Topic 8 and 9 Risk

Question 1

How much do ER typically spend on EE benefits and how is the rate of increase?

Answer 1

• Spend high $ on EE benefits, approx. 40% of payroll
• Rate of increase in cost is high - growing much faster than cash wages (people go on strike for better benefits)

Question 2

Why do firms offer employee benefits?

Answer 2

-Attract and retain capable employees
-Tax advantages
-Productivity and better employee relations
-Employer can take advantage of group insurance

Question 3

Non-contributory benefits financing

Answer 3

-ER pays the full cost of the plan
-EE is covered without making a financial contribution
- all eligible EEs must be covered
-Eligibility = participation

Question 4

Contributory Benefits Financing

Answer 4

-ER and EE share the cost of the plan
-For an eligible EE become a participant, they must make a financial contribution

Question 5

Voluntary Benefits Financing

Answer 5

EE pays for the entire cost of the insurance plan

Question 6

Section 125 Plans (Cafeteria Plans)

Answer 6

• ER sponsored benefit plan that gives employees access to certain taxable and nontaxable pretax benefit
• employees contribute a portion of their salary on a pre-tax basis to pay for the qualified benefits
• ER can deduct the cost of EE benefits as an ordinary business expense (same as salary)

Question 7

Income Taxes

Answer 7

-The EE is sometimes not taxed on the value of their ER-provided benefits
-Method to compensate an EE tax-free (for some benefits)

Question 8

Flexible Spending Account (FSA)

Answer 8

-An EE agrees to reduce their salary pretax by a certain amount and money is deposited into an account
-Three types
~healthcare
~transportation (parking expenses)
~dependent (child care)
~medical care (co-pay & glasses)
-Any unused funds at the end of the plan year are forfeited to the ER

Question 9

Mandatory/Compulsory Benefits

Answer 9

-Common traits are mandated participation and requires the ER to act in a risk-bearing capacity to provide insurance or benefits
-includes social security, worker’s comp, unemployment

Question 10

Group Insurance

Answer 10

-The exposure unit is a group of individuals
-insures the whole group
-no underwriting
-look at the broad characteristics of the group to determine rates

Question 11

Group Insurance Advantages

Answer 11

rates are generally lower than individual insurance
-for the same level of expected cost, GI is less expensive per EE than II
-no individual underwriting – especially helpful if a bad risk
- commissions tend to be lower
- ER helps collect the money

Question 12

Method to Control Adverse Selection

Answer 12

• waiting periods
• pre-existing conditions exclusions
  -Minimum participation requirement
• Minimum group size
• steady flow of persons through the group (newer, younger, better risks should enter to replace older, less healthy risks)
  -the reason the group exists (should exist other than insurance reasons)

Question 13

Disadvantages to Benefits Plan

Answer 13

-coverage may be temporary
-An EE leaves the group -> coverage might terminate

Question 14

Issues with Healthcare

Answer 14

High costs of healthcare
-high rates of inflation compared to the overall rate of inflation
-high premium for ER
-High costs for the government

High percentage of uninsured or underinsured person
-access problem
-27 million uninsured

Question 15

High degree of 3rd payment for health care

Answer 15

-Insurance companies CIGNA, Aetna, and Blue Cross
-Government
-Employers

Question 16

What rule can you think of when thinking about FSA?

Answer 16

The “Use it or loose it rule”

Question 17

2-party Typical Market Transaction

Answer 17

• 2 party (supply and demand)
• price is the equilibrium price
• consumer know the prices of goods and services

Question 18

3-party Healthcare Market Transaction

Answer 18

3 parties
-supply
-demand
-a financial entity that pays for healthcare goods/service

Question 19

3-party Healthcare Market Transaction - Supply

Answer 19

seller/suppliers - usually referred to as a provider of HCGS
-EX: hospital, drug companies

Question 20

3-party Healthcare Market Transaction - Demand

Answer 20

Buyers/demand - consumer of HCGS
-patient
-insured person
-EE of ER who provide health insurance as compensation
-Dependent of an EE covered by health insurance

Question 21

3-party Healthcare Market Transaction - Financial Entity

Answer 21

Entity financially responsible for pays HCGS
-health insurers
-government
-ER (self-insured)

Question 22

Lethal/Costly Decision

Answer 22

-classic moral hazard
-increased quantity demand for HCGS
-Fee-for-service reimbursement of providers

Question 23

Fee-for-service Provider Reimbursement Moral Hazard

Answer 23

-payment system used for providers is typically fee-for-service reimbursement
-provider is paid a fee for each service rendered
-The provider then makes a claim to the insurer to pay for services
-insurer pays the fee for service
-retrospective payment by an insurer who didn’t know what the cost would be until they were billed
-an incentive for a provider - supplier induced demand (provide more services)
-incentive for insured - buy more based on degree of cost-sharing - moral hazard

Question 24

Indemnity Plans General Characteristics

Answer 24

-1980 - 95% of EEs, 2023 3% of EE
-Insured person has complete freedom of choice of providers
-insured role: indemnity for covered losses

Question 25

Indemnity plans cover

Answer 25

-room cost of the hospital -surgeon's fee -follow-up visits from the hospital stay

Question 26

What gaps exist in Indemnity Plans?

Answer 26

- nonhospital based expenditures are not covered - even hospital stays has limited coverage - balance billing - owe hospital amounts not covered by insurance

Question 27

Major Medical Plans

Answer 27

-Benefits provided for a broad array of inpatients and out-patient services - pays for routine, non-hospital based expenses not covered by basic indemnity plans - higher limits for hospital stays - broad coverage - few exclusions - features cost-sharing (deductible and coinsurance)

Question 28

Role of Insurers in Indemnity Plans

Answer 28

-Just indemnify insureds for covered losses -Manage or coordinate care? -No -Freedom of choice of providers? Yes

Question 29

managed care plans

Answer 29

- Medical expense plan that provides covered services to the members in a cost-effective manner - Choice of physicians and hospitals may be limited

Question 30

Health Maintenance Organizations (HMO)

Answer 30

- removes incentives present under fee-for-service plans to do more rather than less - does not always pay providers more for doing more ~ Key: places providers/hospital at financial risk for overutilization - providers can also not balance bill

Question 31

HMO - Capitation Provider Reimbursement

Answer 31

-providers of HCGS are at financial risk for over-utilization - risk shifting dynamic has changed from those under fee-for-service

Question 32

Disadvantage to HMO Enrollment

Answer 32

-less freedom of choice when picking providers -may have to change providers to join HMO -Primary Care Physician gatekeeper -no coverage for out-of-plan utilization

Question 33

PPO general characteristics

Answer 33

-PPO contracts with preferred providers -form a network of providers -preferred providers agree to ~provide service at a discount from their "full charge" ~accept the PPO payment + any deductibles/copay as payment in full for service -No balance billing - not placed at financial risk for under utilization

Question 34

How is a Consumer-Directed Health Plan (CDHP) different?

Answer 34

- Healthcare financing model in which consumers have an economic incentive to manage their care -designed to engage people to make decisions on health and wellness-based consumption -buy healthcare like other products

Question 35

Why consumer directed health plans?

Answer 35

-behavior is responsible for 50% of Health care cost -force employee awareness of costs -enable empowered consumers -80% of claims come from only 20% of the population

Question 36

3 components of a CDHP

Answer 36

1) a healthcare reimbursement account 2) ER offers a high deductible health plan - deductible is much higher than seen in other plans - high out-of-pocket costs - no charge for preventative costs 3) insurer makes info available to the insured to help them make better decisions

Question 37

Consumer-Directed Health Plan (CDHP)

Answer 37

- coinsurance - high deductible - health care reimbursement account - EE and ER can add funds (pre-tax) - If you spend too much, you pay more - covers catastrophic events- cost per person is capped

Question 38

Health Reimbursement Account (HRA)

Answer 38

- EE can use money to pay deductibles and out-of-pocket costs - funds roll over year-to-year - HDHP - for catastrophic loss - HRA for day-to-day health care costs

Question 39

Medicare

Answer 39

A federal health insurance program for - people 65 or older - certain young people with disabilities federally funded and federally administered

Question 40

Medicaid

Answer 40

- provides coverage for low-income Americans - joint federal and state program - federal (60%) and state-funded - state-administered (benefits and eligibility can vary from state to state since joint funding)

Question 41

Patient Protection and Affordable Care Act

Answer 41

AKA Obama Care -dependents covered to age 26 -lifetime limits are banned -no charging higher rates for those with preexisting conditions and coverage of those conditions may not be excluded or reduced - all preventative care and checkups free

Question 42

How is Obama Care actually paid for?

Answer 42

-cost shifting to employers -2000 penalty for employers who do not offer EE health insurance -Additional Medicare tax on income over $200,000 annually is subjected to an additional tax of 0.9% ~250,000 for married couples filing jointly or 125,000 for married filing separately

Question 43

Current Trends in Health Insurance

Answer 43

-pressure from the government on providers to provide transparency on costs -specialty medications are driving costs exponentially (wegovy, HIV med, and cancer treatments) -drugs to treat genetic diseases -tele health and mental health have been pushed to the forefront

Question 44

Employee benefits

Answer 44

any type of compensation other than direct current salary or wages