As small businesses, startups, and non-profits consider offering health insurance for the first time, it's common to weigh the pros and cons of offering a traditional group health insurance plan or offering a "pure" defined contribution health plan. With a defined contribution plan, the business provides employees healthcare allowances for reimbursement of employees' individual health insurance.
In this small business "101" article, we'll provide an overview of the two main types of health insurance - group health insurance vs. individual health insurance.
Group Health Insurance
Group health insurance is a type of policy purchased by an employer and offered to eligible employees of the company, and to eligible dependents of employees. The premium cost is typically split between the employer and employee, and there is a minimum percentage rate the employer must contribute to the premiums. The premiums typically increase every year based on the previous year’s healthcare costs of the employee group.
With group health insurance, the risk is spread over the company -- the number of employees you're covering.
Group health insurance is also known as employer-sponsored health insurance, job-based health insurance, or a small group plan.
Individual Health Insurance
Individual health insurance is a type of policy an individual purchases for himself and/or his family. As of 2014, all individual health plans must cover employees regardless of health. For example, a healthy non-smoking 40-year old employee will pay the same as a non-smoking 40-year employee with a medical condition. Premiums cannot be increased because of health conditions.
With individual health insurance, the risk is spread over a large group of people -- hundreds of thousands, even millions depending on the plan and carrier.
Haven't heard about individual health insurance before?
Prior to health care reform, less than 10% of the US population had this type of insurance. Most people purchased insurance through their employer. However, with the rise of defined contribution health benefits and the Affordable Care Act, the number of people with individual health insurance is expected to grow exponentially. Now, it’s becoming normal for employees to purchase a plan on their own – just like car insurance.
Individual health insurance is also known as a personal health insurance policy or a family health insurance plan.
Group Health Insurance vs. Individual Health Insurance
To understand how the two types of health insurance are similar and different, here's a summary chart.
| Group Health Insurance | Individual Health Insurance | |
|
Employees keep the plan when they |
No | Yes |
|
Employees choose the network and |
No | Yes |
|
Premium tax credits available to |
No | Yes |
|
Coverage for pre-existing medical |
Yes | Yes |
|
Coverage for essential health benefits |
Yes | Yes |
|
Average cost to cover a single employee (2012)* |
$5,615/year | $2,280/year |
|
Average cost to cover an employee + family (2012)* |
$15,745/year | $4,944/year |
| How is the health plan paid for? |
Employer purchases Employees reimburse |
Employees purchase Employer reimburses |
* See this guide for a cost analysis of small group and individual rates in 2014.
Small Business Trend: Defined Contribution Paired with Individual Health Insurance
Because of the affordability of individual health insurance, compared with group health insurance, most (if not all) small businesses are offering employee health benefits with a pure defined contribution approach.
With this type of strategy, the business offers employees a healthcare allowance that employees can spend on purchasing individual health insurance. With health care reform, all employees are guaranteed coverage and many will have access to the health insurance tax credits. Employees purchase the plan that best fits their personal health needs. Employers have complete cost predictability and there are no minimum or maximum contribution amounts.
What are your questions about group health insurance vs. individual health insurance? Leave a comment below.
