It's cheaper because of information disparity. Basicly, individual learns he has condition X tells no one and buys insurance and suddenly the inshurance company is out 200,000+$ or worse (AIDS can easily run 1,000,000+$). However if a company is buying insurance then presumably the insurance company knows more about the risks than the HR person setting up insurance.
That changes nothing. The aggregate probability should be the same. Even if we assume that the insurance company will modify premiums based on the type of work the company does, they'd do that to the individual as well, as they ask your occupation. The chance that the insurance company could get scammed by a covered person lying to indirectly through their employer is is the same as the insurance company getting scammed by a covered person lying directly to the insurance company.
Regardless, this is all covered under pre-existing condition clauses and contract law: i.e. they most definitely WON'T be out the $200k from your hypothetical.
The aggregate probability of a heathy 25 year old deciding to pay full market price for Heath insurance is lower than a sick 25 year old. However, you also get people who discover there at an increased risk for a disease and decide to get coverage etc.
PS: Heath insurance company's are vary rational, if the risks where equivalent they would charge close to the same rates due to market forces. Instead identical group plans even for small groups can be significantly cheaper.
Actually the major thing with group insurance is the number of people.
It is unlikely that more than 1 or 2 people in a small company will have any major health issues, so if you are signing up 20 people your overall risk is lower (in your example a $10,000 per person cost).
Combined with different feelings toward risk, usually health insurance is a win win. The annoying thing about the recent "reforms" is it mandates preventative care be covered, eliminating the ability to get pure "oh crap" coverage.
Number of people is actually not as big a factor as it is made out to be. For major medical and certain supplemental health like dental, there is a load for small groups, but it isn't very much. The risk is certainly higher, but one large claim can make a group's loss ratio beyond what can be recovered, so the additional premium has to be spread across the small group category. The biggest factor which is often overlooked is that the insured is "actively at work" which lowers the potential risk, because working people are healthier and the insurance company can add underwriting factors for certain industries. Another thing to note is even if you are allowed to select a voluntary product like dental or health indemnity product, there is little or no choice on the specific riders or benefit amounts which lowers the "anti-selection" for riders. Products that are partially employer-paid like major med and/or a group's participation percentage being high also limits the potential anti-selection.
Disclaimer: work in Actuarial
That makes sense to an extent. It goes out the door with family plans (to me). Is a spouse more likely to be healthier because their partner works? Child because parent?
> The annoying thing about the recent "reforms" is it mandates preventative care be covered, eliminating the ability to get pure "oh crap" coverage.
This is only annoying until you realize how many people have incurred significant costs by avoiding preventative care. Why do you think insurance companies are so quick to run campaigns for healthy-living, vaccination, regular physicals, etc.? They'd much prefer to pay a few hundred dollars a year for you on a known schedule than deal with open-ended late-stage problems.
Actually, the insurance company would probably do some checking and, finding the proof that you were diagnosed before taking out the policy, would invalidate your policy based on your "fraudulently" filling out the application - and pay out nothing.
The example still works even if the guy is diagnosed after taking out the policy.
Bob takes out a policy because it seems like a good idea, and subsequently is diagnosed with Expensive Heart Disease. He holds onto his policy with dear life, prioritizing the premium payments over things like dinner if he has to.
Joe takes out a policy because it, too, seems like a good idea. Nothing happens to him, and six months later he has a change of heart when he thinks about how many shots of tequila he could be buying with the premiums instead, so he cancels his policy.
Thus sick people become ever more concentrated in the pool of individual insurance customers.
