employee benefits & erisa health insurance

Employee Benefits & ERISAHealth Insurance

August 20, 2011R. B. Drennan, Ph.D.

Associate Professor and ChairmanDepartment of Risk, Insurance and Healthcare Management

Fox School of BusinessTemple University

The Griffith Insurance Education Foundation

Definition of Employee Benefits

Any form of compensation other than direct wages

Total Compensation = Current Cash Compensation + Value of employee benefits

U. S. Chamber of Commerce annual survey shows that over 40% of employer payroll is attributable to employee benefits on average


Why are Employee Benefits a Part of Compensation? Improve corporate efficiency

Attracting and retaining capable employees

Concern for welfare of employees by employer


Why are Employee Benefits a Part of Compensation? Inherent advantages of group

insurance Lower cost than individual insurance

(usually) because of reduced expense loading

No individual evidence of insurability Ease and convenience of employer

selection of insurance coverages Ease of payroll deduction in contributory

and voluntary plans


Why are Employee Benefits a Part of Compensation? Favorable tax treatment in U.S.

Income tax system

For employer Can deduct cost of benefits as a cost of

doing business for income tax purposes

Same as salary


Why are Employee Benefits a Part of Compensation? Favorable tax treatment in U.S.

Income tax system For employee

Employees in general are not taxed on the value of employer provided benefits

Any taxes may be on some income benefits when received or retirement benefits when received

There is no limit to this subsidy in the case of health insurance


Factors Contributing to Growth of Employee Benefits Post World War II wage and

price controls

Union demands through collective bargaining

Revenue Act of 1939 – favorable tax treatment


Role of ERISA – Employee Retirement Income Security Act

ERISA established federal standards for pensions and other employee benefits, including health plans and prohibits states from regulating such plans The preemption clause states that

ERISA supersedes all state laws relating to employee benefit plans as defined under ERISA

One such exemption is for state laws regulating insurance


Employer Provided Health Insurance

Employer-Based Distribution System Majority of health insurance is employer-

provided through an employee benefit plan

Receives favorable tax treatment from the IRS

Group insurance is offered without evidence of insurability



Employer-Based Distribution System Employers essentially provide a

‘subsidy’ to employees for the purchase of health insurance

Traditionally, this subsidy was 100% of the cost of the plan – non-contributory basis

Most employers now provide a subsidy of less than 100% - contributory basis


Percentage of Firms Offering Health Benefits, 1999–2010


Average Annual Premiums for Single and Family Coverage, 1999-2010


Health Care Cost Inflation


Traditional Indemnity Plans Traditional Indemnity Plans

Third Party Payment and Traditional Plans

Three parties in health care transaction Consumer/Buyer/Insured/Patient Provider/Seller (e.g., doctors, hospitals) Financial Intermediary/Third Party (e.g.,

insurer)


Traditional Indemnity Plans Traditional Indemnity Plans -

Incentives Classic Moral Hazard Problem

Moral Hazard exists when the presence of insurance changes the behavior of the insured so as to increase the number of losses and/or the dollar value of the loss

Insured pays a small percentage of the cost of health care

No incentive to consider price/quality/quantity of services


Traditional Indemnity Plans Traditional Indemnity Plans -

Incentives Providers are paid via fee-for-service

reimbursement May have an incentive to perform more

services


Traditional Indemnity Plans Traditional Indemnity Plans - Incentives

Role of third party?

Assume financial responsibility for services delivered ‘Pay the claim’ Any management of cost is retrospective in nature Management of cost and not care

Result of combined incentives – increased utilization and costs


Traditional Indemnity Plans Traditional Indemnity Plans - Types

Basic Medical Expense Insurance Hospital, Surgical and Regular Medical

Expenses

Major Medical Expense Insurance Supplemental or Comprehensive


Traditional Indemnity Plans Traditional Indemnity Plans – Market

Share 1980 – 95% of market

2010 – 1% of market


Early Attempts to Contain Costs Employers Move to Self-Funding

Take advantage of ERISA preemption Avoid State Mandates

Savings in some administrative costs charged by insurers


The Move to Self-Insurance


The Move to Contributory Financing


The Move to ContributoryFinancing


Early Attempts to Contain Costs Insurers Develop Contracts with More

‘Managed Care Tools’ Retrospective Utilization Review Prospective Utilization Review Second Surgical Opinion Program Slightly increased point-of-service cost

sharing with insureds Higher deductibles, coinsurance, out-of-

pocket maximiums


The Move to Managed Care HMO Act of 1973

Provided low interest loans and grants to establish HMOs

Contained Dual Choice Provision Goal was to increase the number of

HMOs and provide incentives for employers to offer them to employees as an alternative to indemnity plans


The Move to Managed Care HMOs

Combine ‘provider’ and ‘payment’ function in third party payment system Ideally, place providers of health care at

financial risk for overutilization HMO in its role as a provider is at risk Changes the risk bearing dynamics as

compared to a traditional indemnity plan



Restrictions on choice of providers depending on the type of HMO and restrictions on ease of access to specialists and hospitals Restrict coverage to use of HMO-affiliated

physicians and hospitals No coverage for out-of-plan utilization



Group Practice Plan and Staff Models [closed panel] and Individual Practice Associations [IPA]

Provider ‘manages’ the care/transaction prospectively

Providers at risk for overutilization through the use of capitation or some other type of payment system shifting risk

‘Quality of care’ becomes an issue Many HMOs compete on quality scores in addition to

price


The Move to Managed Care PPOs – Preferred Provider Organizations

Insurers’ attempt to develop a managed care plan to address perceived problems with HMOs

PPO doctors agree to discount services and agree to accept PPO payment as payment in full

Receive discounted fee-for-service payments Providers are not at financial risk for overutilization


The Move to Managed Care PPOs – Preferred Provider Organizations

Members of the PPO decide at the point they need services: Use of a network physician

Lower out of pocket costs

Use of a non-network physician Higher out of pocket costs

PPOs rely on receiving discounts from providers and providing incentives for insureds to use the preferred providers to contain costs


The Move to Managed Care POS-Type HMOs

Structure HMO core Ability to go to physicians outside the HMO

network


The Move to Managed Care POS-Type HMOs

Members decide at the ‘point-of-service’: Use of a network physician

Reduced out of pocket expenses

Use of a non-network physician Increased out of pocket expenses

Care outside the network is not managed POS plans [like PPOs] provide incentives for

insureds to behave as traditional consumers through the use of benefit differentials


The Move to Managed Care Exclusive Provider Organizations

Relies on provider discounts for cost containment

Coverage obtained only from exclusive providers


Consumerism Traditional health care plans are

characterized by: Low deductibles High expense in terms of premiums Lack of incentives for insureds to behave

as traditional consumers


Consumerism Definition/Rationale

Plans give incentives for patients/insureds to behave as more ‘traditional consumers’ Goal is to cause them to consider price and

quality of care in health care and health insurance consumption decisions

Patient now becomes a more active participant in the third party payment system

Individuals need information to make informed decisions


Consumerism Examples:

Employers provide less than 100% subsidy for health insurance (contributory financing)

Plan raises cost sharing for use of non-network physicians [PPOs, POS]

Tiered prescription drug plans Tiered provider networks Large deductible plans combined with

catastrophic insurance coverages HRAs, MSA, HSAs


Distribution of Covered Workers Facing Different Cost-Sharing

Formulas for Prescription Drug Benefits, 2000-2010


Consumer Driven Health Plans [CDHPs]

Major Characteristics: Employer offers a high deductible health plan

with a high out-of-pocket maximum and catastrophic protection beyond

Premium is reduced as a result Savings in cost is ‘shared’ with employees

through an employee-owned and managed account [e.g., HSA]

Health plan has in-network options available to insureds while they satisfy the deductible



Major Characteristics: Preventive care is covered at 100% Any unused funds are portable and can

be carried forward to the next year



A properly constructed CDHP has three components :

A high deductible health plan A savings account owned and managed

by insureds Information tools needed to help manage

health care needs



Why CDHPs might work to contain costs

Insureds are now spending their own money for many health care encounters

Example of consumerism in the consumption of health care

Helps to control the classic moral hazard problem created by traditional health insurance plans with low deductible


Consumer Driven Health Plans [CDHPs] There is some evidence that

individuals who choose CDHPs over other type of health plans may be lower risk individuals

If this is the case, it is not clear if CDHPs are effective in controlling costs or not


Among Firms Offering Health Benefits, Percentage of Firms That Offer One, Two, or Three or More Plan Types, by Firm Size, 2010‡


Distribution of Health Plan Enrollment for Covered Workers, by Plan Type, 1988-2010


Patient Protection and Affordable Care Act (PPACA)

Prohibition of Annual and Lifetime Limits

Extension of Dependent Coverage PCE limits Grandfathered Plans MLR regulation


Questions?

Thank You

Rob Drennan


employee benefits & erisa health insurance

Documents

individual insurance

irsgroup insurance

income benefits

cost of benefits

retirement benefits

employee benefit plans

income tax purposessame

employer payroll