This is the first in a series of blog posts that will the different group insurance benefits medical plans.

The first type of plan I want to talk about is the Preferred Provider Organization plan, better know as a PPO plan for short – after all, that’s quite a mouthful.

A PPO plan is a more flexible plan and has many advantages:

• It allows you to see any doctor you want.
• You do not have to designate a primary care physician.
• You can usually see any specialist without referral.

A PPO Plan does have some limitations – remember the PP in PPO is short for “preferred provider” and refers to all of the doctors and health care providers that have signed an agreement with the insurance carrier.  When a doctor or health care provider is on the preferred provider list they are considered “in network”. Those not on the list are considered “out of network”.

If the doctor you use is in network it will cost less than if you see a doctor out of network. There are basically two reasons for this. The first is that a PPO sets different deductible payments for in network versus out of network providers.

Secondly, the PPO determines a reasonable cost for each medical procedure and will only pay a percentage of what they decide is a fair cost. If the out of network provider doesn’t agree, you will be responsible for your percentage plus the difference between the bill and what the PPO says is a reasonable cost.

Up next…So Many PPO Plans to Choose From

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Both the employer and employee want to know what group insurance benefits will cost them. For the sake of illustration, we will discuss group medical insurance as it is the most complex and the most costly of group insurance benefits offered.

To get a better understanding of the potential costs, you need to know what factors influence the cost.

There are five main components:

1.    The Type of Plan & Location of the Group
2.    The Size of the Group
3.    The Risk Adjustment Factor (RAF) – For Small Groups
4.    The Level of Employer Contribution
5.    The Level of Employee Contribution

In future posts we will go into more details about the types of plans offered. For now, you need to know that the more benefits the plan offers and the lower the deductible, the more it costs. Geographical location also influences premium amounts and are based on the applicant’s home address.

Businesses with 2-50 employees are covered under a Small Group Insurance Policy. In California the insurance carriers must offer the group coverage if they meet the minimum requirements. This is called “guaranteed issue” and is outlined in California law AB 1672. In addition to having 2-50 employees, 75% of eligible employees must enroll and employer must pay at least 50% of the employee’s premium.

On the other hand, businesses with more than 50 employees are not covered under this law and so do not have the same “guaranteed issue” as small groups. Coverage can be declined due to the group’s history of claims and the health history of the applicants. The premium rates for large groups are specific for that group’s claims experience and risk. Also, the plan options are different from those offered to small groups. They are offered many more options and as discussed above, the rates will vary from plan to plan.

The Risk Adjustment Factor (RAF) is defined by the Small Group Health Act §10700 as the percent adjustment to be applied equally to each standard employee risk rate for a particular small employer, based upon any expected deviations from standard claims. Effective July 1, 1996, this factor may not be more than 110 percent or less than 90 percent.

So, what exactly does that mean? To start with, standard rates have a RAF of 1.00. When you apply for small group insurance, the insurance company looks at the number of people that will be covered, the health of the participants, (specifically looking at any pre-existing medical conditions), the number of Cobra participants and the length of time the company has been in business.

If the group looks “healthy” and is seemingly a low risk, they may offer the group rates that are less than the standard rates. This rate decrease can be no more than 10% below (0.90 RAF) the standard rate.

If on the other hand, if the group looks like it is a higher risk and the insurance company thinks they will have more claims, they can offer them coverage at increased rates. However, the rate can not be more than 10% above (1.10 RAF) their standard rate.

Depending on the plan, an employer can elect to pay between 25% and 100% of the premiums. It is important to note that if the employer pays the full premium, premiums increase when they offer additional plans.

Obviously, any situation where the coverage is not paid 100% by the employer is going to cost the employee the difference between what the total premium is and what the employer contributes.

To provide current information about the nature of employer-sponsored health benefits, the Kaiser Family Foundation (Kaiser) and the Health Research and Educational Trust (HRET) conduct an annual national survey of private and public employers of three or more workers.

The 2007 survey show the following average annual premium contributions:

These results clearly illustrate the varying premiums for different plans.

And the totals for “All Plans” give you the average cost to the employer and to the employee.

Your costs will not match these figures, but they do give you some insight into the costs of group insurance benefits.

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