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Why Individual Health Insurance is More Affordable Than Group Health Insurance

Individual health insurance is more affordable than group health insurance. And under the Affordable Care Act, individual health plans must cover all individuals regardless of health and subsidies are available for qualifying employees. With these advantages, why wouldn't a small business structure their health benefits using individual health insurance? It stretches health benefits dollars farther. Here's a look at how the two types of health insurance work, and why individual health insurance is more affordable than group health insurance.

Individual Health Insurance (Section 105) vs. Group Health Insurance (Section 125)

Individual health insurance is a type of health policy that an individual purchases for himself and/or his family. Individual health insurance policies are often purchased with the guidance of an insurance agent to help navigate plan choices and premium costs. All individual health plans must cover employees regardless of health. For example, for an identical plan a healthy non-smoking 40-year old employee will pay the same as a non-smoking 40-year employee with a medical condition. With individual health insurance, the risk is spread over a large group of people—hundreds of thousands, even millions depending on the plan and carrier.

Group health insurance coverage is a type of health policy that is purchased by an employer and is offered to eligible employees of the company, and to eligible dependents of employees. Currently, over half of non-elderly Americans have group health insurance coverage through their employer, or the employer of a family member. With group health insurance, the employer selects the plan (or plans) to offer to employees. These days, the premium cost is usually split between the employer and employee, and there is a minimum percentage rate the employer must contribute to the premiums. The premium paid by employers for their group policies is typically increased every year based on the previous year’s healthcare costs of the employee group.  With group health insurance, the risk is spread over the company -- the number of employees you're covering.

Individual Health Insurance vs. Group Health Insurance—Cost

Here's a look at the what the national average annual premium costs were in 2018 for group health insurance plans compared to individual health insurance.

Comparison Single Family
Individual health insurance plan $5,280/yr $14,016/yr
Group health insurance plan $6,896/yr $19,616/yr

Sources: eHealth and KFF Employer Health Benefits Survey, 2018

When considering the health reform which took effect in 2014, there are two things to remember:

  1. Individual plans are required to cover the ten essential health benefits (more than what many plans covered pre-2014), and are required to cover all individuals regardless of health benefits (whereas pre-2014 insurers could only accept healthy individuals and/or charge more for unhealthy individuals). These two new changes will cause individual premium costs to increase from current averages. In most states, however, individual rates are still less expensive than small group health insurance coverage.
  2. Second, if employees meet income requirements (earn less than ~$46/year as an individual or less than ~$94k as a family of four), then they will be eligible for health insurance premium subsidies to lower the cost of their premium even more. To be eligible, employees cannot have access to a group health insurance plan. If the businesses offers a reimbursement benefit plan, the business can reimburse employees for the non-subsidized portion of their health insurance premium.

A common question is whether employees will pay more or less than their current individual health insurance coverage in 2019. Whether employees' cost will increase or decrease depends on a few factors:

  • Location (rates vary by state and county)
  • Whether they can keep their current individual health plan
  • The type of coverage employees had previously (was it comprehensive or bare-bones?)
  • Their health status (were they in a high-risk pool?)
  • The income of employees (will they be eligible for subsidies or Medicaid expansion?)

Why Individual Health Insurance is More Affordable Than Group Health Insurance

For the majority of small groups, individual health insurance is more affordable than group health insurance because of the size of the risk pool. As we mentioned above, individual health insurance spreads the risk over a much larger group. Using individual health insurance as the foundation of employee health benefits is also less financially risky for the small business. With a group health insurance plan if one employee has a baby, a surgery, or is diagnosed with a chronic illness, you are likely to see a large premium rate increase at annual renewal time. By using a pure defined contribution approach (where employees purchase individual health insurance), the business has cost predictability.

Small Businesses Using Defined Contribution Paired with Individual Health Insurance

Because of the affordability of individual health insurance, compared with group health insurance, most small businesses are using a pure defined contribution approach paired with individual health insurance to offer employees health benefits. With this type of strategy, the business offers employees a health insurance allowance that employees can spend on purchasing individual health insurance. With health reform, all employees are guaranteed coverage and have access to the health insurance subsidies. Employees purchase the plan that best fits their family's health needs. Employers have complete cost predictability and there are no minimum or maximum contribution amounts. With the new advantages and affordability of individual health insurance, why would a small business offer group health insurance?