Truth about Medical Insurance Premiums

Business Survival Tip
Episode 18
By Carl Kleimann
November 25, 2009

Full Interview transcript

Carl: Hello business owners this is Carl Kleimann with another Business Survival Tip from Odyssey OneSource. I want to dispel a myth about group medical insurance premiums, particularly for small businesses with 50 or fewer employees. The myth that I want to dispel is that your premiums are actually based on the claims experience of your group. Under small group health reform, adopted by most states including Texas, claims experience is pooled among a broad base of small groups. In effect, your claims experience is combined with the claims experience of all other small groups underwritten by your insurance carrier in your particular area or region.

I don't want to suggest that your claims experience has no impact on your rates but rather want to demonstrate that it represents only a small part of the premium calculation.

This is due to a concept referred to in the insurance industry as Credibility. Put another way, the actual claims experience of medical plans with 50 or fewer participants is not a viable indicator of future claims experience. For example, if a small group medical plan with only 10 employees manages to make it through the entire year without a single claim, that provides no actuarial basis for expecting another year without claims.

Premiums for a small group plan are based on two elements. The first is the demographic characteristics (including the average age, gender mix, and geographic location) of the group. Using this demographic data, an insurance carrier will calculate what we will refer to as "base rates." Each carrier is required to file its base rates with the state under that state's small group reform rules. Then, the second element of the rating process is the upcharge for any pre-existing health conditions within the group. Each carrier has its own formula for determining how demographic characteristics and pre-existing conditions translate into premiums. For example, United Healthcare may place a different upcharge on a heart condition than say Blue Cross/Blue Shield. Aetna may place a different upcharge on older employees than say Humana.

So, the next time receive a rate increase even though your small group plan experienced few if any claims, you can spend more time being angry and less time being confused.

I am Carl Kleimann and this has been another Business Survival Tip by Odyssey OneSource, ranked as the number one Professional Employer Organization two years running by the Black Book of Outsourcing. For more information on this and other issues affecting employers, please visit odysseyonesource.com.