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Less Cost-Sharing Means More Value

The smallest firms--those with fewer than 10 workers--pay an average of 18 percent more in health insurance premiums than those in large firms with a thousand or more employees, according to a recent Fund-supported Health Affairs study that takes into account the relative generosity of health coverage.

In looking at employer-provided health coverage, researchers found that type of health plan--HMO, PPO, or indemnity plan--is the greatest single predictor of value for money spent on insurance. Premiums for comparable benefits are 25 percent higher for indemnity plans and 18 percent higher for PPO plans than for HMO plans.

Higher administrative costs from marketing, medical underwriting, and greater risks are some of the factors that contribute to the difference in premiums, says Jon Gabel, vice president of the Center for Studying Health System Change. Gabel is the lead author of the study, the first-ever state-by-state estimate of health insurance premiums adjusted for the quality of coverage.

Employees in states with large urban populations, such as California, Massachusetts, New York, and Pennsylvania, tend to get more value for their premium dollar than those in rural states. When premium costs are adjusted for the quality of benefits, Maine, West Virginia, Wyoming, and Wisconsin are the states where employers and employees receive the least value for their money. While the average adjusted premium for workers in California with average benefits is $2,833, it is $4,001 in Wyoming, the state with the highest average premium. The average across all states is $3,203.

Job-based health benefits in Massachusetts have the highest average actuarial value, or the percentage of total medical expenses a plan will pay. In that state, 88 percent of total medical expenses are paid by employer plans, compared with a low of 73 percent in Montana. The study is based on an analysis of simulated bill-paying for health plan claims from a sample of approximately 30,000 employers' establishments.

"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 Fund president Karen Davis, commenting on the Health Affairs study. "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."

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According to Gabel and his colleagues, 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. "The research also points to the disadvantages small employers face in purchasing health benefits because of high administrative costs."

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