Bye, Bye Group Coverage?
Subsidizing Individual Health Policies
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As health care costs continue to skyrocket, there are growing rumbles among employers that enough is enough. But how many of them are willing to take the drastic step of eliminating group health benefits in favor of providing a subsidy to employees to purchase individual health insurance coverage on their own?
So far, relatively few companies have taken that step. Among all employers, about 3 percent said they were "somewhat likely" or "very likely" to drop health insurance coverage, according to the 1,997 employers surveyed in the 2007 Employer Health Benefits Survey conducted by the Kaiser Family Foundation and the Health Research and Educational Trust. However, just over 1 percent of employers with 200 or more employees said they are "somewhat likely" or "very likely" to drop employee health insurance coverage.
“We see a pretty clear separation by size of employer with respect to those considering individual insurance as a replacement for group coverage,” says Kirk Johnson, a partner with insurance broker McQueary Henry Bowles Troy LLP in Dallas. “We have not had any employers with more than 50 employees consider this, but about 15 percent of employers with fewer than 50 employees have strongly considered this or taken some form of action.”
Few of those employers have taken the step of eliminating group health insurance coverage, though. Instead, Johnson finds, most are extending waiting periods, carving out spouses from coverage and trimming plan coverage levels.
However, data from the Employee Benefit Research Institute show a slow but steady erosion in the proportion of employers with fewer than 200 employees that offer group health benefits. Those numbers have declined from 68 percent in 2000 to 59 percent in 2007.
A New Approach
One small employer that is taking steps away from employer-provided group coverage and toward subsidies for employee-purchased individual coverage is Joe’s Sports Bar, a 90-employee sports and entertainment complex in Chicago. “Our health insurance costs were increasing at triple the rate of our business growth,” says co-owner Ed Warm. That is why the firm is planning to make the change within the next few months.
Although the firm is still working out the details of the new approach, Warm says employees will receive a subsidy to help pay for individual health insurance coverage, with the size of the subsidy to be based on the employee’s level in the company and length of service. He argues that this will help more of the firm’s employees. Under the group health plan, only about a dozen employees received coverage, while the subsidy approach will help many more.
HSAs Can Help
Companies that have gone the subsidy route typically give employees $50 to $200 or so a month to help them buy policies. Alternatively, some employers set up and provide full or partial funding for employee health savings accounts (HSAs) to help workers who purchase high-deductible health plans pay for pre-deductible expenses while growing their health care dollars in a tax-free environment. (To learn more about HSAs, see the SHRM Online article FSA, HRA, HSA: The Alphabet Soup of Defined Contribution Health Care Programs.)
Dedicated Vendors Emerge
Although helping employees purchase private policies is a relatively new wrinkle in the insurance market, vendors specializing in such services are emerging. One is Norvax Inc., a Chicago-based health insurance technology company that developed a web site, GoHealthinsurance.com, to provide side-by-side comparisons of individual health insurance plans and access to an insurance agent to help individuals choose an insurance plan that suits their needs.
Norvax will develop a customized micro-site for employers for a flat setup fee, but most of the company’s revenue comes from the insurance agents who gain access to these customers, according to Fred Karutz, Norvax’s senior vice president of business development.
Treading Carefully
Like any major change involving insurance and employee benefits, the shift from group coverage to health insurance subsidies requires some preparation and consideration. “This change is more complicated than it seems,” says Sharon Alt, president of Alt Benefits Consultants in Fort Worth, Texas. “There is a lot more to this than just giving employees a few dollars and letting them buy individual health insurance.”
- Beware of potential legal and regulatory issues. Throughout this process, employers should consult with
legal counsel and employee benefits experts to make sure their approach does not run afoul of any of the
myriad federal, state and local laws and regulations governing health insurance and employee benefits.
Example: If a company offers individual health insurance as a voluntary benefit within a section 125 cafeteria plan, that approach can introduce potential legal and regulatory issues for the employer, says Mark Kinney, a partner with the law firm Dorsey & Whitney LLP in Minneapolis.
- Understand the problems employees may face in getting individual coverage. Unlike group health
insurance, individual health insurance coverage is subject to underwriting. Therefore, older employees or
employees with a pre-existing medical condition are likely to pay more for coverage or, in some cases, find it difficult if not impossible to find affordable coverage.
Example: An employee who is pregnant and shopping for individual coverage might not be able to obtain
a policy that will cover pregnancy-related costs because the pregnancy was a pre-existing condition. If
this occurs, an employer could find itself facing backlash because of its decision to change the health
benefits program.
- Think through employee attraction and retention issues. A key reason why employers offer health
benefits is to attract and retain talented employees. If an employer moves from group health benefits to
subsidized individual health insurance, it is important to understand how that might affect the company’s
recruitment and retention efforts.
Example: “Many employers may find they are not at the point that they are willing to lessen their chances of hiring the best person for a job because of the benefits package,” says Kinney.
- Consider alternatives. A move to subsidize individual health insurance represents a dramatic shift for many
employers. In some cases, employers may be able to control their costs in other ways and avoid or postpone the need for this change.
Example: Introducing a waiting period for group health insurance coverage can help firms avoid covering employees who do not have a long-term commitment to their employer.
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