"Classes" and "carve-outs" may bring to mind school or Thanksgiving, but in employee benefits, these terms refer to specific populations of employees and/or exclusions in a policy. These concepts are important for understanding how insurance plans are structured, what they cover, and what they may not. At Generous Benefits, we utilize both concepts when working with our clients, and we think everyone should be aware of them, so let's get to it!
"Classes" in employee benefits generally refer to different groups or categories of employees and how they may or may not be eligible to be covered by the benefits offered by your company. Here are some common uses of the term:
In most companies, benefit offerings are segmented by different "classes" based on the type of employee. For example:
Full-Time vs. Part-Time Class: Historically, Full-Time employees get offered a much broader array of benefits, and Part-Time employees get very few to zero insurance benefits.
Salaried vs. Hourly Class: This distinction is often used for more comprehensive Life and Disability insurance offerings to tailor the benefit to closely match each class's earnings structure.
Executives: In some companies, there are "excepted" or "fringe" benefits offered to an Executive class of employees that are specific to those high earners as a way to pass along more compensation under a taxable benefit structure like a Medical Expense Reimbursement Plan.
This classification allows insurers to structure coverage in a way that aligns with different needs and makes it easier for employers and employees to understand what is covered under each class.
Any time employers make different offerings to different classes, the rules can get wild. But, the most important rules to navigate are the Non-Discrimination rules and ensuring that the employer isn't charging more to lower-paid employees.
Our Summary of Group Plan Nondiscrimination Rules Guidebook is a great resource:
A "carve-out" is when certain benefits or services are excluded from a health plan and instead provided through a separate, specialized contract or insurance plan. These carve-outs, particularly used by employers who are self-insured, are typically used to manage specific types of care more effectively and to control costs. Some examples of carve-outs include:
Several health insurance plans carve out organ transplant coverage to a separate stop-loss policy, meaning they are covered separately from the rest of the health plan. This is typically done in a smaller to mid-sized employer that needs to protect itself from the financial impact of an organ transplant to their claims fund reserves. In such cases, a third-party insurance company specializing in organ transplants steps in and pays for those claims a separately from the main insurance stop-loss policy. The great advantage to this type of carve-out is that there is no disruption to the member or their dependents who are affected. This coverage lives in the background of the plan, and everything is coordinated by the main plan administrator or TPA.
Some plans separate a portion or all of their prescription drug coverage from the main health insurance and handle it through a Pharmacy Benefit Manager (PBM). The PBM manages the formulary (list of covered drugs), drug pricing, and reimbursement for pharmacies, while the medical insurer handles the broader healthcare needs.
Some plans end up using multiple PBMs to administer different categories of drugs. They may have the main PBM handling all of the Generic and Brand-name drugs with a secondary or separate PBM handling any speciality medications.
Or, as we've seen more frequently in the last five years, there is a trend to exclude all Specialty Medications from the plan in an attempt to limit high-cost expenses beyond what many employers can tolerate. When this, there is typically a drug advocacy service available to plan members to help navigate and apply for patient or manufacturer assistance programs.
Dental and vision care are frequently carved out of standard health insurance plans. These benefits may be provided under separate policies or through partnerships with specialized providers, allowing the main insurer to focus on primary medical coverage.
While not a specific "carve-out" of coverage, many employers have enlisted the services of condition-specific management vendors to help guide members undergoing high-cost treatments or diseases. Often these disease management vendors focus specifically on members experiencing high cost conditions like cancer care or chronic conditions like diabetes. This ensures that the members of the plan can work with specialized providers who have a deeper expertise to manage such complex care.
Classes in employee benefits can help match the benefits offered much closer to the needs of each employee population.
Carve-outs allow for extra coverage or exclusion of specific items in a manner that is strategically designed to help manage the frequency and severity of the claims associated with those named conditions or coverage items.
When evaluating whether to use classes or carve-outs in a health plan, consider:
Workforce demographics
Budget constraints
Compliance obligations
Administrative resources
Member experience
Understanding the benefits and disadvantages of classes and carve-outs in employee benefits is essential for employers and employees. Each approach serves specific purposes, but also brings trade-offs.
That's where Generous Benefits comes in. We can help determine if utilizing classes of benefits and carve-outs in employee benefits make sense to meet the specific needs of each employer and their employees.