Saturday, March 15, 2008

The Group Insurance Myth Exposed

The myth of the price efficiency of group health insurance persists despite overwhelming evidence to the contrary. Another major news agency published an article that said purchasing health insurance “in bulk”, through employers or small business associations, would certainly save us money. Past presidential candidates have even cited the potential savings of group health insurance pools in their campaign platforms to control health care costs. The Bush administration previously supported this approach during the past presidential election but backed off after they learned that the market facts do not support this conclusion. Some organizations continue to push for group insurance pools for political reasons without supportive economic data. The Des Moines Register reported this week at that some politicians contnue to support an program that allows small businesses to purchase group health insurance through larger associations despite more than a year of evidence tht few employers see value in such an approach. Making more of this inefficient type of health isnurance available is simply not the answer.

The Kaiser Foundation, a leading source or research data on health insurance plans, reports that employers spend an average of $380 per month for single employee coverage and more than $1000 per month for family coverage.

How many individuals who purchase their own health insurance pay more than $1000 per month for family coverage? If you buy your own health insurance, how much doe your coverage cost in comparison to the published cost of group health coverage? Very few people - probably less than 5%, according to several health insurance industry sources – pay more than the amounts published by Kaiser for their individual health insurance. In fact, the average price of health insurance purchased by self-employed people and other individual customers is less than half of the cost of the insurance cited by employers.

How to individual buyers achieve such great savings that large employers cannot accomplish? A close look at fundamental economics provides the answer.

First, individual insurance is not subject to “mandated benefits” included in group health insurance. This means that individual buyers can customize the insurance for their specific needs. A 50 year old couple, for example might be able to trim $200 per month from their health insurance premium because they no longer need to purchase coverage to cover maternity expenses. On the flip side, a younger person may find insurance that is age-rated to reflect the lower medical risks of their age group. By customizing the coverage to their specific needs, individual buyers achieve lower pricing than is available to group insurance buyers. Mandated benefits that may be important to include in coverage for “the masses” may not apply to individual buyers.

Second, individuals have proven to be more resourceful shoppers. Web sites like specialize in low cost health insurance. One of the primary methods is to simply purchase insurance that expires after a period of time – usually 6 to 36 months. This short term medical insurance is priced at 25% to 40% less than equivalent coverage that has longer renewability provisions. Individual buyers know that they will re-shop health insurance every year and that there is a high probability that long term guarantees are not needed because they change insurance plans more frequently.

Third, there is a wider range of coverage amounts and premium pricing available to individuals. In the past, all health insurance policies provided about the same amounts of maximum potential benefits. Now with the expansion of limited benefit health insurance policies, maximum coverage is available, for example in amounts from $50,000 to $5,000,000. Other policies offer the option of limiting the amount of specific coverage. For example, some low cost policies provide a benefit of $75 for a doctor’s office visit or $1000 per day for hospital coverage. This may not cover the entire amount of the medical cost, but it certainly makes the insurance much more affordable. The trade off means that more low priced insurance options are available to the individual buyers can select a plan that fits their budget.

Fourth, the individual health insurance markets have largely embraced the Internet to make pricing immediately available to everyone. Group health insurance, in contrast, is still priced by manual efforts of human underwriters. It is very difficult or sometimes impossible to compare pricing data across a large number of insurance carriers. The pricing of group health insurance – and therefore the market itself - is simply less efficient than the individual insurance market.

Finally, group insurance is required to cover everyone, regardless of health problem. Individual health insurance is designed for specific risk classes. Most people qualify for preferred risk classes. Those with serious ongoing medical problems are typically routed to state high risk pools where the costs are subsidized with public finds. These high risk plans emphasize managed care approach for known medical conditions rather than insurance for unknown medical costs. Again, the net result is that the overall price is lower for the majority of buyers and the only risk of the few who face higher risks are spread among a larger market.

The net result is that individuals have proved to be more efficient shoppers of their own health insurance than their employers and their state legislators. The basic economic principle that market efficiency increases as market restrictions decrease proves to be valid once again. Most individuals can purchase high quality health insurance for about $200 per month and family coverage is still available for under $500 per month.

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