Small Business Health Insurance…
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For the past few years, there’s been an ongoing discussion about whether or not small businesses get the short end of the stick when it comes to how much they pay for health insurance. The line goes something like this - “Big businesses bargain hard - because they’re big - and get great deals, while small businesses - because they’re small, get a crummy deal - and pay way more for health insurance than big businesses.”
Like all good stories, there’s an element of truth to it, but as is often the case, the whole truth rests someplace else. I do not believe that small businesses - at least in Massachusetts - are penalized by the market. I’ll offer up five points to make my case.
Point #1 - Most large businesses self-insure. That means they own the financial risk for the medical expenses incurred by their employees and their families. If $3,000 a person is a good year for incurred medical expenses, and the expenses come in at $5,000 per person, they pay the $5,000. Small businesses, because they don’t have a ton of money or a ton of people to spread their financial risk over, buy insured products - in which the financial risk is borne by their insurer. That means their insurance coverage is much less risky - to them - than the coverage purchased by large employers.
Point #2 - Because they self-insure, large businesses own the financial risk for their employees and their families. What happens to their employees and their families represents their risk. Small businesses, on the other hand, are pooled into a big group of people (usually the employees of other small businesses), and they own a part of the financial risk of the whole group. Again, they bear less risk than large employers bear, because their medical expenses are pooled with other similarly sized companies.
Point #3 - There are no guardrails for big business. If their medical expenses in a given year exceed their budget, they pay for it. For small business, since the financial risk is borne by the insurance company, if their medical expenses exceed the budgeted amount in a given year, the health plan eats it. And at renewal, those expenses get baked into the larger pool of small businesses that make up the basis for deciding what next year’s premium will be.
Point #4 - Not surprisingly, there is more variety in big business pricing than there is in small business pricing. In other words, the price per employee that’s paid by a company with 500 employees can vary a lot - because the medical expenses for each company with 500 people can (and does) vary a lot, too. We always hear about the large company that pays less than average for health care coverage. For every one that’s under the average, there’s at least one over it - and the range is gigantic. Small business pricing operates within a price “band.” In other words, no one small business can pay any more than a set amount - determined by statute - than another small business for the same benefit plan. As a result, the cheapest price for a small business may be higher than the cheapest price paid by a large business, but the reverse is also true. There will be a number of large businesses paying far more per person than the highest price paid by small business.
In addition, large businesses that self-insure do have more plan design flexibility than small businesses, because they don’t need to include state mandated benefits as part of their benefit plans. Small businesses, which almost always buy insured products, are purchasing plans that are regulated by the state - and therefore, do include all benefit mandates. The value of these mandates - and whether or not they ought to be part of every plan design - is a debate that’s raged for years. What is undeniable is that not being required to offer every benefit mandate can result in a cheaper plan design, but it will be one that has less coverage, too. Small businesses buying fully insured products don’t have that option.
Point #5 - In Massachusetts, health plans typically pay out in medical claims somewhere between 86 and 90 cents of each premium dollar. In a given year, some companies might have numbers that are slightly higher or lower - but that’s the bulk of the range. Most self-insured businesses are closer to the 90% number - but that’s in part because they own all the financial risk (and usually have to purchase reinsurance to protect themselves against a handful of catastrophic cases) - and most fully insured small businesses are closer to the 86% number. What’s the financial risk of medical expenses exceeding budgeted amounts worth? It has to be worth something. One percentage point? Two? Three? Four?
Whatever the amount, my point is simply this - when you compare relative financial risk, and the cost of medical expenses against premiums collected, there’s simply not a lot of evidence that would lead one to believe that, on average, there’s a gigantic cross-subsidy between large and small businesses in Massachusetts, and that small businesses are getting the short end of the stick.
I wonder how much demand there might be within the small group health insurance market for a product that would allow the employer to self-insure for the first $5,000 or $10,000 of claims per employee beyond the employee’s deductible and just purchase stop loss coverage beyond that level. Do insurers offer such a product? If not, why not? If they do, how much lower is the premium and what’s the cost of administering the claims within the client’s exposure limits?
With respect to large, self-insured clients, I’m curious as to how much they pay insurers on a PMPM basis for claims processing, network access and, if they want it, disease management. Finally, in a state like Massachusetts, could you estimate the average savings large self-funded employers achieve by not having to comply with the state’s benefit mandates because they are covered by ERISA rules instead?
Barry - there are some folks who write funding arrangements that are kind of self-insured and kind of fully insured - but the rules in MA are pretty strict about what can happen here. If it walks like a duck (i.e., looks like a fully insured product with a very low “reinsurance” attachment point - like $5,000), then the DOI in MA is going to call it a duck, and expect it to be a filed, regulated product.
Self-insured payments for basic claims processing and payment amount vary - a lot - by region, by service and by carrier. The average is probably about 9-10% of claims, but the top and bottom ends are probably 7% and 12% - depending on where you are and what you’re asking for.
The benefit mandate rages - good, bad, both, neither. I’d guess the non-core (let’s spend an hour discussing that!)benefit mandates are worth about 20% of the premium.
I read an interesting article today by Martha Bebinger on the wbur.org web site. It was dated 8/31/07 and is titled “Health Insurance rates to rise”. The article goes on to quote the projected percentage rise in premiums for all of the local health plans including Tufts, HPHC, BCBS and Fallon (Vincent Capozzi of HPHC predicts HPHC rates to rise by 6-12%). I have noticed that an article like this appears every year right around this time as the local plans set their premium rates for the huge January 1st renewal contracts. To me this seems like collusion of the worst kind as the local health plans all go into discussions with employers knowing how far they can safely raise their premiums. Since Tufts, HPHC and BCBS dominate the health insurance market here in Massachusetts it seems strange to me that they would be allowed to publicly announce their rate increases? You would think the plans would be trying to keep their rates as aggressive and as secret as possible to try and gain market share. Instead. they all announce about an 8% increase so that employers are left with very few options in shopping around. In a truly competitive market the three firms that control all of the business should not be allowed to announce their rate increases every year and then go realize them with almost no risk of losing any business because their customers have so few choices with similar provider networks.
Sean - each year, we get called by the local media and asked what we think premium trends for the next year will look like. We give them a range - because frankly, it varies from company to company, depending on the size of the company, its geographic location, its claims experience, or the claims experience of the pool of customers it gets included with for pricing purposes. You could argue, I suppose, that there’s signalling involved here - but no more so than you see when analysts ask people about gas prices, housing prices, food prices, and the like. And the specifics of each case come down to the plan design, the client, the broker, and who’s got what the customer’s looking for.
And three competitors is plenty. An employer that can get price quotes through a broker or directly from three of the top rated health plans in the country has options - and we all know it. We all sharpen our pencils every day - and it shows. No plan in MA has an operating margin of more than 1-2 percent. That’s a pretty tight window.
Frankly, I think we’d all be better off if docs and hospitals had to do the same thing - tell people their prices every year. The price variance among the three plans selling similar products to employers is transparent and pretty competitive. The price difference between providers offering the same service with no transparency is huge - 300-400%.
Charlie – Thanks very much for your detailed response to both my comment and Sean’s. I couldn’t agree more on the provider price transparency issue. My question is: what needs to happen to change this, especially with respect to confidentiality agreements that are often in place? I think it would be enormously helpful if actual insurer reimbursement rates, including Medicare and Medicaid’s, were easily accessible, especially to primary care docs who make many referrals. While insurers have, in the past, considered their negotiated rates proprietary and resisted disclosure for competitive reasons, if they are really interested in controlling medical cost growth, it seems that it is in their interest if PCP’s had this information in an easily accessible, user friendly format. Insurers could make cost-effective referrals one of the metrics they use to evaluate primary care doctors (and specialists) as part of the growing trend toward premium designation and lower copays for members who choose doctors that receive the insurer’s premium designation. I am curious as to how both HPHC and the Massachusetts regulators come down on this issue.
I really feel that docs, hospitals, HMO’s and patients need to keep each other accountable. When people shop for cars, we don’t expect our auto insurance to pay, so we end up doing a great deal of comparison shopping. We look at the quality of the car, who is providing us the car and what the price is going to be. Why do we not seek healthcare in the same manner. I have a feeling that most will not question their HMO and/or their physician due to a lack of understanding when it comes to their EOB (Explanation of Benefits) or simply because they do not have a basic understanding of what is reasonable when it comes to healthcare cost. Most, never ask questions, but simply expect their insurance to foot the bill and I truly believe that many healthcare providers rely on this. It is my opinion that healthcare costs will never be competitive until there are consistent measures and/or audits put in place to hold healthcare providers accountable.