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I want to make certain I understand group or employer-based health insurance premium pricing.

An employer has dozens of employees. The risk for all employees requiring high-usage of healthcare is small, hence the premiums for each employee (member) is lower than had each member purchased their own individual policies, as the risk for any one member requiring high-usage of healthcare is greater?

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    Hmmm, I'd expect the managing overhead per account comes into play. Also companies deduct the premium before an individual gets paid, lowering the late-payment troubles. Apr 2 at 21:13

2 Answers 2

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hence the premiums for each employee (member) is lower than had each member purchased their own individual policies, as the risk for any one member requiring high-usage of healthcare is greater?

That is the basic idea. If the company is very small they might not get the savings that an even larger group can get. That is why some organizations serve as group for small companies.

Some organizations are big enough that they self-insure. They pay an insurance company to provide the network of medical facilities, and to manage the program; but the big company pays for all the medical costs.

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    Is this really about pooled risk, or is it just a matter of collective negotiation? Why would an insurer expect the costs (i.e. payouts) to be lower for 1000 people who all work at the same company versus 1000 unaffiliated people who all have individual policies? The insurer pools the risk either way, no?
    – Tashus
    Apr 2 at 15:50
  • @Tashus the bigger the group the more likely they have a spread of health conditions that mimic the entire population. Apr 2 at 16:36
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    Many group policies insist EVERYONE be included (and paid for) even those who would not buy coverage for themselves. 1000 people who all decided they needed coverage for braces (or glasses or whatever) are quite likely to be very different from 1000 random people. Apr 2 at 16:44
  • @mhoran_psprep Yes, but that's why I specified 1000 employees of one company versus 1000 individuals. I think the answer lies in Kate's comment.
    – Tashus
    Apr 2 at 16:51
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    Perhaps so @user71659 but "I don't need coverage because my spouse has a great plan" is not "I don't need coverage because my kids have straight teeth and we all have good vision" Apr 2 at 21:39
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mhoran_psprep's answer is absolutely correct, I just wanted to add on some context in reply to Tashus's comment about insurers pooling risk across their entire population (and I don't have the rep to comment yet).

Insurance companies don't typically pool risk across their entire population, instead they pool risk by line of business (individual, small group, large group, MA, managed Medicaid, etc.) and, in the case of the large group market, by each individual group. This is done because insurers typically offer different products for different LOBs and aren't necessarily required to offer products for every LOB (in fact many, if not most, don't). The Affordable Care Act (aka the ACA, colloquially known as Obamacare) requires insurers to create a single risk pool for all their individual market offerings (see here), and there are other regulations that vary state to state, but insurers don't typically have a single shared risk pool.

They do this because the nature of the different markets are very different. Members in the individual market tend to be more expensive for the insurer because people who aren't offered coverage through their employer or government program tend to only purchase coverage if they expect to use it. This causes the adverse selection phenomena described in the article above. Group plans are generally cheaper because there's a captive consumer base that tends to be healthier on average than members who purchase on the individual market.

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  • So someone from this specific company is a lower risk than a random person requiring insurance. So that lower risk profile causes the lower premiums. Presumably the reason these employees are seen as lower risk than the general population is because the company has managed to convince the insurance company that this is the case during their negotiations. Am I roughly on the mark there? Is it possible for a random person to make these same arguments to lower their risk profile and insurance premiums? Apr 3 at 9:10
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    The reason employees are lower risk is because those with an employer-sponsored insurance plan are less likely to decide to "go without" insurance than those who have to pay out of pocket. So "adverse selection" is less of an issue. Apr 3 at 9:56
  • Yes I think this is the more direct answer to the asker's question, because what's really at play here isn't the difference in 'pooling risks', but rather a change to the nature of the actual population of individuals being covered. Realistically if you are someone who 'knows they are more likely to need insurance', then that fact may or may not be information known to the insurer, meaning the insurer may or may not be able to adjust premiums to account for it [like +premiums for smokers, which they would ask you about, and you might be denied a smoking-related claim if you had lied]. Apr 3 at 14:54
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    The difference between 'adverse selection phenomenon' and 'larger pooling of risk' is subtle, but I do think it is relevant. Consider in context a discussion of public healthcare: Larger pooling of risks means removing the chance that insurance companies go bankrupt due to a bad claims year [protection against which requires government intervention mandating that insurers properly diversify and reinsure their risk]. Removing the adverse selection phenomenon means you're subsidizing unhealthy people's coverage [government services] with healthy people's [+taxes]. Apr 3 at 15:45
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    @PeterGreen I don't think that's correct. This is an issue of adverse selection bias, because those who seek insurance out personally [a time consuming costly process], may be more motivated to do so [understanding of their own health condition in a way that may not come across in a simple medical exam or questionaire that would enable the insurer to modify premiums to account for risk]. Because the employer's plan may be at least partially subsidized, some of the headache of admin is taken away, and and the employer may need a certain % of uptake, a broader group of insured people may result. Apr 3 at 15:50

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