Why the Individual Market is Less Expensive – and Expected to Stay That Way
Welcome to the first post in our blog series “Ask Gravie.” Each week we’ll share our perspectives on hot health insurance-related topics being talked about in the news, asked by our customers, or that just seem like they should be talked about. If you have a question or a topic you’d like us to address, send it our way using the form to the right or send us an email at info@gravie.com.
This week we’re featuring Abir Sen, CEO at Gravie. Read on for Abir’s take on the cost of individual health insurance compared to group.
Q: How is individual health insurance an affordable alternative to group insurance?
There are two key reasons individual insurance by nature is less expensive than traditional group plans:
1. Participant Pool Size and Risk
Insurance rates are determined by the average risk of all the people in the pool, based on the premise that when some individuals in the pool are in need of healthcare services, everyone in the pool will essentially pay for that care.
In a traditional group plan, the pool of participants is very small compared to the individual market, so when one person in the group requires care, there are fewer people in the group to “pay” for that care. Which is why rates need to be higher.
In the individual market, the pool is made up of all individuals in the market, making that pool significantly larger than even the largest imaginable group plan pool. There are far more healthy people paying for the needs of those who require services. The larger the pool, the more predictable its outcomes are (percentage of sick people and healthy people) because a larger pool more closely reflects typical distribution of both in a population. That means insurers have less risk, and premiums can be lower.
2. Breadth of Coverage
In a traditional group plan, benefits administrators typically pick one to three plan choices, each with a wide breadth of coverage designed to satisfy all the needs the individuals in the group might have; to that end, they usually offer a range of doctors, facilities, specialties, and extras. So many potential needs have to be considered that these plans include coverage that’s not needed by most of the people in the plan – they’re paying for coverage they don’t necessarily need. The need to accommodate so many needs with one to three plans drives up the premiums.
In the case of individual insurance, though, individuals or employees select the insurance plans that make sense for their geographies, health situations, and family needs. Most people will choose plans that provide only the coverage their family needs, so they’re not paying for services they aren’t likely to use.
Q: We’re starting to hear that individual insurance rates are rising in some states because the pools now include those who were previously uninsured or uninsurable. Will rate increases continue across the board?
While it’s true that higher-risk individuals can raise the overall risk of the pool, it’s important to remember that young, healthy individuals are also being added back into those pools, in effect “balancing out” the risks. The impact of individuals on both ends of the spectrum will be a one-time blip until equilibrium is achieved and the risk is absorbed in the system.
Another development we’ll see is competition among insurers as more continue to enter the field. As with any market, insurer competition isn’t likely to allow premiums to inflate to the group rates of the past.
What questions do you want answered in “Ask Gravie”? Let us know and we’ll do our best to get you the answer.
About Abir Sen
Prior to founding Gravie, Abir was the CEO of Bloom Health where he led the creation of private exchanges – one of the largest trends in healthcare services. Prior to Bloom, Abir was co-founder and president of RedBrick Health. Under his leadership, RedBrick Health launched the industry-leading Health Earnings system, created innovative product and distribution partnerships, and achieved health improvement results that far outstripped any of RedBrick Health’s competitors. Before co-founding RedBrick Health, Abir co-founded Definity Health and was part of the team that invented the Personal Care Account, the predecessor to the Health Savings Account.
Abir has a B.A. in Economics from Lawrence University and an M.B.A. from the Harvard Business School. Other than healthcare, Abir’s interests include aviation, dogs, and U2.