Health Care and an Employee Benefit

• Health care benefits represent the most popular

insurance benefit offered by employers.
• Fewer than 10 million persons, less than 5% of
the total population, obtain health insurance
coverage under individual policies.
• The overwhelming majority of persons covered
by private health insurance obtain their
coverage under group plans, usually sponsored
by an employer.

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 Dominance of Employee Benefits
for Health Financing

There are two reasons for the overwhelming

dominance of employee benefits as a source of
financing for health care benefits.
• Favorable tax treatment of health care
provided as an employee benefit.
• Economy of the group insurance approach,
which makes group coverage cheaper than
individually written coverage.

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 Contributory-Noncontributory Plans

• Health care programs are often written on a

contributory basis, meaning that the employer
and employee share the cost of the program.

• Often, the employer pays the premium for the

employee’s coverage, and the employee pays
the cost of coverage for dependents, but other
cost-sharing arrangements exist.

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 Premium Only Plan

• Under a premium only plan, the employee

accepts a reduction in salary and allows the
employer to use the reduction to pay insurance
premiums on a before-tax basis.
• The employee saves the income and FICA taxes
that would otherwise be payable on the amount
by which salary is reduced.
• Any funds that are set aside but not used for
health insurance premiums or health care costs
are forfeited by the employee.

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 Medical Savings Accounts

• Medical savings accounts (MSAs) are a version

of the flexible spending account idea that many
employees have used with positive results.

• The employee requests a reduction in salary,

with the amount by which the salary is reduced
set aside for out-of-pocket medical expenses in a
MSA.

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 Financing Health Care Benefits

• Health care employee benefits may be self-

insured or they may be fully insured.

• As expected, larger employers tend to self-

insure, while smaller firms transfer the risk of
loss to an insurer.

• In between, there are a variety of arrangements

with different degrees of retention.

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 Self Insurance and Health Care Financing

1. It is estimated that over 2/3 of large employers

self-insure their employee health care programs.
2. It is increasingly common for smaller employers
to engage in some degree of self-funding.
3. Self-insured plans avoid premium taxes.
4. Self-insured plans also avoid state-required
mandated benefits (chiropractors, podiatrists,
mental illness).

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 Insured Plans

The private health insurance industry is composed

of three broad types of organizations:
Commercial Insurance Companies
Blue Cross and Blue Shield Plans
Capitating Health Care Providers

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 Capitating Health Care Providers

• HMOs, PHOs and ODSs differ from commercial

insurers in the fact that they are also health care
providers.
• The insurance element in HMOs and PHOs
derives from the manner in which they charge for
their services, which is called capitation.
• Under the capitation approach, individual
subscribers pay an annual fee and in return
receive a wide range of health care services.

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 Self Insured Plans

The cost advantages of self-insurance stem from

two major sources.
• First, by eliminating the premium, the employer
eliminates the premium taxes assessed by state
governments.
• Most states require that group insurance policies
include certain “mandated benefits,” such as
coverage for chiropractors and podiatrists,
mammographies, and mental illness, which are
avoided by self-insurers.

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 Approaches to Self-Funding

Two basic ways of self-funding health care benefits.

Disbursed self-funded technique.

• Employees’ claims are paid directly out of the
firm’s cash flow, as an expense and are tax
deductible when they are paid.
Tax-exempt trust.
• Contributions are paid into the trust, from which
claims and expenses are paid.
• Contributions are deductible when made, and
excess funds are invested as reserves.
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 Traditional Medical Expense Insurance
Fee-For-Service Plans

Historically, commercial insurers and Blue

Cross/Blue Shield organizations have provided
fee-for-service benefits.
1. Insured sought services from a provider.
2. Insurance would pay some or all of the
providers charge, directly or by
reimbursing the insured.
3. The provider and insured agreed on the
level of care and the insurer paid the bill.
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 Managed Care Plans

1. Critics argued that the fee-for-service

approach provided an incentive to
overutilize health care.
2. The trend in recent years has been away
from indemnity fee-for-service plans toward
programs with a more direct relationship
between the provider and the insurer.
3. Newer approach includes HMOs, PPOs, and
point-of-service plans.
4. These programs are often referred to as
managed care plans.
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 Traditional Fee-For-Service
Medical Expense Insurance Plans

1. Hospital expense coverage

2. Surgical expense

3. Physician’s expense coverage

4. Major medical coverage

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 Hospitalization Insurance

1. Hospital service benefit contracts

2. Hospital reimbursement contracts

3. Indemnity (cash payment) contracts

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 Surgical and Physician’s Expense

1. Surgical service plans

2. Surgical expense reimbursement

contracts

3. Physician’s expense reimbursement

insurance

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 Major Medical Insurance

1. High maximum (or unlimited)

2. Deductible

3. Coinsurance or share-loss provision

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Major Medical With Base Plan

$1,000,000 maximum

Insurer pays 100% of costs up to maximum

$200
Insured
Coinsured Layer of Coverage
pays 20%
Insurer pays of Costs
80% of costs in excess of basic policies
80% of costs in excess of deductible on
expenses not covered by basic

$100 Corridor Deductible

Basic hospitalization and surgical expense coverage

(same or different insurer)

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Comprehensive Major Medical

$1,000,000 maximum

Insurer pays 100% of costs up to maximum

$10,000
Coinsured Layer of Coverage Insured
pays 20%
of Costs
Insurer pays 80% of costs

$250 per person/$500 family Deductible

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Illustrated Payment Under Major Medical

Amount of loss $20,000

Less deductible 250
______
19,750

Insured pays 20% of expense

over deductible up to $10,000 $2,000

Insurer pays balance $17,750

33-20
 Alternate Approaches to Health Care
Financing

Traditional insurance plans no longer

dominate the insurance market. Many
employers now offer health care coverage
under alternative mechanisms.

1. Health Maintenance Organizations

2. Preferred Provider Organizations

3. Point-of-Service Plans

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 GENERAL NATURE OF HMOs

• Provide a wide range of health care services

to a specified group of subscribers in return
for a fixed periodic payment.
• Sponsored by a group of physicians,
hospital, employer, labor union, consumer
group, insurance company, or Blue
Cross/Blue Shield plans.
• HMO provides for the financing of health
care and also delivers that care.

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 TYPES OF HMOs

• Staff model

• Group model

• Individual practice association

• Network model

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 Physician Hospital Organizations

1. Also sometimes called

• Integrated Delivery Systems (IDS’s)
• Provider Sponsored Organizations
(PSO’s)

2. Similar to HMOs.
• PHO’s are paid a capitated fee
• fee is divided among providers on a
prenegotiated basis
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 Preferred Provider Organizations
(PPO’s)

1. Doctors or hospitals with whom employer

or insurer contracts to provide medical
services.

2. Provider discounts services and sets up

utilization control programs to control
costs.

3. Employees not required to use PPO, but if

they go elsewhere they must pay more.

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 Point of Service Plans (POS)

1. Point of Service (POS) plans are the newest

development in health insurance field.

2. In one respect, POS plans operate like a

PPO, since the employee retains right to
use any provider but will pay a higher part
of the cost for a provider outside network.

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 Point of Service Plans (POS)

3. At same time, POS is like an HMO, since

care received through the network is
managed by a primary care physician or
“gatekeeper.”

4. POS plans were created when HMOs

allowed subscribers to use non-network
providers.

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 Health Insurance for Senior Citizens

1. Medicare program

2. Medicare supplement (Medigap) policies

3. Long-term care insurance

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 Medicare Program

1. Part A: Hospital Insurance

• hospital care
• nursing home benefits
• home health benefits
• hospice care

2. Part B: Supplementary Medical Insurance

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 Employer Group Medicare Coverage

• Federal Law requires that employers with 20 or

more employees must also offer the same
health benefits, under the same conditions, to
employees age 65 or over and to their spouses
who are 65 or over, that they offer to younger
employees and spouses.

• Employers must also offer health care coverage

to employees' spouses who are between 65 and
69, even if the employee is under age 65.

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 Employer Group Medicare Coverage

• The employee may accept or reject coverage

under the employer group health plan.

• If the individual rejects the plan, Medicare will be

the primary payer for Medicare-covered health
services that he or she receives.

• If the employee rejects the employer plan, an

employer cannot provide a plan that pays
supplemental benefits for Medicare-covered
services or subsidize such coverage.

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 Medicare Supplement Coverage

• Employer-provided group coverage for Medicare-

eligible persons is integrated with Medicare,
under an arrangement called a carve-out plan.
• Under a carve-out plan, the participant receives
the amount payable under the plan, minus the
amount paid by Medicare.
• The effect is to produce the same payment by the
participant as for other workers who are under
age 65.

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 Accounting for Retirees’ Health Care
Coverage

• In 1990, the Financial Accounting Standards

Board (FASB) adopted a new standard under
which retiree health care costs must be accrued
while an employee is still working.
• Starting in 1997, a company’s balance sheet
must reflect a liability equal to the unfunded
obligations to retirees.
• Benefit analysts estimate the unfunded liability
for post-retirement health care benefits at over
$400 billion.
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 Long-Term Care Policies

• Although Medicare provides coverage for the

normal health care needs of older persons, it
does not meet the long-term care need, such as
the cost of custodial care in a nursing home.
• Long-term care insurance pays the cost of care
in a nursing home or other extended care
facility.
• Long-term care has rarely been included in
employee benefit plans.

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 Cost Containment Provisions

In addition to managed care arrangements such as

HMOs, PPOs, and POS plans, most traditional
indemnity plans have adopted cost control
provisions.
1. Increased employee cost sharing
2. Coordination of benefits
3. Covering alternative sites of care
4. Addressing utilization

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 Increased Employee Cost Sharing

• The trend in recent years has been to increase

the portion of medical expenses funded by the
employee.

• Employee contributions to purchase coverage

have tended to increase, as have deductibles,
the employee’s share of covered expenses, and
out-of-pocket maximums.

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 Coordination of Benefits

• Coordination of benefits applies when health

care coverage applies to a dependent who also
has employer-provided health care coverage.

• Under a standard coordination of benefits

provision, if a wife is covered by her employer
and as a dependent under her husband’s policy,
her policy applies before the husband’s policy.
• The husband’s policy pays nothing if the wife’s
policy covers the total cost of the expenses.

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 Covering Alternative Sites of Care

• Originally, hospital insurance policies covered

only care administered in a hospital.
• Most policies now recognize that there may be
less costly alternative, but still appropriate, sites
for delivering care.
• Policies are likely to cover outpatient surgery and
ambulatory care.
• Policies are also likely to cover care delivered in
skilled nursing facilities, home health care, and
hospice care.
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 Addressing Utilization

• Second surgical opinion programs require (and

pays for) a second opinion prior to surgery, with
the belief that this might reduce the incidence of
unnecessary surgeries.
• Preadmission certification requires the insured to
receive approval of the insurer prior to being
admitted to the hospital for certain conditions
• Concurrent review programs review care while
the insured is in the hospital to determine
whether continued hospitalization is necessary.

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 Mandated Access

In the debate over health care, two issues

predominate:
• lack of coverage for some segments of
society
• escalating costs from year to year

Efforts to address access have been made at

both the state and federal levels.

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 COBRA

1. Requires continuance of employer-sponsored

group health insurance under specified
circumstances.

2. 18 months for terminated employees.

3. 36 months for spouses of deceased, divorced

or separated workers or dependent children
whose eligibility for coverage ceases.

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 Subsidized State Health Insurance Pools

1. Persons not eligible for Medicare or Medicaid

who cannot buy health insurance may obtain
coverage from pools, usually at a subsidized
rate.
2. By 1995, 29 states had created such pools.
3. Although the pools are subsidized, premiums
range from 125% to 200% of the state average
premiums.
4. Costs in excess of premiums are covered by a
subsidy, in most states from health insurers.

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 Small Group Reform Laws

1. Aim to improve availability of health insurance

to small businesses and their employees
2. Typically, laws require insurers to offer plans to
small groups on a guaranteed issue basis
• individual employees may not be excluded.
• time limits apply to preexisting conditions
exclusions.
• after preexisting conditions requirement is
met, coverage is portable to a new insurer.
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 Dental Expense Insurance

• Dental expense coverage is written on a

scheduled or nonscheduled basis.
• Scheduled plans provide a listing of various
dental services, with a specific amount available
for each.
• The coverage is usually subject to a calendar
year deductible of $50 or $100 and a
coinsurance rate that varies with the type of
service provided.

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 Dental Expense Insurance

• Written with a dollar reimbursement limit or

on a service basis.

• Coinsurance may require different cost-

sharing in earlier years (e.g., 50% first year,
60% second year, 70% third year, 80% fourth
year and 90% thereafter).

• Coinsurance may also be structured to

encourage or discourage utilization (100%
for preventive care, 50% for orthodontics).

33-45
 Dental Expense Insurance

Category Limit Deductible

Coinsurance

Preventive/
diagnostic
services $1,000 Annual none 90%/10%

Basic services Included $100 80%/20%

Major services Included $100 60%/40%

Orthodontia $1,000 Lifetime $250 50%/50%

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 Funding Arrangements

Health care financing arrangements have

changed dramatically over the past 20 years.

The change was motivated by

• an increasing understand of risk

management
• pressure to control costs
• high interest rates

33-47
 Stop Loss Insurance

• Firms that elect to self-fund their health care

benefits may purchase stop loss insurance to
protect against the risk of abnormally large
losses or severe loss experience.
• Aggregate stop loss and specific stop loss
contracts are available for this purpose.
• Specific stop lost insurance protects against
large claims incurred by a single insured.

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 Retrospective Rating Arrangements

• The retrospective rating approach has found wide

application in financing employer-provided health
care programs.
• Under these programs, the policy-holder’s
premium fluctuates directly with loss experience,
subject to a maximum.
• A typical maximum premium under a health
insurance retrospectively rated program might be
115 percent of the conventional premium.

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 Extended Grace Period Arrangements

• Under the terms of a conventional group health

insurance arrangement, the policyholder is
allowed a grace period of 31 days from the due
date within which to pay the premium.

• In response to buyers desire to participate in the

cash flow benefits associated with insurance
premiums, some insurers offered plans extending
the grace period to 60 or 90 days.

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 Minimum Premium Arrangements

• A minimum premium arrangement is a partially

self-funded plan.
• The employer pays benefits under the plan up to
a predetermined limit, which is based on
projected claims.
• If claims exceed the projected level, the insurer
becomes responsible for claims.
• The plan sponsor pays the insurer a premium that
reflects the insurer’s risk; the possibility that
actual claims will exceed expected claims.
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