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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

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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

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Major Types of Employee Benefits

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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

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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

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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

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Major Types of Group Medical Insurance

Traditional fee-for-service HMO PPO

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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

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Classification of Fee-for-service Plan

Basic health care benefits Hospital expense Surgical expense Medical expense

Major medical insurance Comprehensive medical insurance

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Provisions of Fee-for-service Plan

Deductible Coinsurance Stop loss limit Maximum limit

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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

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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

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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

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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

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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

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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

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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

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Health Care Cost Inflation

Health care costs increased substantially during the 1980s and early 1990s

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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