“Adverse Selection” is one of those insurance terms that you may or may not have heard of, or even understand if you have, but it is definitely something you need to know more about. In the journals of Life/Health 101, adverse selection is defined as “when an insurance company has selected more poor risks than good risks”. From the insurance company’s point of view, for them to financially make out on a health insurance risk, they need to have as many healthy people (low users) in the group, as less healthy (high users). If only the sick join, or remain, it becomes a challenge to keep premium dollars in line with claim costs. When claim costs exceed premium, the risk assessment of your group goes up and your premiums go up as well. Thus, the adverse selection cycle begins. This cycle continues to increase premium. The healthy people then pay more which causes them to seek other alternatives, which may even include going without coverage.
Employers today are exposing employees to more and more cost sharing to offset the cost of this benefit. For employees, this comes in two forms; sharing in the actual cost of medical expenses through deductibles, co-pays and coinsurance or through paying some share of the monthly premium cost. Employees tend to “do the math” when it comes to paying part of the monthly premium. “Doing the math” is when an employee calculates what their share of the cost is, versus the return in benefit. For low users or healthy employees, that cost sharing can’t be too high. On the other hand, those same people might not balk at higher deductibles because they aren’t using the health care system as much. When they do the math, and conclude your premium costs are too much, you lose what we at Bates Insurance Group as “healthy premium”. At the same time, chances are you didn’t lose any of the high users because the benefit is too important to them. The math tells them to stay on as a participant. So when you as an employer thought by charging more back to the employees each month would save money, it didn’t. In fact, it started a cycle that eventually results in costing you more. As an agency, we recommend that employers pay as close to 100% of the employee premium each month as possible, and if feasible, none of the dependent premium. An employer rarely knows what health conditions exist in the dependent class. Sometimes an employer has to make these changes over time and not abruptly. However, this restructuring of contribution ensures greater total employee participation which usually equates to a more balanced group, with longer term savings for all.