1. Lecture 10 Medical Benefits: The Changing Environment Health Care in United States Taxation Development of Medical Expense Coverage Cost Containment and Managed Care State Reforms Federal Role in Health Care

2. Health Care Costs in United States Total costs in excess of $1 trillion 14% of GNP (in 1960, 5.4% of GNP) Health care costs in 1998 –Per employee $3,817 –Per retiree $4,984 (under 65) $2,092 (65 and older) No other country devotes more than 10% of GNP to health care US rank on health status (of 24 OECD countries) –Male life expectancy 17th –Female life expectancy16th –Infant mortality21st

3. Health Care Costs in United States - (cont.) Salaries of Doctors to Average Worker –US5.4 –Germany4.2 –Canada3.7 –England, France, Japan2.4 Incentives to specialize Fraud Unnecessary treatment 1/7th of health care dollars spent for treatment during last 6 months of life 28% of Medicare expenditures for those over 65 spent for last year of life Administrative costs over $200 billion

4. Taxation Employer paid premiums are tax deductible for employer and not taxable income for employee Employee paid premiums can be paid in pre-tax dollars Medical expense benefits received are tax free except –if they exceed medical expenses –if they are paid for cosmetic surgery –if they are paid to a Highly Compensated Individual (HCI) under a self-funded discriminatory plan

5. Development of Medical Expense Coverage Prior to 1930 medical expenses paid by individual Blue Cross and Blue Shield (1930s) Health Maintenance Organizations (HMOs) –Initially (1929 and 1930s) –Growth (1970s) Insurance Companies –Early efforts (1930s) –Major medical (1949) Government Involvement –Medicare (1960s) –Medicaid (1960s)

6. Development of Medical Expense Coverage - (cont.) Reaction to Spiraling Costs –ERISA (1974) –HMO Act (1973) Continued Change –National Health Insurance Proposal –Self-funding of benefits –Cost-shifting to employees –Managed care in 1980 90% of insured employees under traditional plans by 1995 75% of insured employees under managed care

7. Cost Containment and Managed Care 1970-1993 –Medical component of CPI increased over twice as fast as the general inflation rate 1994-1997 –Medical costs in line with inflation 1998- –Medical costs increasing over the rate of inflation again Reasons for cost increases –Technology –Malpractice suits –Third-party payments –Undercapacity –Design of medical plans –AIDS –Aging population Reason for slowing rate –Managed care –Cost-shifting

8. Cost Containment Measures Benefit plan design Alternative providers Alternative funding methods Claims review Health education and preventive care External cost-control systems Managed care –Controlled access to providers –Comprehensive case management –Preventive care –Risk sharing –High-quality care

9. State Reforms NAIC Small Employer Health Insurance Availability Model Act Tort reform Claim administration reform Health Insurance Purchasing Cooperatives

10. Federal Role in Health Care National Health Insurance Proposal Medical Savings Accounts Managed Care Reform Legislation –Health Care Quality Choice Act