Cash Provisions

The Concern About Employee Opt Out For Cash Provisions

CIS works because its 250+ members act as a group to purchase and administer health benefits. Group rates usually are more affordable because the risk of claims is spread over a larger employee population with mixed claims experience - some employees will have lots of claims, others will have very few. The math is simple since premiums equal total claims and administrative costs divided by the number of covered employees. "Adverse selection" i.e. the chance that the covered population will be dominated more by those with poor claims experience than by those with fewer claims, is a threat to affordable group rates. This is the basis for CIS’ reluctance to endorse more generous opt out for cash provisions at an individual member level. If employees anticipate that they will use health benefits, they’ll stay; if they anticipate otherwise, cash may seem like a good alternative.

Based on a large group claims distribution typical of the CIS program (see chart below), about half of the employees will have claims that total less than $500 a year. This half of the total membership accounts for only 5% of the total amount paid out in claims. So, to illustrate the point, if this half of the membership were to take its share of premiums out of the program, they would take only 5% of the claims with them. The other half would then be facing premiums that need to double to cover the 95% of claims that still remain with the smaller group.

If your city or county purchases health insurance on its own, the combined claims costs of your covered employees determine your premiums. If you offer an "opt out for cash" program, two results may occur. If the employees who opt out tend to have a lot of claims, then your premiums for the remaining employees are likely to decrease as overall claims costs decrease. On the other hand, if those who opt out have low claims costs, your premiums will rise in order to cover the cost of claims for those who remain.

As one of CIS’ 250 employer members, your premiums are based on the combined claims costs for all members, divided by the number of covered employees in the group. When even a few members negotiate or otherwise offer generous "opt out for cash" programs, these actions impact all CIS members. If, as experience suggests, healthy, low-cost employees are more likely to respond to large cash incentives, then opt out provisions create pressure on per employee premiums which need to rise to cover claims costs for the group. Under these circumstances, the rest of the group is subsidizing the "savings" received by an individual member. CIS’ cap of $25 a month is an attempt to protect the larger member group against the consequences of individual member action that may be detrimental to the overall group.

Annual Claims Per Person	Percent People	Percent People Cumulative	Percent Dollars	Percent Dollars Cumulative
$0-200	22%	22%	1%	1%
$201-500	27%	49%	4%	5%
$501-1,000	20%	69%	6%	11%
$1,001-2,500	14%	83%	13%	24%
$2,501-5,000	8%	91%	12%	36%
$5,001-10,000	5%	96%	17%	53%
$10,001-25,000	3%	99%	21%	74%
$25,001 or more	1%	100%	26%	100%

This chart shows a typical claims distribution. 49% of the people have $500 or less paid out in claims in a year and account for only 5% of the total claims dollars. The remaining 51% of the people have claims of $501 or more in a year but account for 95% of the total claims dollars. "Adverse selection" occurs when employees are given an incentive to either opt out of the program or choose a much lower level of benefits.

In a buy down situation, a similar phenomenon occurs. The employees with low annual claims go to the lower cost plan and pay lower premiums into the group. Those with higher claims stay in the richer benefit plan and so do 95% of the claims so premiums need to rise dramatically to cover those costs.

In either situation, the larger the incentive for the healthy/low claims cost employees to move out of the plan, the greater the impact on rates. If there are very modest financial incentives, the impact is minimized.