What Is Group Health Insurance (and How Does It Work)?

Group health insurance is a type of health insurance coverage provided by an employer or organization to its employees or members. These plans are designed to cover a group of people under a single policy, typically offering more affordable premiums and broader coverage compared to individual health insurance plans.

According to recent research, 67% of employees and 68% of employers believe that employer-covered health care is the most important benefit, so it's important to have the knowledge and skills required to build effective coverage plans.

Here, we're discussing the backend mechanics of group health insurance, how products in this category can benefit insurers and some important considerations when designing group health insurance products.

Who Needs Group Health Insurance?

Group health insurance products are valuable for a variety of collectives and, in some cases, are required by law in the United States.

Employers

Under the Affordable Care Act (ACA), employers with 50 or more full-time employees are required to provide a group health insurance plan to 95% of their full-time employees in the United States. Failure to comply can result in hefty penalties that employers must pay to the IRS. Beyond this, group health insurance plans must also meet minimum coverage and affordability requirements.

Offering group health insurance plans is attractive to potential employees and can help retain talent, promote employee well-being, and demonstrate a commitment to employee health and financial security.

Small Businesses

Unlike an employer with 50 or more full-time employees, a small business is generally not required by law to provide group health insurance. However, providing small group health insurance — which is health coverage specifically designed for smaller businesses and start-ups — as part of an employee benefits package can help these employers compete in the market when recruiting new employees.

The Benefits Gleaned by Insurers for Developing and Offering Group Health Insurance Products

For insurers, developing attractive and effective group health insurance products is beneficial in several ways, offering more revenue stability and the advantages of economies of scale, among others:

Stable and Predictable Revenue Streams

Since group health insurance plans typically involve long-term contracts with employers or organizations, they provide insurers with stable and predictable revenue streams. This helps support business initiatives and long-term goals while also managing financial risks and enhancing decision-making — something particularly important when planning for future growth and investment.

Economies of Scale

Insuring a large group of individuals under a single policy allows insurers to benefit from economies of scale. By spreading risk across a larger pool of members, insurers can:

• Lower administrative costs.
• Make it easier to negotiate better rates with health care providers.
• Achieve greater efficiency in claims processing and management.

Competitive Advantage

Offering competitive group health insurance products can differentiate insurers in the market and attract employers, organizations, and other group sponsors. Insurers that can provide comprehensive coverage options, innovative benefit designs, and value-added services may gain a competitive edge and increase market share.

Risk Management

Insurers with diversified portfolios of group health insurance plans can spread their risk across multiple employer groups, industries, and geographic regions. This can help mitigate the impact of adverse claims experiences in any particular market segment and enhance overall risk management. This is called risk pooling, and it works as follows:

In a group plan, the health risks of a large number of people are averaged out. This means that even if a few individuals have expensive medical needs, the overall cost is spread across the entire group. This is different from individual coverage, where a single high-cost claim can significantly impact an insurer's bottom line. With a larger pool, there is a lower chance of the entire group experiencing a surge in claims at once, making it easier for insurers to manage finances.

Additionally, insurers can gather health history data on a group of employees and use it to estimate future health care costs more accurately. This allows them to set appropriate premiums that reflect the group's risk profile.

Group Health Insurance vs. Individual Health Insurance

From an insurer's perspective, there are some key differences between group health insurance plans and individual health insurance plans that affect premium pricing.

For example, group health insurance plans are underwritten based on the overall risk profile of the entire group. For individual plans, underwriting is based on the health status of individual members.

Insurers should assess factors such as the demographics of the group to be insured, historical claims experience, and industry trends to determine appropriate premium pricing. On the other hand, pricing for individual health insurance is based on an individual's age, health status, location, and other factors, which leads to more personalized and typically more costly premiums.

Benefit Design for Group and Individual Coverage

Group health plan coverage often offers standardized benefit packages with uniform coverage levels for all members of the group. Employers or organizations may have the flexibility to customize certain aspects of the plan, such as cost-sharing arrangements or additional health benefits, like dental plans — but it depends on how the product is designed.

In contrast, individual health insurance plans may offer more flexibility in benefit design, allowing individuals to choose from a range of coverage options and benefit levels to suit their specific needs and preferences.

Market Dynamics for Group and Individual Health Insurance Plans

The group health insurance market is influenced by employer-sponsored coverage, collective bargaining agreements, and industry-specific factors. Insurers compete for business based on factors including:

• Health plan design.
• Pricing.
• Customer service.

On the other hand, the individual health insurance market may be influenced by factors such as consumer choice, affordability, and access to coverage options through health insurance marketplace exchanges or private insurers.

Creating an Attractive Group Health Insurance Product for Employers

These factors are not the only considerations in designing a group health insurance plan. The process also requires robust industry knowledge, analysis, and planning.

1. Understand the Target Market

When designing a group health insurance plan, it is imperative to research industry trends, typical employer size, and employee demographics (age, health status, family composition) within the employer's industry.

2. Balance Cost and Coverage

A good group health plan should balance comprehensive coverage for employees with affordability for both the employer and the insurer. This might involve offering tiered plans with varying premiums and coverage options or negotiating competitive rates with health care providers to ensure quality care at a controlled cost.

3. Include Risk Management Strategies

When it comes to underwriting, clear guidelines are paramount to assess the overall health profile of potential employer groups. Additionally, preventive care strategies, such as partnering with employers to offer wellness programs that incentivize preventive care, help to promote a healthier workforce. This could potentially lead to fewer claims and lower long-term costs for employers and insurers.

Develop Profitable Group Health Insurance Products With Help From Lewis & Ellis, LLC.

At Lewis & Ellis, LLC., our actuaries are equipped with diverse experience and proficiency in insurance product design to provide you with a competitive edge in the health insurance industry.

Looking for Medicare Advantage services? See how we can help.

Contact us today to learn how actuaries at Lewis & Ellis can help you build better group health insurance products.