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One of the most talked about things in the United States is healthcare, but it is surprising to find out most people know very little about the insurance coverage they currently have. The only time the average American takes the time to understand their healthcare coverage is when they are needing to use it. At the moment of use, complaints are often heard about how much it is going to cost, but very little time is spent remembering this was the insurance coverage the member willingly chose at open enrollment. Most members use the time at open enrollment to see what the monthly cost will be out of their check and spend little to no time exploring what the actual cost might be in the event of needing to use the coverage.
Sit in a coffee shop for an hour and I guarantee you will hear someone say, “can you believe how much my health insurance premiums went up” or “greedy insurance companies how come they keep driving our prices up”. Who is to blame? Is all the blame really to be put on the insurance companies, or should some of the blame be on the employers, the government, or maybe even the member themselves? Has it ever crossed your mind there are a lot of decisions companies need to make when it comes to insurance? It is more than if they should offer coverage, but also what type of coverage, who to cover, and how will the employees react.
Companies, especially small to mid-sized businesses, have big decisions to make when it comes to what healthcare coverage to provide. It is often overlooked that the corporate decision on what to do with benefits is critical not only to the company’s bottom line, but also the members it covers. The decisions made by a company go far beyond what health insurer to use, but rather what benefits to offer, what type of network should be available, how to fund the premium, and if they should be fully-insured or self-insured.
This article will explain some common misconceptions related to insurance premiums, especially when you get coverage through your employer. Some topics it will discuss include: plan options, benefit designs, funding of premiums, and some other confusing decisions companies need to make like being Fully vs. Self-Insured.
Healthcare decisions made at a company are complex and affect a lot of parties. Even though there are a lot of decisions made when it comes to healthcare, most members (employees) only see the outcomes of the process through the plans offered and their associated benefits and costs. There are different strategies used by companies to select benefits. In many cases these involve outside brokers and or consultants and can take months to finish.
Oftentimes members will have an option of an HMO, PPO, and maybe a High Deductible product. Each of these plans have different associated benefits and include different member cost sharing mechanisms. PPOs often provide the most flexibility, while HMO often have the most competitive cost sharing (deductibles, Copays…). But don’t be fooled into thinking that HMOs are bad or inflexible, many times the benefits of the HMO can be as richer than the PPO with a network that is very similar.
Plan and benefit options are chosen carefully by companies and premiums are often be set in a manner to incent employees towards certain decision. Some companies may decide to discount their HMO because they think that they might be able to attract some healthier lives into the plan and thus helping lower the premium increases. Or conversely some companies may increase premium on another plan in order incent people towards a different option.
Employees like options, and the more options available implicitly make the employee feel they are being better taken care of. Though not always the case, when an employee sees only one option for health benefits, they often think their employer is being cheap and inflexible. It is interesting to note many insurance companies are more competitive in their pricing when they are the only option available to the members, and thus your employer may be doing you a favor by having less options.
Key Point: Having options is good for moral, but it is good to balance it with the better rates that may be available with fewer options.
A fallacy occurs for many employees when they attempt to understand the relative value of their insurance by comparing out of pocket premium costs to what others are paying at other companies. When looking at individual insure not subsidized by a company, most would assume more expensive coverage is richer and would require less out of pocket costs in the long run. This is a fairly safe assumption in individual insurance, but not in group insurance. The problem with basing richness of coverage on the amount the employee is responsible for, is the funding of premiums may not be the same between companies or even from year to year at the same company.
If the company is paying less of the premium and the member share went up, the member could be under the impression they are buying better coverage when they are actually getting worse coverage. On the converse (and unlikely), a company could agree to pay a higher portion of the premium, thus making the out of pocket premium costs lower and potentially leaving the member thinking coverage got worse. Healthcare is getting more expensive and thus the overall premium charged is also increasing. As costs go up some companies are needing to pass more of the cost on to their employees in order to be able to offer coverage.
Key Point: Employees often compare premium costs, but don’t understand how they are funded. Employees paying more does not always translate into getting more.
Companies need to select both plans and benefits carefully, not only to look out for the wellbeing of their employees, but also to make sure they are able to attract and retain new talent. The marginal increase in aggregate premium caused by the richer benefits are often much lower to the company than the expense it is to hire new employees more frequently. If you are losing people because of poor benefits, it might save you money by buying more expensive benefits.
A company decision on what benefits to offer is often a balancing act of what employees expect to receive, and what budget the company has for medical coverage. For example, if a company has a budget of $100,000 to pay for health insurance it could pay 100% of premium with lower benefits, or it could pay 75% of the premium for more rich benefits. If an employee has grown accustomed to getting all their premiums paid for, then they might be happier with option one. If option two was enacted where the company now pays 75% of the premium, some might feel like they are not getting as much of a benefit even though they could be receiving the same or better coverage than before.
A company’s understanding of their employees is paramount to making proper benefit decisions. Balancing the weight of offering fully/mostly paid coverage versus offering richer coverage at a cost to the employee is a careful item that needs to be considered. Funding strategies often change over time and carefully explaining and implementing them is important. With the cost of healthcare increasing, the more transparency offered to the employee the better. When employees understand what portion of the premium they are paying, they often better understand increases in premiums and how they flow through to them.
Key Point: Transparency in the funding of premiums can alleviate much confusion and unhappiness
Understanding how things are funded is very important to understanding healthcare, and a wrong understanding of funding can lead to wrong understanding of the actual costs. For example, I once was in an ER department at a hospital and heard a nurse say “can you believe that the patient has to pay $150 for an MRI, it does not cost that much to do one”. The nurse was correct, but not in the way they thought they were. An MRI costs far more than $150 when you think of the cost of the machine, the cost of the tech, and the cost of the doctor reading the results. The $150 dollars is tied to the benefits the member is under and does not reflect the actual cost of the service.
Similarly, an employee might complain about the amount of money coming out of their paycheck every month to cover insurance, when in reality it is only a small portion of the total premium. Just as the nurse was associating the cost with the employee copay, many people forget to fully appreciate the portion of the premium the employer is paying. Employees have got so used to companies paying a majority of the premium that when the premium increases they quickly forget they are still only paying a portion of the total. (Don’t even get me started on how good some of the union deals are!)
Key Point: On average, most employees are still getting a really great deal on health insurance
Many employees get mad when they see premiums go up and blame it on insurance companies getting greedy. It just needs to be remembered that a company decision on how premiums are funded can also affect the amount paid by the employee. According to the Kaiser Family Foundation (https://www.kff.org/ ), employer sponsored health plans on average pay approximately 82% of premiums for individuals and 71% of premiums for families.
Insurance is confusing and the more time taken to understand it the better. Don’t wait until the time of use to understand your insurance. Call your insurance company and ask questions. Don’t be scared to ask your HR department about how premiums are divided up. Taking a little time up front will help with your understanding when you actually need to use the coverage.
About the Author
Joshua W. Axene, FSA, FCA, MAAA, is a consulting Actuary at Axene Health Partners, LLC and is based in AHP’s Temecula, CA office.