Employee Benefits: Overview and Group Medical Coverage

1. 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 INS301 Chp16

2. 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 INS301 Chp16

3. Major Types of Employee Benefits INS301 Chp16

4. 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 INS301 Chp16

5. 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 INS301 Chp16

6. 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 INS301 Chp16

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

8. 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 INS301 Chp16

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

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

11. 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 INS301 Chp16

12. 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 INS301 Chp16

13. 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 INS301 Chp16

14. 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 INS301 Chp16

15. 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 INS301 Chp16

16. 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 INS301 Chp16

17. 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 INS301 Chp16

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

19. 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 INS301 Chp16