The Basic Principles of Risk Management and Insurance

Report
The Basic Principles of
Health Insurance
Vickie L. Bajtelsmit, JD, PhD
Professor of Insurance and Finance
Department of Finance and Real Estate
The Griffith Insurance Education Foundation
Agenda
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Trends in employee benefits
Problems in the health care/health
insurance market
Types of health insurance coverage
Patient Protection and Affordable Care
Act (PPACA)
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Why Do Firms Offer Employee
Benefits?

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Tax advantages of qualified plans
Cost savings of group insurance
Competition for qualified workers
Improved employee productivity,
morale and retention
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Tax Benefits of Qualified Plans
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
Employee benefits are not taxable
income to employee and are a
deductible business expense to the
employer.
How much does this save?
 Federal (25%), state (5%), and payroll taxes
(7.65%) ~38%
 If health insurance is $6,000, employee
would need $9,677 in pre-tax income to buy
on his/her own. =cost/(1-t)
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What are the benefits of getting health
insurance through employers?

Group insurance usually cheaper.
 Lower underwriting costs
 Lower administrative costs (e.g. billing)
 No individual negotiation or commissions

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When insurance is offered to a group,
all members are eligible to participate
without proof of insurability
Employees may prefer the simplicity
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Benefits Offered by Small vs Med/Lg Firms
Type of Employee Benefit
Insurance
Health
Prescription Drugs
Dental
Vision
Life
Long Term Care
Health Savings Accounts
Disability
Paid sick leave
Short term
Long term
Retirement
Any
Defined Benefit
Defined Contribution
Small Firms
(Less than 100
workers)
42%
40%
23%
13%
40%
6%
8%
53%
26%
20%
35%
9%
31%
Medium/Large
Firms (100+
Employees)
63%
61%
51%
28%
75%
24%
21%
73%
52%
44%
66%
30%
54%
Type of Employee Benefit
Paid Time Off
Holidays
Vacation
Personal leave
Family leave
Unpaid Time Off
Family leave
Other Benefits-Financial
Reimb. Acct: Childcare
Reimb. Acct: Healthcare
Severance pay
Other Benefits-Quality of Life
Child care
Subsidized Commuting
Wellness programs
Emplee Assistance Programs
Source: U.S. Department of Labor, Bureau
of Labor Statistics www.bls.gov
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Small Firms
(Less than 100
workers)
Medium/Large
Firms (100+
Employees)
70%
70%
26%
7%
87%
85%
50%
13%
77%
94%
20%
19%
51%
53%
4%
3%
14%
25%
16%
9%
50%
69%
Benefits Differ by Firm Characteristics
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Trends in Retirement Plan Types
(All Workers)
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Trends in Retirement Plan Types
(Among Workers Who Have a Plan)
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Role of ERISA – Employee
Retirement Income Security Act
 Established federal standards for employee
benefits, including retirement and 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
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Issues in Health Insurance and Healthcare
 Health care cost inflation
 More than double CPI
 Health expenditures as % of GDP (~14%)
 Per capita expenditures increase at 6%,
premiums average 7% of disposable income
 Quality relative to cost

Aging of the population

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Will increase demand for care and costs
Reduced employer coverage of retiree health ins.
Pre-PPACA, uninsured 16% of the population
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Average Annual Premiums for Single and
Family Coverage, 1999-2011
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Firm and Worker Premium Contributions for
Single and Family Coverage, by Plan Type, 2011
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Sources: Kaiser Family Foundation Survey of Employer
Sponsored Health Benefits
Increases in Workers’ Contributions to
Premiums, Inflation, and Earnings, 1999-2011
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Rate of Increase is Slowing
16.0
Family Premium (Small Firm)
Annual % Increase
14.0
Family Premium (Large Firm)
12.0
Overall Inflation
10.0
Wage Growth
8.0
6.0
4.0
2.0
0.0
-2.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Since 2000, cumulative increases in:
prices (34%)
wages (47%)
family health premiums (250%)
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Sources: Kaiser Family Foundation Survey of Employer
Sponsored Health Benefits; Bureau of Labor Statistics, 20002010
Types of Health Insurance Coverage

Traditional fee-for-service (FFS)
 Reimburses for actual medical costs incurred
 Patient decides what medical care they want

Managed care
 Costs are reduced by:


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Controlling patient access to medical care
Contracting with providers for lower rates
Providing incentives for low-cost alternatives
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Traditional Indemnity Plans
(Fee-For-Service)
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Basic and major medical
Provider usually bills insurance company
Choice of providers
Deductibles, Coinsurance (e.g. 80/20), and
out of pocket limits (stop-loss)
Common exclusions: well care, cosmetic,
vision, dental
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Problems with Indemnity Plans

Consumers have no incentive to control
costs

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Don’t pay directly for services, so incentive to
use more once the deductible is met
Cost comparison info isn’t readily available
Providers have no incentive to control costs
 More services, more income and profit
 Classic moral hazard problem
 Increasing costs over time
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Methods of Controlling Costs
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“Self-insurance”
Managed care plans
Consumer choice plans
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Self-funded plans
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Note: Self-insurance is not really insurance;
employer takes the risk
How can self-funding reduce costs?
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Avoid state mandates (ERISA preemption)
Lower admin. costs and insurer profit charges.
Reinsure above a stop-loss (average $200,000)
Can provide incentives to employees
Percentage of covered workers in partially
or fully self-funded plans grew from 44% in
1999 to 60% in 2011
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Managed Care Organizations

Health Maintenance Organization
(HMO)
 Limited choice ; comprehensive care
 Providers have incentives to control costs

Preferred Provider Organization (PPO)

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Participating providers contract for reduced $
Point of Service (POS)
 Similar to PPO, but affiliated with an HMO so
more comprehensive medical care
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Consumer-Driven Plans
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High deductible health plan with HSA
 Unused HSA funds can be saved pretax
for retirement or future medical costs.
Preventive care usually covered
Cost sharing incentives
 Contributory premiums
 Better coverage for in-network, generic
Rx
 GOALIncentives for cost control
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Trends in Health Insurance Type
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Other Sources of Health Insurance

Social Security Medicare (age 65+)
 Part A (hospital); payroll tax (1.45%); no
additional premium if 40 quarters (otherwise
$248-$451/mo)
 Part B (medical) $99.90/mo. premium in 2012
(more if MAGI>$85,000)
 Part D (Rx) (average $30-$40/month 2012)

Medicare Supplement (“medigap”)
 Private plans that fill in Medicare gaps

Medicaid (for low income)
 State-run, federally-subsidized health insurance
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PPACA Key Provisions

Individual Mandate (2014)
 Must have health insurance or pay tax penalty $695 $2,085 based on income

Employer Mandate (2014)
 Employers of 50+ workers: $2,000 penalty for no
health ins. (excluding the first 30 employees)-

Medical Loss Ratio
 80% of premiums (small group plans 85%) must go to
claims costs and quality improvements; rebate the
excess to consumers.
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PPACA Key Provisions

State Health Exchanges (2014)
 Individuals and businesses < 100 employees can
purchase certain types of policies
 Federal support to states for creation of the
Exchanges

Expansion of Medicaid (2014)
 Cover < age 65 with AGI up to 133% of poverty
level (~$14,000 individual, $29,000 family of 4)
 Fully funded by federal government first 3 years,
90% thereafter
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PPACA Key Provisions

Premium Subsidies:
 For incomes up to 400% of poverty level
($44,000 individual, $92,000 family of 4) w/o
employer plan
 Insurance must be bought through Exchange
 reduce adverse selection concerns

Premium Tax Credits (2010)
 35% to small businesses providing insurance
to employees (increasing to 50% 2014)
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PPACA Key Provisions
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Coverage Requirements:
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Children to age 19 regardless of preex. cond.
Children to age 26 on parents plan
No annual or lifetime limits on coverage.
Must include well care with no copay or
deductibles
Premiums
 Limits on plan increases, effect of rating factors,
and difference in premiums between highest
and lower priced plans

Prohibit Rescission for “Honest Mistake”
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Health Exchange Plans
Bronze
Plan
% of
coverage
of benefit
costs of
the plan
60%
Silver
Plan
Gold
Plan
70%
80%
Platinum
Plan
90%
Catastrophic
Plan
Only available
in individual
market for
those up to
age 30 or
exempt from
mandate
Out of
pocket
limit
Equal to the Health Savings Account (HSA) limit
$6,250 individuals, $12,500 families in 2013
Pricing
Factors
Age: 3:1
Smoking Status 1.5:1
Area within a state
Family composition
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Questions?
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