Individual vs. Group Insurance…Which is Better?

April 28, 2010

Group insurance is better, right?

Isn’t it always cheaper than buying an individual plan?

The answer is no, not always. Not in the Medicare world.

The usual argument says group insurance is less expensive because the cost of paying for serious illnesses is spread across more people – so it becomes less expensive in the long run, even if it does limit the choice of plans to one-size-fits-all.  Large companies, unions, and public sector entities that provide health care benefits for their employees/members are able to negotiate a reasonable rate because they’re insuring hundreds or thousands of people, reducing the risk for the insurance company.

We Can All Learn a Lesson from GM…

This advantage starts to diminish for companies or municipalities that have promised lifetime health care benefits to their retired workers. As the retiree population size grows, an ever-larger percentage of the insurance group falls into the over-65 category, where chronic conditions and catastrophic illnesses occur more frequently. Insurance premiums increase for everyone as the average age of the insured group rises. The burden of paying for insurance for retired employees may even become a threat to the survival of the business, as in the case of GM in 2008.

Individual Market Risk Pools Are Larger

Individual market risk pools will always be much larger than any single-company pool – spreading risks over a larger population, which is a powerful driver for keeping premiums in line. Unless your company name is Wal-Mart, and your group plan covers one million people, guaranteed issue coverage for all individuals – as we have in Medicare today – is essentially a “super group” that better controls future price increases.

The good news is when older employees are moved from the corporate group insurance to health reimbursement accounts, which they can use to buy their own Medicare insurance, costs for the employer drop significantly. And since the employer has control over the amount of HRA funding it provides, long-term liabilities for retiree health care become both predictable and sustainable.

Retirees Benefit Too

Medicare plans vary in the doctors that accept them and the cost and types of drugs they cover. A good plan for one person won’t meet the needs of another.  As well, seniors often move to other parts of the country after they retire, or they “snowbird,” spending their winters in one place and summers in another. To serve these individuals in a group plan, health insurers must “rent” other insurers or third-party administrators, often paying a higher price for that privilege, which they pass to employers in the form of higher premiums and which employers in turn pass to retirees.

Choice = Savings

For the individual insurance buyer, then, having a choice of a number of plans from different insurance providers allows comparison shopping for the best value. Being able to comparison shop encourages competition among carriers as well, helping to keep costs in line. And individual buyers in the Medicare market often find plans that cost less than the group plan provided by their employer!

FACT: Health Care Reform Will Be a Future Factor

The health care reform bill creates a mandate for everyone to have insurance coverage, guarantees issue to all applicants, and opens up insurance exchanges across the country by 2014. It will be interesting to see how these changes will impact the balance of group vs. individual insurance coverage in this country. What will happen to insurance premiums? Here’s what health care consultant and blogger Bill Kramer wrote in a recent post published just before the bill passed:

“If health reform passes, insurers in the exchanges will have to compete more on price, since the traditional tools of risk management will be taken away. Healthy competition among insurers will drive them to find ways to work with providers to hold down costs. From an overall policy and political perspective, it’s probably better to have the providers negotiating and sometimes fighting with private insurers rather than lobbying the government for higher payment rates. And some of the insurers might actually be seen as good guys, if they can develop constructive partnerships with providers to offer affordable, high quality health care.”

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