Individual health insurance is more affordable than group health insurance. Also, under the Affordable Care Act, individual health plans must cover all individuals regardless of health, which was not previously the case. Tax credits are also available for qualifying employees.
With these advantages, why wouldn't an employer structure their health benefits using individual health insurance? It stretches employers’ health benefits dollars further, gives employees more choice, and also gives employees an insurance plan they can keep no matter where they are employed. Here's a look at how the two types of health insurance work and why individual health insurance is more affordable than group health insurance.
How individual health insurance differs from group health insurance
Individual health insurance
Individual health insurance is a type of health policy that an individual purchases themselves which covers them and their family. Individual health insurance policies are often purchased with the guidance of an insurance agent or broker to help navigate plan choices and their associated costs.
All individual health plans must cover employees regardless of health. For example, for an identical plan, a healthy non-smoking 40-year old employee will pay the same as a non-smoking 40-year employee with a medical condition. 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.
Group health insurance coverage
Group health insurance coverage is a type of health policy that is purchased by an employer and is offered to eligible employees of the company and their eligible dependents.
Currently, over half of non-elderly Americans have group health insurance coverage through their employer or a family member’s employer. With group health insurance, the employer selects a plan, or plans, to offer to employees. These days, the premium cost is usually split between the employer and employee, and there is a minimum percentage the employer must contribute to the premiums.
The premiums for group policies typically increase every year based on the previous year’s healthcare costs of the employee group. With group health insurance, the risk is only spread over the company, which means rates can increase dramatically depending on the number of employees being covered. See the discussion on risk pools below.
How costs of individual health insurance and group health insurance compare
Here's a look at the 2019 national average annual premium costs for group health insurance and individual health insurance plans.
|Individual health insurance plan||Group health insurance plan|
Factors that affect premiums
Under the health care law, insurance companies can account for only 5 things when setting premiums for individuals.
- Age: Premiums can be up to 3 times higher for older people than for younger ones.
- Location: Where you live has a big effect on your premiums. Differences in competition, state and local rules, and cost of living account for this.
- Tobacco use: Insurers can charge tobacco users up to 50% more than those who don’t use tobacco.
- Individual vs. family enrollment: Insurers can charge more for a plan that also covers a spouse and/or dependents.
- Plan category: Individual health insurance plans have the following categories: Bronze, Silver, Gold, Platinum, and Catastrophic. The categories are based on how you and the plan share costs. Bronze plans usually have lower monthly premiums and higher out-of-pocket costs when you get care. Platinum plans usually have the highest premiums and lowest out-of-pocket costs. Group health insurance plans are not required to use these tiers, though most do (even if they call them something else). Typically, employers offering group plans typically choose just one or two tiers to offer employees. The employees then decide which tier they want based on their share of the premium costs.
States can limit how much these factors affect premiums. As noted above, and discussed in risk pools below, claims made from year to year impact the overall rate.
Factors that do not affect premiums
Insurance companies cannot use the following for calculating rates.
- Sex: Insurance companies can’t charge women and men different prices for the same plan.
- Medical history: Insurers also can’t take your current health or medical history into account. All health plans must cover treatment for pre-existing conditions from the day coverage starts. Note that while an individual’s medical history cannot affect that individual’s rates, prior claims can impact the rates of the entire population being insured.
HRAs and premium tax credits
Premium tax credits can make individual health insurance even more affordable for those who qualify. However, employees who are offered a group health insurance plan are not eligible for premium tax credits. Health reimbursement arrangements (HRAs) are a great way for employers to assist employees with the cost of individual insurance and out-of-pocket medical expenses. However, it’s important for employers to understand how different types of HRAs might impact employee eligibility.
For example, an employer can offer a qualified small employer HRA (QSEHRA) to assist employees with any unsubsidized portion of their insurance premiums and out-of-pocket medical expenses, but there are caps on the allowance the employer can offer. Also, QSEHRAs can only be used by companies with fewer than 50 employees that do not offer a group health insurance plan.
An individual coverage HRA (ICHRA), on the other hand, can be offered to a specific class, or classes, of employees alongside a group health insurance plan. However, employers cannot offer the same class of employees the choice between an ICHRA and a group health insurance plan. ICHRAs have no restrictions on allowances or company size, but offering employees an ICHRA might cause them to lose their premium tax credits.
Find out how much employers spent on QSEHRA allowances last year
Risk pools: why individual health insurance is more affordable than group health insurance
For the majority of small groups, individual health insurance is more affordable than group health insurance because of the size of the risk pool. As we mentioned above, individual health insurance spreads the risk over a much larger group. Using individual health insurance as the foundation of employee health benefits is also less financially risky for the organization.
With a group health insurance plan, if one employee has a baby, a surgery, or is diagnosed with a chronic illness, you are likely to see a large premium rate increase at renewal time. Individual health insurance premium rates have actually decreased in many states in recent years.
The benefits of an HRA
Because of the affordability of individual health insurance compared with group health insurance, many employers find offering employees an HRA they can use to purchase individual health insurance is an ideal option as it gives employees more choice and themselves more control over costs.
Employees can shop for a plan that meets their current needs and life circumstances—young, healthy individuals might save money by purchasing a low-cost, high-deductible plan, while older individuals might purchase plans with a lower deductible and out-of-pocket maximums. At the same time, a defined monthly allowance protects the employer by making costs predictable.
In addition, HRA administration services like PeopleKeep are available to help employers set up a benefit in minutes, ensure compliance, and offload much of the benefit management to keep staff focused on core business.
Learn how HRAs work for employers
What questions do you have about individual and group health insurance? Let us know in the comments section below!