The Secret of Health Insurance Quotes

The mysterious health insurance black boxMost people are mystified by the quoting process that health insurer’s use.  I have to admit, it isn’t an easy process to understand, even for someone who has been in the industry for years.  As I’ve mentioned in the past, the insurance companies employ actuaries to access the risk of an individual or group based on a number of factors.  The factors include the groups demographics (age, sex, etc), health status and geographic location along with the probabilities of certain incidences occurring in the general population.  Then they put it all in a black box, add water and stir…and out pop your insurance rates!

Rates vary company to company and from individual to individual.  However, once they are determined (here’s the secret) the differential in rates across plan design remain the same.  Let me illustrate.  Company ABC has individual rate of $360.00 and Company XYZ has an individual rate of $400.00 based on the factors described above.  Both have the same plan design, in this case a PPO with a $500 deductible, $2000 out-of-pocket limit, 90/70 co-insurance, $20/$40 copays and a $15/$35/$50 drug benefit.  Given that the plan design is the same, any variable of the plan that is changed should effect both companies’ rates by the same percentage.  For example, moving the deductible from $500 to $1,000 will result in the same decrease in individual rates for the company.  As a rule of thumb, each $500 change in deductible will result in a 5% change in premium.  So, in this case, ABC’s rate would fall to $342 and XYZ’s rate would become $380.  Simple right?

The PPO plan design changes that will affect your rates the most are 1) the deductible – this has the largest affect, 2) out-of-pocket expenses, 3) co-insurance, 4) office and ER co-pays and finally 5) drug co-pays.   The reason that deductibles and out-of-pocket expenses affect your rates the most are because they effectively shift the risk away from the insurance company and toward the covered individual.  Over the course of a year, the insurance company has a range of claims that it expects to pay out on your group based on your demographics and health conditions.  If you are a large enough group, the insurance company doesn’t need detailed health histories, because they can rely on their actuarial tables (the probabilities in the total population).  As a result of knowing the range of claims, the can determine approximately how much less they will have to pay based on a change in deductibles, copays, etc.  Because of this, the percentage change in premium based on a plan change is basically the same for all groups.  This rule tends to become less true the smaller the group we are talking about becomes. 

Obviously, there are several ways to improve your health insurance quote/renewal.  The first is to improve your demographics.  How do you do that?  Well, you could hire healthy young males and healthy middle-aged women.  Both of these groups tend to have lower health care expenses, however you could run afoul of the Department of Labor with discriminatory hiring practices.  Or, the other thing that you could do is to improve your company’s overall health.  This is a little harder to do , as it requires changing people’s behaviors, but it can be done through focused wellness programs.  Of course, you can’t focus on what type of wellness program to implement until you know the general health status of your company.  If you’re not self-insured it can be difficult to understand what health conditions are driving the costs.  That is why it is important to start with a Health Risk Assessment before introducing a full-blown wellness initiative.  Typically, we like to pair the Assessment with a blood draw.  This not only gives us information about a your populations behaviors, but also gives us hard facts through the blood panel.  If you would like more information about how wellness programs can help your company control health care costs, drop me a line.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: