544 Chapter 13 Insurance and Risk Management
tier level (such as “$150 for single coverage, $450 for family”). Sometimes an employer will
contribute some set percent of the cost (such as “65% of the cost”). And sometimes a more
complicated formula may be used (such as “the cost of a single contract paid in full, plus half
of the difference between single and family cost for a family contract”).Example 13.2.10 Suppose that the cost of a single health insurance contract is
$300 and a family contract is $750 per month. How much would you pay per month
if your employer’s contribution toward a family contract is (a) a fl at $600 per month,
(b) 75% of the cost, or (c) the cost of a single contract, plus half of the difference
between single and family costs.(a) If the employer pays $600, you are left to pay $750 $600 $150.(b) If the employer pays 75%, you pay 25%, or (25%)($750) $187.50.(c) If the employer pays the single cost plus half the difference, that leaves half the difference
for you to pay. The difference is $750 $300 $450. So you pay (50%)($450) $225.00.If the premium rates rise, as they almost always do from one year to the next, the effect on
you as the employee can be quite a bit different, depending on the formula used.Example 13.2.11 Suppose that the health insurance cost increases to $350 for a
single and $875 for a family contract. What would your cost then be for the formulas
in Example 13.2.10?(a) The employer still pays $600. You are left to pay $875 $600 $275.(b) (25%)($875) $218.75.(c) The difference is $875 $350 $425. So you pay (50%)($425.00) $212.50.Notice that with the flat dollar formula, the employer’s cost does not increase when the
premium does; all of the increase flows to the employee. (Unless, of course, the employer
decides to increase its $600 contribution.) With the other two formulas, the employer and
employee share in the cost increase, though not necessarily to the same degree. Which type
of formula is preferable depends on whether you are the employer or the employee.
Many employers offer their employees a choice of different health care plans. An
employer may offer a choice of a traditional deductible and coinsurance plan or an HMO,
or may offer multiple different managed care plans for employees to choose from, or some
other array of alternatives. Again, the employer may set its contributions according to any
number of different formulas. As the following example will illustrate, though, the formula
that a business uses to determine its contributions may have a very big effect on which
plans its employees choose.Example 13.2.12 Suppose that a company offers its employees a choice of two
different health insurance plans. The company offers a point-of-service plan or an
HMO. The monthly rates for the point-of-service plan are $298.75 single and $786.92
family. The rates for the HMO are $244.08 single and $703.92 family.Calculate the employee costs for each plan if the employer’s contribution formula is
(a) 70% of the premium for either plan or (b) 90% of the cost of the less expensive
plan, applied to either choice.(a) Under the 70% formula, the employee pays 30% of the cost of any of the options. The
employee costs are then:POS: Single: (30%)($298.75) $89.63
Family: (30%)($886.92) $266.08
HMO: Single: (30%)($244.08) $73.22
Family: (30%)($703.92) $211.18(b) Under the 90% of the less expensive plan, the employer would contribute 90% of the
HMO costs to either option. For singles, this is (90%)($244.08) $219.67; for families