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Small Business Owners Pay Too Much For Health Insurance

There’s a huge misconception out there that if you own a business, you get a better deal on health insurance. The fact is, many “group” health insurance plans come with higher price tags than individual health policies.

For the small business owner with 5-7 employees or less, offering to reimburse employees for their individual health insurance policies through an HRA (Health Reimbursement Arrangement) can prove a significant cost savings to the business, while giving more freedom of health insurance plan choice to their employees.

In addition, the employees ‘own’ their individual plans, which means there’s no need for COBRA coverage if they leave their current employer. Since businesses smaller than 20 employees do not offer COBRA coverage anyway, individual plans become even more attractive.

The biggest advantage of individual health plans over small group plans is price. Individual health plans typically offer lower premiums than similar group plans. The reason is risk. Individual health insurance in Washington State requires a health risk questionnaire be completed as part of the application process. The purpose of the health questionnaire is to ‘weed out’ the higher risk applicants with significant health risks.

Most people pass the questionnaire with ease. When they do, they fall into the same group as everyone else who also passed the same questionnaire, which represents a lower ‘risk’ to the insurance company, thus lowering rates. (Those who do not pass the health questionnaire are provided the opportunity to sign up on the Washington State Health Insurance Pool, a high-risk pool with significantly higher premiums) If a business has an employee who does not pass the health questionnaire, then it can still prove less expensive to cover the high risk pool premium for that individual employee versus paying higher group rates for all employees.

Group plans in Washington do not have a health questionnaire, so the insurance company has no way of ‘weeding out’ the unhealthy employees. The rates have a ‘built in’ risk factor, whether warranted or not, because the insurer has no way of separating the high risk groups from the low risk. Groups of 2-50 employees are ‘community rated’ meaning they are in the same risk pool whether their employees have low utilization or high. Therefore, the small business with healthy employees ends up paying a higher rate because of other businesses who may have employees with expensive high risk chronic health problems.

Offering individual health plans to employees comes with more advantages than just lower price. They also come with less administration. Unlike ‘group” plans, there are no ‘renewals’ each year to go through, no minimum participation requirements imposed by insurance carriers, and no minimum employer contribution requirements, either. Employers still have the ability to define eligibility, probation periods, and can design their health benefit package with more options and flexibility.

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