Tom's Take Blog
June 21, 2017
Are there any downsides to how traditional health insurance carriers determine a group’s monthly premium?
Tom’s Take: The process for how premiums are calculated in a fully insured health plan can be a bit complex, so let’s start with the fact that a premium even exists.
In self-funding, employers aren’t paying a monthly rate that’s pre-determined by a pool of other similar-sized companies or last year’s overall claim experience. Nope. They aren’t paying a set premium at all. Instead, employers that choose to self-fund are paying for actual health claims as they are incurred each month in place of an often-inflated premium which is based on several factors.
With that explained, we can go back to the process for determining premiums. Size is the biggest factor when a fully insured health plan’s group premium is set. In large companies with 100-plus employees, premiums are typically referred to as “experience-rated.” What does this mean? Let’s say XYZ Company is having a particularly expensive year worth of claims costs with an increase in new health conditions diagnosed and more hospitalizations. Premiums could go up for the whole group next year because of this overall experience.
A small company’s premiums are different in that they are “community-rated.” Under this structure, insurance carriers will typically pool a number of small-sized companies together into the same group and then assign premiums based on the collective, or community, results. What if your company is lumped in with another in the industry/area that doesn’t have a work population as healthy as yours? You guessed it: your health plan’s premiums could suffer.
So many of our clients see the benefits of eliminating set monthly premiums when they move to self-funding. There is no “penalty” factored in for an uncharacteristic year of increased care utilization or over-compensating for another company’s less-than-stellar health. You are paying actual costs, for your workforce only, as claims come in.