1 Introduction to Private Health InsuranceIra B. Wilson, MD, MSc February 3, 2014

2 Case Mrs Drummond; stopped all her medications when copays went from 50 cents to $2 per medication PHP 310, Spring 2014

3 Goals Moral Hazard Public vs. private insuranceTypes of private insurance What it costs you What you get How the ACA changes private insurance Important facts about employer based insurance PHP 310, Spring 2014

4 Moral Hazard and Cost Sharing

5 Definition of Moral HazardMoral hazard occurs when a party insulated from financial risk behaves differently than it would behave if it were fully exposed to the financial risk The “moral” in moral hazard has nothing to do with ethics PHP 310 Spring 2014

6 Key Points about Moral HazardWhen we have insurance we behave differently in ways that may produce utilization than when we do not When we have insurance we are more likely to utilize health services than when we do not, and the more insurance we have the more we are likely to use PHP 310 Spring 2014

7 Counterbalancing Moral HazardBalance or tension No insurance or poor insurance: little protection against financial losses Too much or poorly structured insurance: unnecessary or wasteful utilization PHP 310 Spring 2014

8 Cost Sharing Premium cost sharing, deductables, copays, and coinsurances (book, page 205; more on this Friday) Attempt to counterbalance the natural tendency to unnecessary utilization by requiring payment at the point of service Motivate patients to be smart shoppers or to have “skin in the game” PHP 310 Spring 2014

9 RAND Health Insurance ExperimentStudy of the impact of cost sharing on utilization and health outcomes 1980’s Patients and families randomized to different levels of cost sharing PHP 310, Spring 2014

10 RAND Health Insurance ExperimentTaken from Phelps CE, Eight Question You Should Ask About Our Health Care System, 2010 PHP 310, Spring 2014

11 RAND Health Insurance ExperimentTaken from Phelps CE, Eight Question You Should Ask About Our Health Care System, 2010 PHP 310, Spring 2014

12 RAND Health Insurance ExperimentTaken from Phelps CE, Eight Question You Should Ask About Our Health Care System, 2010 PHP 310, Spring 2014

13 RAND Health Insurance ExperimentCost sharing reduced utilization but did not result in worse health outcomes Medical care demand is price sensitive – but can it be to sensitive? Case PHP 310, Spring 2014

14 Prices To be a smart consumer you have to know what the prices of things are Price transparency has been slow to arrive … but that may start to change quickly PHP 310 Spring 2014

15 JAMA November 13, 2013 Volume 310, Number 18 1927PHP 310 Spring 2014

16 Problems with Cost SharingShopping for medical care is not like shopping for groceries; different information asymmetry problem (providers know more than patients) Medicaid co-pay example Poor decisions (i.e., decisions that are not in the self-interest of the medical shopper) are probably common Soumerai studies from 1980s* on what medications people stopped taking when Medicaid medication payment strategy changed *Soumerai SB et al., N Engl J Med Aug 27;317(9):550-6 PHP 310 Spring 2014

17 Cost Sharing Balancing ActOn the one hand it works to reduce utilization On the other hand it does nothing to insure that patients make the right decisions about what utilization to forego Population impact (RAND HIE) vs. individual impact (case from previous slide) Current trend: increase patient cost sharing PHP 310 Spring 2014

18 Public vs. Private Insurance

19 Percent Distribution of National Health Expenditures, by Type of Sponsor, 1987, 2000, 2010Federal Private Business State & Local Household Other Private Revenues 68.2% 64.5% 55.1% 44.9% 35.5% 31.8% KFF Health Care Costs Primer 2012 Government Private Government Private Government Private 1987 (Total = $519.1 billion) 2000 (Total = $1,377.2 billion) 2010 (Total = $2,593.6 billion) Notes:  Starting with the 2009 NHE data, CMS expanded their focus on spending by Type of Sponsor, which provides estimates of the individual, business, or tax source that is behind each Source of Funds category and is responsible for financing or sponsoring the payments. “Federal” and “State & Local” includes government contributions to private health insurance premiums and to the Medicare Hospital Insurance Trust Fund through payroll taxes, Medicaid program expenditures including buy-in premiums for Medicare, and other state & local government programs. “Private Business” includes employer contributions to private health insurance, the Medicare Hospital Insurance Trust Fund through payroll taxes, workers’ compensation insurance, temporary disability insurance, worksite health care. “Household” includes contributions to health insurance premiums for private health insurance, Medicare Part A or Part B, out-of-pocket costs. “Other Private Revenues” includes philanthropy, structure & equipment, non-patient revenues. Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group at https://www.cms.gov/NationalHealthExpendData/ (see Historical; NHE Web tables, Table 5).

20 Sources by Age Group Over 65: Virtually all public insurance (Medicare) Under 65: combination of sources, but majority private PHP 310, Spring 2014

21 Where do people under age 65 in the U.S. get health insurance?Two-thirds of nonelderly population has private coverage 62% have employer-sponsored covered 5% purchase individual policies 15% have Medicaid or other public coverage 18% are uninsured (pre-2014) Employer, Dependent 30% Uninsured/ IHS 18% Employer, Own 32% Medicaid/ Other public 15% Where do we get health insurance? At age 65, most people in the U.S. qualify for Medicare. That age group has virtually universal coverage as a result. Before age 65, we rely on various sources of coverage. About 15% of the non-elderly are covered under public programs – mostly Medicaid, a safety net program for certain low income people: children, parents of dependent children, pregnant women, and people with disabilities who cannot work. The vast majority of people under age 65 rely on private health insurance. In our $1.9 Trillion health care system in 2004, more than 1/3 of total health care spending was financed by private health insurance. More than 60% of the non-elderly get private health insurance at work – as a benefit from their own job or as the spouse or dependent of a working family member. About 5 percent of the non-elderly buy health insurance on their own, in what’s called the “individual insurance market.” The rest – 18% or almost 46 million non-elderly Americans – are uninsured. Individual Policies 5% Total = 255 million people under 65 Source: KFF analysis of Urban Institute estimates of March 2005 Current Population Survey, U.S. Census Bureau. From: kaiserEDU.org

22 PHP 310, Spring 2014

23 Culture and History See Ch 3 in textbookRoots of private insurance in the 1930’s Long history of distrust of government role in health care The private health insurance industry is very large and very politically powerful PHP 310, Spring 2014

24 Take Home Messages Private insurance in the US is critical to solving the health care access puzzle Likely to remain for the foreseeable future PHP 310, Spring 2014

25 Kinds of Private InsurancePHP 310, Spring 2014

26 Donna Dubinsky ArticleShe and her family had trouble buying heath insurance because of all of the following except Serious pre-existing conditions Trivial pre-existing conditions High premiums High deductibles Major paperwork hassles PHP 310, Spring 2014

27 Classification by SizeEmployer Sponsored Insurance (ESI; sometimes Employer Based Insurance or EBI); this is group insurance Large group: generally ≥ 200 employees Small group: generally < 200 employees NB: the ACA defines a “small employer” as 2 to 50 employees Individual Groups: take advantage of pooling Individuals: cannot PHP 310, Spring 2014

28 Employer Based Insurance Versus Individual InsuranceRisk pooling The bigger the company the bigger the pool and the more risk is spread No pooling for individual insurance Underwriting for groups Less risky because underwriting focuses on groups not individuals; idea of actuarial stability Less expensive because you don’t have to assess the risk of each individual PHP 310, Spring 2014

29 Employer Based Insurance Versus Individual InsuranceLess of an adverse selection problem because people didn’t select to join that company because of their health risks Huge public subsidies because both company and individual contributions to health insurance are tax exempt (>$250B/year) Between companies there is experience rating; within a company there is, in effect, community rating PHP 310, Spring 2014

30 From an Issue Brief from Deloitte, “The Impact of Health Reform on the Individual Insurance Market: A strategic assessment.” 2011 PHP 310, Spring 2014

31 State-licensed vs. Self-insuredState-licensed health insuring organizations or “fully insured” plans BCBS, Aetna, United Healthcare Employer pays an premium for each employee, and the plan assumes full insurance risk for employee Tend to be smaller employers, employee range 45% of the private insurance market Regulated by states PHP 310, Spring 2014

32 State-licensed vs. Self-insuredSelf-funded employee health benefit plans Company insures itself rather than purchasing insurance Contract with third party to administer the benefits (for example, to pay claims) Tend to be large employers, often with employees in multiple states NOT regulated by states; regulated by federal government under a law called ERISA* *ERISA: Employee Retirement Income Security Act PHP 310, Spring 2014

33 KFF Employer Health Benefits Survey 2013PHP 310, Spring 2014

34 Premiums, Deductibles, Co-pays and Co-InsuranceWhat it Costs You Premiums, Deductibles, Co-pays and Co-Insurance PHP 310, Spring 2014

35 Key Terms Premium: amount you pay to purchase insuranceComes out of your paycheck if you have employer based insurance Monthly bill if you have individual insurance First section assignment will give you a chance to think these through in more detail PHP 310, Spring 2014

36 Key Terms Premium Deductible: the amount that an individual or family has to pay out of pocket before insurance takes effect In the next lecture we will discuss “High deductible health plans” Very high deductibles can be like “catastrophic coverage” No deductible = “first dollar coverage” Discuss how catastrophic coverage is like normal house or car insurance PHP 310, Spring 2014

37 Key Terms Premium DeductibleCo-pay: a fixed amount that the insured person has to pay at the time a service is provided Office visit co-pay might be $15 or $20 Emergency Department visit might be $75 or more PHP 310, Spring 2014

38 Key Terms Premium Deductible Co-payCo-insurance: a fraction of the cost of a service that the insured person has to pay Co-insurance for a hospital stay might be 25% PHP 310, Spring 2014

39 Key Terms Premium Deductible Co-pay Co-insuranceNB: even if you have insurance … total out of pocket costs (the sum of all of the above) can really add up PHP 310, Spring 2014

40 What You Get Benefits PHP 310, Spring 2014

41 ACA: Essential Health BenefitsAmbulatory patient services Emergency services Hospitalization Maternity and newborn care Mental health and substance use disorder services including behavioral health treatment Prescription drugs Rehabilitative and habilitative services and devices Preventive and wellness services and chronic disease management Pediatric services, including vision and dental care From Implementing New Private Health Insurance Market Rules, KFF, Jan 2013 PHP 310, Spring 2014

42 Benefits Before the ACAVariation in what was covered Variation in how and to what extent it was covered Exclusions for pre-existing conditions Yearly and life-time spending caps Variable coverage of medications Variable coverage of mental health and substance abuse disorders Part time workers often not covered PHP 310, Spring 2014

43 How the ACA Changes Private InsurancePHP 310, Spring 2014

44 How ACA Changes Things Guaranteed issue: require insurers to accept all applicants in individual and group markets, regardless of health status, occupation, or other risk factors PHP 310, Spring 2014

45 How ACA Changes Things Guaranteed issue Guaranteed renewabilityRenewable at the policyholder’s discretion Exceptions nonpayment or late payment of premiums, for an act of fraud by the policyholder, or for other limited reasons PHP 310, Spring 2014

46 How ACA Changes Things Guaranteed issue Guaranteed renewabilityModified community rating Adjustments allowed for family coverage, geography, age, and tobacco use No adjustments permitted for pre-existing conditions, occupation, gender, duration of coverage, credit worthiness 3:1 variation in age group allowed PHP 310, Spring 2014

47 How ACA Changes Things Guaranteed issue Guaranteed renewabilityModified community rating Single risk pool: claims experiences of all enrollees in individual plans pooled; reduces risk that sicker people will pay higher premiums PHP 310, Spring 2014

48 How ACA Changes Things Guaranteed issue Guaranteed renewabilityModified community rating Single risk pool Required coverage of “Essential Health Benefits” PHP 310, Spring 2014

49 ACA: Essential Health BenefitsAmbulatory patient services Emergency services Hospitalization Maternity and newborn care Mental health and substance use disorder services including behavioral health treatment Prescription drugs Rehabilitative and habilitative services and devices Preventive and wellness services and chronic disease management Pediatric services, including vision and dental care From Implementing New Private Health Insurance Market Rules, KFF, Jan 2013 PHP 310, Spring 2014

50 How ACA Changes Things Guaranteed issue Guaranteed renewabilityModified community rating Single risk pool Required coverage of “Essential Health Benefits” Medical Loss Ratio (p 336 in textbook): requirement that 80% of premium dollars in individual market be spend on care and quality improvement This is far from a complete list; but important examples PHP 310, Spring 2014

51 Important Facts about Employer Based InsurancePHP 310, Spring 2014

52 PHP 310, Spring 2014

53 PHP 310, Spring 2014

54 PHP 310, Spring 2014

55 PHP 310, Spring 2014

56 PHP 310, Spring 2014

57 Tax Subsidies for ESI Health care premiums are not counted as taxable income Premiums paid by an employer to purchase employee health insurance do not count as income Any portion of the premium the employee pays is not taxed These dollars are excluded from both income tax and payroll taxes or FICA (Federal Income Contribution Act), which is what goes to pay for Social Security and Medicaid PHP 310, Spring 2014

58 Tax Subsidies for ESI “Tax expenditure” is the amount of tax dollars that the government does not get in revenue because of this Totals about $250B, which is about the same amount of money as we spend on the whole Medicare program It has a regressive effect (higher income people benefit more) Only applies to ESI (not individual market) PHP 310, Spring 2014

59 Policy Issues These deductions reduce government revenuesContributes to over utilization (moral hazard) See excellent David Brooks NYT editorial PHP 310, Spring 2014

60 Take Home Messages Private insurance is a critical component of the health care “system”, and covers more than 50% of Americans under 65 Employer based and individual Large companies tend to “self insure” Premiums, deductibles, co-pays and co-insurance Costs of private insurance are rising PHP 310, Spring 2014

61 Take Home Messages ACA makes fundamental changes in private insurancestabilize private insurance eliminate what are perceived as unfair practices (e.g., excluding those with pre-existing conditions) Federal government provides large and regressive subsidies to ESI through tax policies PHP 310, Spring 2014