Health Insurance Plans: Tailored Coverage vs. Group Risk Sharing


In individual health insurance plans, each policyholder and their dependents have their policy and coverage tailored to their specific needs. Premiums and coverage are determined based on individual factors such as age and deductibles. Consequently, premiums can vary widely.

On the other hand, collective or group insurance plans are often provided by employers and organizations. These insurance plans cover a group of individuals under a single policy. Premiums and coverage are based on the overall risk profile of the group, leading to lower costs per individual. The risk-sharing nature of these plans can result in more stable premiums for all members, with healthier individuals subsidizing costs for those with higher medical needs.

For instance, while creating a collective insurance plan for a community of people aged 50 to 85, this demographic is more likely to require healthcare services due to age-related conditions and chronic illnesses. It could cause a higher healthcare utilization rate among its members, leading to greater claim volume and associated costs. This adverse selection could also lead to a disproportionate number of high-cost claims, impacting all members with potentially increased premiums.

Let’s set a premium of $65 per person which aims to maintain affordability, it may not accurately reflect the true cost of coverage, especially for older individual rates. Also, there’s a risk of losing benefits if the collective plan needs to migrate to another insurance company. This is particularly relevant due to two-year waiting period for coverage of pre-existing condition. If the plan switches companies, members may lose the benefits accrued during this waiting period, potentially leaving them exposed to significant healthcare costs.

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