Employer Provided Health Insurance in the U.S.

November 2 - 9, 2005

What is Group” Insurance?

A technique under which many individuals (and possibly their dependents) are insured under a single policy issued to another entity

“Individuals” are usually employees“Another entity” is usually the employer

Predominant method of providing health insurance, life insurance disability, insurance, and dental insurance

Group Insurance CharacteristicsGroup Contract

Provides coverage to many people under one contract. Individuals receive a certificate of insurance.

Experience RatingActual claims experience of the group may be used to determine future premiums

Group UnderwritingUnderwriting is evaluation of applicant to determine priceMembers of a group not required to show evidence of insurability

Why Are Groups Valuable?

Group Insurance & Adverse SelectionAdverse selection can be quite costly and can even lead to “unraveling” of the insurance marketBy providing insurance to an entire group, it automatically pools higher and lower risk people together Note: can still have selection by “group”

Coal miners versus stock analystsRole of experience rating

“Desirable” Groups to Insure

Exist for reason other than obtaining insuranceReasonable and steady turnoverPersistent – will be around for a whileMinimize individual participation choiceFavorable eligibility provisionsGood prior experience

Other Underwriting Factors

Size of the group

Composition of group (age, sex, income)

Industry

Geography

Eligible Groups (in most states)

Often a minimum number of persons to be considered a group

Common in life insurance policies (often 10 people)About ½ of states have min. for health (5 - 10 people)

Most states approve the following groups:Individual employer groupsNegotiated TrusteeshipsTrade associationsLabor union groupsSome also allow “Multiple employer welfare arrangements” (MEWA)

State Regulation

McCarran-Ferguson Act (1945): gives the states substantial regulatory authority in the area of insuranceNearly all regulation done at the state levelNational Association of Insurance Commissioners (NAIC) tries to encourage uniformity of regulation, but much variation exists

Regulation

States regulate contract provisionsStates may impose limitations on benefits Taxes on insurer of approx 2% of premiums often levied within a state. Note: HMOs not subject to this taxJurisdiction – doctrine of comity

Benefit Mandates (examples)

CaliforniaIn vitro fertilization, diabetic education, accupuncture

ConnecticutDentists, dependent students, naturopaths

WisconsinAlcoholism treatment, chiropractors

Federal LegislationAge Discrimination in Employment ActPregnancy Discrimination ActERISAAmericans with Disabilities ActHealth Maintenance Organization ActCOBRAHealth Insurance Portability and Accountability ActMental Health Parity ActFamily and Medical Leave ActMany others …

Brief History of HI in USHealth insurance largely non-existent before Great DepressionBlue Cross – run by hospitals, guaranteed a certain number of hospital days per year in return for annual premiumBlue shield – for physician paymentsPrivate insurance took off during/after WWII

During price controls, firms were allowed to offer health benefits to compete for workersBlue cross had been profitableTax benefits

Brief History, continuedMedicare (elderly) and Medicaid (poor) introduced in 1960sGroup health insurance receives very favorable tax treatment

Deductible at corporate level (no corp tax)Not taxed at individual level by federal or state income tax, or Social Security taxA major reason for the predominance of an employer based health insurance system2005 Presidential tax reform panel recommends limiting the tax benefits

Why Do We Care About Insurance?

Many medical expenditures are highly uncertain & (partially) unpredictable imposes significant financial risk on individualsBasic economics / insurance theory suggests that risk averse individuals are made better off (have higher utility) when they can insure against risk

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Insurance Theory in BriefLiquidity constraints: it is difficult to borrow when sick (may not live to repay!)It is not optimal to save for low probability, high cost outcomes (may never occur)Insurance allows you to reduce consumption only by the annual premium (the average cost of care in population) rather than being exposed to uncertaintyIf insurer covers lots of people with uncorrelated risks, then insurer can predict average costs reasonably well

The Fundamental Trade-offRisk Spreading vs. Incentives: Health insurance involves trade-off between risk spreading and providing incentives to use health care efficiently

By efficiency, we mean use health care when the social gains exceed the social costs

Increasing the generosity of insurance spreads risk more broadly, but also may lead to increased average losses “Moral hazard” “Principal agent problems”

Moral HazardA form of “hidden action” that arises from insurance company’s inability to monitor and control behaviorIndividuals are more likely to seek out treatment if they do not pay for it themselves Optimal insurance contracts would only pay for care that the individual would have chosen had he/she not been insuredVery difficult to monitor!

Is MH Really a Problem?

The issue: Is demand for medical care sensitive to price?Evidence: Most economists agree that there is a moderate price elasticity of demand

Reasonable estimate is –0.2A 10% increase in out of pocket costs decreases

health expenditures by 2%Ex: If insurance lowers out of pocket costs by

80%, then expenditures will rise 16%

Policy Features to Address MHDeductibles: amount an individual must pay before insurance company pays anythingCoinsurance rates (co-payments): The percentage of the total bill above the deductible paid by the patientStop loss amounts: Coinsurance paid until stop loss is reached – maximum out of pocket payment in a yearPolicies may also cap various types of expenditures (e.g., only 8 mental health visits per year)

Principal-Agent Relationships

Issues that arise when the principal expects the agent to act in principal’s best interest

Examples: Principal AgentPatient DoctorsShareholders Firm managersDefendant Defense attorney

Principal Agent problems arise when the interest of the principal and agent are in conflict

Patients, Doctors and InsurersTraditional insurance – insurer pays a fixed amount based on procedure / treatment provided

Patient & doctor incentives are alignedDoctor’s Hippocratic oath is to what is in best interest of patientInsurers interest not well-served: Dr gets paid for procedure, patient pays nothing, so incentives exist to maximize health outcomes with no concern for cost

Changing RelationshipsNew forms of insurer/provider relations are changing the incentives

Doctors now have responsibilities to other providers, insurers, not just patientsIncentives to hold down expenditures may ultimately enhance aggregate patient well-beingBut this can lead to conflicts about what constitutes appropriate care

• When others are sick, you want resources targeted efficiently

• When you are sick, do you want your doctor thinking about the bottom line?

Types of Policies

Indemnity – basically “fee-for-service”

Managed CarePreferred Provider Organizations (PPOs) Health Maintenance Organizations (HMOs) – fully integrate insurance and provision

Indemnity Insurance

Traditional insurance is known as indemnity insurancePays a fixed amount of money for a particular condition when the individual is sickAmount paid is the “appropriate” amount for the person’s disease

Traditional Plan OverviewPrior to mid-1970s, most employees were covered by traditional or indemnity plans

Patients had freedom to choose providerFew attempts at controlling costs

Today, even the traditional plans have many managed care features to control costs, influence behavior of patients and focus more on preventative careTraditional plans now cover a minority of employees (14% by some estimates) but it varies widely by state

Typical Indemnity PlanBasic medical coverage

Hospital expense benefitsSurgical expense benefitsPhysician expense benefits•Vision care•Prescription drugs•Hospice care

Major medical (for catastrophic events)

deductible

Stop loss

$ paid

Total $ expenditure

Patient payment

Insurer payment

Total payment

Cost sharing under Indemnity insurance

RegulationsSome states mandate coverage of mental illness, alcoholism, drug addiction, etc

Mental Health Parity Act (>50 employees)

Pregnancy Discrimination Act requires firms with >15 employees to treat pregnancy, childbirth, etc the same as other conditionsSince 1998, “Newborns’ and Mothers’ Health Protection Act” – must cover hospital stays for 48 hours following vaginal delivery, 96 hours for cesarean (for both mother and child)

Managing Care in Traditional Plans

“Managed care” simply means the insurer influences type and scope of care received

Pre-certification, 2nd opinions, etc.Pre-approval of visits to specialistsIncreased benefits for preventative care

So why are these traditional plans not called managed care plans?

Few restrictions on access to providers

Managed CarePreferred Provider Organizations (PPOs) – forms network of Drs, hospitals, pharmacies

Out of network care much more expensive

Health Maintenance Organizations (HMOs) – fully integrate insurance and provision

Group/staff HMOs – physicians are salaried employees (e.g. Kaiser)Independent Practice Associations (IPAs) or Network Model HMOs

• Do not have own employees, but contract with providers

• Stringent review procedures

Key CharacteristicsDimension Indemnity

InsurancePPO IPA/Network

HMOGroup/Staff

HMO

Qualified Providers

Almost all Large network

NetworkNetwork

Choice of Providers

Patient Patient Gatekeeper (in network)

Cost sharing Fee-for-service

Discounted FFS

Capitation Salary

Cost sharing Moderate Low in network, high out of network

Role of insurer

Pay bills Pay bills, form

network

Pay bills, form

network, monitor

utilization

Provide care

Limits on utilization

Demand side Supply side (price)

Supply side (price, quantity)

Typical Group Health Provisions: Eligibility

Covered positionProbationary periodFull timeActively at workEligibility and plan replacement

Covered by previous planEligible classificationSpecial situation: preexisting conditionTreatment of deductible

Dependent EligibilityEligible dependents

spousechildren < specified age, disabled any age

Employee must usually be coveredEnrollment window if contributory

31 days typical• new job• new insurance plan• dependents for first time

yearly open enrollment periodNew dependents covered if others are

Coordination of Benefits

Plan with COB provision pays firstCoverage as employee pays before coverage as dependentChildren with two parents living together birthday rule: policy of parent with earliest birthdayOther rules for different family structures

Termination of CoverageTermination of coverage of employee

employment terminatesemployer cancels coverageemployee ceases to be eligiblemaximum benefit is reachedemployee quits making contributions

Termination of coverage of dependentsdependent ceases being a dependentemployee’s coverage ceasesdependent hits maximum benefitemployee quits making contributions

COBRAConsolidated Omnibus Budget Reconciliation Act of 1985Requires that health plans allow employees and certain beneficiaries to elect to have their current HI coverage extended at group rates for up to 36 months following a “qualifying event”

Death of employee, termination, change in workers status to part time, divorce, employee eligibility for Medicare (spouse and kids), child ceases to be a dependent

COBRA: Coverage Ceases

Termination or part time: 18 monthsSocial Security disability: 29 monthsOther qualifying events: 36 monthsImmediately if:

don’t pay portion of premiumgroup plan terminatescovered by another plan

COBRA Misc.Must be offered continuationNot automatic coverageIndividual must pay premium, but limited to 102% of cost for active employee (150% for months 19-29 if Social Security disabled)COBRA has proven costly to employers

Adverse selection: only elected by 20% of eligibles, and they have costs that are 150% - 200% of claim costs for active employees

Preexisting conditionMental or physical condition for which medical advice, diagnosis, care or treatment was recommended or received within the 6-month period ending on enrollment datePlans typically allowed to put restrictions in place for 12 months

HIPAA: Health Insurance Portability and Accountability Act of 1996

Increase labor mobility / reduce “job lock”Use evidence of prior insurance coverage to reduce / eliminate length of preexisting condition exclusion

Health Insurance Portability and Accountability Act (HIPAA) of 1996Pre-existing conditions: exceptions

no 12 month period for•pregnancy: if no lapse in coverage•newborns and adopted children

– if covered within 30 daysPremiums: can not be higher for pre-existing conditionsCoverage proof: former employerEffective date: June 30, 1997

Health Savings Account

HSAs are new, effective January 1, 2004Pay for current and future health expenses on tax free basisEligibility:

Must be covered by high deductible health planMust not be covered by other health insuranceNot eligible for MedicareNot dependent on someone else’s return

HSA Definitions

$1000 < deductible < $2000Out of pocket < $5000 (indiv) or $10k (family)Contributions made by employer, employee or both – contributions are aggregatedMax contribution is lesser of deductible or $2,600 (indiv) or $5,150 (family)Can be used for medical expenses, or after 65, for Medicare premiums, etc.

HSA Debate

Idea is to provide incentives for individuals to control costs – money that is not used can be used to reduce future costsBundling with high-deductible plan provides catastrophic coverageShould these be extended more broadly?

The Future of U.S. Health Care in a Global Market

G.M. articleCan GM remain globabally competitive with such high health care costs?If not, what should GM do?Whose responsibility is it?

WalMart articlesIs WalMart “anti-worker” for not providing generous health care packages?What do you think about WM employees using means-tested programs like Medicaid?