“Basics of Group Health Insurance in America”

1. “Basics of Group Health Insurance in America” Jesse A Patton LUTCF, HIA, MHP, FAHM, HIPAAA, EHBA, PHIAS Hilton Garden Inn Kelley Insurance Center– Drake University October 2, 2012

2. Economy, Budget Deficit, Medicare Top Election Issue Priority List Thinking ahead to the November election, please tell me how important each of the following will be to your vote for President. The economy Extremely important Very important Somewhat important Less important than that The federal budget deficit Medicare Medicaid Spending on the military The 2010 health care law Taxes International affairs Immigration issues Social issues such as abortion and gay marriage Note: Some items asked of separate half samples. Don’t know/Refused answers not shown. Source: Kaiser Family Foundation Health Tracking Poll (conducted September 13-19, 2012)

3. Health Insurance Coverage in the U.S., 2010 Total = 305.2 million * Medicaid also includes other public programs: CHIP, other state programs, military-related coverage. Numbers may not add to 100 due to rounding.SOURCE: KCMU/Urban Institute analysis of 2011 ASEC Supplement to the CPS.

4. Cumulative Increases in Health Insurance Premiums, Workers’ Contributions to Premiums, Inflation, and Workers’ Earnings, 1999-2012 Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2012. Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April), 1999-2012; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey, 1999-2012 (April to April).

5. Average Annual Premiums for Single and Family Coverage, 1999-2012 $15,745* * Estimate is statistically different from estimate for the previous year shown (p<.05). Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2012.

6. Early History of Health Insurance in America • The first 15 private health insurance companies were chartered in Massachusetts in 1847-48. • At the same time, more than 100 benevolent societies operated successful group health mutual insurance in New York City

7. The Baylor Plan • The first modern employee group benefit plan was an agreement between Dallas County public school teachers and Baylor Hospital in 1929. The Baylor Plan was organized by a hospital administrator who had previously been a school superintendent.

8. Blue Cross Blue Shield • In 1944, the Baylor Plan merged into Blue Cross Blue Shield of Texas. By that time, more than 3 million Americans were covered by Blue Cross Blue Shield policies

9. Father of Managed Care • Managed Care as we know it today has its roots in a number of prepaid healthcare arrangements in the early 20th century. The earliest example of this dates back to 1910, when the Western Clinic in Tacoma, Washington  provided a wide range of medical services to lumber mill owners and employees for a monthly premium of 50 cents

10. Distribution of Health Plan Enrollment for Covered Workers, by Plan Type, 1988-2012 2% 1% 1% 1% <1% Note: Information was not obtained for POS plans in 1988. A portion of the change in plan type enrollment for 2005 is likely attributable to incorporating more recent Census Bureau estimates of the number of state and local government workers and removing federal workers from the weights. See the Survey Design and Methods section from the 2005 Kaiser/HRET Survey of Employer-Sponsored Health Benefits for additional information. Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2012; KPMG Survey of Employer-Sponsored Health Benefits, 1993, 1996; The Health Insurance Association of America (HIAA), 1988.

11. Government Involvement • With the 2nd world war raging in the 1940's, labor was in short supply, and the government imposed wage controls. To deal with this situation, employers begun to offer health insurance as a fringe benefit to attract more workers. The government sought to encourage this new development, offering businesses income tax exemptions for health care related expenses. This begun the current trend of the employer as a health insurance supplier

12. Modern Day Tax Advantage • Federal Tax law has played major role in shaping our health care financing system • Today U.S. Government provides a $246 Billion dollar tax relief in Tax Deductibility as a Business Expense • Tax Exclusion for Employees • Benefits receive by employee are not taxable to the employee

13. Tax BenefitsEmployer Deduction for Health Insurance • When an employer pays for health insurance for employees, the premiums are deductible as a business expense. • This is the employer deduction. • There are some limitations on deductibility as a business expense for partners and sole proprietors. • A business deduction reduces taxable business income.

14. Tax Benefits TodayPremium Payments • When an employer pays all or part of a health insurance premium for an employee, the employee is not taxed on the amount the employer pays. • This amount that is not taxed is called the tax exclusion.

15. Deduction of Health Insurance What About these two situations? • An Employer sponsors health insurance for employees, but not under cafeteria plan • A person buys an individual health policy without employer involvement

16. Premiums? • Health Insurance premiums are generally considered qualified medical expense • If greater that 10% of AGI can take an itemized deduction • Individuals get to take deduction in excess for 10%

17. Self-Employed • Special Tax rules apply to self-employed who pay for their own health insurance. • The difference is self-employed can deduct the entire amount of health insurance premiums plus other medical expenses once they exceed 10% threshold

18. Some Important Definitions

19. Today’s Benefit Environment • Increased Employee Turnover, resulting in higher administrative costs for insurance plans and weakening bond between employers & employees. • Intense Business competition, especially from abroad. • Movement in Society toward giving individuals more responsibility.

20. Regulation of Health Insurance • Purpose • Insure solvency • Oversee risk spreading/risk selection • Guaranteed issue • Community rating • Government Role • State primary regulator • Rules vary by state/insurance market • Federal government sets national rules

21. Challenges to Risk Spreading • Adverse selection • Medical underwriting • Pre-existing exclusions • Risk-based rating • Benefit design • Risk selection • Trade off of availability and adequacy vs. affordability

22. Risk Spreading Concentration of Health Spending in the U.S. Population Note: Population includes those without any health care spending. Health spending defined as total payments, or the sum of spending by all payer sources. Source: KFF calculations using data from Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey

23. Price includes what insurers pay out in benefits to hospitals, physicians, and other health care providers on behalf of their members. Price

24. Utilization is the volume factor. More tests, more services, more drugs, more procedures drive up utilization – and thus overall costs. Utilization Price

25. Intensity Utilization Intensity is the impact of replacing a product or service with a more expensive one. New health care services add increasing costs. Price Price

26. Selection impacts overall costs when someone with lower than average benefit expenses leaves the group. Selection Intensity Utilization Price

27. Leveraging When health care expenses rise, but member’s copayments stay the same, the impact to overall costs is called leveraging. Selection Intensity Utilization Price

28. How Does Trend Affect My Rates? 2011 $1100 -$1000 $100 x .9 $90 Example: Claim Deductible Insurance Payment 2012 $1265 -$1000 $265 x .9 $238.5 % Increase 15% 0 265% Assumptions: Policy Year 2003 | Deductible $400 | Coinsurance 90/10 | C$500 | Trend @ 15%

29. Leveraging When health care expenses rise, but member’s copayments stay the same, the impact to overall costs is called leveraging. Selection Selection impacts overall costs when someone with lower than average benefit expenses leaves the group. Intensity is the impact of replacing a product or service with a more expensive one. Intensity Utilization Utilization is the number of health care products and services provided. Price includes what insurers pay out in benefits to hospitals, physicians, and other health care providers on behalf of their members. Price Understand the factors that impact health insurance premiums Utilization Utilization

30. Diagnostic Imaging X-Ray $52 - $78 CT Scan $624 - $986 MRI $ 782 -$1,186 PET Scan $3,278 - $5,828

31. Dynamics of Health Coverage • Health insurance coverage is not static • Approximately 2 million Americans lose health insurance every month – often for a short period • Coverage options can change with… • Loss or change of job • Change in family status (e.g. divorce, death of spouse) • Birthday (e.g. 19th) • Move • Change in health status

32. Constraining Medical Costs How Much Can Private Insurance Costs Be Affected? 1/3 Taxes Administration 14% Claims Cost 86% Centers for Medicare & Medicaid Services, 2011

33. Two Primary Private Markets • The Group Insurance Marketplace • The Individual Insurance Market

34. Overview of American System • Employer-Based Coverage • Individual Policies • (FEHB) Federal Employees Health Benefits • TRICARE • Medicare • Medicaid • (CHIP) Children’s Health Insurance Program

35. Typical Fully Insured Model Employer Group Pays Premium Insurance Company Managed Care Network Prescription Drug Employee or Dependent incurs a medical claim at a healthcare provider Claim Process Utilization Review Disease Management Case Management Reinsurance Pooling Healthcare Provider Paid 35

36. Fully Insured Major Medical Plans • Traditional Insurance Carriers ** National and Regional • Customized plan design ** Multiple plans, networks and or carriers • Employee Benefit Design ** Health Maintenance Organization – HMO ** Point of Service-POS ** Preferred Provider Organization – PPO ** Exclusive Provider Organization – EPO ** Indemnity Plans ** Consumer Driven Health Plans -CDHC

37. HMO Insurance • HMO program will have access to a "primary care provider" who knows the person's personal, family, social, and financial situations well enough to coordinate his/her care in an effective way that will use fewer services • Primary care providers run tests or prescribe treatments before passing you on to a specialist

38. Types of HMOs • Staff model: Physicians are salaried and direct employees of the HMOs. This model is an example of a closed-panel HMO, meaning that contracted physicians may only see HMO patients • Group model: HMO does not pay the physicians directly, but pays a physician group. The group then decides how to distribute the money to the individual physicians. This model is also closed-panel

39. Types of HMOs • Independent practice association (IPA): This model is an example of an open-panel HMO, where a physician may maintain his own office and may see non-HMO members. Physicians contract IPA and then IPA contracts HMO • Network model: HMO will contract with any combination of groups, IPAs, and individual physicians. Since 1990, most HMOs run by managed care organizations use the network model.

40. What is a POS Insurance Plan • A POS insurance plan is also called a point of service insurance plan • A POS Insurance Plan is an insurance plan that allows the insured person to choose providers or specialists with the POS plan's network s referred by their primary care physician, or to self-refer to a provider outside the network

41. What is a PPO • PPO stands for preferred provider organization. • Providers in the PPO will provide the insured members of the group a substantial discount below their regularly-charged rates. This arrangement helps ensure that the insurer will be billed at a reduced rate when its insured utilize the services of the "preferred" provider

42. Typical Self-funded Model Managed Care Network Administration Costs Pays Employer Prescription Drug Utilization Review Contributions Disease Management Claim Account Interest Income Case Management Refunds claims beyond limits Pays claims Transplant Carve Out Stop Loss Stop loss Claims 42

43. Self Funded Group Plans • Prior to 1974 regulation of self-funded plans were state controlled • ERISA placed regulation with federal government • Self-funded plans under ERISA avoids state regulations including insurance regulation 43 .

44. Self-funded Group Plans • Employer elects custom benefit design • Employer funds Medical claims • - Third Party Administrator • - Administrative Services Only Vendor • Stop loss liability insurance placed for abnormal risks 44

45. Specific Stop Loss Lifetime Maximum Carrier liability Specific stop loss level Employer liability (employer pays for each individual) $50,000 $75,000 $100,000 • Coverage on the individual claim • Eligible claims in excess of the individual stop loss level are reimbursed by the carrier • Eligible claims below the individual stop loss level are the responsibility of the employer 45

46. Aggregate Stop Loss Maximum aggregate attachment point Corridor (employer liability) 20% 10% 40% 30% 50% 25% 100% Expected Claims (employer liability) • Cap on claims liability for entire group • Expected claim cost is established • Aggregate is a percentage of expected claim cost • Eligible claims exceeding aggregate stop loss level are reimbursed by stop loss carrier 46

47. Health Reimbursement Arrangements • Employers establish special health plans to cover certain out of pocket expenses for their employees • These plans are not insured but are basically “promises to pay” usually in addition to the employer’s underlying health plan. • The law does not require that there be an underlying plan • The employer decides which benefits (chosen from 213d expenses) are covered by the plan • The employer creates a plan document describing the program

48. Features of a Health Reimbursement Arrangement HRA Credits $$$$$$$$$$$ Credits are not taxable to the Employee Credits to the HRA From Employer Tax-Free Distributions to the Employee (For Qualified Medical Expenses)

49. Health Savings Account • A Health Savings Account (HSA) is a special • account owned by an individual where • contributions to the account are to pay for current • and future medical expenses • • HSAs are used in conjunction with a “High • Deductible Health Plan” (HDHP) • – Insurance that does not cover first dollar medical • expenses (except for preventive care) • – Can be an HMO, PPO or indemnity plan, as long • as it meets the requirements • • HSAs modeled after Archer MSAs

50. Average Consumer What Is A HSA… How Does It Work? PART A Consumer purchases low premium – high deductible major medical insurance policy PART B Consumer opens HSA & deposits savings...TAX DEDUCTIBLE (covers deductible, co-insurance & out of pocket expenses) Consumers are in control of their CASH! .