Employee Benefits & ERISA Health Insurance August 20, 2011 R. B. Drennan, Ph.D. Associate Professor and Chairman Department of Risk, Insurance and Healthcare Management Fox School of Business Temple 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 The Griffith Insurance Education Foundation

Why are Employee Benefits a Part of Compensation?  Improve corporate efficiency  Attracting and retaining capable employees  Concern for welfare of employees by employer The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

Employer Provided Health Insurance  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 The Griffith Insurance Education Foundation

Percentage of Firms Offering Health Benefits, 1999– 2010 The Griffith Insurance Education Foundation

Employer Provided Health Insurance The Griffith Insurance Education Foundation

Average Annual Premiums for Single and Family Coverage, The Griffith Insurance Education Foundation

Health Care Cost Inflation The Griffith Insurance Education Foundation

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) The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

Traditional Indemnity Plans  Traditional Indemnity Plans - Incentives  Providers are paid via fee-for-service reimbursement  May have an incentive to perform more services The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

Traditional Indemnity Plans  Traditional Indemnity Plans - Types  Basic Medical Expense Insurance  Hospital, Surgical and Regular Medical Expenses  Major Medical Expense Insurance  Supplemental or Comprehensive The Griffith Insurance Education Foundation

Traditional Indemnity Plans  Traditional Indemnity Plans – Market Share  1980 – 95% of market  2010 – 1% of market The Griffith Insurance Education Foundation

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 Griffith Insurance Education Foundation

The Move to Self-Insurance The Griffith Insurance Education Foundation

The Move to Contributory Financing The Griffith Insurance Education Foundation

The Move to Contributory Financing The Griffith Insurance Education Foundation

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 Griffith Insurance Education Foundation

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 Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

The Move to Managed Care  HMOs  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 The Griffith Insurance Education Foundation

The Move to Managed Care  HMOs  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 Griffith Insurance Education Foundation

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 Griffith Insurance Education Foundation

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 Griffith Insurance Education Foundation

The Move to Managed Care  POS-Type HMOs  Structure  HMO core  Ability to go to physicians outside the HMO network The Griffith Insurance Education Foundation

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 Griffith Insurance Education Foundation

The Move to Managed Care  Exclusive Provider Organizations  Relies on provider discounts for cost containment  Coverage obtained only from exclusive providers The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

Distribution of Covered Workers Facing Different Cost-Sharing Formulas for Prescription Drug Benefits, The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

Consumer Driven Health Plans [CDHPs]  Major Characteristics:  Preventive care is covered at 100%  Any unused funds are portable and can be carried forward to the next year The Griffith Insurance Education Foundation

Consumer Driven Health Plans [CDHPs]  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 The Griffith Insurance Education Foundation

Consumer Driven Health Plans [CDHPs]  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 The Griffith Insurance Education Foundation

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 The Griffith Insurance Education Foundation

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

Distribution of Health Plan Enrollment for Covered Workers, by Plan Type, The Griffith Insurance Education Foundation

Patient Protection and Affordable Care Act (PPACA)  Prohibition of Annual and Lifetime Limits  Extension of Dependent Coverage  PCE limits  Grandfathered Plans  MLR regulation The Griffith Insurance Education Foundation

Questions? Thank You Rob Drennan The Griffith Insurance Education Foundation