What Makes up Your Medical Insurance Costs (Part 1 of 3)
One of the most valuable employer-provided benefits is medical insurance. This article is the first of three on how Medical Insurance costs are determined. Understanding this will help employees, managers and HR staff understand the complexity behind this benefit.
Three areas of medical insurance costs impact the employee:
1) The total cost for the entire medical insurance plan
2) How that total cost is shared between employer and employee through “premium” contributions
3) Employee out-of-pocket costs
This Part 1 article will focus on the first two items in the above list.
Health Insurance Cost Structure
For this article we will assume the insurance plan is a fully-insured plan that an employer purchases from one of the health insurance companies. There is also a self-funded option where the employer assumes the insurance company risk. A self-funded plan works pretty much as I will describe with some exceptions regarding the party (employer versus insurance company) responsible for various functions. The term “administrator” is used to refer to either the employer or insurance carrier that is responsible for those functions.
The Plan Administrator calculates the expected costs of the plan and assumes the risk if their actual spending exceeds their expected costs.
Factors that go into determining the total anticipated cost of a health plan include:
1) The medical services that will be covered by the Insurance Plan and what healthcare providers charge the Plan for those services
2) The shared out-of-pocket costs that covered members will contribute toward the cost of specific services when they use them
3) The costs incurred by the administrator for processing claims, facilitating payments to providers and otherwise running the Insurance Plan
4) The size and makeup of the covered member population and their expected utilization of health care services
Included Medical Services
The Insurance Plan, based on state and Federal regulations, as well as good plan design principles, will determine which medical services will be covered under the insurance plan. These details will be described in a Plan Document that the administrator provides to members.
The Plan Document provides details on “What Is Covered” by the Plan. This includes a listing of medical services that are, and are not, covered. This document also outlines the provider network that must be used for a service to be covered. It will also include details related to any processes that must be followed before a service is authorized to be covered.
There is also a ”How It Is Covered” portion of the Plan Document which contains details about how members contribute toward the cost of the services that they use.
Expected Utilization
The administrator estimates the anticipated costs of services to be used based on the size and demographics of the covered population. The estimate includes information they know or anticipate about the use of medical services. They account for the usage trend in recent years and include the expected impact of any changes being made to covered services and plan design.
When the process is complete the administrator will have assembled a total cost projection that looks like the following:
· The expected use of medical services by the covered population in the upcoming year
TIMES
· What providers will charge to provide those services
PLUS (or MINUS)
· Enhancements (or reductions) to covered services
PLUS
· Costs to administer the plan (processing claims, etc.)
MINUS
· What members will pay out-of-pocket when they use services
The total from the above makes up the total expected cost to the Plan for the upcoming year.
Sharing the Costs Via Premium Contributions
Once the Total Plan costs have been estimated, the total is used to determine the contribution or “Premium” that should be paid by those covered by the Plan.
A premium contribution will be determined for various coverage levels which typically consist of the following:
· Employee Only
· Employee Plus Spouse
· Employee Plus Child/Children
· Employee Plus Spouse Plus Child/Children
The process above is used to determine a “premium” contribution for each of the four coverage levels. As you would expect Employee Only coverage will have alower contribution than Family Coverage due to having fewer covered membersincluded in the coverage option.
An employer will have established a philosophy regarding how much they will contribute toward the total premium for each coverage level. An employer typically covers 60% to 80% of the premium. Employees pay the remainder through pay period premium contributions.
The employee’s health plan costs come from the following two parts:
1) The premium contribution is the amount that all employees (based on their coverage group) contribute toward the Insurance Plan costs. This provides the security of being covered by the Insurance Plan.
2) The out-of-pocket expenses that are paid by the employee and any covered family members, for the services that they specifically use.
There can be differences of opinion regarding the appropriate mix of costs to share between the Plan and the member.
Someone with a lot of health issues would likely prefer an approach that has higher premiums contributions for everyone covered by the plan, and has lower out-of-pocket expenses when services are used. Conversely, an employee that doesn’t need a lot of healthcare services would prefer that a higher portion of the costs are paid out-of-pocket by those who use medical services and the premium contribution paid by all employees is lower.
The next article in this series provides a more detailed explanation of out-of-pocket expenses.
Written by Brian Mitchell
Brian Mitchell has experience leading Total Rewards strategy and implementation for large employers.
Benefit Boosts by Brian Mitchell© – Vol 2024-010
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