Massachusetts HC Reform November 29, 2006

The Context The problem of the “uninsured” and “underinsured” is perennial issue Clinton Health Security Act in 1994 “Hillary Health Care” Reform never materialized “Republican Revolution” Recent attempts by states

Three Major Issues Pooling Providing insurance efficiently requires large pools of participants created independently of health status Most uninsured do not have access to pools Affordability Average cost of family health insurance through large firms in MA is $11,500 Attempts to subsidize (such as through tax system) Mandates Even with large subsidies, take-up rates are low

Differing Views The Left: expand public insurance entitlements The Right: Expand access to private health insurance (e.g., tax credits)

Background on Massachusetts Republican Governor, Democratic Legislature Relative low uninsurance rates 9% vs. 18% nationally Large amount of federal funding at stake Nearly $400 million in Medicaid funds were to be lost – “focused the minds” State’s uncompensated care pool provided source of funds Reform in 1980s created pool to reimburse hospitals for unpaid expenses

The Plan “The Connector”: a central purchasing pool to help everyone purchase at group rates All firms required to set up accounts so employees can pay with pre-tax dollars Large subsidies for those under 300% of poverty line (about $60k for 4 people) Limited, but inexpensive, insurance plan for those above Individual mandate – or big tax penalty $295 annual charge per employee on firms that do not offer HC insurance

Other Group Insurance

Life Insurance Over 90% of companies offer full-time employees life insurance Term life insurance Provides death benefit during particular period Widely used in group plans to provide insurance during pre-retirement period Whole life insurance Do not terminate until benefits paid to beneficiaries Have a cash value component Much more expensive per $ of coverage

Who Pays? Contributory plans: employees pay the entire premium or share cost with employer Noncontributory plans: employer pays entire premium for coverage (within designated limits) Section 79 of Internal Revenue Code: the cost of employer-provided group term life insurance qualifies as a tax free benefit to employees  most plans are noncontributory because tax benefits are superior

Section 79 Rules To get tax benefit, policy must: Provide general death benefit Be provided to a group of employees Provided under policy carried by employer Amount of insurance is based on formula that precludes individual selection. Formula may be based on age, years of service, compensation or position.

Section 79 Tax Benefit At corporate level, employers may deduct paid premium amount as long as employer is not beneficiary of the policy (this part applies regardless of whether meet section 79 tests) Section 79: Cost of first $50k of insurance is excludable from individual income too Lots of requirements must be met, including nondiscrimination rules Prohibits employers from discriminating in favor of highly compensated employees Okay if cover 70% of all employees Okay > 85% of participants are not key employees

Ex: UIUC Employee Life Insurance Options State of Illinois Plan All full-time employees receive term life insurance in an amount equal to their annual salary, at no cost. Part-time employees also qualify for life insurance, but must share in a percentage of the cost proportionate to their appointment.

Ex: UIUC Life, cont. May optionally purchase additional life insurance up to four times your annual salary. You may also purchase life insurance for your spouse or children. Life insurance enrollment is guaranteed during the 10-day new employee enrollment period. Thereafter, evidence of good health is required to increase your life insurance and to add coverage to your spouse and/or children. University also offers additional term life up to $250,000 (over $30k requires evidence of good health)

Disability Insurance DI replaces income for employees who become unable to work on a regular basis because of any illness or injury During one’s work life, 1 out of every 3 employees will have a disability that lasts at least 90 days Social Security program includes a disability income component

Group Disability In 1999, 61% of companies offered a short term disability program, and 70% offered a long-term plan (6 months is cutoff) Full benefit often consists of 50 – 70% of salary, subject to a max dollar amount. Why not 100%? Waiting periods common

Disability, cont. Most disability plans integrate with: Workers compensation Social Security Pension plan Tax treatment Employer contributions tax deductible and not included in employee taxable income Employee contributions not deductible When benefits are paid, it is partially taxable (the part paid by employer contributions)

Ex: UIUC Disability Income Plan Disability benefits are provided through the State University Retirement System Requires 2 years participation for illness, no minimum for accident Waiting period: benefits begin 60 days after disability (or after sick leave benefits end) Benefits: 50% of base salary Benefit Duration: Benefits payable until total benefits received equal 50% of earnings while in the system

Ex: Supplemental Disability New employees guaranteed coverage if apply within 60 days of employment. Benefits coordinated with SURS so that a total benefit of 66.67% of earnings, up to max of $7,500/month is paid. Pays 66.67% during first 2 years if illness Then pays 16.67% (SURS pays 50%) Premiums based on age and benefit amount Note: most private sector plans integrate with Social Security disability (vs. SURS)

Cafeteria Plans Flexible benefit plans that allow employees to direct some of their tax-favored compensation into benefits of their choice About 25% of employers with >500 employees offer Less common among smaller employers Give employees fixed dollar amount that they can allocated themselves Can choose between qualified benefits or cash Cannot be deferred compensation except for 401(k) Can even buy extra vacation time