Employment-Based Health Benefits Among Mid-Sized and Large Employers Paul Fronstin, Ph.D. Director, Health Research & Education Program Employee Benefit Research Institute Copyright© - Employee Benefit Research Institute Education and Research Fund, All rights reserved. The information contained herein is not to be construed as an attempt to provide legal, accounting, actuarial, or other such professional advice. Permission to copy or print a personal use copy of this material is hereby granted and brief quotations for the purposes of news reporting and education are permitted. Otherwise, no part of this material may be used or reproduced without permission in writing from EBRI-ERF.

2 Employment-Based Coverage is Most Common (Americans Under Age 65 in 2003) Source: EBRI estimates of the March 2004 CPS. millions

3 Mid-Size and Large Account for Half of Employment- Based Market (Workers Ages 18-64, 2003) Source: EBRI estimates of the March 2004 CPS.

4 Employee Wage/Health Benefit Trade-Off Satisfied with mix of health benefits and pay Prefer more health benefits and lower pay Prefer fewer health benefits and higher pay Don’t know/Refused Source: EBRI/MGA 2004 Health Confidence Survey.

5 Types of Health Plans FFS: Fee-for-service or traditional indemnity coverage. –No provider networks, reimbursement based on UCR. HMO: Owns its health care facility and employs providers on a salaried basis. –Typically low or no cost sharing, limited provider network. POS: HMO with option for members to use out of network providers. PPO: Panel of providers who individually contract with insurers/employers. –Limited network with out of network benefits. Similar to FFS in many respects. Consumer Driven Health Plans (See below)

6 Enrollment, by Firm Size, 2004 Source: Kaiser Family Foundation.

7 Regulation of employee benefits is two-tiered: ERISA ERISA is the primary regulator of private-sector employee benefit plans. –Sets forth standards on reporting and information disclosure, claims appeal procedures, remedies for wrongfully denied benefits, and fiduciary standards. ERISA preempts all state laws that relate to employee benefit plans. ERISA specifically preserve state rights to regulate the ‘business of insurance’

8 Health Benefit Plan Regulation Self-funded plans: employer pays for the health care claims of its participants directly out of its own income or assets. –Regulated exclusively at the federal level Fully-insured plans: employer pays premiums to purchase a commercial insurance product. –Regulated directly at the federal level and indirectly at the state level. –State regulation includes mandated benefits, premium taxes, and other regulation of insurance companies.

9 Percentage of Covered Workers in Partially or Fully Self-Funded Plans, by Firm Size, 2000 & 2004 Source: Kaiser Family Foundation.

10 Health Insurance Portability and Accountability Act of 1996 (HIPAA) Created national standards: –Portability and access to care –Preexisting conditions –Discrimination based on health status –Timely disclosure regarding information –Electronic transmission of health information –Rights to privacy –Medical savings accounts

11 Other Federal Mandates COBRA (1985) Newborns’ and Mothers’ Health Protection Act (1996) Mental Health Parity Act (1996) Post-mastectomy surgery mandate (1998)

12 Annual Premiums, by Firm Size, 2004 Employee Only Coverage Family Coverage Workers $3,732$9, or More Workers $3,678$10,046 Source: Kaiser Family Foundation.

13 Offer Rates, by Firm Size, 2004 Source: Kaiser Family Foundation.

14 Coverage Rates, by Firm Size, 2004 Source: Kaiser Family Foundation.

15 Percent of Employers Providing Choice of Plans, by Firm Size, 2004 Source: Kaiser Family Foundation.

16 Average Annual Deductibles, Employee- Only, by Firm Size, 2004 Source: Kaiser Family Foundation.

17 Hospital Cost Sharing, by Firm Size, Average Hospital Deductible/Copay $279$208 Average Hospital Coinsurance 18%16% Average Hospital Annual Deductible $685$312 Source: Kaiser Family Foundation.

18 Drug Plan Incentives for PPO, Large Employers, 1998 & 2003 Combination of Generic and Mail Order Incentive Lower copayment32%78% Higher coinsurance1% Pay difference between generic & brand name 2%6% No Generic or Mail Order Incentive 22%6% Source: Hewitt Associates.

19 Tiered Provider Networks Hospitals & doctors. Tiers vary with cost & quality. –Similar to PPO (in vs. out) –Similar to Rx tiers. Cost sharing distinctions –Co-payment per hospital day. –Coinsurance rate per stay. –Overall deductible per stay.

20 Health Reimbursement Arrangement (HRA) Employer provided notional account that allows for pre-tax reimbursement of medical expenses. Typically combined with a high-deductible health plan. Employee contributions not permitted.

21 Preventive Care Personal Account Deductible Gap Insura nce Ensures good health Neutralizes “hoarding” Employer Funds Only Notional Account Section 105 Plan Balance rolls over year to year Employer controls growth % Employer controls exit rules Vesting COBRA Retiree medical Qualified long- term care Participant responsibility Can fund thru Flexible Spending Account (FSA) Education and Decision- Support Tools Consumer education Chronic disease management Health Promotion Online tools Telephonic support HRA Prototype Source: PriceWaterhouseCoopers.

22 Health Savings Account (HSA) Allows for tax-free accumulation of savings. –Tax free contribution. –Tax free accumulation. –Tax free withdrawals for health care services, COBRA and LTCI premiums, retiree health premiums for Medicare-eligible retirees. Qualified health plan. –Self-only: Minimum $1,000 deductible, $5,100 OOP max. –Family coverage: Minimum $2,000 deductible, $10,200 OOP max. Contributions –Self-only: limited to level of deductible up to $2,650 max. –Family coverage: limited to level of deductible up to $5,250 max. Catch-up contributions allowed once age 55 of $1,000. –Phased-in by 2009.

23 Large Employer Interest in HSAs: Likelihood of Offering a High-Deductible Health Plan with an HSA

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