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 employerprovided 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,
1999-2010
The Griffith Insurance Education Foundation
Health Care Cost Inflation
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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
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The Move to Contributory
Financing
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The Move to Contributory
Financing
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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-ofpocket 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


Use of a non-network physician


Lower out of pocket costs
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


Use of a non-network physician



Reduced out of pocket expenses
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, 2000-2010
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, 1988-2010
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