19. Health Insurance. Introduction. Employee Participation. Plan Operators

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1 19. Health Insurance Introduction As the cost of health care continues to climb, health insurance is becoming an increasingly valuable employee benefit. Employers view it as an integral component of the overall compensation packages that allow them to attract and retain workers. In addition to health protection for themselves and their family members, health insurance is viewed by many employees as a sometimes substantial source of income protection. Depending on the nature of an illness and the benefits provided, an employee s financial well-being could be jeopardized by unanticipated medical expenses. In 1993, an estimated 82 percent of full-time employees in medium and large private establishments were covered by an employment-based health insurance plan. Among these 29 million persons, approximately 40 percent had medical care benefits that were fully financed by their employer; approximately 20 percent had family coverage fully financed by their employer (U.S. Department of Labor, 1994a). In 1994, 62 percent of full-time employees in small private establishments participated in a group health plan (U.S. Department of Labor, 1996). There are two primary types of health plans that may be offered by an employer: prepaid plans, such as those provided through health maintenance organizations (HMOs), and traditional fee-for-service plans. This chapter describes fee-for-service plans, including basic, major, and comprehensive medical insurance. (For more information on health insurance, see chapter 23 on HMOs, chapter 24 on preferred provider organizations, and chapter 25 on managing health care costs.) Employee Participation Many employers cover all eligible employees under a single health plan, although different employee groups may have different plans (e.g., union members and nonunion members may have separate plans). Most employees are covered at the time they are hired or after they satisfy a waiting or service period. In 1993, 44 percent of full-time employees in medium and large private establishments participating in medical plans were subject to a service requirement. The most common service period was three months (Employee Benefit Research Institute, 1995). Many plans cover employees and their dependents. All or part of the cost of the coverage for an employee or for his or her dependents may be paid by the employer. However, in many plans, the employer contributions for employee coverage may differ from the employer contribution for dependents coverage. Employee and dependent costs for coverage are generally paid through payroll deduction and may be paid with pre-tax dollars. Plan Operators Employment-based health benefits may use any of a variety of plan operators: commercial insurance plans, Blue Cross and Blue Shield plans, or self-insured plans. Commercial Insurance Plans Insurance companies are a major source of health insurance. Generally, the premium for such insurance protection is calculated to cover the benefits that will be paid, administrative costs, insurance sales commissions, state premium taxes, and surplus (i.e., profit). Generally, for employee groups of 50 or more, the insurer maintains separate claims records for the group and periodically adjusts the premium to reflect the group s claims experience; these are called experience-rated plans.

2 Blue Cross and Blue Shield Plans Blue Cross plans cover hospital services; Blue Shield plans cover medical and surgical services. Although many plans operate under the Blue Cross and Blue Shield name, each plan is independent; each generally operates in a specific geographic area; the various plans may offer different benefit structures. Blue Cross and Blue Shield plans must comply with certain standards established by the Blue Cross and Blue Shield Association. In addition, in some states, Blue Cross and Blue Shield plans are required to enroll all applicants regardless of health status. Self-Insured Plans In a self-insured plan, the employer, or a trust to which the employer contributes, pays employee health care claims directly. Thus, the employer essentially acts as its own insurance company and bears the financial risk of making payments to providers. Some employers both self-insure and self-administer their medical plans. Other employers self-insure their plans but purchase administrative services contracts to take care of their administrative needs. Additionally, some insurers offer stoploss insurance to employers, which covers catastrophic health expenses above a maximum and, therefore, limits a self-insured plan s liability. Employers that self-insure do so for a number of reasons. Some employers self-insure in order to retain control of the plan reserves, others self-insure in an attempt to manage health care costs more directly. Some employers prefer to self-insure because these plans are not subject to state mandated benefit laws and insurance premium taxes. 1 Health Insurance Benefits Insurance plans calculate fee-for-service payments to providers in different ways: based on usual, customary, and reasonable (UCR) 2 charges; a fixed schedule of fees; or a combination of the two. The UCR approach recognizes all usual, customary, and reasonable charges for covered services. Plans that use fixed schedules recognize charges for covered services only up to a fixed dollar limit. This limit can take many forms; e.g., a plan may limit hospital benefits to a fixed dollar amount per day and reimburse surgical charges according to a schedule of payment by procedure. Some plans combine elements of UCR and fixed payment. An example would be a hospital plan that recognizes the UCR amount for room and board and a scheduled amount for surgical procedures. Most fee-for-service plans use UCR to determine payments for covered services. Prepaid Plans Whereas fee-for-service plans reimburse insured persons for covered charges they incur, prepaid plans promise to deliver needed health care and require that care be obtained from a prepaid plan provider. Because care is paid for before, rather than after, it is provided, there are no UCR or fixed dollar limitations. (For a discussion of prepaid plans, see chapter 23 on HMOs.) Premium Contributions, Deductibles, Coinsurance, Out-of-Pocket Limits, and Maximum Coverage Limits Virtually all covered services in non-hmo health care plans are subject to employer payment limitations and require the employee to share in the costs of coverage. 3 These costsharing features generally include premium contributions, deductibles, coinsurance, and maximum caps on benefits. These plan features are intended to reduce plan costs, encourage employee cost consciousness, and reduce administrative expenses. A deductible is a specified amount of initial medical costs that would otherwise be treated as covered expenses under the plan, which each participant must pay before any

3 expenses are reimbursed by the plan. Deductibles typically range from $100 to $500. Under a plan with a $200 individual deductible, for example, a participant must pay the first $200 in recognized expenses for covered health care expenses according to the plan provisions. The deductible must be satisfied periodically (generally every calendar year) by each participant, sometimes with a maximum of two or three deductibles per family. However, some plans contain a three-month carryover provision. If so, any portion of the deductible that is satisfied during the last three months of the year can be applied toward satisfaction of the following year s deductible. Coinsurance provisions require the plan participant to pay a portion of recognized medical expenses; the plan pays the remaining portion. Commonly, the employee pays 20 percent, with the plan paying the remaining 80 percent of recognized charges. Most major medical plans include both deductibles and coinsurance provisions. Thus, once the plan participant pays the deductible (e.g., the first $200 in medical expenses), the plan pays 80 percent of all other covered charges. Some services may have special coinsurance provisions (e.g., 50 percent coinsurance). Because 20 percent of a large medical claim may pose a significant financial burden for many individuals and families, most plans limit participants out-of-pocket expenditures for covered services. In this case, once a participant has reached the out-of-pocket maximum, covered expenses are reimbursed in full for the remainder of the year. The out-of-pocket limit may be renewed at the start of the calendar year for each individual participant. In 1993, the average dollar maximum on family out-of-pocket expenses for full-time, medium and large private establishment employees participating in non-hmo medical plans was $2,642. The average dollar maximum on individual out-of-pocket expenses for full-time, medium and large private establishment employees participating in non-hmo medical plans was $1,319 in 1993 (Employee Benefit Research Institute, 1995). Most medical plans impose a maximum dollar limit on the amount of health insurance coverage provided. Plans may impose an annual or lifetime maximum on payments for all covered services. Individual lifetime maximums are set usually at very high levels, such as $250,000 or $1 million. Separate lifetime maximums may be set for specific coverages such as psychiatric care. Although less common, plans that impose limits may do so on an episode basis, such as per hospital admission or per disability. As health care plan costs continue to escalate, employers are increasingly changing the design of these cost-sharing features. Employees are more often required to contribute toward routine health care plan cost expenses such as premiums and deductibles. However, a growing proportion of employees are protected against catastrophic loss by out-of-pocket limits on the overall amount they must pay toward health care costs. Moreover, U.S. Department of Labor data indicate that plans increasingly include higher plan maximums, further protecting employees. 4 Preexisting Conditions A preexisting condition is a condition for which care or treatment was recommended or received during the six months prior to coverage under a health plan and does not include genetic information. Group health plans are prohibited from applying preexisting condition limits for periods greater than 12 months (or 18 months for late enrollees). The preexisting condition limit cannot be applied in cases involving pregnancy or in cases involving newborns or newly adopted children who become covered under the plan within 30 days. 5 Group health plans are required to take into account an individual s prior creditable coverage when applying any preexisting condition limit. A plan must reduce the duration of its preexisting condition limit for one month for every month of prior creditable coverage, so

4 long as the individual does not have a break in coverage exceeding 63 days. Waiting periods are not counted as a break in coverage. Basic Health Insurance Plans Basic health insurance plans primarily cover health care services associated with an episode of hospital care, including hospitalization, in-hospital physician care, and surgery and generally also cover outpatient surgery. Basic health insurance plans typically pay for hospital room and board, physician care, and surgery on a UCR basis but may pay other charges in full. Hospitalization Hospitalization coverage pays for inpatient hospital charges, such as room and board, intensive care, necessary medical supplies, general nursing services, and inpatient drugs. Some outpatient services (such as preadmission testing or emergency treatment as a result of an accident) may also be covered. The plan may have separate limits for certain types of care (e.g., room and board benefits may be limited on a per admission basis). Physician Care Physician care coverage pays for in-hospital visits by a physician. Medical care obtained in a physician s office or at home is usually excluded from the basic plan. A major medical plan will cover these types of services. Benefit limits often apply, such as a dollar amount per visit or a limited number of visits (e.g., for mental health care) percalendar year. Surgical This type of coverage pays for surgical procedures performed by a licensed physician. The surgery can be performed in a hospital, outpatient facility, or physician s office. Additionally, the services of an assistant surgeon, anesthesiologist, and anesthetist may also be covered. Surgical procedures often are reimbursed according to a fee schedule. Major Medical Insurance Major medical insurance plans are of two types supplemental and comprehensive. Supplemental major medical plans cover some services that are excluded under basic plans and may also cover the same services but with higher coverage limits. Comprehensive major medical plans provide the combined coverage of a basic plan and a supplemental plan. Unlike basic medical plans, major medical plans cover a broad range of health care services and are designed to protect against large medical expenses. Comprehensive Plans Comprehensive major medical plans provide coverage for the same types of services covered under combined basic supplemental plans and have replaced many combination plans. Comprehensive plans also include deductible and coinsurance requirements but may provide first dollar coverage for emergency accident benefits or waive out-of-pocket expenses for certain types of benefits altogether. Other Health Care Plans Medical plans generally exclude services that are predictable or not considered medically necessary, including most types of dental, vision, and hearing care. As a result, stand-alone plans providing these benefits are growing in popularity. Because of their highly elective nature, various limits are placed on the benefits provided. (For more information on these benefits, see chapter 20 on dental care plans and chapter 22 on vision care plans.) Continuation of Coverage

5 The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) requires public and private employers with health insurance plans to offer continued access to group health insurance to former employees and their dependents: for up to 18 months (29 months for the disabled) if employment is terminated (other than for gross misconduct) or if hours of work are reduced below the level at which coverage is normally provided: or for up to 36 months if coverage is lost as a result of cessation of dependent status, death of the employee, divorce or legal separation, or entitlement to Medicare. The coverage offered must be identical to that actually provided prior to the change in employment status. The qualifying employee or dependent may be required to pay up to 102 percent of the premium (102 percent of the average cost if the plan is self insured). The employer may charge disabled employees 102 percent for the first 18 months and up to 150 percent during the 19th through 29th months. At the end of the 18- or 36- month period, the employer must offer conversion to an individual policy if the group plan includes a conversion privilege (an option required in some states). Also, some states may require a longer coverage period and/or include groups with fewer than 20 employees. Group health plans for public and private employers with fewer than 20 employees are excluded from these provisions, as are church plans (as defined in sec. 414(e) of the Internal Revenue Code), the District of Columbia, and any territory, possession, or agency of the United States. Prior to the enactment of the Omnibus Budget Reconciliation Act of 1989 (OBRA 89), coverage could be terminated prior to the end of the maximum required period if the qualified beneficiary became covered under another group health plan. OBRA 89 provides that COBRA may not terminate before the maximum period if the qualified beneficiary becomes covered under another group health plan that excludes or limits a preexisting condition of the qualified beneficiary. However, the Health Insurance Portability and Accountability Act of 1996 allows COBRA coverage to be cut off as soon as any preexisting condition limit in the new plan has been satisfied. Conclusion For many decades, health insurance plans have played a significant role in employee benefit planning. Modern technology, increased longevity, and a growing emphasis on good physical and mental health make these plans even more important today. The development of managed care plans, and dental, prescription drug, vision, and hearing care plans attests to the dynamic nature of this employee benefit area, as does the development of wellness and employee assistance programs. Future innovative efforts in plan design will be influenced strongly by the continuing need for health care cost management as well as by constantly changing government regulations. Bibliography Employee Benefit Research Institute. EBRI Databook on Employee Benefits. Third Edition. Washington, DC: Employee Benefit Research Institute, Health Insurance Association of America. Source Book of Health Insurance Data: Washington, DC: Health Insurance Association of America, Rosenbloom, Jerry S. The Handbook of Employee Benefits. Third Edition. Homewood, IL: Dow Jones-Irwin, Snider, Sarah. Features of Employer-Sponsored Health Plans, EBRI Issue Brief no. 128 (Employee Benefit Research Institute, August 1992).

6 U.S. Department of Labor. Bureau of Labor Statistics. Employee Benefits in Medium and Large Private Establishments, Washington, DC: U.S. Government Printing Office, 1994a.. Employee Benefits in Small Private Establishments, Washington, DC: U.S. Government Printing Office, On April 26, 1995, the U.S. Supreme Court ruled that the Employee Retirement Income Security Act of 1974 (ERISA) does not preempt New York state surcharges on hospital bills paid by commercial insurance companies and health maintenance organizations (HMOs) (Travelers Insurance Inc. v. Pataki). The ruling did not address self-insured plans. Under the New York hospital rate system, a 13 percent surcharge (retained by the hospital) is imposed on hospital bills covered by commercial insurers and HMOs. Commercial insurers are subject to an additional 11 percent surcharge (retained by the state), while HMOs that do not enroll a specified percentage of Medicaid patients face up to an additional 9 percent surcharge. The Supreme Court determined that although the surcharges may have an indirect effect on ERISA plans with respect to the cost of providing the benefit, the state regulation does not restrict an administrator s plan choice or structure, thus the surcharges are not preempted by ERISA. In a footnote to the Supreme Court decision, the court stated that it specifically did not address the surcharge statute insofar as it applies to self-insured funds because neither the District Court nor the Court of Appeals expressly addressed the issue. The issue of self-insured plans was left to the lower courts. On August 15, 1995, the U.S. Court of Appeals for the Second Circuit handed down a ruling that states the Supreme Court s decision in the Traveler s case leaves no room for claiming self-insured plans are exempt from New York s hospital surcharges. Thus, New York state can impose its surcharges on all payers, including self-insured plans. The ramifications of the decision on self-insured plans are still unclear. The Second Circuit Court decision could lead to increased costs for employers in New York that self-insure their health care benefits, and it may also lead to other states adopting similar statutes. (For more information on self-insured health benefit plans and ERISA, see chapter 3 on ERISA or Employee Benefit Research Institute Special Report/SR-31/Issue Brief no. 167, ERISA and Health Plans (Employee Benefit Research Institute, November 1995). 2 Usual, customary, and reasonable means that the charge is the provider s usual fee for the service, does not exceed the customary fee in that geographic area, and is reasonable based on the circumstances. A fee may be considered reasonable when special circumstances require extensive or complex treatment, even though it does not meet the standard UCR criteria. 3 Non-HMO plans include both fee-for-service and preferred provider organization plans. Although cost-sharing features may be included in HMOs, cost sharing is less prevalent in this type of delivery system due, in large part, to restrictions outlined in the Health Maintenance Organization Act of 1973 (P.L ). For example, deductibles for basic benefits are prohibited in federally qualified HMOs. In addition, allowable copayments are limited. 4 See Sarah Snider, Features of Employer-Sponsored Health Plans, EBRI Issue Brief no. 128 (Employee Benefit Research Institute, August 1992). A plan maximum is the dollar limit on the amount of health insurance provided. Plans that impose limits may do so on a per episode basis or on an annual and/or lifetime basis. 5 HMOs are allowed to substitute a 60-day affiliation period (90 days for late enrollees) for a preexisting condition limit.