Chapter 2: How do they figure out what plans to offer and how much they cost?
Health insurance plays an outsized role in our lives. But does anyone really know how it works? Or, for that matter, what it really says? In this series, I will be talking to my dad, a retired healthcare executive, about a variety of topics to get some clarity on private (employer-supplied) health insurance.
Jeremy Sachs spent 30 years working for a Fortune 500 insurance company. During much of that time, as House Counsel for the Employee Benefits Division, he advised corporate managers of the Division on a wide range of legal issues relating to the Company's group health insurance policies, including during the times when the Health Insurance Portability and Accountability Act (HIPAA) and the Americans with Disabilities Act (ADA) were passed and instituted.
This series does not apply to Medicare, Medicaid, Obamacare (The Affordable Care Act, or ACA), or individual health insurance, unless otherwise specified.
The Players
Insurance Company
- Sales Rep/Marketer—liaison between the insurance Company and your employer
- Underwriters – determine the risks involved for each policy
- Actuaries – mathematicians who determine the cost of a policy
Your Employer
The Process
Negotiations for a new health insurance policy or an update to an existing policy are long and complicated
They start with your employer. The insurance company’s sales rep sits down with your employer’s Benefits Manager and negotiates what your employer wants included in the insurance policy: what level of risk the insurance company is willing to take; what the deductibles will be; the method will be for computing a provider’s “reasonable and customary (R&C) charges”; and, what percentage of those R&C charges the company wants to cover. (That’s when the policy says they will cover 80% of reasonable and customary charges after the deductible or 70% of psychological therapy visits.)
Once the insurance company knows what the employer wants in the policy, the representative collects certain types of information about your employer, including:
- Type of work (office/manufacturing/labor/academic/government, etc.)
- Number of employees
- Type of employees and percentages (skilled, management, executive, etc.)
- Employee retention (In the insurance industry, employees who stay at their jobs longer may suggest a more stable lifestyle – that is, employees who keep a job for only a short time, and then move on are considered higher risk.)
- Claims history from previous years. (A Group Policy issued to a brand-new company may cost more, since the Insurer will have to guess how high the first yearly payout of claims will be.
- Company financial stability
And about you. Since it’s illegal to ask specific employee health questions, the insurance company will ask questions about the members of the group:
- Gender
- Age
- Race/Ethnicity
- Percentage who have dependents.*
- Other general demographic questions
* Dependents are important because their – both children and spouses – costs are calculated at a higher rate than that for the primary insured. This is because since employees come to work on a regular basis, they are assumed to be generally healthy. But no such assumption can be made for dependents. Spouses and kids, as a group, tend to have more or higher claims than employees. (The kids I know definitely get sick or injured more often than the adults, but I am not sure why the spouses do. Dad didn’t know, either.)
These and other factors are all thrown into equations when the insurance company calculates the cost of the individual benefits offered in the policy, and the premium for the policy overall.
Once the sales rep has collected all the information from the employer, they send it to the underwriters. Underwriters determine how risky it will be for the Insurer to cover the group. Keeling over from a heart attack is more likely in a sedentary cube farm than on an active factory floor. But losing a finger is more likely on a factory floor than in a cube farm. Unless you’re using the copier wrong.
Or, if the Company is located, say, in Florida, the group may have a more employees with respiratory conditions than in, say, in the Colorado Rockies, where the air tends to be purer.
The underwriters start with “standard rates”. They take the gathered information and use complicated algorithms to determine how much risk of a claim is likely for each type of coverage that the employer wants in the policy. They then assign higher degrees of risk for any elements of the group that don’t fit the algorithm. Then they send their calculations to the actuaries.
The Actuaries are the mathematicians who figure out how much to charge. Actuarial tables are always being updated. As treatments and knowledge around a condition improve, probabilities of severe consequences are adjusted and sometimes costs go down. But there are also new conditions that can’t be treated that have to be factored in. They create their own algorithms around the Law of Probabilities -- that you will need X treatment, based on current national or local (industry) claim experience. They create rates to be charged to the group based on a series of calculations of the probability that employees and dependents, as a group, may at some point need all or most of the insurance for the conditions covered by the policy. Then they figure out the rates for your employer’s Group Policy.
With the rates in hand, the sales rep for the Insurer finally presents the policy package to your Benefits Manager. The package includes rates, definitions, and descriptions of what will be covered. These are the sections that specifically explain the insurer’s LIMITATIONS on what’s covered and lists of the risks that it will not cover at all (EXCLUSIONS), as well as a whole host of administrative requirements and other explanatory material.
A squeaky wheel can impact your insurance policy.
So, after two pages, why does all this matter? Because you’re not as powerless as you think.
There is a long negotiation involved once the initial figures are given. Both sides are worried about competition. Insurance companies don’t want to lose clients to another insurance company because of lower prices, and your company doesn’t want to lose good employees to a competitor with better benefits.
And that doesn’t even touch on unionized industries. Unions will often negotiate on the cost to employee and breadth of coverage. Like better maternity coverage for a younger employee pool or better rehab coverage for an older employee pool.
So, if you have an opinion, tell your employer. Start with the Benefits Coordinator or someone in Human Resources for companies that aren’t big enough to have a Benefits Coordinator. We had issues a few years ago with the pharmacy provider my company was using, and after a few years, there were enough complaints that my employer switched providers. [CS1]
It’s not a guarantee, but it never hurts to speak up.
Bonus:
Every policy has an incurred but not reported (IBNR) reserve for health insurance claims, commonly referred to as a ”tail.” The tail covers late claims submissions. Sometimes I just don’t have the time and energy to submit claims, especially the out of network ones, so I wait until I do. The tail, based on the size of the policy, covers those late filings. The length of this grace period, called the IBNR runoff, varies with the policy, but is often six to twelve months. So don’t give up on reimbursement if you’re a little late. Know your IBNR runoff period, and give yourself a break.