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Group Health Insurance - Is It Really Insurance?

December 4, 2018

Captives, Healthcare, Health Insurance

Yes, I know you need a license to sell it, but I don’t see it as insurance in the traditional sense.  It’s not.  It is, however, the traditional method of financing the costs of employees' health care.

Photo by rawpixel on Unsplash-2Photo by rawpixel on Unsplash

Here’s how it really works.  Let’s say you employ 100 people.  You buy insurance from one of the few large insurers licensed to do business in your state.  The premium anticipates a certain level of claims.  If your employees incur medical costs above that amount, you will probably simply have a commensurate premium increase the next year.  Nothing fancy about it.  You had more claims than the insurer expected.  The insurer just wants its money back.

So, what’s the difference between this and commercial property insurance?  Your 100 employees might work in a building valued at $5,000,000.  You pay $25,000 to insure this.  When the building burns down, the insurer pays $5,000,000 and renews the policy the next year.  The premium does not go up to $5,000,000 to recoup the insurer’s losses.  In health “insurance,” it does.

Photo by on Unsplash
Photo by on Unsplash

That’s why I say group health insurance is not really insurance.  It’s more of a loan.  Or, it is really just a deferred payment program for your employees’ medical costs.  Remember that the premium is based on the anticipated level of claims. 

What if they have half that anticipated level of claims?  I won’t insult you by asking if your premium is cut in half the next year.  You know the answer to that.  Of course, not.  Should it?  Of course.  What happens is your broker heroically cuts the rate by about five percent.  Whoo-hoo!

There is a better approach to this issue.  If you are going through the renewal process now, ask your broker how else to skin this cat.  When your broker says self-insurance is the only answer and you can’t take the risk, talk to someone else.  There IS a better way.

Blog post by GEB President, Anderson Baker.

Topics: Captives, Healthcare, Health Insurance