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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