The Basic Principles of Health Insurance

The Basic Principles of Health Insurance

Vickie L. Bajtelsmit, JD, PhDProfessor of Insurance and Finance

Department of Finance and Real Estate

The Griffith Insurance Education Foundation

Agenda Trends in employee benefits Problems in the health care/health

insurance market Types of health insurance coverage Patient Protection and Affordable Care

Act (PPACA)


Why Do Firms Offer Employee Benefits? Tax advantages of qualified plans Cost savings of group insurance Competition for qualified workers Improved employee productivity,

morale and retention


Tax Benefits of Qualified Plans 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)


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

When insurance is offered to a group, all members are eligible to participate without proof of insurability

Employees may prefer the simplicity


Type of Employee BenefitSmall Firms

(Less than 100 workers)

Medium/Large Firms (100+ Employees) Type of Employee Benefit

Small Firms (Less than 100

workers)

Medium/Large Firms (100+ Employees)

Insurance Paid Time Off Health 42% 63% Holidays 70% 87% Prescription Drugs 40% 61% Vacation 70% 85% Dental 23% 51% Personal leave 26% 50% Vision 13% 28% Family leave 7% 13% Life 40% 75% Unpaid Time Off Long Term Care 6% 24% Family leave 77% 94% Health Savings Accounts 8% 21% Other Benefits-Financial Disability Reimb. Acct: Childcare 20% 51% Paid sick leave 53% 73% Reimb. Acct: Healthcare 19% 53% Short term 26% 52% Severance pay Long term 20% 44% Other Benefits-Quality of Life Retirement Child care 4% 16% Any 35% 66% Subsidized Commuting 3% 9% Defined Benefit 9% 30% Wellness programs 14% 50% Defined Contribution 31% 54% Emplee Assistance Programs 25% 69%

Benefits Offered by Small vs Med/Lg Firms

Source: U.S. Department of Labor, Bureau of Labor Statistics www.bls.gov



Benefits Differ by Firm Characteristics


Trends in Retirement Plan Types(All Workers)


Trends in Retirement Plan Types(Among Workers Who Have a Plan)

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


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

Will increase demand for care and costs Reduced employer coverage of retiree health ins.

Pre-PPACA, uninsured 16% of the populationThe Griffith Insurance Education Foundation

Average Annual Premiums for Single and Family Coverage, 1999-2011



Firm and Worker Premium Contributions forSingle and Family Coverage, by Plan Type, 2011

Sources: Kaiser Family Foundation Survey of Employer Sponsored Health Benefits

Increases in Workers’ Contributions to Premiums, Inflation, and Earnings, 1999-2011


Rate of Increase is Slowing

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0Family Premium (Small Firm)

Family Premium (Large Firm)

Overall Inflation

Wage Growth

Ann

ual %

Incr

ease

Since 2000, cumulative increases in:prices (34%)wages (47%)family health premiums (250%)

Sources: Kaiser Family Foundation Survey of Employer Sponsored Health Benefits; Bureau of Labor Statistics, 2000-2010The Griffith Insurance Education Foundation


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: Controlling patient access to medical care Contracting with providers for lower rates Providing incentives for low-cost alternatives


Traditional Indemnity Plans (Fee-For-Service) 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

Problems with Indemnity Plans Consumers have no incentive to control

costs 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


Methods of Controlling Costs “Self-insurance” Managed care plans Consumer choice plans


Self-funded plans Note: Self-insurance is not really insurance;

employer takes the risk How can self-funding reduce costs?

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


Managed Care Organizations Health Maintenance Organization

(HMO) Limited choice ; comprehensive care Providers have incentives to control costs

Preferred Provider Organization (PPO) Participating providers contract for reduced $

Point of Service (POS) Similar to PPO, but affiliated with an HMO so

more comprehensive medical care


Consumer-Driven Plans 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 GOALIncentives for cost control



Trends in Health Insurance Type

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


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.


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


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)


PPACA Key Provisions Coverage Requirements:

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”


Health Exchange PlansBronze Plan

Silver Plan

Gold Plan

Platinum Plan

Catastrophic Plan

% of coverage of benefit costs of the plan

60% 70% 80% 90%

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: 3:1Smoking Status 1.5:1

Area within a stateFamily composition


Questions?


The Basic Principles of Health Insurance

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