Small & Large Business Health Insurance Costs
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It’s not news that small employers have a harder time getting and holding onto health insurance coverage than larger employers. But in many cases, the rationale for this problem is predicated on the idea that small employers — because of their size — pay far more for health insurance than larger groups do. I wondered about this, and asked our finance people to separate average claims expenses for smaller employers (those with less than 50 employees) from the claims expenses for those employers with more than 50 employees. I also asked them to do the same thing with health insurance premiums.
I expected to discover that small business, on average, had higher medical costs on a per member basis, and therefore, paid higher premiums. I figured small businesses would have less “random” risk than large businesses, because roughly half of all small businesses offer their employees coverage, while almost all mid-size and large businesses offer coverage.
Imagine my surprise, then, when I got the numbers back. Small businesses, on average, had lower medical claims expenses per member than larger businesses, and lower health insurance premiums(!). In fact, much lower. On average, per member premiums for small businesses were 10 percent lower than the premiums paid by larger businesses, consistent with claims costs that were also about 10 percent lower.
So — if the small businesses who do business with Harvard Pilgrim pay less — on average — than larger businesses — then where’s the perception that small businesses pay a lot more than larger businesses coming from?
I think it comes from the pricing rules for small businesses. Small group rates are regulated at the state level, and the highest price can’t be any more than a defined percent of the lowest price, and the group needs to be priced and managed “in toto.” Put more simply, if the highest price is $100, then the lowest price can’t be below $50 — no matter what the demographic or medical expense variance might be across all small businesses.
On the other hand, larger company premiums are priced more directly on the calculated medical expenses of each group, meaning there is no ceiling and no floor for large groups overall. If one group pays $100 per person, another can pay $50, or $25, or $200 — depending on their own medical expenses. Since everyone’s paying a price that’s based, more or less, on their own medical expenses, there’s less concern about whether or not someone’s getting a good deal.
I don’t know if the premium and medical expense story at other health plans is similar or not — but for now, you heard it here first. Small businesses doing business with Harvard Pilgrim pay lower prices, on average, than larger businesses do. Surprise!
My employer (a small business with like 20 employees), choose to stay with their health insurance company (despite that company raising rates) because they were still the cheapest option. Our finance/HR person said that she looked into other health insurance companies and both Tufts and Harvard Pilgrim would cost like twice what we pay now.
Hi Charlie,
This is both surprising and good news. But just to make sure that trend continues, would you be opposed to making public on an average, aggregated basis that information on pricing by group size? I believe this would be important information for small businesses to have going forward, and would be helpful to make sure all insurers are pricing in a similar way as you. As you know, currently large group rates are not filed; neither are self-insured rates. Having that information be public on an average basis would be helpful and would make the industry far more transparent. I believe it is also very important for insurers to disclose the percentage of compliance on state mandates by their self-insured, ERISA-exempt employer clients. As you know, state mandates are costly, and may not be fair if everyone is not complying. Thanks for running the numbers Charlie.
Jon Hurst
Retailers Association of Massachusetts
Lyss - to be honest with you, I find it hard to believe that TAHP and HPHC - offering the same plan design you get from your current carrier - would be double the price. We might be higher - but I’ve never heard of us being that much higher for the same plan design. Are you sure your people got a quote on the same plan design from us and from TAHP?
Hi — Sorry, I posted above as anonymous. Oops. So Lyss - are you sure we’re twice as expensive? Seems unlikely. And Jon, I’m all for more transparency, so my answer to you is mostly “yes,” but it would depend on whether or not sharing too much of this information might look like and act like price fixing - and actually drive prices higher and not lower. Remember - the broker who represents your members uses the fact that we don’t know what the other guy’s quoting to create competition. If we know everything about what the other guy’s up to, that might lead to higher prices, not lower ones.
And I’m not sure I know how to calculate the percentage of compliance with state benefits mandates. I’ll have to ask someone at HPHC who’s smarter than me about how to do that.
Thanks Charlie,
I hear ya on the broker issue, yet in the retail world all prices–in stores, on the Internet, etc.–are all transparent which forces lower prices, not higher. I am also concerned given front page of the Globe today that if we aren’t careful; if we aren’t transparent, certain small purchasers could also be asked to subsidize the state’s Commonwealth Care products. The Connector also needs clear transparency and yard sticks to compare the pricing of their taxpayer subsidized products versus small group fully insured products. In a period in which family plans are now hitting $20k per year, everything must be on the table–from full transparency, to hospital rate setting, to repealing certain mandates, to easing Minimum Credible Coverage, to even discussing whether community rating should be scrapped to force more competition. The payers are struggling.
Jon
Jon - I didn’t say “no, because…” I said, “yes, but…” I’m all for transparency. In fact, I’ve been talking about it for three years. But I think our prices are already transparent. No one has to buy insurance from HPHC or any other carrier without knowing the price in advance - and they can shop from carrier to carrier - adjusting benefit designs as they go - to get the best price that’s out there. That’s pretty transparent - and consistent with the price transparency you discuss above.
That said, no one knows how anyone who sells anything in a global market builds their pricebook - or whether they make more on CDs than they make on books or toys. And frankly, I don’t think anybody cares. What they care about is knowing what they’re paying for up front, and what they’re getting for their money.
Your approach would require Amazon.com, ToysRUs, and every other retailer to tell you not just what the price of the product is - but how much they make on it - and how it relates to what they make on other products. In places where we know about different prices for the same product or service (airline tickets, for example - buy ‘em six months in advance and you usually pay a lot less than the person who buys one on the day of the flight), we don’t begrudge the differential - only that we know about it in advance of making our purchasing decision.
Health plan prices are in the public domain. No one buys a product from a health plan without knowing what it costs - and we work every day to make that price as low as we can.
Provider prices, however, are not in the public domain. In addition, plans are not allowed - under the terms of their provider agreements - to share price information with anyone. It’s a jealously guarded secret. This is inherently inflationary, and completely archaic. That’s why we argued for having the state of MA collect this data from the carriers and make it publicly available to everyone. And since provider and pharmacy costs make up about 88-90% of the cost of health insurance in Massachusetts, this is where the action is in rising health care costs.
Plan pricing methodologies, etc. - at least in this market - feel to me like crumbs on the margin. Going forward, however, I do worry about the point you raise about the Connector - but you should view that as a good thing. If the Connector ends up serving as a price ceiling regulator for all small group business, your members would benefit, right? It would be the rest of the market - those employers with more than 50 employees - who would pay to make up for the deficits created by the Connector’s price fixing policies.
But I digress…In the end, if you want to know what’s driving up health care costs, you have to start with the 88-90 cents on the dollar that are driven by provider and drug costs. That’s what isn’t in the public domain today - and needs to get there. The sooner the better.
“In the end, if you want to know what’s driving up health care costs, you have to start with the 88-90 cents on the dollar that are driven by provider and drug costs. That’s what isn’t in the public domain today - and needs to get there. The sooner the better.”
Charlie – What will it take to get it there – regulation, state legislation, federal legislation, or providers and insurers agreeing to waive confidentiality agreements? I also think it would be helpful if hospitals move toward episode or package pricing for expensive surgical procedures. At he very least, just knowing what Medicare pays for various procedures and DRG’s would provide a benchmark to assess the reasonableness of hospital and doctor list prices. Actual insurer reimbursement rates by CPT-4, ICD-9 and DRG code would be enormously helpful, and I just don’t buy that it would drive prices higher. I don’t think the healthcare world is immune to competition if robust price and quality transparency tools existed that both patients and referring doctors could easily access.
I\\\\\\\\\\\\\\\’m trying to figure out what percentage of health care most companies pay for. I live in Kansas and work at a casino, the casino pays for 85% of my health care. Am I getting a good deal?
Mimi - I don’t know anything about your plan design, but generally speaking an employer who pays 85% of the cost of the premium of the policy offered to its employees and their families is offering a pretty good deal. I think the national average is around 75-80%