Generosity of health insurance plans varies widely by state

Employees in the smallest firms (1-9 workers) pay an average 18% more in health insurance premiums than those in the largest firms (1,000+ workers), when actuarial value - the percentage of total medical expenses paid by a health plan - is taken into account, a new Commonwealth Fund-supported study finds.

In this look at employer-provided health coverage, researchers found that type of health plan is the key determinant of both actuarial value and adjusted cost. The adjusted premiums are 25% higher for indemnity plans and 18% higher for preferred provider organization (PPO) plans than HMOs. Higher administrative costs from marketing, medical underwriting (the process by which insurers assess medical risk), and greater risks are some of the factors that contribute to the difference in premiums, say Jon Gabel, vice president of the Center for Studying Health System Change, and colleagues, authors of the new study published in the May/June issue of the journal Health Affairs.

Employees in states with large urban populations, such as California, Massachusetts, New York and Pennsylvania, also tend to get more value for their premium dollar than those in rural states, according to this first ever state by state estimate of the cost of the adjusted price of health insurance.

When authors adjusted premium costs for the quality of benefits, Maine, West Virginia, Wyoming, and Wisconsin were the states where employers and employees got the least value for their money. For example, the average adjusted premium for California employees with average benefits is $2,833, compared with $3,203 on average across all states, and $4,001 in Wyoming, the state with the highest average premium. Other states with the lowest adjusted premiums are Hawaii ($2,717), Alabama ($2,981) and Arizona ($2,983).

"Indemnity insurers have greater market share in rural states, so employees and employers in those states end up paying higher adjusted premiums. Also, small employers are more predominant in rural states, and they have less clout than large employers in negotiating with insurers," said Commonwealth Fund President Karen Davis.

Massachusetts had the highest average actuarial value, with 88% of total medical expenses paid by employer plans, compared with a low of 73% in Montana. The study, "Generosity and Adjusted Premiums In Job-Based Insurance: Hawaii Is Up, Wyoming Is Down," is based on an analysis of simulated bill paying for health plan claims from a sample of approximately 30,000 employers' establishments from the 2002 Medical Expenditure Panel Survey-Insurance Component (MEPS-IC).

"Millions of Americans who have health care coverage are underinsured--meaning their coverage does not protect them against catastrophic costs, and they face cost barriers to needed care," said Davis. "The value of an insurance plan and the financial protection it provides are crucial for state and federal policymakers to consider when designing health care coverage strategies."

Health maintenance organization (HMO) plans have an actuarial value that is nearly 14 percentage points higher than conventional indemnity plans. Translated into dollars, an HMO in 2002 cost nearly $700 less per employee than a PPO and nearly $1,000 less per employee than an indemnity plan.

"Our research clearly tells us that HMO plans still have a strong position in the health insurance marketplace and can offer employers and employees a solid value for their money," said Gabel, lead author of the study. "The research also points to the disadvantages small employers face in purchasing health benefits due to high administrative costs."

According to the authors, between 1997 and 2002, the proportion of medical bills paid by insurance rose about 8 percentage points, from 75 to 83 percent. This is due to a shift from coinsurance to copayments in PPO and point of service (POS) plans that resulted in patients paying less because they no longer pay a deductible for physicians' services. A second reason for the increase was that provider networks became broader; therefore more care was provided in-network, resulting in lower cost-sharing.

Additional findings include:

• About half (52%) of employees in small firms (1 - 49 employees) have deductibles compared to fewer than half (44%) in firms of 50 or more employees. Just 40 percent of employees in the largest firms (1,000 and more employees) have deductibles.
• Of employees in small firms who have deductibles, the average amount is $599, compared with $386 for their counterparts in large firms.