Finding The Tipping Point For Sharing Group Medical Premiums

Premium sharing is also a good strategy for eliminating duplicate coverage.

Assume employee Bill has a working spouse, Sue, with excellent group medical insurance coverage provided by her employer. And assume that Bill’s employer pays 100% of the employee and dependent premium for medical insurance. Bill has no financial incentive to decline coverage for his spouse. And he could argue that Sue’s plan does not provide 100% coverage anyway so his group plan will help fill in the gaps. But at what cost to Bill’s employer? Assume the monthly premium to insure Bill’s wife as a dependent is $500. Yet Bill’s plan is the secondary payer. Most of Sue’s claims will be paid by another insurance company.

Next, assume Bill’s employer offers to pay 75% of the dependent premium, $375 in this case. Bill must decide whether the secondary coverage is worth $125 monthly. The employer cannot lose. If Bill elects dependent coverage, $125 of the monthly premium has been shifted to him. If he declines coverage, his employer is freed from paying its $375 share of the premium.

The most popular alternatives to premium sharing are either charging employees a flat dollar amount or a fixed percentage of the employees’ own premiums.

A system that charges a flat dollar amount, such as $20 per paycheck, is easy to understand, but it discriminates against the lower-paid employees. Furthermore, in small group insurance plans where each individual’s monthly premium will vary by age, a flat dollar amount discriminates against the younger employees, who usually qualify for lower rates.

Charging employees a fixed percentage of their own premium, such as 20%, again discriminates against the lower paid. But if participants are individually rated by age, the older employees will pay more than the younger employees. Furthermore, a fixed percentage is easy to update, and there is a predetermined sharing of future rate increases.

Some employers will charge employees a fixed percentage of their monthly salaries. At employers that use this method, the higher-paid (and usually older) employees end up paying more of their respective costs. In addition, some employers will waive any premium sharing for employees below a certain income level.

The employer may be able to soften the blow of shifting more premium costs to employees by implementing a Section 125 cafeteria plan. This type of plan, which has a minimal cost, enables employees to pay their share of the monthly premium with before-tax dollars.

Here’s an important final note about avoiding anti-selection: Cost shifting is here to stay. However, the burden on the employee should not be so severe that healthier employees opt out of the plan and seek lower-cost alternatives on their own. Employers should endeavor to pay enough of the medical insurance cost so that the employee cannot secure coverage privately at a lower price.