Keeping health insurance costs down.

• Author: Day, David
• Position: Indiana: Small Business Reference Guide - Brief Article

Over the last several years, employers have seen unprecedented increases in the cost of providing health insurance for their employees. While inflation has averaged 3 to 4 percent annually, health-insurance premiums have seen double-digit increases. So why are costs escalating so rapidly? One reason is how employees use their health insurance.

Most employees are not educated on the effect their claims have on their health-insurance costs. Many view their insurance card as a "debit card," and feel they must max out their coverage every month. As a result, they are seeing the doctor more often and their employer's health premiums are increasing.

What most people fail to realize is that insurance premiums are calculated using three simple criteria:

1. What is the cost of the expected claims (multiplied by 1.25% to protect the insurance company)?

2. What will it cost to process the claims?

3. What profit does the insurance company need to make?

If you add up these figures and divide the sum by the number of employees in the group, you will have the cost per employee, per year, for health insurance.

Because most groups stand alone and are relatively small, the risk cannot be spread out among a large group of people. And because claims and claims experience stick with you, a high claim year will affect premiums for several years to come. In order to minimize exposure, many employers are turning to PEOs (professional employer organizations). A PEO groups the employees from several small to medium-sized employers into one large group, giving them access to true group benefits. So instead of being a stand-alone group with 20 employees, they become part of a large group with several thousand employees. And if the PEG has a true group plan, a high claim year for one employer is spread out over the entire group, thus minimizing the risk.

Fifteen years ago most insurance plans had a $250 or $500 deductible with coinsurance of 80/20. Employees paid their own medical costs up to the deductible before their insurance would kick in. Because of this, they only relied on their health insurance when a serious illness occurred. The everyday common...