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How to fix health insurance w/ no Gov’t required January 27, 2010

Posted by visceralrebellion in Health Care.
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While the details of premium calculation by health insurance companies (HIC) are very complex, premiums may be broken down into the following categories for the purpose of explaining premiums to the average educated American.

Monthly health insurance premiums are calculated using the following basic formula:

(((Claims Risk+Administrative Cost)/(Number of Members in Group)))/(12 months)=Monthly Premium per Member

Claims Risk is comprised of two general parts:

Unanticipated expenses, such as hospital stays and emergency care. These expenses are determined using both statistical analysis of the group’s previous claims and research on the likelihood of injury and disease among the group’s members based on group demographics and occupation.

Mandated expenses, those services and products the government forces every HIC to cover, e.g. birth control, mammograms, acupuncture, etc.

Administrative costs are the standard costs of doing business including salaries, taxes, equipment, etc. The “Cadillac tax” would fall into this component if enacted.

The number of members is artificially determined by law. Currently, every group must have one and only one Taxpayer ID Number to purchase the plan, whether an SSN or an Employer ID Number. Unlike car and life insurance, HICs are not permitted to create a benefit plan that allows any number of individuals or employers to join.

Example numbers will clarify. These are SWAG numbers, particularly the claims risk numbers. I’ve tried to maintain proportions in claims risk and list constants.

Example 1: a small business with 25 employees purchases a standard HMO plan. The claims risk for those 25 employees is calculated to be $100,000—$70,000 unanticipated and $30,000 mandated ($1,200 per member per year for mammograms, physicals, etc.) Administrative costs typically run $2 per member per month, so add $600 per year.

The calculation appears thus:

((($100,000+$600)/25))/(12 months)=$335.00 per member per month

Let’s increase the group size to 200. The associated claims risk goes up as well, though not as much due to the statistics. The mandated costs go way up because of the relative certainty of those expenses.

Claims risk: $200,000 unanticipated, $240,000 anticipated (still $1,200 per member per year)

((($420,000+$4,800)/200))/(12 months)=$177.00 per member per month

Increasing the group size nearly halves the costs per member per month.

Increase the group size to 1,000, the typical large company.

Claims risk: $800,000 unanticipated, $1,100,000 anticipated ($1,200 per member per year for mammograms, physicals, etc.) Administrative is 1000($2)(12) or $24,000.

((($1,900,000+$24,000)/1000))/(12 months)=$160.33 per member per month

Simple mathematics demonstrates that the larger the number of members, the lower the costs per member per month.

To immediately reduce premiums for everyone—not just unions and Nebraskans—without a dollar of tax money and without a single federal agency, simply allow HICs to pool members the same way property and life insurance companies pool members. The HIC offers a benefit package that allows employers or individuals to join the package, NOT the group, which greatly increases the denominator while not increasing the anticipated cost factor of the numerator by very much at all.

Preexisting Conditions

As an aside, let’s look at what forcing preexisting coverage does to the premiums.

Use the same calculation, but the claims risk increases dramatically. Take a diabetic for example. Average costs for insulin-dependent diabetic are $25,000 annually for that single person: an additional $10,000 in known expenses such as insulin and needles, and $15,000 for greatly increased risk of hospitalization and emergency care. Using the 200 member group, the calculation is:

((($445,000+$6,000)/201))/(12 months)=$186.00 per member per month

To take on one preexisting condition, each member’s premium increases $9.98 per month, or $119.00 per year.

Currently, if the diabetic had not had coverage in the previous 12 months the diabetic must wait one year for coverage for diabetic services and products, after which the diabetes is covered. This allows the claims experience for the group to absorb some, but certainly not all, of the increased costs over the yearlong wait. If the diabetic has had coverage over the entire previous 12 months, there is no waiting period and the group has to absorb the costs immediately.

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