Small businesses are always on the lookout for finding an insurance plan that can be manageable under a tight budget. Group health insurance is currently mandatory to buy for all employers in businesses and organizations. So, even if you run a small enterprise with seven to ten employees, you have to ensure the insurance benefits for them.
The pandemic outbreak has made it compulsory for businesses of all sizes to offer group healthcare policies to employees. Under this policy, the employer pays for the premium of the Mediclaim plan on behalf of the employees. It may or may not be a comprehensive plan(coverage for employees and their dependent family members). In either case, the employer pays the premium. So, it is understandable why a small business owner searches for an affordable option.
Group healthcare plan and small business – As a small business owner, you must find effective ways to cut the overall cost of the premium. The business returns may not be too high for small enterprises and can fluctuate in terms of annual performance. In such cases, bearing the cost of an expensive policy gets difficult on the employer. It is the main reason why a small business owner always seeks an opportunity to reduce the cost of the premium. But does that mean they have to compromise with the coverage aspects and offerings? Not necessary! There are other ways through which a small business may successfully reduce the overall premium cost in a group healthcare policy.
What are the different risk pooling mechanisms available?
Insurance is one of the most popular risk-pooling mechanisms used worldwide. India has multiple types of risk pooling methods being used to provide health insurance for people.
1. Government Subsidized health insurance schemes: Government subsidized health insurance schemes provide subsidized insurance coverage to specific targeted segments of the population. These schemes predominantly target the poor and the informal sector. Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB- PMJAY) launched in September 2018 is the single largest health insurance scheme.
2. Social Health Insurance (SHI) Schemes: These are compulsory health insurance schemes for organized sector employees. Both employees and employers (the Government or private enterprises) pay premiums towards Government mandated health insurance coverage.
The Employee State Insurance Scheme (ESIS) run by Employee State Insurance Corporation (ESIC) in the Ministry of Labor is the largest such scheme. ESIS provides comprehensive coverage – including in-patient and out-patient benefits – to private establishment workers and their families. It covers workers earning less than Rs. 21,000 per month.
Another social health insurance scheme is the Central Government Health Scheme (CGHS) run by the Union Government for its employees.
3. Private Health insurance schemes: These are non mandatory health insurance programs that individuals and businesses purchase for their employees. These can be either individual / family or group business (excluding Government). The individual schemes are targeted towards individuals and families.
Group insurance schemes target small businesses, corporates and private enterprises where employee compensation is higher than the Rs, 21,000 ceiling under the ESIC.
Understanding risk pooling in group health policy
Pooling is accumulation and management of revenues in such a way as to ensure that the risk of having to pay for healthcare expenses is borne by all members of the pool and not by any individual contributor. In insurance schemes, pooling is done by the insurer.
Have you heard of the concept of risk pooling in a group healthcare insurance plan? It is a fundamental aspect of any group insurance policy. It is especially effective in healthcare plans. The employer pays the premium and the employee can enjoy the plan coverage against the payment. The risk pooling does not concern the insured person in any way or affect their coverage benefits.
Let us understand pooling in health insurance with an illustration:
Consider a corporate group with 100 employees (members). The members are about the same age, and they have similar lifestyles and are part of a homogenous group. From their experience, they know that one of the members gets sick and incurs health costs. While they are not able to predict who will fall sick, they do know that one member at least will fall sick every year. The employer ( corporate group) is worried about potential losses due to illness, injury or a disease and decides to collect a small portion of money from each member. They pay the money collected and contribute some portion from their end to a third-party called “Insurer”. The insurer gets into a contract with the employer ( also called the insured) that if one of the employee/member falls sick the expenses are paid for the treatment. This in a nutshell, is insurance.
The pooling risk concept in a group healthcare policy allows a combined payment of premium for employees with high health risks and low health risks. It balances the requirements. The feature in the insurance allows the higher premium rate for the high-risk individuals (Healthwise) to be offset by the premium rate of those with lower health risks. It helps in the even distribution of the expenses carried by the employer.
Is it truly beneficial for small businesses?
It is essential to understand if the risk pooling feature is beneficial for small enterprises. It is a decision that the employer must make carefully. As they are the ones responsible for meeting the annual expense for continuing the insurance, it is vital to have a clear idea. Following are the benefits of risk pooling that you can enjoy while meeting the group healthcare insurance expenses for your small business.
- More stability: Why does a small business owner have to worry so much to find an affordable group healthcare insurance plan? Because the returns of a small business are limited and often unpredictable. With the risk pooling option in insurance, you can expect to maintain a stable expenditure amount. As the risks get balanced between the employees, you never have to pay a huge lump sum to meet the requirements.
- Better balance: It helps in finding the balance in expenditure and also in your workforce. It can impact productivity if you think from a broader perspective. Thus, you can make a better business decision and alter the group dynamics with better analysis.
- Fewer risks: Reduce the unpredictable premium hikes with the pooling feature. The risk gets evenly spread in the employer-sponsored group healthcare plan. Even if the group grows large in the coming time, you can successfully mitigate the risks of unpredictable expense increment. If you think from a long-term perspective, it is truly a benefitting plan for all small businesses.
Factors that play a role
Business size and group dynamics: Suppose your small business has fifty employees, with eighty percent of them having a high health risk. If most employees are above the age of fifty with a medical history, they are naturally considered high-risk individuals. So, the remaining twenty percent of low-risk individuals may not completely balance the expenditure. But it will reduce the amount to a limit. So, group dynamics matter the most in determining the cost cut.
Coverage features in the insurance: The coverage areas in the group healthcare plan also play a crucial role in determining the overall expense. So, if you want to understand the ways to curb the cost, you have to sit with your insurance broker and discuss the coverage essentialities. The combination of risk pooling and insurance coverage helps decrease the cost for a small business.
Important Points to Consider For Risk Pooling
While there are many advantages of risk-pooling and buying health insurance, there are some characteristic problems and very important aspects that insurers and companies need to be aware of before they go for risk-pooling.
1. Adverse selection
Adverse selection occurs when those who anticipate needing healthcare choose to buy insurance more often than others. This happens when insurers lack full information about the risk of individual insured persons and there is an asymmetry of information. An insurance scheme with adverse selection will be full of people with high risk of illness. This in turn results in a financial drain on the insurance program and may challenge the viability of the scheme. A common logic is high-risk individuals are people who have a higher requirement of health services. So, through health insurance, these people are protected from high medical costs, because this is cross-subsidised by the healthy.
One of the best ways of countering adverse selection is by having a large enrolment unit, e.g. covering all employees in a company, or including all dependents/family members if the employee family is to be insured. This is where risk-pooling helps but small businesses should ensure the enrolment of members in insurance is maximized to avoid adverse selection. Businesses should try and make insurance schemes compulsory. This means that those with low risk cannot opt out of the scheme and will subsidise the high risk.
2. Moral hazard
Moral hazard refers to the way in which insurance changes people’s perspectives. In general, the tendency of individuals, once insured, tend to behave in such a way as to increase the likelihood of a loss against which they have insured. Moral hazard is a problem for financial viability of health insurance schemes, as it results in cost escalation and excessive medical treatments.
Small businesses ensure employees are provided insurance by risk-pooling. Since there is no medical underwriting done prior to purchase of the policy, they should try and structure the insurance program to control the risk of moral hazard. It can be countered by introducing containment measures like having co-payments on claims so that the employee shares some of the medical costs. This puts a barrier on unrestrained use of health services. However,co-payments,if sizable, can act as a barrier to utilization of health services and defeat the objective of health insurance.
Because health insurance reimburses hospitals or providers on the basis of services rendered, there is an incentive for providers to offer lower costs, perhaps lower quality, services or to only service a healthier population ( adverse selection) .
In addition, once a patient is covered under a health insurance scheme, there is the incentive for them to consume more health care than is otherwise needed ( Moral Hazard).
Hence it is critical for small businesses to structure the insurance program that mitigate the risks of adverse selection and moral hazard. Consulting with an expert in the matter is vital before you go ahead with the decision of opting for risk pooling in the insurance policy. They will help you uncover the pros and cons specific to your business.
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