1. Introduction to Private Health Insurance
Ira 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 insurance
Types 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 Hazard
Moral 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 Hazard
When 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 Hazard
Balance 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 Experiment
Study 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 Experiment
Taken from Phelps CE, Eight Question You Should Ask About Our Health Care System, 2010
PHP 310, Spring 2014

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

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

13. RAND Health Insurance Experiment
Cost 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 1927
PHP 310 Spring 2014

16. Problems with Cost Sharing
Shopping 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 Act
On 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, 2010
Federal 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
(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 textbook
Roots 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 Insurance
PHP 310, Spring 2014

26. Donna Dubinsky Article
She 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 Size
Employer 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 Insurance
Risk 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 Insurance
Less 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-insured
State-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-insured
Self-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 2013
PHP 310, Spring 2014

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

35. Key Terms Premium: amount you pay to purchase insurance
Comes 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 Deductible
Co-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-pay
Co-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-insurance
NB: 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 Benefits
Ambulatory 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 ACA
Variation 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 Insurance
PHP 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 renewability
Renewable 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 renewability
Modified 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 renewability
Modified 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 renewability
Modified community rating
Single risk pool
Required coverage of “Essential Health Benefits”
PHP 310, Spring 2014

49. ACA: Essential Health Benefits
Ambulatory 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 renewability
Modified 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 Insurance
PHP 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 revenues
Contributes 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 insurance
stabilize 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