PROs AND CONs OF GROUP HEALTH INSURANCE

“Group Health Insurance” is health insurance that covers all eligible people in a group regardless of their age or physical condition. In the U.S., group health insurance has generally been provided by employers. Thus, the concepts of employer-based insurance and group health insurance have become linked. However, group health insurance can be provided by other types of organizations such as professional like General Insurance and trade associations, unions, social or civic groups, and governments.

Enrollment in a group usually occurs when an employee first begins work or during a specified period called “Open Enrollment” when employees can switch health plans if their employer offers more than one option. Open enrollment generally happens once a year, although Medicare allows switching each month. Sometimes employees are allowed to change plans at a time other than open enrollment in the event of a major change such as marriage, divorce, birth of a child, or death. “Coordination of Benefits” makes sure that medical services covered by more than one group plan (for example, when both spouses are insured) are not paid more than once and not paid more than 100% of the claim amount.

“Small Group Health Insurance” refers to the number of employees (sometimes 1 or 2, but most often between 3 and 25, and sometimes up to 100) covered under a company’s group insurance plan. In the small group market, health insurance prices are based mainly upon two factors. The first is the expected cost of medical services in a given geographic area; the second is the projected utilization of services. Insurers usually estimate the probability of an insured using medical services based upon factors such as age, sex, and medical history. Those individuals who are considered a greater risk will often pay a higher premium for insurance. Premiums are also affected by the type of benefit plan chosen.

The following are some of the advantages of group health insurance. First, employer contributions to group health insurance premiums (and often the employee contributions as well) are generally not taxed. One exception is if your employer pays you an amount that can be used for health insurance, but can also be spent on other things; that amount is taxed as income.

Second, when a group is formed for some purpose other than to obtain health insurance (for example, employees at a company) and there are significant employer contributions that encourage even low-cost people to sign up, then there is less adverse selection with a group than with individual insurance. Low-cost people are combined with high-risk people in a single risk pool. However if the group is formed for the purpose of getting insurance (e.g. a state high-risk insurance pool) or the employer contributes very little to the premium, then adverse selection can be a problem.

Third, group health insurance can be cheaper per policy because fixed costs are spread over many policies. This is called “Economies of Scale.” Some of the costs of marketing, underwriting, and administration do not increase much with the number of people covered by the policy. Accordingly, the average premium is lower for large group policies than for small group policies and lower for small groups than for individuals. Fourth, large employers or other large organizations often have clout or market power to negotiate lower premiums with insurance companies than individuals.

The primary disadvantage of group health insurance is the limitation of employee choices when only a limited number/types of plans are offered. The extreme case is when only one health plan is offered on a “take it or leave it” basis. For example, if the only plan offered is an HMO that does not include an employee’s favorite physician, then that employee is not well served by that group health insurance. As another example, if one employee thinks that acupuncture is the best way to treat headaches, then that employee probably may be able to get an insurance policy as an individual that covers acupuncture. However, it is unlikely that there would be enough support for acupuncture among fellow workers to get it included in a group health insurance policy.

A key plan design issue for group health insurance is deciding what benefits should be covered and whether workers should have coverage options. For example, should a person whose religion precludes use of traditional medical services be forced to pay for health insurance that they will not use? Flexible benefits address the issue of limited choice by allowing employees some flexibility in picking which types of insurance and benefits they want. However, this opens the door for adverse selection.

Suppose there are flexible benefits for eyewear insurance. If the only people to select eyewear insurance are those who are certain to replace their glasses next year, then the premium for eyewear insurance will equal the cost of buying glasses plus the administrative cost. In this case, even before moral hazard, it would be cheaper to buy glasses than to buy eyewear insurance. Moral hazard (people ordering more expensive glasses or other services when they are insured) could make the inefficiency of eyewear insurance even worse.

Another issue in the design of group health insurance is the amount that workers should contribute to the premium. Workers will not make cost-conscious plan choices if they do not bear some of the cost of selecting a more expensive plan. With the general concept of defined contribution, an employer pays a fixed amount (perhaps the premium of the lowest cost plan) regardless of which plan the worker selects. If employees select the cheapest plan, they get it for free. If they pick a more expensive plan, then they pay 100% of the incremental difference in premiums.

Yet another group insurance issue is whether employees’ dependents should be covered and what degree of subsidization there should be for dependent coverage. Employees are generally better health risks than their dependents because employees are at least healthy enough to work. Accordingly, dependent coverage can be costly. Should employees without dependents subsidize the premiums of those with dependents?

If you are self-employed or if your company does not offer group policies, then you may need to buy individual health insurance. Individual policies cost more than group policies and generally involve evaluation of your health status through a series of medical questions or physical exam. The results will affect how much your individual coverage costs. Individual insurance is somewhat more risky for insurers than group insurance, because group insurance allows the insurer to spread the risk over a larger number of people. For this reason, individual insurance is generally more difficult to obtain and more costly than group insurance.