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.

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.


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.


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.

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.


Financing Health Care Benefits
• Health care employee benefits may be selfinsured or they may be fully insured. • As expected, larger employers tend to selfinsure, while smaller firms transfer the risk of loss to an insurer. • In between, there are a variety of arrangements with different degrees of retention.


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).


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


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.

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.

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.

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.

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.

Traditional Fee-For-Service Medical Expense Insurance Plans
1. 2. 3. 4. Hospital expense coverage Surgical expense Physician’s expense coverage Major medical coverage


Hospitalization Insurance
1. 2. 3. Hospital service benefit contracts Hospital reimbursement contracts Indemnity (cash payment) contracts


Surgical and Physician’s Expense
1. 2. 3. Surgical service plans Surgical expense reimbursement contracts Physician’s expense reimbursement insurance


Major Medical Insurance
1. 2. 3. High maximum (or unlimited) Deductible Coinsurance or share-loss provision


Major Medical With Base Plan
$1,000,000 maximum Insurer pays 100% of costs up to maximum $200 Coinsured Layer of Coverage
Insurer pays 80% of costs in excess of basic policies 80% of costs in excess of deductible on expenses not covered by basic

Insured pays 20% of Costs

$100 Corridor Deductible Basic hospitalization and surgical expense coverage (same or different insurer)

Comprehensive Major Medical
$1,000,000 maximum Insurer pays 100% of costs up to maximum

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

Insured pays 20% of Costs

$250 per person/$500 family Deductible

Illustrated Payment Under Major Medical
Amount of loss Less deductible $20,000 250 ______ 19,750 Insured pays 20% of expense over deductible up to $10,000 Insurer pays balance

$2,000 $17,750


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


• 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.


• Staff model • Group model • Individual practice association • Network model


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

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.

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.


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.


Health Insurance for Senior Citizens
1. Medicare program 2. Medicare supplement (Medigap) policies 3. Long-term care insurance


Medicare Program
1. Part A: Hospital Insurance • hospital care • • • nursing home benefits home health benefits hospice care

2. Part B: Supplementary Medical Insurance


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.


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.

Medicare Supplement Coverage
• Employer-provided group coverage for Medicareeligible 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.

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.

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.

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. 2. 3. 4. Increased employee cost sharing Coordination of benefits Covering alternative sites of care Addressing utilization

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.


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.

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.

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.

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.


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.


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.

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.

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.

Dental Expense Insurance
• Written with a dollar reimbursement limit or on a service basis. • Coinsurance may require different costsharing 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).

Dental Expense Insurance
Category Coinsurance
Preventive/ diagnostic services Basic services Major services Orthodontia



$1,000 Annual Included Included $1,000 Lifetime

none $100 $100 $250

90%/10% 80%/20% 60%/40% 50%/50%

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

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.


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.

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.


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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