Parental health coverage in group insurance: Why opting out of it can be a costly mistake

Parental insurance is usually a sensitive topic, both for human resource (HR) managers and employees. Depending on how you segment the data, 30-50% of mid- to large-size companies offer their employees health coverage for parents.

The sensitivity is owed to the fact that a substantial chunk of these companies recover the cost of coverage from the employees’ payroll, mostly in the form of a monthly deduction from salary. The annual cost of covering two parents for average hospitalisation benefits range between Rs.30,000 and Rs.50,000, depending on the size of the group and past claim history.

The premium for parental insurance is an order of magnitude higher than the hospitalisation insurance cost for employee, spouse and children. If the cost is borne by the company, any increase hits the HR budget. If this is borne by the employee, they are faced with the dilemma of whether to opt for this coverage or not. High absolute cost can sometimes deter the employee, but opting out may not be the best decision for a few reasons.

High claims incidence

First, it is important to see the cost in the right perspective. Group policies, generally, have no waiting period. So, claim can happen on the first day of coverage. That’s why parental insurance witnesses significantly high claims incidence. For instance, for a voluntary parents’ insurance plan, the claim incidence can be around 25-33%. This means every fourth person is making a claim. Another way to interpret is that the likelihood of an individual making a claim once in four years is extremely high. The claim incidence includes a wide variety of hospitalisation cases, cataract being the most frequent. Then there are elective surgeries, like knee and hip replacement, and more severe ones, such as heart bypass surgery, cancer, and stroke. This statistic itself establishes the need to maintain a coverage for parents at all times.

The second comparison that employees make is the premium comparison between the group rates and the individual premium. Considering that individual plans are exempt from the 18% Goods and Services Tax (GST), the group rates can, at times, seem more expensive than the retail rates. However, this is only half the truth. A large number of senior citizens find it difficult to get individual insurance covers. With age, many develop chronic ailments such as diabetes and hypertension. Insurers may increase premiums or decline coverage to people with such medical history. Sometimes, cases with history of minor surgery such as kidney stone removal, are declined. So, while the premium comparison is made between the group rates and the lowest available individual rate, the possibility of getting coverage is lower. Under a group plan, however, coverage is guaranteed. There is no case-wise medical underwriting or need for declaration of health history for individual members. Also, all individual plans would carry waiting period for pre-existing ailments and a few other common ailments. So, while the plan may be cheaper, the coverage becomes restrictive.

Opt-in/opt-out framework

The third element that employees should be cautious about is the emerging trend, where HR is putting new guardrails in place.

Traditionally, for voluntary plans, employees had the flexibility to opt for the parental coverage at the time of policy renewal, and similarly opt-out, if they so desired. This created an arbitrage. Employees would not enrol in the program until a health issue developed. While they would miss out on the emergency care, they would postpone the elective surgeries till the coverage was in place. Once the surgery was done, they were free to opt-out. A handful of cases like these are enough the derail the economics of the programme.

To address this, several HR managers put in place an opt-in/opt-out framework. For example, in one such program of a large corporate, once employees have opted-in they remain part of the program for the next three years. Employees who decide to stay out are not allowed to opt-in for the next three years. During the year, only new hires are allowed to enrol within 30-days of joining. Employees can opt-out after three years, if they so wish. This ensures the program is not abused and runs sustainably. So, if the employee chooses to decline the opt-in, and a health issue develops, then employee would neither get coverage under the group plan, nor would it be easy to buy a retail plan.

There are situations where skipping the group plan is a reasonable decision. If the parents have a comprehensive individual policy with an adequate sum insured, stable renewal history, and manageable premiums, the incremental value of the group cover may be limited. A few even consider buying a super top-up plan for parents—here, a deductible is applied. Claim amount up to the deductible is to be borne by the insured. Amounts exceeding the deductible are reimbursed by the insurer. This lowers the premium cost substantially.

Need to be better informed

The decision of whether to opt for a parental plan should be based on the family’s overall current coverage and needs, not the mere availability of a workplace benefit. However, the decision should be well informed. There is an underlying rationale behind high premiums for parental insurance. Sophisticated HR managers, and finance leaders understand the math. However, a large number of employees at mid or junior level do not understand the context. That’s why sometimes the high absolute premium may deter an opt-in. There is need to educate the employees about the relatively high claim utilisation, and possible limitations of individual insurance covers.

The Author is Managing Director, Securenow