In order to determine the appropriate premium to charge, each group policy is evaluated on its own merits and charged according to the risk of the group’s population. If they know someone in the group is sick, they adjust upwards the premium dollars to offset the known payout. If there have been high historic claim trends in the group, the insurance company may decline to offer a policy or will raise the premium to compensate for the additional risk of future claims. They do the same thing by looking at the age of the group.
The insurance company sets asides reserves to pay future claims. It pools some of the money received in the form of premiums together for that purpose. States requirements vary on the amount of reserves required. There are minimums and maximums and it is based on actuarial calculations and the probability of a claim.
Insurance companies try and vet out as much possible information on the health of a group as they are legally allowed. This improves their odds on paying out claims. By assessing as much risk as possible an insurance company can stack the odds in their favor. Insurance companies underwrite each policy based on the total risk of that policy.
Health insurance in the United States is primarily sold to employees in the form of group insurance through their employer. The insurance company looks at the combined risk of everyone employed at the company. They look at age, health, previous medical conditions and expected future medical conditions. Then they estimate the cost of claims for the year on the group of people as a whole. They then rate and rank the policy.
Groups with larger number of young people generally have lower cost insurance. Many insurance companies age base adjust premiums, since the older an individual is the higher the risk of loss.
In order for a health insurance company to underwrite an individual policy, they need to understand the risk of the individual. If there is any risk of paying out a claim on the individual, they build in the risk into the cost of the policy or they decline the coverage. Health insurance companies “cherry pick” healthier populations to skew the odds in their favor. That means, if the health insurance questionnaire filled out by an individual indicates a potential risk, like a pre-existing condition or a response to a question on a questionnaire that tilts the odds in favor of paying out a claim, they limit their risk by denying coverage to the individual.
If you have “Bad Odds”
Small groups and individuals with an “unhealthy population” often have no where to go. If an insurance company rates them unfavorably they generally join the ranks of the uninsured. Many states offer insurance to high-risk individuals through state mandated high risk insurance pools or policies. Insurance companies in some states are required to offer insurance to high-risk individuals or those that are deemed, “uninsurable”. Often the rates for these policies are high and many people cannot afford to purchase them.
Who pays for the “High Risk” individuals?
Taxpayers. Federal, State and local governments all share in the cost of those that are uninsured. That’s the kicker when it comes to insurance. Taxpayers are already paying for the most expensive of the sick. Those that become permanently disabled and the elderly are covered through Medicare and Medicaid. People injured in the military are covered by the military or veterans administration benefits and the elderly are covered under medicare. These are some of the most expensive claim groups in the country.
Sweet Deal if you’re an Insurance Company
It’s a pretty sweet deal for insurance companies, and getting sweeter. Many insurance companies while still putting on a “local face” are owned by extremely large mega corporations. In fact, the five largest own an estimated __% of the market and they are still gobbling.
Stacking the House
Insurance companies legally (and immorally) stack the odds in favor of higher profits and reduced claims. They intentionally embrace techniques and practices that allow them to deny coverage to those that are the sickest.
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