Why is traditional health insurance so expensive for midsize employers?

It’s renewal season again.

It’s a familiar story for CFOs, HR leaders, and benefits consultants.

Your traditional insurance renewal is 35%. You’ll negotiate it down to 18%. You look for places to cut (shift more cost to employees, raise deductibles, trim benefits, etc.)

But out of time to consider other options, you sign the renewal and wait another 12 months for the cycle to repeat.

If this sounds familiar, you’re not alone. Midsize employers across the country face the same frustrating reality every year. It’s not because you missed something or didn’t negotiate hard enough. It’s because the traditional health insurance system wasn’t built for you.

Key Takeaways

• 1. Traditional health insurance is expensive for midsize employers because you’re locked into high fixed costs, little to no visibility into cost drivers, and no control over what to do about it.

  2. Employers can’t manage what they can’t see. Claims transparency is essential to cost control.

  3. Alternative funding models, like self-funding with the ParetoHealth captive, offer new options for control and predictability.

How traditional health insurance works and why it’s so expensive

Traditional fully insured plans are expensive for midsize employers because they combine:

1. 1. High fixed costs 
   2. Little to no visibility into healthcare cost drivers
   3. No levers to drive down healthcare costs

Here’s how it works: every month, you pay a health insurance premium to the insurer, whether your employees use healthcare or not.  

The insurer pools that money with other companies’ premiums, pays themselves to process claims, pays medical and pharmacy claims from that pot, and keeps whatever’s left over. That’s how they make a profit.

High fixed costs

Because the insurer takes on the risk of paying big claims, they build in extra cushion to protect themselves and cover administrative costs. That’s why you have high fixed costs. You’re paying for their safety net and administrative inefficiency, not just the actual cost of healthcare.  

Little to no visibility into cost drivers

And once you’ve paid your health insurance premium, you’re left in the dark. You have limited claims information and no pharmacy rebate transparency to know how those dollars are spent. You can’t see which conditions or claims are driving costs. The insurer knows, but often, they don’t share that data.  

No levers to drive down healthcare costs

Worse, you don’t have any real options to control spending. Traditional fully insured health plans are one-size-fits-all because that’s easier for insurers to manage. Midsize employer don’t have the leverage to tailor benefits to your population or make strategic changes that could help you save money on healthcare costs. 

So, you’re stuck with high fixed costs, no healthcare cost transparency, and paying more each year without a clear way to fix it. 

Why the traditional fully insured model wasn’t built for modern healthcare needs

The traditional fully insured model was created in the 1950s when healthcare was less expensive and healthcare costs were growing at a slower rate than today.   

Back then, paying a fixed premium made sense. Insurers took on the risk, employers paid the premium, and everyone moved on. 

In the last three years, high-cost claims have grown larger and more frequent, but the traditional health insurance model hasn’t changed. There has been a 14.5x increase in the frequency of catastrophic claims (>$2M+) for midsize businesses. One serious diagnosis can mean a million-dollar claim, which translates into a higher fully insured premium at renewal.

When you pay a monthly premium with a traditional fully insured health plan, you have no visibility into what’s driving your healthcare spend, and you have limited options to help you lower that spend.

What is a health insurance premium?

A health insurance premium is the amount an employer pays, typically monthly, to an insurance company to maintain health coverage for their population.  

The health insurance premium covers many different expenses including administrative costs, insurance company profit, taxes, reinsurance, and the actual cost of healthcare. However, fully insured premiums are like a black box. You write a big check with no visibility into what is actually being funded.

What is a medical or pharmacy claim?

A medical claim is a request for payment submitted by a healthcare provider to an insurance company for services rendered, such as a doctor’s visit or a procedure.

A pharmacy claim is a request sent by a pharmacy to a patient’s insurance provider or pharmacy benefit manager (PBM) for reimbursement of a prescription medication.

ParetoHealth gives midsize employers protection and potential for healthcare savings

Midsize businesses are especially vulnerable to this system of volatile healthcare costs with little control over expenses.  

The way out of the fully insured trap starts with a mindset shift. Stop making one-year decisions and chasing the lowest rate. Only a long-term solution can break this cycle.
 
ParetoHealth unites employers with 50–1,000 employees into one strong, like-minded community that creates a better way to eliminate volatility and lower overall health benefits costs.

Join the thousands of who have joined ParetoHealth on the right side of the fight.

-> See how ParetoHealth provides midsize employers with everything they need to spend less and get more from their health benefits.

Written by: Melissa McDonald, Director of Content Marketing

Sources 

• • Tokio Marine HCC (2024): Stop Loss Group Annual Market Report.

Further Reading

• • ParetoHealth: How it Works