GROUP VS. INDIVIDUAL INSURANCE
One of the major differences between individual insurance and group insurance would be the number of lives insured under the policy. With individual policies one or two lives would normally be insured while in a group plan several lives would be insured under a Master Contract.
Group plans provide a Master Contract between an employer and the Insurance Company. The employees would receive a document known as a Certificate of Insurance which would provide the specific coverage.
Another major difference would involve the underwriting process. Normally, each individual would be reviewed by the insurance company underwriters prior to the issuance of the policy. With group policies the size of the group would determine whether an individual would be underwritten or not. Typically, policies are issued without individual underwriting on groups with over ten employees. You will find, however, exceptions to this rule from time to time. As an example, some insurance companies will individually underwrite groups with less than fifteen employees.
Another distinctive difference is that group plans will continue indefinitely, unlike individual policies which would end when an individual insured dies. The reason for this was mentioned above as the contract is between the employer and the insurance company not between the insurance company and the individual insured.
In the group concept, all contractual rights belong to the employer and not to the employee. Just like any owner of an insurance contract, the owner has certain contractual rights and thus can assign one of the most important rights, naming a beneficiary, to the employee.
Upon review of the benefits of a group policy vs. an individual policy you will learn that group plans typically have more benefits with lower costs. One of the major reasons for the lower costs is that there will usually be more healthy then unhealthy persons on the plan.
Groups with older persons and with a poor claims experience can expect premium increases. If this were a new small group it would be distinctly possible that the underwriters would turn down the coverage totally. Insurance companies would prefer to insure larger groups composed of young persons with a low claims experience. The continuation of a low claims experience and an inflow of younger employees will certainly keep the premiums down.
REIMBURSEMENT OF EXPENSES
These plans are also known as plans of indemnity. The types of expenses to be reimbursed by most plans will include :
- Hospital room and board
- Hospital related expenses
- Hospital pre-admission testing
- Second surgical opinions
- Treatment for nervous disorders
- Accident injury expenses
- Maternity health care expenses
- Annual physical exams
- Anesthesia expenses
- Out patient surgery
- Home care
- Hospice care
- Surgical expenses
- Prescription costs
- Dental costs
- Vision care costs
VARIETY OF PLANS
Today’s group plan policies generally provide for any or combination of the following:
- Combination of the above two
- Comprehensive major medical plan
- Basic plan
- Major medical plan
The major medical coverage is designed to provide additional coverage to a basic medical expense plan. This plan is meant to become active when the insured has exhausted basic benefits and paid a deductible toward the cost of medical care. Most, if not all, group major medical plans require coinsurance. This is a cost sharing arrangement requiring the insured to pay a certain percentage, such as 20%, of the covered expenses while the insurer pays the remaining 80% of the same expense.
The amount of deductibles paid in indemnity plans vary from plan to plan. The purpose of deductibles is to reduce premiums. One should look upon deductibles in a favorable way as they:
- Reduce small claims costs
- Reduce premium expenses
- Control eligibility for benefits
- To be fair to families being insured, plans usually provide for a maximum number of deductibles such as 3, even though there may be as many as 10 family members.
If employers were to fund a first dollar plan expenses would increase dramatically. First dollar plans involve the paying of all claims from dollar one. Obviously, this type of plan will often invite abuse as well as become cost restrictive. Today’s group plans will normally provide for some sort of a deductible such as $100, $200 etc.
PURE COMPREHENSIVE MAJOR MEDICAL PLAN
Pure comprehensive major medical plans today usually provide for the following:
- The insured pays an initial deductible (i.e. $100, $200 etc.)
- There is a coinsurance feature such as a 20%/80% feature in which the plan pays 80% of the covered expenses remaining after the deductible while the insured pays the balance due on some specified dollar amount (i.e. $5,000 out of pocket)
- After the out of pocket dollar amount indicated above is reached the insurer pays 100% of the remaining balance up to the lifetime maximum benefits allowed.
A plan requires a $100 deductible per covered person per year, and has a coinsurance feature of 20%. After $5,000 out of pocket expenses, the insurer will pay 100% of covered expenses. Maximum lifetime benefits is $2,000,000.
If the total covered expenses for the year including the insured’s deductible was $10,000, how much would the insured pay totally?
Answer: $ 1,100
The insured pays the $100 deductible. Then the insured pays 20% of the first $5,000 of covered expenses which if $1,000. Remember, the insurer now has to pay 100% of the remaining expenses during the year while the insured pays nothing. Therefore, the total expenses incurred by the insured is the $1,000 plus $100 for a total of $1,100.
Most, if not all, group health plans provide optional coverage for the dependents of the employees. The costs for dependents vary as to how much the employer and the employee pays. Some employers pay 100% for the dependent’s benefits while most pay a portion of the costs and some pay none.
As companies attempt to be more competitive in their industries more and more employers are paying more and more of the costs. If it weren’t for the help of employers many employees couldn’t afford to pay the group insurance premiums for their dependents.
However, as costs for health care increases some companies have had to cut back benefits. Unfortunately, the first ones to be effected are health care benefits.
COST CUTTING STRATEGIES
Retroactive Premium Approach
With this approach the group is underwritten for a less than standard monthly premium with an agreement that if the group’s claims exceed a pre-determined level, the employer will reimburse the insurer for any deficit at the end of the year on a retroactive basis.
Delayed Grace Periods
This plan is used primarily in times of high interest rates when the employer can earn more on its money than it must pay the insurer for the privilege of delaying the payment of premiums. Under this plan the employer is permitted to pay premiums 30-90 days in arrears and to pay interest only on the date premiums are due. It almost sounds like a short-term loan, doesn’t it?
Minimum Premium Concept
This plan is usually made available to employers who have medium and large groups. Under this concept the employer is responsibility for paying up to 90% of the anticipated claims from its cash flow and investments. However, if the employer becomes insolvent, the insurer is liable for 100% of the plan benefits.
A stop-loss plan is used to contain plan costs and to insure against catastrophic claims. If the group’s total claims exceed an agreed upon “stop-loss” level for the year, the insurer agrees to cover the excess. An example of stop-loss amount can be $25,000. If claims go over the $25,000 then the insurer will be responsible, not the employer. Because the insurer is not liable for many of the claims, it can afford to maintain lower reserves and charge lower premiums.
MULTIPLE EMPLOYER WELFARE ASSOCIATION (MEWA)
The MEWA is basically the same as a Multiple Employer Trust with one major difference. Business owners get together as a self-insured association.
By jointly paying bills and sharing the risks small companies can better afford health benefits for their employees. However, just like METs it is important to take care and investigate thoroughly a MEWA before joining.
MULTIPLE EMPLOYER TRUST (MET)
This can be one way in which small groups could receive benefits of a group health plan. The small group can join with other small groups and form a trust to negotiate together for more liberal benefits, provisions and costs. The resulting MET can not only save the small group money but also provide a broader range of services which would not be available in an individual plan.
Unfortunately however, the MET would be subject to more strict underwriting then members of a large group. The MET is only available for single employer groups.
WHAT TYPES OF GROUPS ARE ELIGIBLE FOR GROUP INSURANCE?
The state insurance departments can establish certain rules and regulations prior to approving group insurance plans. One of the most important points is that groups cannot be formed just for the purpose of being able to obtain group insurance./
In order for a state to approve group insurance it must be delivered to any of the following:
- Multiple employer trusts (MET)
- Individual employer groups
- Labor unions
- Professional associations
Employees can be defined as:
- Former employees
- Current employees
All participants must be employees of the employer. To be considered an employee look at the following tests that will be applied:
- Length of service
- Employment responsibilities
- Union membership
- Pension plan participation.
Once the employee tests have been applied the next step is to see if the group is acceptable with respect to size. Underwriters usually require a certain number of minimum employees in order to qualify for group insurance benefits.
Minimum standards and eligibility requirements are usually established and audited by the following:
- State insurance department
- Internal Revenue Service
- Insurance companies.
Of course the Internal Revenue Service takes an interest in group insurance plans because of the tax advantages that some of these group plans offer. In order to qualify for these tax advantages groups must contain a minimum of ten employees. However, there are a number of exceptions to the IRS rules. The exceptions are as follows:
- The amount of insurance provided is based on a uniform percentage of compensation and;
- A physical exam is not required and;
- Any evidence of insurability is limited to questions asked on the medical part of the application and;
- The plan provides benefits to all full-time employees or;
- Full time employees are insurable and can prove it.
Additional Exceptions To The Required Ten Member IRS minimum
- Evidence of insurability is not required for eligibility
- Group’s primary purpose is not to obtain group insurance
- Insurance is restricted to all employees of the employer
- Coverage is mandatory for all participants.
Employees That Can Be Kept Out Of Plans
- Those employees over the age of 65
- Employees employed upto less than 6 months
- Part-time employees working no more than 24 hours a week
- Seasonal employees working no more than 5 months a year.
MINIMUM PARTICIPATION BY EMPLOYEES
1. Contributory Plans
Contributory plans are defined as those plans in which the employees either pay for all of the insurance plan costs or at least some of them. The minimum participation percentage of employees is at least 75% of the eligible persons. If the contributory plan has less than 75% participating then the minimum participation has not been met. The majority of group plans today are contributory while the company is paying somewhere between 50% – 75% of the employee’s insurance costs.
- Because the employee contributes part or the entire premium, he/she generally has a greater interest in the plan.
- Possibility of larger benefits.
- Employees have some control over the plan.
2. Noncontributory Plans
Noncontributory plans are defined as those plans in which the eligible employees do not contribute to the costs of the plan. The employer pays for it all and because of that the plan must include 100% of all the eligible employees. There is a lot of pressure today, especially by some labor unions to have their insurance plans paid for by the employer.
- Ease of administration because of easier bookkeeping as payroll deductions are not necessary
- Employer retains greater control over the plan
- Plan savings for costs such as those spent in the solicitation of employees to join the plan.
The type of and descriptions of all benefits provided under a group insurance plan must be spelled out in the schedule of benefits. The benefits listed must benefit all of the group members, not just one individual. This also means that plan benefits cannot favor, as an example, the officers of a company by giving them more benefits than the other employees.
Additionally, benefits cannot be tied to earnings or position other then in-group life plans which can provide higher death benefits for those with higher earnings.
Group insurance plans can provide for life, disability and health insurance needs.
GROUP HEALTH INSURANCE AND TAX CODE
Employer paid group health insurance premiums are fully deductible by the employer. Additionally, the employee does not have to include the value of the paid premiums as income. If the reimbursed amounts to the employee exceed actual expenses then taxes will have to be paid on the excess.
It must also be noted that favorable tax benefits will not be allowed if the employer plan fails to comply with the Act known as Cobra, which provides for extended coverage requirements.