Small employers and their health insurance brokers may be all too familiar with the small employer health insurance death spiral, a circumstance that leads to escalating health insurance rates and health plan cancellations. This article takes a look at how the death spiral impacts small employers, and the best solution to combat it.
What is the Small Employer Group Health Insurance Death Spiral?
The death spiral starts when an employee’s cost to participate in the employer plan exceeds the employee’s willingness to pay. When this happens, the healthiest employees begin to drop off the employer plan in favor of individual policies. This causes the remaining small employer risk pool to become “sicker”, resulting in higher insurance premiums on renewal the following year.
Then, the process repeats. Again, the employer reduces benefits to maintain costs, more healthy employees drop off, and the rate goes up the following year.
This death spiral perpetuates until the small business either: (1) cancels the plan; or (2) is unable to meet the minimum contribution requirements or minimum participation requirements set by the insurer, and the plan is canceled by the insurer.
A Solution to the Death Spiral - Premium Reimbursement
Facing double-digit growth in health insurance premiums, many small employers are either eliminating health benefits or redesigning the plans to include higher deductibles, larger co-payments, and greater premium-sharing by employees.
The best solution to combat the death spiral and still offer employees health benefits, however, is to cancel the group health insurance plan and transition employees to individual health insurance and premium reimbursement.
With premium reimbursement, the employer offers employees a monthly healthcare allowance to use on individual health insurance – instead of contributing to a group health insurance plan.
Employees purchase their own health plan through a broker or their state's Health Insurance Marketplace, and are reimbursed for their premium expense up to the amount available to them.
Premium reimbursement combats the death spiral because:
The employer gets out of the business of selecting and purchasing health insurance.
On average, individual health insurance costs up to 60% less than group health insurance coverage, so the employer can offer the same or better level of coverage for less.
Employees select the carrier and plan that best fits their health and financial needs. Individual health insurance is now guaranteed-issue, meaning healthy and unhealthy employees have equal access to coverage.
With premium reimbursement, there are no minimum participation requirements and no minimum contribution requirements. The employer can offer the benefit by employee class, and set any contribution amount that fits their budget.
In fact, because of the inherent problems and unsustainable cost of small employer health insurance, we estimated in a recent Whitepaper that 60% of small employers will transition employees to individual health insurance and premium reimbursement by 2017.
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