The Basic Principles of Health Insurance

1. 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

2. 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) The Griffith Insurance Education Foundation

3. 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 The Griffith Insurance Education Foundation

4. Tax Benefits of Qualified Plans • Employee benefits are not taxable income to employeeand 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) The Griffith Insurance Education Foundation

5. 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 The Griffith Insurance Education Foundation

6. Benefits Offered by Small vs Med/Lg Firms The Griffith Insurance Education Foundation

7. Benefits Differ by Firm Characteristics The Griffith Insurance Education Foundation

8. Trends in Retirement Plan Types (All Workers) The Griffith Insurance Education Foundation

9. Trends in Retirement Plan Types(Among Workers Who Have a Plan) The Griffith Insurance Education Foundation

10. 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 The Griffith Insurance Education Foundation

11. 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 population The Griffith Insurance Education Foundation

12. Average Annual Premiums for Single and Family Coverage, 1999-2011 The Griffith Insurance Education Foundation

13. Firm and Worker Premium Contributions for Single and Family Coverage, by Plan Type, 2011 The Griffith Insurance Education Foundation

14. Increases in Workers’ Contributions to Premiums, Inflation, and Earnings, 1999-2011 The Griffith Insurance Education Foundation

15. Rate of Increase is Slowing Since 2000, cumulative increases in: prices (34%) wages (47%) family health premiums (250%) The Griffith Insurance Education Foundation

16. 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 The Griffith Insurance Education Foundation

17. 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 The Griffith Insurance Education Foundation

18. Problemswith 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 The Griffith Insurance Education Foundation

19. Methods of Controlling Costs • “Self-insurance” • Managed care plans • Consumer choice plans The Griffith Insurance Education Foundation

20. 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 The Griffith Insurance Education Foundation

21. 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 The Griffith Insurance Education Foundation

22. 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 • GOALIncentives for cost control The Griffith Insurance Education Foundation

23. Trends in Health Insurance Type The Griffith Insurance Education Foundation

24. 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 The Griffith Insurance Education Foundation

25. 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. The Griffith Insurance Education Foundation

26. 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 The Griffith Insurance Education Foundation

27. 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) The Griffith Insurance Education Foundation

28. 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” The Griffith Insurance Education Foundation

29. Health Exchange Plans The Griffith Insurance Education Foundation

30. Questions? The Griffith Insurance Education Foundation