23.1 Characteristics of Group Health Insurance
Key Takeaways
Group health uses a master policy held by the employer with certificates issued to employees.
Underwriting is based on group characteristics rather than individual medical exams.
Experience rating adjusts premiums based on the group's claims history.
Contributory plans typically require 75% participation; noncontributory plans require 100%.
Employer contributions are often deductible, and employee contributions may be pre-tax.
Eligibility rules and active-work requirements reduce adverse selection.
Group health insurance provides coverage to a defined group of people, typically employees of a company. Understanding how group coverage differs from individual coverage is essential for the licensing exam.
Master Policy and Certificates
Master Policy (Contract)
| Feature | Description |
|---|---|
| Holder | Employer (policyholder) |
| Contains | All terms, conditions, benefits, exclusions |
| Negotiations | Between employer and insurer |
| Amendments | Made to master policy |
Certificates of Insurance
| Feature | Description |
|---|---|
| Recipient | Each covered employee |
| Content | Summary of coverage |
| Legal status | Not the actual contract |
| Purpose | Proof of coverage |
Key Point: The employer holds the master policy; employees receive certificates that summarize their coverage. The certificate is NOT the contract.
Group vs. Individual Underwriting
| Factor | Group Insurance | Individual Insurance |
|---|---|---|
| Underwriting basis | Group as a whole | Individual applicant |
| Medical exams | Generally not required | Often required |
| Health questions | Limited or none | Detailed health history |
| Guaranteed issue | Usually | Not typically |
| Adverse selection control | Through eligibility rules | Through underwriting |
Group Underwriting Factors
| Factor | Consideration |
|---|---|
| Industry | Hazard level of work |
| Group size | Larger = more predictable |
| Age distribution | Younger = lower costs |
| Gender mix | May affect costs |
| Geographic location | Regional cost variations |
| Prior claims experience | Loss history |
Experience Rating
Experience rating adjusts premiums based on the group's actual claims experience:
| Group Size | Rating Approach |
|---|---|
| Small groups (< 50) | Community rated or manual rated |
| Medium groups (50-500) | Blended experience rating |
| Large groups (500+) | Full experience rating |
Experience Rating Formula
New Premium = (Experience Factor × Claims) + (Credibility Factor × Manual Rate)
| Term | Definition |
|---|---|
| Experience factor | Weight given to group's own claims |
| Credibility | Statistical reliability of group's experience |
| Manual rate | Standard rate for similar groups |
Example
- Group's claims last year: $800,000
- Manual rate premium: $1,000,000
- Credibility: 70%
- Experience adjustment: ($800,000 × 70%) + ($1,000,000 × 30%) = $860,000
Contributory vs. Noncontributory Plans
Contributory Plans
| Feature | Details |
|---|---|
| Funding | Employer AND employee share cost |
| Typical split | Employer pays 50-80% |
| Participation requirement | Usually 75% minimum |
| Employee portion | Payroll deduction (pre-tax if Section 125) |
Noncontributory Plans
| Feature | Details |
|---|---|
| Funding | Employer pays 100% |
| Participation | 100% of eligible employees |
| Adverse selection | Lower risk (all must participate) |
| Administrative simplicity | No employee contributions to track |
Exam Tip: Contributory plans require 75% participation; noncontributory plans require 100% participation. This helps prevent adverse selection.
Advantages of Group Insurance
For Employers
| Advantage | Benefit |
|---|---|
| Tax deduction | Premiums are business expense |
| Attract talent | Competitive benefits package |
| Retain employees | "Golden handcuffs" effect |
| Employee productivity | Healthier workforce |
| Lower rates | Group purchasing power |
For Employees
| Advantage | Benefit |
|---|---|
| Lower cost | Group rates below individual |
| No underwriting | Guaranteed coverage |
| Pre-tax premiums | Section 125 cafeteria plans |
| Convenience | Payroll deduction |
| Employer contribution | Reduced personal cost |
Key Group Insurance Principles
Flow of the Master Group Contract
Insurer → Master Policy → Employer → Certificates → Employees
Eligibility Safeguards
To prevent adverse selection, group plans use:
| Safeguard | Purpose |
|---|---|
| Minimum participation | Ensures healthy mix of risks |
| Eligibility waiting period | Prevents job-hopping for coverage |
| Probationary period | New employees wait before eligibility |
| Active work requirement | Must be working to be covered |
| Definition of eligible employees | Full-time, hours per week |
Common Eligibility Requirements
| Requirement | Typical Standard |
|---|---|
| Employment status | Full-time (30+ hours/week under ACA) |
| Probationary period | 0-90 days |
| Waiting period | First of month after hire |
| Active at work | Must be working on effective date |
Key Takeaways
- Group health uses a master policy held by the employer with certificates issued to employees.
- Underwriting is based on group characteristics rather than individual medical exams.
- Experience rating adjusts premiums based on the group's claims history.
- Contributory plans typically require 75% participation; noncontributory plans require 100%.
- Employer contributions are often deductible, and employee contributions may be pre-tax.
- Eligibility rules and active-work requirements reduce adverse selection.
In group health insurance, which document does the employer receive that contains all the terms, conditions, and benefits of the coverage?
Certificate of Insurance
Summary Plan Description
Master Policy
Enrollment Form
A contributory group health plan requires what minimum participation rate from eligible employees?
50%
65%
75%
100%
Which rating method is typically used for large employer groups (500+ employees) to determine premiums?
Community rating
Manual rating
Experience rating
Age rating
Sections you finish are checked off in the contents.