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Chapter 6: Health Insurance Schemes Group

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This document should not be carried outside the physical and virtual boundaries of TCS and
its client work locations. Sharing of this document with any person other than a TCSer will
tantamount to violation of the confidentiality agreement signed when joining TCS.

Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that may be appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.
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Contents

Chapter - 6 Health Insurance Schemes - Group ................................................................ 4
Introduction ...................................................................................................................... 4
6.1 Introduction to Group Health Insurance ................................................................. 5
6.2 Controlling adverse selection in Group Health Insurance ....................................... 5
6.3 Classification of Corporate Group Health Insurance ...............................................6
6.3.1 Self Funded Healthcare ...................................................................................... 7
6.3.2 Self-insured Employer .................................................................................... 7
6.3.3 Components of Self-Funding ............................................................................. 8
6.3.4 Self - Funded Plan Insurance ..........................................................................9
6.3.5 Functioning of a Self-Funded Insurance .............................................................9
6.4 Stop Loss Excess Insurance .................................................................................. 10
6.4.1 Writing a Stop Loss Coverage ...................................................................... 11
6.5 Issues with Self-funded Insurance ........................................................................ 12
6.6 Fully Insured Group Health Insurance .................................................................. 12
6.6.1 Enrollment and Renewal of Contracts .......................................................... 13
6.7 Risk Rating for Group Insurance Policies .............................................................. 13
6.8 Advantages of Group Health Insurance ................................................................ 13
6.9 Disadvantages of Group Health Insurance ........................................................... 14
Summary ........................................................................................................................ 15
References ...................................................................................................................... 18

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Chapter - 6 Health Insurance Schemes - Group

Introduction
Group Insurance is a type of insurance where people belonging to one category, takes one
single healthcare policy common to all the members of the group, whose primary motive to
form a group is not insurance. The pricing (premium) and benefit package is different to
that is generally available in the market for individuals. This chapter tries to explain
different types of group health insurances, and pros & cons of choosing each type of
financing method.

Learning Objectives
On completion of this chapter, you will understand the:
Groups eligible for Group Health Insurance
Characteristics of Group Health Insurance
Different types of financing and its associated benefits and risk
Functioning of Stop-loss Excess Insurance

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6.1 Introduction to Group Health Insurance

Under a group health insurance scheme there will be one single policy called as the master
policy for a group of employees or members who share similar attributes. Inclusion of
individuals into the group is not at the discretion of the insurer or the member and at times
comes as a mandate, like in the case of employee health insurance. There will not be a
problem of adverse selection as the primary motive of people getting insured is not
obtaining insurance and availing the benefits of it.

Group insurance can be provided for:
Organizations
Labor unions
Cooperative societies
Churches, service groups etc..,

Group insurance policies are of two types:
Non-Contributory: In this case, employer either completely or partially contributes
premium towards the insurance pool.
Contributory: In this case, employer collects funds through payroll deduction of
employees and transfers them to the insurance company.

In a non-contributory plan, employer pays the premium and it is assumed that the
participation is compulsory. However, some employees may not wish to participate in
contributory schemes as their income levels are low or they have coverage elsewhere.
6.2 Controlling adverse selection in Group Health Insurance

Since the entire group is considered as a single unit for the purpose of underwriting a group
health insurance, there are chances of adverse selection. Certain adapted policies are put in
place apart from inherent aspects of the group that ensures adverse selection does not
happen:
Insurance being incidental to the group: Insurance should not be the primary
motive for the members of the group to come together, generally the groups will be
like employee group, labor unions etc..,
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Constant flow of persons into the group: Predicted claims are always directly
proportional to the average age of the group and with younger people joining the
group that comes down and so does the risk.

Benefits are automatically determined: Employees are not given a choice to
determine their benefit package. If there is such option, then members with poor
health choose the one with maximum benefit package and members who are
healthy tend to choose one with minimum coverage.

Minimum participation in the group: Another aspect in underwriting control is the
substantial participation of eligible people in the group to avoid adverse selection. It
will be 100% in case of non-contributory plans and a minimum of 75% in
contributory plans. More the number of people participating less will be the risk of
the insurance company against undue proportion of sub-standard lives.

Cost sharing by a third party: Ideally either the employer or the trade union or the
labor union contributes towards the premium. If it is non-contributory scheme
complete control will be with the employer which does not require consent from
many people to meet the participating requirements. Even if it is a contributory
scheme, it will not be that big a problem, as the group will have their
representatives.

Best-in-class administrative system: There has to be an administrative
organization working for the insurance company to collect premiums and handle
claims. Usually it is the employer who collects funds through payroll deductions in
case of contributory scheme.
6.3 Classification of Corporate Group Health Insurance

In most of the countries it is a mandate that employers must provide either healthcare
facilities or a compulsory health insurance to its employees. Such corporate health
insurance can be of two types:
Self funded healthcare
Fully insured private group health insurance
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Both these funding options vary in their way of functioning, especially with respect to the
employers role in providing these facilities. Structure and functioning of each of those will
be explained in detail below.
6.3.1 Self Funded Healthcare
Self funded healthcare is a type of employer health insurance where the funding to meet
the healthcare expenses and disability benefits of its employees is self financed by the
employer. It is different from fully insured plans where the premium is paid to the insurance
company by employer-employee on a pre-determined contribution basis and the
healthcare cover to the employees and their dependants is provided by the insurance
company contracted by the employer.
Though self funded healthcare is not a typical group health insurance and does not come
under the purview of all the laws governing the insurance industry, it will have plan/policy
document explaining the eligibility and benefits covered. In self-funded healthcare,
employer assumes the entire risk of meeting those expenses, hence are subjected to high
financial risk.
6.3.2 Self-insured Employer
A self insured employer is the one who provides health and disability benefits to its
employees whose claims are paid from its own cash flows instead of paying regular
premiums to conventional insurance companies.

Who can self-insure?
Any small or large business can self-insure. It works well for companies where the cash flows
allow them to meet the claims expenses, which implies that it functions well for large
companies.

Benefits and reasons for employers to self-insure
It does not have to comply with all the regulations which a typical group insurer has
to comply with.
Flexibility to customize the benefit package according to the needs of the
employees
Depending on the trends in the employee health problems like diabetes, obesity
etc.., employer can organize health awareness programs
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Cash flows of the employer improves by self-managing the funds because, claims
are paid when actually incurred, but in the case of fully-insured, premiums are paid
in advance, and hence an interest income is earned by doing so.
Expenses incurred for this can be claimed for tax deductions
Employer can choose the provider network that best suits their needs
Benefit package can be altered any point of time without the change in insurer or
procedure of availing healthcare services.

Important aspects a self-insurer has to consider
Companies who opt for self-funding their employee healthcare have to consider the
following aspects for smooth functioning of the plan:
Cost incurred in adding additional personnel and hiring a TPA to administer the
program
Trends and patterns in the history of claims
If stop loss insurance is purchased, then the opportunity cost of purchasing the
same
Cash flows of the employer to remain liquid as well as solvent
6.3.3 Components of Self-Funding
Typically if an employer chooses a group health insurer and pays regular monthly/yearly
premiums for the risk assumed by the insurer, that premium amount constitutes following:
Current and predicted cost of claims
Administration fees of TPA
Tax on the payable premium
Profit of the insurance company

But in the case of self-funding, since the employer himself assumes the financial risk there
will not be any profit to insurance company and also no taxation since the contribution is
not actually insurance premium. Administrative fee comes into picture only when the
employer outsources the administration to a TPA. But if the employer, in order to mitigate
risk opts for stop loss insurance, it will add up to the total cost.


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6.3.4 Self - Funded Plan Insurance
In self-funded plan insurance, employer pays/reimburses the medical expenses instead of an
insurance company. Though it is not an insurance there are features and a defined benefit
package that the employer offers. There are a lot of employers providing health coverage
through established self-funding plans.

Considerations: Large companies save a lot of money through self-insurance plans
to its employees as it need not have to pay premiums to insurance companies. A
part of the reserves is set aside by the employer to meet these obligations. Because
it is the liability of the employer to pay out the benefits that it has promised. So in
case of bankruptcy the priority for employees remains the same, whether it is
salaries or the unpaid claims.

Administration: Enrollment of employees is not by default. Generally a TPA (Third
Party Administrator) is hired by the employer to administer the self-insurance plan
and its name appears in the plan documents. But it is not responsible to pay the
claims and also its role is not subject to the insurance laws.

Treatment: Since the self insurance plan is not subjected to health insurance laws,
it is not bound to cover the diseases and treatments mandated by the laws. There
will be defined list of treatments and diseases covered under the plan.

Conflict of Interest: Since it is the employer who is responsible for making
contributions to the plan as well as making payment to the claims, it can create a
conflict of interest. Hence to avoid that, generally employer hires a TPA to
administrate the plan and it must provide a fair deal to opt this plan instead of going
for an individual private health insurance plan.
6.3.5 Functioning of a Self-Funded Insurance
Operation of self-funded insurance is similar to that of a typical insurance company.
Contributions are collected in regular intervals both from employer and employees which
will be transferred to a trust fund. Any claims which arise will be compensated by
withdrawing the money from the trust. Excess funds if any remaining, would be used to
offset any future costs.
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Stop Loss Insurance: In order to mitigate financial risk to certain extent employer
includes stop loss insurance to self-funded insurance to covers catastrophic claims.
Employer can set a maximum tolerable amount that the employer can accept, and
if the aggregate claims exceed that amount the insurance company will
compensate that excess amount. Cost of stop loss insurance is inversely
proportional to the maximum acceptable loss. When employer takes stop-loss
coverage the type of insurance provided is called as Partially Self Funded
Insurance.

Variations: Not all self-funded plans use stop loss insurance. Plans without stop loss
insurance spend less in implementing self-funded plans. But in the case
unanticipated substantial claims, there will not be an assistance from stop loss
insurers and will have to bear them as out of its own cash flows.

Considerations: Self-funded plans are highly flexible and can be suited to the need
of the employees. If the contributions are more than the paid claims, rest can be
used to meet future expenses. But the efforts need to be spent by the employer is
more and assumes a lot of risk than the going for conventional insurance plans.

6.4 Stop Loss Excess Insurance

Stop loss insurance, which is usually termed as excess insurance, provides protection
against unanticipated losses. Employers who provide self-funded insurance but do not want
to assume 100% risk against losses arising out of them purchases stop loss insurance. Such
insurer is responsible for meeting the obligations of employer exceeding a certain limit
which is the deductible.

Employer is the insured in this case because his liabilities (employee benefit package) are
insured by stop loss insurer and not the employees (participants of the healthcare plan).




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There are two types of stop loss insurance. They are:
Specific stop-loss: It is a type of excess coverage provided by the stop loss insurer
when the employer encounters a high amount of claim for an individual. It provides
a shield against the claims arising out of abnormal severities occurring to an
individual in a single claim rather than claims in total. It is termed as individual stop
loss.
Aggregate stop-loss: It provides a ceiling for the aggregate amount of claims in
total for the employer for a given contract period. In case the claims exceed the
ceiling amount as per the terms of the contract, then the insurer reimburses the
employer for the excess amount.

Depending on the necessity employers use one or both of these plans if they provide self-
funded insurance to their employees.
6.4.1 Writing a Stop Loss Coverage
Stop loss coverage is generally written through a trust. In a conventional group insurance
program, employer is issued the policy. But in case of a trust, trustee is the policyholder and
the employers who opt for stop loss insurance are the participating employers in the trust.
All these participating employers are provided the documents describing the outline of
benefits of the policy issued to the trustee.
Following are the terms associated with the trust:
A TRUST provides stop loss coverage to the participating employers
Bank is the TRUSTEE which acts as the policyholder for the stop loss insurance.
Document issued to the trustee is the POLICY
Employer who purchases the stop-loss insurance through trust is called as the
PARTICIPATING EMPLOYER
Each participating employer is issued a PARTICIPATING CERTIFICATE which is
similar to the policy issued to the trustee

For any expense/claim to be reimbursed under the stop-loss coverage it must satisfy the
following conditions:
It must be covered under the Employers benefit plan
It must be eligible to be defined under the policy terms of stop-loss coverage
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6.5 Issues with Self-funded Insurance

Though self-funded insurance appears to be cost saving, in the long run there are a lot of
inherent issues/concerns with it.
Small Businesses: Since the savings through self-funded insurance is achieved
through economies of scale in expenses like administration and a larger risk pool for
claims, it is not in the scope for smaller businesses to go for self-funded insurance.

Cash flows: Though most of the employers go for partial self-funding through stop-
loss coverage, companies either need to have regular cash flows or should have set
aside some funds to meet the claims expenses and remain liquid in the due course.
So just the ability to get the money required is not sufficient, companies should get
them in a timely manner to meet the obligations.

Administration: Since the company is operating on itself, its own operating staff
working 24*7 need to be put in place to provide services for employees going for
claims.

Fluctuation in claims: In case of fully funded insurance cash outflows of the
company are predictable but it is not the case in self-funding. At times companies
might have to meet abnormal claims expenses which it has to be prepared for.

Waiting period: By going for this option, employers might not realize the benefits
in a short span because of the cyclical nature of claims. Hence it might take a
minimum of 3-5 years to fully realize the benefits of the strategy.
6.6 Fully Insured Group Health Insurance

It is one of the key benefits provided by the organizations to its employees, by providing a
healthcare coverage to them and their dependants (parents and children), where a part or
the entire contribution towards the insurance premium would usually be borne by the
employer. It is because in most of the countries it is a mandate for the employer to take care
of its employees healthcare needs.

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Here an insurance company, called as a group health insurer would provide coverage to that
particular group of employees at premium rates generally would be less than the individual
premiums (premium calculation would be explained in detail below).
6.6.1 Enrollment and Renewal of Contracts
There cannot be a denial of participation either from the employer or the insurers side
which is otherwise in individual insurance. Hence all the eligible employees must be offered
coverage if they are willing to enroll.
Generally renewal of contract is at the employers discretion, provided following things did
not happen:
Premiums not paid
Either employer or its employees committing fraud or any intentional
misrepresentation
Non-compliance with the terms of the contract
6.7 Risk Rating for Group Insurance Policies

In pricing (determining the premium rates) a group insurance policy, health actuary can
employ three different kind of models based on the size of the organization and their claims
experience. The classification is as follows:
Manual Rating: It is used for smaller groups, where the premium is determined
based on the average benefit payments
Experience Rating: It is typically employed for larger groups with a quite a bit of
claims history, and its premium is based on its own claims experience
Blended Rating: It uses a mix of both the claims experience as well as the average
risk of all the groups. And based on the size of the group the weightages of claims
experience and manual premium is determined. So larger the group, higher will be
the weightage of claims experience and smaller the group, higher will be the
weightage of manual premium.
6.8 Advantages of Group Health Insurance

There are a lot of reasons why corporate as well as individuals prefer group health insurance
over individual insurance like:
Premium rates are relatively low given their characteristics like age, member group,
occupation, work environment etc..,
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Administration of insurance becomes a lot easier because there will be one single
master policy applicable to all the members of the group irrespective of their health
conditions or other attributes
Policy commences once the employee becomes part of the organization, moreover
there will not be any physical examination as in the case of individual policies
6.9 Disadvantages of Group Health Insurance

From the employees point of view there are quite a few limitations:
Since this insurance is provided for working in the company the coverage provided
is temporary in nature. So employee either have to purchase an expensive
individual policy or a one that provides less liberal coverage in order to retain
protection in case group plan is terminated for loss of employment or retirement.

Individuals who are habituated to large coverage while under employment either
fail to realize the need for or are reluctant to bear the costs of individual insurance.

Flexibility of group insurance is limited to the design of the master plan for the
employer and is not extended to the individual employees who are covered

In case of individual insurance, the agent or advisor assesses the financial needs of
the members and advises accordingly which a group insurance does not do.


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Summary
Under a group health insurance scheme there will be one single policy called as the
master policy for a group of employees or members who share similar attributes.
Group insurance can be provided for:
Organizations
Labor unions
Cooperative societies
Churches, service groups etc..,
Group insurance policies are of two types:
Non-Contributory
Contributory
Adverse selection in group insurance can be avoided for the following reasons:-
Insurance being incidental to the group
Constant flow of persons into the group
Benefits are automatically determined
Minimum participation in the group
Cost sharing by a third party
Best-in-class administrative system
Corporate group health insurance is classified into two types based on the way the
policies are structured:-
Self funded healthcare
Fully insured private group health insurance
Self funded healthcare is a type of employer health insurance where the funding to
meet the healthcare expenses and disability benefits of its employees is self
financed by the employer
A self insured employer is the one who provides health and disability benefits to its
employees whose claims are paid from its own cash flows instead of paying regular
premiums to conventional insurance companies.
Following are the reasons why employers go for self-funded insurance:-
It does not have to comply with all the regulations which a typical group
insurer has to comply with.
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Flexibility to customize the benefit package according to the needs of the
employees
Depending on the trends in the employee health problems like diabetes,
obesity etc.., employer can organize health awareness programs
Cash flows of the employer improves by self-managing the funds because,
claims are paid when actually incurred, but in the case of fully-insured,
premiums are paid in advance, and hence an interest income is earned by
doing so.
Expenses incurred for this can be claimed for tax deductions
Employer can choose the provider network that best suits their needs
Benefit package can be altered any point of time without the change in
insurer or procedure of availing healthcare services.
Following are the constituents of a fully insured policy premium:-
Current and predicted cost of claims
Administration fees of TPA
Tax on the payable premium
Profit of the insurance company
A part of the reserves is set aside by the employer to meet the obligations of self-
funded insurance plans
Generally a TPA (Third Party Administrator) is hired by the employer to administer
the self-insurance plan and its name appears in the plan documents
Self-funded plans are highly flexible and can be suited to the need of the employees
Stop loss insurance which is usually termed as excess insurance provides protection
against unanticipated losses.
Employers who provide self-funded insurance but do not want assume 100% risk
against losses arising out of them purchases this stop loss insurance, where stop
loss insurer is responsible for meeting the obligations of employer exceeding a
certain limit which is the deductible.
Types of stop loss insurance:
Specific stop-loss provides coverage for high individual claims
Aggregate stop-loss provides coverage for aggregate claims when exceed
certain amount
Issues associated with Self-funded Insurance are:-
Risk and administrative cost for Small Businesses are higher
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Regular cash flows are required or certain funds need to be set aside
Administration
Fluctuation in claims over periods
Waiting period for reaping benefits of this choice
In case of Fully Insured Group Health Insurance, employers provide healthcare
coverage to its employees and their dependants (parents and children), where a
part or the entire contribution towards the insurance premium would usually be
borne by the employer
Different types of risk rating employed for group health insurance are:-
Manual Rating
Experience Rating
Blended Rating

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References
Mohith Saradhy, Group Insurance: An overview, Ibexi Solutions
Michael J. Brien, Constantijn W.A. Panis, Large Group Health Plans Study, March 23,
2011
Employer Self-insurance Decisions and the Implications of the Patient Protection and
Affordable Care Act as Modified by the Health care and Education Reconciliation Act of
2010 (ACA), United States Department of Labor and United States Department of Health and
Human Services
Jonathan Gruber and Helen Levy, The Evolution of Medical Spending Risk, Journal of
Economic Perspectives-Volume 23, Number 4-Fall 2009, Pages 2548
Bhat Ramesh & Mavlankar Dileep (2000), Health Insurance in India: Opportunities,
Challenges and Concerns, Indian Institute of Management, Ahmedabad.


Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that maybe appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.


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