If you work for a small or medium-sized employer with group health insurance, if one employee has a baby, a surgery, or is diagnosed with a chronic illness, you are likely to see a large premium rate increase at renewal time. That's because the insurance company needs to recover their losses from a relatively small group of people.
Group health insurance is misleading because insurance means spreading the risk among a large group of people or organizations so that no single entity bears the cost of a catastrophic illness. However, that's not how group health insurance works. Each time an insured employee in your organization runs up large medical bills, your organization ends up paying these costs the following year via an increase in its annual health insurance premium. The insurance employers pay for is actually little more than a delayed bill-paying mechanism.
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Many employers wish all they had to worry about was paying $75,000 a year for the medical costs of a diabetic child. Some medical situations today, from preterm births to cancer can cost hundreds of thousands or millions of dollars—making the entire employee health plan unaffordable, or potentially even driving the employer out of business.
Suppose you work for a 51-person company where one participant develops a health condition costing $200,000 a year or more. Next year, the health insurance premium paid by your company will go up by $200,000. The cost of your group medical plan would increase more than $500 a month per employee, forcing your employer to cut benefits or possibly terminate the plan. What would happen if two people developed such a condition? Group health insurance plans are ticking time bombs as their workforce ages.
These annual benefit reductions and/or increased outlays by employees inevitably lead to an ongoing version of adverse selection—a perpetual process referred to as the "employer health insurance death spiral."
The death spiral starts when an employee's cost to participate in the group plan exceeds the employee's willingness to pay. When this happens, the healthiest employees begin to drop off the employer plan in favor of individual policies. This causes the remaining employer risk pool to become proportionately sicker, resulting in even higher insurance premiums on renewal the following year. Then, the process repeats itself—the employer reduces benefits to maintain costs, more healthy employees drop off, and the rate goes up even more the following year.
This group health insurance death spiral perpetuates until the business either: (1) cancels the plan themselves; or (2) is unable to get enough employees to stay in the employer pool and the plan is cancelled by the insurance company for low participation. Virtually all small employer policies require participation of 75 percent or more of eligible employees in order to be renewed.
What's the Solution?
You should switch to individual health insurance because it's more stable. With an individual plan, you're in a large group and your after-subsidy cost can only increase with your income.
(Look for our profile of Rick Lindquist in coming months and please join us at Benefits Selling Expo from May 19-21 in Scottsdale, Arizona, where Lindquist – among many others – will be presenting.)
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