The game has begun to shift under our feet, and the tried and true fully insured group plan might be short for this world as a result. Here’s why:
Big change #1: How (healthy) businesses get their benefits has changed dramatically
The small group market has changed radically and odds are you haven’t noticed because this stuff is as boring as it is important.
Most Americans get their health insurance from their employer, and most employers in the US are small businesses. Over the last three years, the share of the 3–49 employer market that receives their health insurance from level funded plans has increased from 10% to 36%.
This shift will change everything about benefits in the US. But, before we can get into the “why”, we’re going to have to learn a few words together.
But first, a glossary:
Fully insured group health plans
These are the classic ways that small businesses have gotten health insurance. Everyone gets the same rate based on employees’ age and geographic location.
Level funded group health plans
These are new-ish and really getting hot. Premiums are determined by an underwriting process (often a survey) that involves each company and all of their employees and their dependents. (If this sounds like an administrative headache, you’re right.)
Underwriting
The process of pricing out risk. The more “good risk” you have, the cheaper the price winds up being. The more “bad risk” you have, the more expensive the price comes out to be.
Good risk
Someone (or someones) are expected to cost less on average to cover for the duration of the contract, they’re considered “good risk.” An example might be a 25-year-old vegan, who runs every day and avoids exciting things like blacking out while racing jet skis.
Bad risk
If someone (or someones) are expected to cost more on average to cover for the duration of the contract, they’re considered “bad risk.” An example might be a 64-year-old who enjoys boozing and bare-knuckle boxing matches.
An important sidebar here I’m going to get up on my soapbox about…
Most of what makes people good or bad risk isn’t under their control. Even my examples used above lean towards the personal responsibility in one’s health but the two most standard things to underwrite on (age, and where a person lives) are out of their control. Let’s say you live downwind from a heavily polluting factory, it’s not your fault that your children are at a higher risk to develop asthma, but underwriting might be a sneaky way to charge you for it — adding a financial penalty on top of the health penalty already leveled against you.
If we’re not really careful with how and where we underwrite people, it turns into another tax on the most systematically disadvantaged among us. The myth that a person’s health is entirely under their control and is therefore, entirely their responsibility is as hurtful as it is insidious.
Alright, now that we’ve gotten that out of the way, let’s talk about what a 4x increase in level funded plan adoption means to the broader system of health insurance in the United States.
Taking the “FUN” out of “level FUNded”
The whole point of level funded plans is that healthy groups (at the time the policy is written) can get better rates than the average group can get with a fully insured policy.
It’s not convenient to do so — employees need to pass health screenings which most people don’t love and if your health profile changes over the year, your pricing will change upon renewal. This sounds simple enough but there’s all sorts of weirdness introduced by making the employer responsible for the overall health profile of the company. For example, if in the back of your head you knew your renewal was coming up, do you really think you’d be impervious to an unconscious bias creeping into your mind when interviewing a diabetic candidate?
Cards on the table, I don’t like them but I’m willing to explain myself.
But I digress, health insurance is way too expensive as just a general broad fact. If level funded plans help more people get covered, that’s a win right?
Kind of.
Level funded plans now account for roughly 40% of the 3–49 employee segment. It’s important to note, this is the most healthy portion of that market. These plans have gone from something that brokers never touched to the only thing that many of them now sell over that same timeframe.
You can’t blame the employers. Health insurance is too expensive and they need an alternative to continue to offer it. The problem though is that not everyone can get onto a level funded plan, and the people cut out are getting a worse and worse deal.
Smaller companies <5 employees typically can’t pass underwriting because they don’t have enough people for the model to make a reliable prediction. Unhealthy companies are obviously also cut out as not covering these people was sort of the entire goal to begin with.
Both of these segments tend to be the most cost-conscious subsets of the market who are now left with only the most expensive option — fully insured small group plans. That’s a problem.
It’s a problem now. It’s a catastrophe when we project forward. Level funded plans are going to continue to absorb more of the good risk in the small group space, meaning that fully insured plans will have to increase their pricing even faster than they have historically as their risk pool deteriorates. As fully insured plans get more expensive, more companies will opt out of offering anything at all and the negative selection bias is going to continue to accelerate the spiral.
Not to revert to cliches but the whole “united we stand, divided we fall” aspect applies to health insurance as well. The rise in level funded plans are a threat to the entire group health insurance market as it is currently constructed.
This trend isn’t lost on the carriers providing fully insured group plans either. We’re seeing major players exit the market in a move that might foreshadow the end the fully insured group market as a whole.
The old way groups have done health insurance isn’t working. Small businesses need an affordable alternative that brings risk back to a broader pool for both the microeconomics of the employer finances and the macroeconomics of the broader system to work.
Hope?
Enter StretchDollar — with our product, small employers can define their own benefits budget, give the entirety to their employees pre-tax, and their employees can get coverage through the broader individual exchange and do it all in under 10 minutes.
It helps that for the first time ever individual policies are now cheaper on average than small group policies in many major metros. Simpler, more affordable health benefits that remove the employer from the middle between employees and their doctors? StretchDollar’s ICHRA is the future of health benefits.
Ready to get started? Dive into enrollment here (it’s just 10 minutes) or check out how it works.
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