would not be able to come up with $2,000 in cash within 30 days. 2 While some employees may be covered by disability insurance, the benefit received is usually a portion of the employee s income, making cash outlays in the event of a critical illness difficult for the 68% of Americans that live paycheckto-paycheck. 3 2 Health care costs are expected to continue to increase faster than inflation. From 2000 to 2010, national health expenditures increased at an average annual rate of 5.6%, about twice the average annual rate of increase of inflation (2.5%). 4 Over the timeframe, health expenditures are expected to continue to outpace inflation, at an annual rate of 5.3% 5 versus 2.1%. 6 3 In response to rising health care costs, many employers have been forced to shift more responsibility for health care costs to employees, exposing employees to higher out-of-pocket medical costs. Even though employers paid 20% more toward their employees health insurance in 2010 than they did in 2005, workers paid significantly more (47%) during the same timeframe, while their wages increased only 18%. 7 To that end, a growing number of employers are adopting high deductible health plans (HDHPs), which commonly have deductibles of $1,000 or more. In 2012, 26% of employers who offered health benefits offered an HDHP, up from 12% in Currently, about 16% of all covered employees are enrolled in an HDHP. 8 Fifty-four percent of HDHP participants have aggregate out-of-pocket family maximums of $7,000 or more. 9 Yet, this high level of exposure is not exclusive to HDHPs. Exhibit 1 indicates that 33% of participants in all types of plans exceed this threshold. Exhibit 1: Exposure to high medical out-of-pocket maximums 33% All Medical Plans Participants with aggregate out-of-pocket family maximums of $7,000 or more (Percent of participants by medical plan type) 54% 23% 26% Health Preferred Maintenance Provider Organization Organization 31% Point of Service High Deductible Health Plan/ Savings Option* * Includes Health Savings Account qualified plans and Health Reimbursement Account based plans. Source: Kaiser Foundation 2012 Survey. This trend will likely continue as rising costs combine with the full effect of health care reform, which sets a minimum floor for health benefits that may be less robust than many employers offer today. 1 Survey of Consumer Finance, 2010, and Prudential analysis. Represents the average value of transactional account (e.g., checking account) holdings for families with such accounts. Does not include qualified retirement accounts (e.g., 401(k) accounts, IRAs). Actual level of household savings may be even lower, because this analysis only includes households with transactional accounts. 2 Annamarie Lusardi, Daniel Schneider, and Peter Tufano, Financially Fragile Households: Evidence and Implications, National Bureau of Economic Research Working Paper 17072, May American Payroll Association, Getting Paid in America, Survey Kaiser Family Foundation, and 5 Kaiser Family Foundation, 6 Department of Labor (2011); Congressional Budget Office, An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022, page Kaiser Family Foundation, 8 Mercer press release, Employers held health benefit cost growth to 4.1% in 2012, the smallest increase in 15 years, November 14, Kaiser Family Foundation, 2012 Annual Survey Employer Health Benefits, page

5 These factors can lead to financial distress As a result of these three factors inadequate savings, increasing health care costs, and shifting of responsibility for health care costs to employees medical issues have resulted in financial distress and bankruptcies for many households. Sixty-two percent of all bankruptcies in the U.S. are based on a medical event, and the share of bankruptcies attributable to medical problems rose by 50% between 2001 and Surprisingly, among those bankruptcies, 78% of those individuals had health insurance, yet the average out-of-pocket medical expenses were nearly $18, Out-of-pocket expenses that may be incurred during a critical illness include lost wages, uncovered medical expenses, and non-medical expenses, as outlined in Exhibit 2. By one estimate, as much as two-thirds of all costs related to serious illnesses are non-medical, including transportation to and from treatment, medically necessary renovations to a home, and family lodging or meals purchased during an individual s stay at the hospital. 12 About half of U.S. households have savings less than $10, % of medical plan participants have aggregate out-of-pocket family maximums of $7,000 or more* 62% of all bankruptcies in the U.S. are based on a medical event 10 Exhibit 2: Out-of-pocket expenses associated with a serious illness Lost Wages Medical Expenses Non-Medical Expenses For employee Possibly for a family member caring for the employee Deductibles Visit copays Prescription and non-prescription medicines Out-of-network visits Medical equipment Travel to appointments Home accommodations Care giving Housekeeping Special diet 4 * Source: Kaiser Foundation 2012 Survey 10 David U. Himmelstein, MD, Deborah Thorne, PhD, Elizabeth Warren, JD, and Steffie Woolhandler, MD, MPH, Medical Bankruptcy in the United States, 2007: Results of a National Study, American Journal of Medicine, David U. Himmelstein, MD, Deborah Thorne, PhD, Elizabeth Warren, JD, and Steffie Woolhandler, MD, MPH, Medical Bankruptcy in the United States, 2007: Results of a National Study, American Journal of Medicine, Sternberg, Erich, How Critical Illness and Accident Plans Add Value to Employers Health Plans, LifeHealthPro, July 28, 2010.

6 Solutions can help mitigate financial risks Several solutions are available that may help employees mitigate, to varying degrees, the financial risks associated with a significant medical event. These solutions, outlined in Exhibit 3, are not mutually exclusive. Exhibit 3: Solutions to help mitigate financial risks of a significant medical event Solution Insurance: Critical illness Disability Life Accident Hospital Indemnity Health savings account (HSA) How it Works Ideal for risks such as a critical illness that have a relatively low probability, but a high financial impact. Protects against the financial consequences of a predetermined set of critical illnesses by providing a lump sum payment upon diagnosis to help cover medical and non-medical expenses. Protects against the loss of income associated with predetermined conditions by providing a portion of income for a limited period. Protects against the financial consequences of a loss of life. Protects against the financial consequences of accidents by providing a lump sum payment for medical and non-medical expenses. Protects against hospital costs (coverage may be incorporated in critical illness and accident insurance policies). Provides a savings vehicle to cover out-of-pocket medical expenses, and may be funded by the employer or employee. Many employers provide HSAs alongside HDHPs to help employees meet their higher deductibles. HSAs do not cover non-medical expenses that may be significant, such as the cost of child care, housecleaning, travel, home modifications, and the loss of income. The average balance of an HSA account was $1,470 in 2011 likely less than is needed to cover out-of-pocket expenses related to a critical illness.* Wellness program Return-to-work program Encourages better health and lower medical costs through self improvement and disease prevention. Includes making accommodations for employees to accelerate return to the workplace after a disability, enabling employees to return to their pre-disability compensation sooner than they may have been able to otherwise. * Employee Benefit Research Institute, Fronstin, Paul E., Health Savings Accounts and Health Reimbursement Arrangements: Assets, Account Balances, and Rollovers, , January This paper focuses on critical illness insurance (CII), because it may be best suited to meet the emerging need for protection against increasing out-of-pocket medical costs and related expenses in the event of a serious illness yet employers and employees know little about it. This paper explores how CII can help to close coverage gaps for employees, and provides best practices on how employers may implement a CII program. 5

7 Critical illness insurance (CII) may help close the coverage gaps CII is designed to complement health insurance by providing financial protection against direct and indirect out-of-pocket costs associated with a specified critical illness it is not a substitute for medical or disability insurance. The conditions CII generally cover include heart attacks, cancer, strokes, renal disease, and major organ transplants, but employers may have flexibility to customize which illnesses they want to cover in order to meet their employees needs. Claims are usually paid upon diagnosis in a lump sum that employees may use for any medical or non-medical expenses, which may include increased living expenses, such as caregiving, housecleaning, transportation, and outside services. The lump sum feature allows employees to decide for themselves how to utilize these funds to meet their specific needs. CII offers advantages to employees and employers The likelihood of suffering a critical illness may be higher than many think. One in three adults has some form of cardiovascular disease. One in three women and one in two men in the U.S. will develop cancer during their lifetime. 13 However, in any given year, the likelihood of getting a serious illness is much lower, making it a risk that can be insured against at an affordable cost. CII can improve employees financial wellness by helping fund the increased out-of-pocket expenses borne by employees as a result of a serious illness. CII provides employees with: An affordable way to minimize the financial risk associated with serious illness by filling in the gaps of current coverage, particularly for non-medical out-of-pocket costs. Financial peace of mind during a difficult time, allowing employees to focus on recovery. Flexibility to utilize the funds for any type of expense, such as transportation or home modifications, given that the nature of expenses may vary significantly depending on specific needs. A way to help protect retirement savings; a serious illness might cause employees to dip into their retirement savings to cover expenses and may prevent them from making additional contributions to their retirement savings. Ease and convenience in making claims, because the lump sum feature preempts the need to submit expenses for approval. Convenience of enrolling through the workplace. When protection products are offered through the workplace, employees can rely on employers to conduct product research and make payroll deductions. Employers may offer access to some level of CII coverage without medical underwriting, making it more convenient for employees to obtain coverage. Moreover, employees may often be able to benefit from favorable group pricing. CII provides several advantages for employers, as they continue to strategically balance offering a robust benefit package that improves employees financial wellness with containing benefit costs. CII may help employees pay for increasing out-of-pocket expenses as they transition to lower cost health insurance plans. Controlling health insurance costs is a top priority for most employers, 14 and about two-thirds (65%) of finance executives are likely to shift more responsibility for health care costs to employees. 15 Employers may shift costs by pursuing a wide range of strategies, including raising deductibles, raising dependent coverage costs, and shifting to HDHPs. For example, employers are increasingly offering HDHPs at lower costs, giving employees more day-to-day control over their expenses. Offering CII may provide a cost effective way to counterbalance the higher out-of-pocket costs borne by employees with any type of health plan, given that medical expenses are expected to continue to increase faster than inflation Benefitspro, Kathryn N. Mayer, Will Critical Illness Insurance Take Off?, June 20, According to the American Heart Association and the American Cancer Society CFO Publishing study with Prudential, The Future of Retirement and Employee Benefits, May 2012, page CFO Publishing study with Prudential, The Future of Retirement and Employee Benefits, May 2012, page 5.

8 CII can help employers implement a wide range of health plan strategies to shift costs. Exhibit 4 illustrates one example in which the shift in family coverage from a Preferred Provider Organization (PPO) health plan to a HDHP results in average annual cost savings of $2, (The savings may accrue to employers, employees, or both, depending on who funds the premiums.) To help fill in coverage gaps for the out-of-pocket expenses related to a critical illness, a portion of the savings may be used to provide CII, which has an estimated average annual cost of $200 for family coverage. 17 The benefit may be funded by employers, employees, or a combination of both. Exhibit 4: Cost savings resulting from shift in plan design from PPO to HDHP Average annual premium cost for family coverage* $16,357 $11,947 $14,129 $10,409 Savings available to provide supplementary protection, such as critical illness insurance (~$200 average annual cost)** $4,410 $3,720 $2,228 $1,538 $690 Preferred Provider Organization HDHP with Savings Option Total Employer Costs Employee Costs Savings Available for Supplementary Coverage *The Kaiser Family Foundation, 2012 Annual Survey Employer Health Benefits, page 83. **Sternberg, Erich, How Critical Illness and Accident Plans Add Value to Employers Health Plans, LifeHealthPro, July 28, Helping employees improve their financial wellness also helps employers maintain productivity levels. Employees financial distress can have a negative impact on the workplace; 29% say that personal financial issues are a distraction at work. 18 CII allows employees to recover without the burden of financial pressures related to recovery costs. 79% of finance executives agree that employee benefits are critical to attracting and retaining talent Employers may increase the attractiveness of their benefit offerings. Seventy-nine percent of finance executives agree that employee benefits are critical to attracting and retaining talent. 19 CII claims are generally administered by the provider, and therefore do not increase the burden on the employer s administrative staff, who may already be stretched, and may become more so as a result of additional reporting necessary to comply with Affordable Care Act requirements. 16 Calculations based on The Kaiser Family Foundation, 2012 Annual Survey Employer Health Benefits, page Sternberg, Erich. How Critical Illness and Accident Plans Add Value to Employers Health Plans, LifeHealthPro, July 28, PriceWaterhouseCoopers, PwC Financial Wellness Survey: 2011 Results, page CFO Publishing study with Prudential, The Future of Retirement and Employee Benefits, May 2012, page 5. 7

9 Acceptance of CII is gaining momentum In 2010, 22% of U.S. employers offered CI plans, up from 12% in A number of factors suggest adoption of CII will continue to increase. Employees are increasingly concerned about health and health care costs. 21 Most surveyed employees who learned about CII liked it, and felt that the worksite was the best place to obtain coverage. 22 To continue to drive increased adoption, brokers and employers should help to increase familiarity with and knowledge about CII. Research indicates that employees and employers have little knowledge about CII. Excluding employers that offer CII, only 17% are very familiar with it, 35% are somewhat familiar, and almost half are not very or not at all familiar. 23 For example, many may not be aware that CII complements health insurance by helping to provide financial protection against medical and non-medical out-of-pocket costs. Moreover, brokers report that most employees do not think they need CII, because they believe their insurance plans will include the same coverage provided by CII. 24 The most intriguing thing is it goes beyond medical expenses. A consumer 24 CII is widely accepted internationally, and is sold in 54 countries. 26 Many of these countries have nationalized health care plans, thereby reducing the need for comprehensive medical insurance, and increasing the need for complementary protection to fill gaps. Moreover, CII is used in various ways across countries. In the U.K., CII is used for the purpose of mortgage protection, that is, CII proceeds are used to pay part or all of the balance on an individual s mortgage. Australians use CII to fill the gap caused by the disability insurance waiting period. 27 As you get older, you hear different horror stories. One major surgery could wipe people out. A consumer 24 Brokers are becoming more familiar with CII, as employers execute their strategy to shift responsibilities to employees and increasingly adopt CII. When asked which voluntary benefits were expected to increase in adoption, 41% of brokers said CII the highest among all voluntary products LIMRA, Weathering the Storm, May 2011, page DSG and Matthew Greenwald & Associates, Retiree Insights Focus Group Findings, September LIMRA 2012 Consortium Qualitative Study on CI and Accident Insurance, Creating a Game Plan for Critical Illness and Accident Insurance, June 2012, pages LIMRA, Weathering the Storm, May 2011, page LIMRA 2012 Consortium Qualitative Study on CI and Accident Insurance, Creating a Game Plan for Critical Illness and Accident Insurance, June Prudential Financial, Seventh Annual Study of Employee Benefits: Today & Beyond, 2012, page American Association for Critical Illness Insurance, Critical Illness Insurance Sales Tend To Be Small, April 3, Standard Life and Accident Insurance Company, The Clear and Present Need for Critical Illness Insurance Today, 2011.

10 Employers should consider the following best practices Employers considering complementing their benefits offerings with CII should consider best practices regarding product design, product positioning, education, communication, and partnering with a provider. 1design products to effectively help improve employees financial wellness. Simplicity is key to making the CII benefit more appealing and understandable to employees. A simple product design lends itself to easy enrollment processing, streamlined claims management, minimal administrative support, and streamlined communications. I think if [CII were] kept simple this is what it pays out on, this is what your price is more people would take it. A broker 24 Employers may customize the CII features listed in Exhibit 5 to balance employee needs, affordability, and simplicity. For example, employers may be able to lower costs by eliminating CII features that are redundant with other available benefit offerings. When considering how a CII benefit could be funded, employers should keep in mind that CII is generally used to complement health insurance by providing financial protection against out-of-pocket expenses, and should be affordable to encourage adoption and improve employees overall financial wellness. At one end of the spectrum, employers may fund the entire CII benefit, possibly to help employees mitigate the financial impact of bearing more benefits costs. Moving along the spectrum, employers may fund a portion of the CII benefit for all employees, or only for certain employees, such as those that select HDHPs. At the other end of the spectrum, employers may offer CII as an employee-paid voluntary benefit a low-cost way to provide protection against increasing out-ofpocket expenses. Exhibit 5: Customizing critical illness insurance features to meet employers needs Customizable Features Covered conditions Level of claim payments Re-occurrence benefit Guaranteed issue Spouse and child coverage Plan design for increments Age reduction schedules Continuation policy Funding method Explanation Critical illnesses covered (e.g., cancer, heart attack, stroke) Amount of lump sum payment for each condition Benefit maximum in the event of multiple claims Portion of benefit that does not require underwriting Capability to cover family members Capability to increase level of the benefit Amount of benefit that reduces with age Length of time coverage is maintained after employment ends Premiums paid by employer, employee, or both Considerations Demographics of employee base: Age General health Susceptibility to specific conditions Income level Current health plan offerings Employee turnover rates Funds available to employer and employees for benefits 9

11 The benefit received is tax-free to the employee only if premiums are paid by the employee with after tax dollars. If the premium is partially funded by the employee, that portion of the benefit would be tax-free. 2 Position CII as a core protection benefit that addresses key universal financial risks. Financial and medical protection solutions should be presented and emphasized as primary or core benefits that protect against risks to which nearly everyone is exposed. Doing so guides employees to place more attention on them. CII may be most effectively used when positioned as a core benefit alongside medical, life, and disability insurance during enrollment, in order to highlight how the products complement each other, such as helping to fill the out-of-pocket coverage gaps created by the shifting of costs to employees. Key to positioning CII as a core benefit is to keep the product design simple, making it an easy add-on to other core protection products that employees are more familiar with, such as medical, life, and disability insurance. An indication of the importance that employers place on a benefit is how they allocate their employee benefit budget. More employers are helping employees pay for CII, indicating they may be increasingly viewing it as a core protection benefit. Exhibit 6 indicates that, for employers offering CII, 28% paid for part or all of the benefit in 2010, up from 9% in Exhibit 6: Trend toward employers support for critical illness insurance 3 educate Funding method for critical illness insurance 91% % 20% 6% 8% 3% Employer-Paid Contributory (employer and employee) Source: LIMRA, Weathering the Storm, May Employee-Paid (voluntary) employees on the increasing need to protect against medical and other related out-of-pocket expenses, and how CII may fill these gaps to help improve employees financial wellness. To help employees understand their increasing exposure to medical and non-medical out-of-pocket expenses, employers should provide statistics on the chances of being diagnosed with a critical illness, the average costs of hospital stays and medical expenses associated with a critical illness, and the additional living expenses that may be incurred, such as childcare, housecleaning, travel costs, and lost income. Employers may include examples and case studies in their education programs to establish the need for protection, and connect these needs to specific solutions so that they resonate with employees. Because employees are not very familiar with CII, education is especially important to position CII as a solution. Education should help employees understand LIMRA, Weathering the Storm, May 2011, page 9.

12 how CII can help fill their coverage gaps during a critical illness. Education should also clarify which expenses CII is designed to protect against that are not covered by medical or disability insurance. Non-medical out-of-pocket expenses should be emphasized to help distinguish CII from other complementary medical products. Employers can customize education for employees, and provide an integrated online enrollment system with automated tools, such as needs estimators and educational videos. Providers may also offer customized enrollment support via the phone or online chat with licensed representatives to answer product questions, conduct needs analyses, and provide personalized coverage recommendations. 4 Communications programs should emphasize CII as a core protection solution. Communications programs should emphasize CII along with the other core protection solutions, such as medical, life, and disability insurance, that help improve employees financial wellness, indicating how CII complements the other coverage. To that end, incorporating a compelling case study may help to make the problem and solutions real and relevant for employees. Similar to communications for other benefit offerings, communications should be tailored for different employee segments and personalized for each employee. Eightyeight percent of employees say they have an interest in receiving benefits communications that are tailored to their personal situations. 29 Employers should leverage a range of benefit communications channels, including , home mailings, intranet sites, seminars, mobile apps, group meetings, and social media because employees vary in their channel preferences Partner with a provider to leverage its experience with education, communications, marketing, and administration. Historically, CII has been offered to employees directly from product providers (i.e., the individual model), but the trend is shifting to employers offering CII as a group benefit (i.e., the group model). In the voluntary products market (which includes CII when offered on a voluntary basis), worksite sales have shifted from the individual model to the group model; in 2011, 55% of worksite sales were with group benefits providers, up from 39% in Employers may consider offering CII as a group product so that they can more easily customize their CII product design, promote CII as a core benefit alongside health, life, and disability insurance, potentially fund all or part of the premium, and have a more holistic understanding of their employees benefits coverage. In addition, if employers add CII to their group benefits offerings, they may leverage existing enrollment processes and available tools and access administrative and reporting capabilities offered by their group benefits providers. Further, they can look to the provider for turnkey enrollment campaigns and education. Group providers may also help customize marketing programs with the benefit of understanding an employee s participation across products. For example, a participation analysis for an existing plan may reveal employee coverage gaps. Employers should engage with their providers on an ongoing basis, and provide participant data for analysis, so that the provider can help identify underinsured segments of the workforce and tailor enrollment and educational campaigns for these segments. 29 Topline survey results for Prudential Financial s Fifth Annual Study of Benefits: Today & Beyond, October Topline survey results for Prudential Financial s Seventh Annual Study of Benefits: Today & Beyond, Eastbridge Consulting Group, U.S. Work Site/Voluntary Sales Report,

13 Conclusion Low savings rates, increasing health care costs, and shifting of responsibility for benefits to employees in the U.S. are widening coverage gaps that may jeopardize the financial wellness of employees in the event of a critical illness. Several solutions, which are not mutually exclusive, may help employees mitigate the financial risks associated with a critical illness to varying degrees. CII helps employees improve their financial wellness by helping to fill the widening coverage gaps. CII offers several advantages to employers and employees alike. Momentum for CII coverage is building in light of the current landscape. Employers considering complementing their benefits offerings with CII should consider best practices regarding product design and positioning, education, communication, and partnering with a provider. 12

14 For additional thought leadership material from Prudential, please visit research.prudential.com Group Critical Insurance coverage is a limited benefit policy issued by The Prudential Insurance Company of America, a Prudential Financial company, 751 Broad Street, Newark, NJ Prudential s Critical Illness Insurance is not a substitute for medical coverage that provides benefits for medical treatment, including hospital, surgical and medical expenses and does not provide reimbursement for such expenses. This Critical Illness coverage is not comprehensive health insurance coverage (often referred to as Major Medical Coverage ). It does not satisfy the individual mandate of the affordable care act. It does not meet the requirements of minimum essential coverage as defined by federal law. The Booklet-Certificate contains all details, including any policy exclusions, limitations, and restrictions which may apply. If there is a discrepancy between this document and the Booklet-Certificate/Group Contract issued by The Prudential Insurance Company of America, the Group Contract will govern. A more detailed description of the benefits, limitations, and exclusions applicable are contained in the Outline of Coverage provided at time of enrollment. Please contact Prudential for more information. Contract provisions may vary by state. Contract Series: Prudential, the Prudential logo, the Rock symbol, and Bring Your Challenges are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide