1 INS301 Chp16 Employee Benefits: Overview and Group Medical Coverage Overview of employ benefits Group medical insurance Background of health care market Moral hazard problem Traditional fee for service plan Health Maintenance Organizations (HMOs) Provisions in Group Medical Plans Health Care Cost Inflation

2 INS301 Chp16 Major Types of Employee Benefits Medical insurance Retirement plan Life insurance Short term disability insurance Long term disability insurance other insurance such as dental, vision insurance

3 INS301 Chp16 Major Types of Employee Benefits

4 INS301 Chp16 Who Pays the Cost of Benefits? In the long run, employees pay the cost contributory plans - directly noncontributory plans – indirectly In short run, employer profitability is likely to decrease if benefit costs increase

5 INS301 Chp16 Background on Health Care Market Three major players Health care providers Physicians, nurses and hospitals Employees/individuals who seek health care Employers / Insurers who provide insurance

6 INS301 Chp16 Moral Hazard Problems Providers often can influence demand Providers better informed Consumers do not pay marginal cost due to insurance Two types of moral hazard Ex ante Ex post

7 INS301 Chp16 Major Types of Group Medical Insurance Traditional fee-for-service HMO PPO

8 INS301 Chp16 Traditional fee-for-service plans Employer provides coverage With deductibles and coinsurance Employer either self insures or purchases insurance from Insurers Blue Cross/Blue Shield organizations Employees choose service provider Provider charges fee to employee or insurer

9 INS301 Chp16 Classification of Fee-for-service Plan Basic health care benefits Hospital expense Surgical expense Medical expense Major medical insurance Comprehensive medical insurance

10 INS301 Chp16 Provisions of Fee-for-service Plan Deductible Coinsurance Stop loss limit Maximum limit

11 INS301 Chp16 Excessive Utilization and Fee-for Service Fee-for-service plans aggravate excessive utilization problem b/c of the separation of Provision of insurance Provision of care Reducing excessive utilization Increase deductibles and coinsurance Managed care insurer monitor use limit choice in service providers

12 INS301 Chp16 Health Maintenance Organizations (HMOs) HMO is a type of managed care plan that provides health care services to its members through a network of doctors, hospitals, and health care providers. How HMOs control cost involve contracts with physicians whose compensation depends on utilization Employees’ choice of providers is restricted HMOs charge employers a fixed annual fee Primary care physician

13 INS301 Chp16 HMO Backlash Critics: HMOs have too little incentives for quality care Factors limiting problem too little care can lead to greater costs later malpractice claims competition

14 INS301 Chp16 Preferred Provider Organizations (PPO) Another approach to containing costs in group health insurance Difference from HMO Give employees and their dependents a broad choice of providers If the insured goes to a preferred provider, PPOs waive most deductibles and coinsurance

15 INS301 Chp16 Provisions in Group Medical Plans Dependent coverage usually requires an additional employee contribution Premiums within a plan usually vary less than expected claim costs vary cross-subsidies group plans can still be beneficial to low risk Mandated benefits e.g., mental health services

16 INS301 Chp16 Provisions in Group Medical Plans Portability Pre-existing conditions clauses  why? - reduce adverse selection  problems:  discourages job changes  exposes those who switch jobs to less coverage COBRA 1996 legislation  can still have pre-existing conditions clause for 12 months  but coverage under a prior employer’s plan counts

17 INS301 Chp16 Provisions in Group Medical Plans Renewability Individual coverage typically is guaranteed renewable ==> those who learn about illnesses continue to get insurance on the same terms as those who don’t Group coverage typically is not guaranteed renewable Why the difference?  Switching costs higher for individuals  ==> less likely to get those with good experience switching insurers

18 INS301 Chp16 Health Care Cost Inflation Health care costs increased substantially during the 1980s and early 1990s

19 INS301 Chp16 Why Have Health Care Costs Increased? Excessive utilization Increased demand for quality care Technological advances Increased proportion of elderly people Other factors Uninsured people obtain care via expensive means Increased number of malpractice suits  defensive medicine