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Defined Contribution: Drop Group Employer Coverage and Switch to Individual Health Insurance
During this period, many employers stopped providing health benefits entirely. The percent of jobs that included health benefits fell to 57 percent—9 percent fewer U.S. jobs provided health benefits in 2013 versus 1999. The average cost of group health benefits is expected to reach approximately $20,000 per family and $8,000 per single in 2016.
On average, employees on group health insurance will be paying more and getting less in terms of higher deductibles, higher copays, and higher out-of-pocket maximums.
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.
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 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.
The average cost to cover an employee with group health insurance has increased from $2,196 per year in 1999 to $5,884 per year in 2013. For family coverage, the cost has increased from $5,791 per year in 1999 to $16,351 per year in 2013. This is not sustainable for employers or employees. Prior to 2014, the annual cost of individual health insurance was about $2,500 a person—but there was a catch. Everyone medically qualified for group coverage but, in 45 states, only healthy people and their healthy families medically qualified for individual health insurance.
Then, the Affordable Care Act (known as ACA or Obamacare) was passed in 2010. The ACA mandated that the price, benefits, and qualifications for individual health insurance be roughly the same or better than most group coverage.
Even if you work for a company that pays 100 percent of the cost for you to participate in the group health insurance plan, you are probably paying between 50 and 100 percent of the cost to add your spouse and children to your group plan.
Most people don’t realize the cost of their family is typically deducted from their net wages via their paychecks.
Group health insurance has been hit by soaring costs in recent years, making it less affordable for employers and employees. From 1999 to 2013, the annual premium that U.S. health insurance companies charged for group health benefits plans increased approximately 182 percent to roughly $16,350 per family. For single coverage, the cost has increased about 168 percent to $5,884 per single (Kaiser Family Foundation 2013).
One of the most unpredictable things about group health insurance is that you do not control the policy. Your employer may cancel the entire plan or change the benefits at any time with little or no notice to you, and there is no COBRA available when the entire plan is canceled.
There are numerous reasons employers choose to cancel coverage:
Switching to a new health insurance company. Every year (and sometimes in the middle of the year), thousands of employers switch health insurance companies (and cancel the current coverage) due to the savings it presents to the business, or because the insurance company refused to renew the policy.
Failing to meet insurance company requirements. If the health insurance provider audits your plan and finds that your company is out of compliance with the plan terms, such as a 75 percent minimum participation requirement, the insurance company can cancel coverage for the entire company.
Failing to make payment. Retroactive termination for nonpayment of premium is permissible, and there is no requirement that a premium be accepted after the original due date.
Going out of business. Ten (10) to 12 percent of employers close each year—that’s almost 1 million business closures per year.
Once your current plan is canceled, you lose access to it—there is no COBRA available on a canceled plan. Note also that if you are no longer employed and already on COBRA, and your former employer cancels their entire plan, you also lose your health insurance.
Fortunately, having an employer or former employer cancel your plan is a qualifying event that makes you instantly eligible to purchase individual coverage on your state’s Health Insurance Marketplace at any time, even outside the traditional annual open enrollment period. However, should this happen to you, you will still have to switch to a new health insurance policy and possibly even a new insurance company.
When you have to switch health insurance companies, as explained earlier, if you are in the middle of a health issue, it could be financially devastating and/or you could lose contact with your existing medical providers. Your new plan may not cover your current doctor and hospitals. If your new plan does not cover your current medical providers, you will be required to make a choice between (A) transferring to a new provider whom you may not trust or (B) paying out-of-network for your current provider which could be as expensive as having no health insurance at all.
In our specialized economy today, success in business requires that managers and owners focus on better ways to serve their customers. This ranges from continually improving your products and services to finding better ways for your customers to obtain and pay for your products and services. No stone can be left unturned when it comes to improving the customer experience.
Group health insurance is another hour you are not spending managing and improving your product or service. Even if your company is large enough to justify having dedicated full-time managers of your group health insurance plan, with health insurance costs today exceeding profits for many companies, it’s rare that the CEO and CFO of a Fortune 500 company doesn’t spend many hours managing their health benefits program.
Although they don’t know it, many employers are not competent at managing their group health insurance benefits. Just as you see some of your customers are relatively uneducated about how to properly buy and save money on your product or service, you and your managers are similarly uneducated when it comes to knowing how much group health insurance coverage to purchase and how to pay for it. This is because there is virtually no transparency for employers when it comes to managing their employer health benefits program. Everything is disguised—from how much their health insurance broker makes in commissions and overrides on the different policies they recommend, to the performance and efficiency of each medical provider in the plans’ networks.
As pointed out throughout this eBook, employer-provided health plans present challenges to individuals, families, and businesses.
Since 2000, the percentage of Americans covered by employer-provided health insurance has steadily declined. Facing double-digit growth in health insurance premiums, employers have either eliminated health benefits or redesigned the plans to include higher deductibles, larger copayments, and greater premium sharing by employees. However, a paradigm shift is occurring in the way businesses offer employee health benefits—a shift from an employer-provided health insurance to employer-funded individual health insurance.
Small businesses are switching to individual health insurance because:
The answer is an emphatic, “Yes!”
Your company may cancel its employer-provided health plan and give all or part of the savings to employees to reimburse them for all or a portion of their individual health insurance premiums. This concept is commonly referred to as defined contribution health benefits.
As crazy as it might sound at first, you should be asking your employer, “Could you please cancel our group health insurance plan?”
Why? Because if you are offered qualified affordable group health insurance by your employer, you and your family are disqualified from receiving the federal subsidy, even if you are eligible based on your income.
Let’s say you live in Dallas, Texas, earn $60,000 per year, and have a family of five. Your employer may offer you a group plan where your employer pays the full $500 per month cost per person for you, and you pay for your four family members at a monthly cost of $1,200 a month. That’s $14,400 per year out of your pocket to have your entire family of five covered by the group health insurance plan.
Alternatively, on the Texas Health Insurance Marketplace (available via www.healthcare.gov), you could purchase better coverage with an individual Blue Cross Blue Shield Silver Plan for all five family members including you without any government subsidy for $899 per month—that’s for permanent health insurance, $30 copays for doctor visits, and $0 for generic prescriptions.
That’s $10,788 ($899 × 12) a year before the federal subsidy for better coverage than the $14,400 per year you would pay just to add your family to the group plan.
But, if your employer didn’t offer you qualified affordable group coverage, you would receive a $580 per month federal subsidy towards paying the $899 per month cost, reducing your monthly premium to $319 per month for all five members of your family. This $580 per month subsidy is effectively a $6,960 tax free cash gift for you and your family from the federal government.
If your employer has less than 50 employees, there is no charge or penalty to your employer for you to receive this subsidy. But, if your employer has more than 50 employees, the employer would have to pay a penalty of up to $3,000 per year for each employee that receives subsidized coverage (up to a maximum penalty of $2,000/year for all employees after a 30 employee credit).
It gets even better if you earn $40,000 per year and your employer doesn’t offer a group plan—you would get free coverage for your entire family under Medicaid.
If you earned $80,000 per year versus $60,000 per year, your federal subsidy would fall from $580 per month to $312 per month, causing your $899 per month premium before subsidy to fall to $587 per month. Even if you earned $80,000 per year, your annual cost for much better, permanent individual coverage would be $7,044 per year ($587 × 12) for all five members of your family versus your employer charging you $14,400 per year just to add your family members to their group plan.
When you drive to work today look around at the people, cars, and buildings you pass by. Between one-sixth and one-fifth of the people you pass on their way to work, representing 17.5 percent of our gross domestic product, work producing a product or service nobody really wants to buy—healthcare, or more accurately sickness care, since what most Americans call healthcare has very little to do with health.
Despite the fact that the U.S. spends two-and-a-half to three times per person what other developed nations spend on healthcare, the United States is the unhealthiest developed nation on earth. There are many reasons proposed for why this is so.
For example, 95 percent of the pharmaceutical prescriptions filled each year in the United States are for drugs you are expected to take for the rest of your life— because drug companies find it much more profitable to create customers for life by producing maintenance drugs that treat the symptoms of diseases versus drugs that cure diseases.
Medical providers from the individual doctor to the largest hospital are paid for their procedures and time spent versus their outcomes or health of their patients. However, the major reason that the U.S. healthcare industry costs so much is because the employers who pay for most U.S. healthcare do not have a financial stake in the long-term health of their employees.
Employees used to stay with one company for 25 years or more. Today, the average employee is projected to change jobs more than 10 times over his or her 45-year working life. Most of the major illnesses on which you can spend $1 today to save $100 tomorrow (like heart disease from obesity or cancer from poor nutrition) will not show up until an employee is long gone or retired, at which time the $100 cost is picked up by another employer or by taxpayers through Medicare.
As medical costs have escalated, employers have, in effect, told their medical providers to pay for only those expenses related to keeping or getting the insured back to work—and this does not include paying for the prevention of a disease that will not manifest itself during the expected tenure of the employee with the company.
Despite a new federal mandate in the ACA that employers must cover preventive care, the federal definition of preventive care includes tests like mammograms and prostate exams that merely screen for diseases rather than help prevent them. Significant weight reduction, nutritional advice, vitamins, minerals, smoking cessation, and hundreds of other wellness-related treatments are excluded from most group and most individual health insurance plans. Although at least with individual health insurance plans you can choose to apply the savings to your wellness care.
In summary, rising healthcare costs, driven mostly by group health insurance, challenge our nation on multiple fronts:
A major limitation of group health insurance is that you and your family do not get to pick the provider network. The provider network refers to the medical providers (e.g., doctors and hospitals) covered by the plan.
With provider networks, health insurance companies contract with medical providers in local areas to provide service to their policyholders or members for either a flat monthly fee or a discounted rate. Group health insurance plans will typically provide access to a provider network. If you seek care outside of this network of providers, your insurance may not pay for the services or pay a lower amount. Today, most medical providers, from local pediatricians to big-city hospitals, charge patients who don’t belong to their health insurance network much higher prices (sometimes 10 times higher) than they charge to those in their network for the exact same service.
If your preferred doctor or hospital providers are not in your employer plan’s network, the plan may not cover you if you continue to receive services from those doctors. Even worse, the only way to manage this problem is to either (1) switch medical providers; or (2) switch employers.
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Millions of Americans today are either unable to retire early, working in jobs they don’t really want, or working in jobs that don’t actualize their full potential—all because they need their group health insurance to take care of themselves, a spouse, or a child with a chronic medical condition.
Patients with chronic medical conditions like depression, cancer, or diabetes typically require care by the same medical provider over a long period of time, and changing doctors can be very detrimental to their care as well as to their wallet.
While the Affordable Care Act (ACA) has made affordable individual health insurance accessible to millions of Americans, when employees switch from group coverage to an individual policy, it is unlikely that their new health insurance company has a network that covers all of their existing providers.
Even if an employee finds an individual health insurance company network that covers their existing medical providers or equivalent substitutes, it will typically be very expensive to switch their insurance company and network of providers as previously described.
When it comes to health insurance, employees have very different needs. However, your group health insurance plan takes a one-size-fits-all approach. With group health insurance, most employees do not get to choose from a wide range of deductibles or copays. As result, many employees are paired with coverage that does not fit their family’s needs.
Understanding Deductible, Copay, and Coinsurance
A mismatch of coverage with your needs can cost you thousands of dollars per year unnecessarily.
How? Health insurance plans that cover more of your medical expenses (i.e., health plans with lower deductibles) usually have a higher monthly payment. As a result, you pay more upfront in the form of higher premiums in exchange for getting to pay less when you receive medical care.
For example, a plan with a low deductible would probably work best for a family expecting to visit the doctor and pharmacy regularly. However, the same plan might be a poor choice for a young, single adult male who only expects to go the doctor once per year for his annual physical. Since the young, single employee will not use the coverage he is paying up front for, he is being charged up to 100 percent more than he actually needs. By contrast, if he were able to select a high deductible HSA plan, he could be saving thousands of dollars in an account for future medical expenses.
This is the biggest problem with group health insurance—it only covers you when you or a loved one is healthy enough for you to remain at work. Sadly, most people don’t realize this until they become too ill to come to work and get terminated, or they can’t come to work because they are needed full-time to take care of a sick child or spouse.
Each year between 1 and 2 million American families file personal bankruptcy. Until recently, the causes of these bankruptcies were unknown, and most people assumed credit card spending, divorce, and loss of employment to be among the major reasons.
In February 2005, Harvard University released the results of its study, “Illness and Injury as Contributors to Bankruptcy.” The study interviewed Americans in bankruptcy courts and determined that about half were “medically bankrupt”— driven to bankruptcy by medical bills not covered by health insurance. Equally surprising, the study concluded:
Three-fourths of the medically bankrupt had health insurance at the beginning of their illness.
The majority of the medically bankrupt owned their own homes and had attended college.
Many people filing medical bankruptcy were middle-class workers with health insurance who were unable to pay their copayments, deductibles, and exclusions in the group health insurance plan.
Few employees with group health plans are aware that their health insurance terminates when they lose their job, and that COBRA, if it is offered, only covers them for up to 18 months at an exorbitant cost.
Here’s what really happens when you lose your group health insurance:
Once you lose your job, you lose your group health insurance unless you elect to go on COBRA. COBRA, which stands for Consolidated Omnibus Budget
Reconciliation Act of 1985, is the acronym for the name of the 1985 legislation that requires most employers with 20 or more employees to offer former employees the short-term opportunity to remain on the company’s group health insurance plan at the employee’s own cost.
COBRA allows you to continue your group health insurance for up to 18 months as long as you pay 100 percent of the cost of your former employer’s plan plus a 2 percent administration fee (102 percent total).
If you can afford COBRA, and it is offered by your employer, it’s only good for up to
18 months of coverage for you (the employee) and up to 36 months for dependents.
If you cannot afford COBRA, or if your illness requires treatment for more than the 18 to 36 months that COBRA is available, you will be forced to switch health plans.
If you are in the middle of a health issue, this could be devastating because:
When you switch plans midyear, your deductibles and out-of-pocket maximums will be reset. Depending on your new plan, this could expose you to up to $12,000 in additional healthcare costs per year.
Your new plan may not cover your current doctor and hospitals, forcing you to transfer to new medical providers or pay out-of-network for your current providers—which could be almost the same in cost as having no health insurance.
Transferring to new medical providers who are not familiar with your recent medical history could be dangerous to your health or the health of a loved one.
The good news is that COBRA will be going away for most people because most exemployees can now get individual coverage for a small fraction of the cost of COBRA. Generally, only people who cannot find an individual health insurance policy covering a critically-needed medical provider should consider staying on COBRA.