Aims and objectives of this chapter:• Present a brief history of healthcare benefits• Explain the structure of healthcare benefit plans• Discuss design issues related to the healthcare benefit plans• Evaluate cost containment issues related to healthcare benefit plans• Introduce consumer-driven healthcare plans• Discuss the accounting implications of healthcare benefit plans• Address the issues related to post-retirement health plans• Discuss the financial issues related to healthcare benefit plans• Explain tax dimensions of healthcare benefit plans• Introduce the International Financial Reporting Standards and employee health and welfare plansPrimarily, a healthcare benefit program is designed to protect employees against the risk of incurring medical expenses. By estimating the overall risk of medical needs, both for minor and major incidents among a targeted group, the benefit program aims to ensure that money is available to pay for these expenses as employees or their dependents incur them.According to the definition provided by the Health Insurance Association of America, health insurance is “coverage that provides for the payments of benefits as a result of sickness or injury.”1 In other words, the purpose of a healthcare benefit program is to provide employees, and their dependents, protection against financial losses that result from incurring medical expenses for both minor and major medical care needs.1 “How Private Insurance Works: A Primer by Gary Caxton.” Institution for Health Care Research and Policy, Georgetown University, on behalf of the Henry J. Kaiser Family Foundation.A Brief History of Healthcare BenefitsUp until the 1930s, healthcare expenses were the responsibility of the ill, or the injured, and their families, but after the Great Depression the first Blue Cross plans were born. In the late 1930s, physicians entered into the equation with the establishment of Blue Shield plans. Throughout the 1940s, Blue Cross and Blue Shield were the main providers of healthcare protection plans.Health maintenance organization (HMO) plans then began to proliferate; common belief holds that these were a product of the 1950s, but there is evidence to the contrary. Kaiser plans had their start in the late 1920s.Insurance companies, upon observing the success of Blue Cross and Blue Shield, entered into the field of medical insurance by introducing hospital coverage and then adding doctor charges and surgical procedures.National health insurance came next as the federal government entered into the fray on behalf of the elderly and the poor. Medicare provided benefits for persons over the age of 65. This program was financed by government revenue, premiums from Medicare enrollees, and taxes paid by both employers and their employees. Another healthcare protection program, Medicaid, was created for low-income wage earners.Throughout the 1970s and until now, healthcare benefits have undergone numerous design changes. These ever-changing dynamics are described in detail throughout the remaining chapters of this book. These constant changes are primarily driven by cost.The Prevalence of Healthcare Benefit PlansThe following list supplies recent data on the incidence of employer-sponsored healthcare plans.2 According to the most recent census report (for the year 2011, which was published in September 2012), out of 312,250,315 total United States citizens,2 “Income, Poverty, and Health Insurance Coverage in the United States: 2011,” www.census.gov/newsroom/releases/archives/income_wealth/cb12-172.html; also “Income, Poverty, and Health Insurance Coverage in the United States: 2010,” www.census.gov/prod/2011pubs/p60-239.pdf (September 2011).• The number of people with health insurance increased to 260.2 million (84.3%) in 2011, compared to 256.6 million (83.7%) in 2010.• The percentage of people covered by private health insurance in 2011 was statistically unchanged compared to 2010 (63.9%). This is the first time in the past decade that this rate has not decreased.• The percentage of people covered by employment-based health insurance in 2011 was also unchanged compared to 2010, remaining at 55.1%.• The percentage of people covered by government health insurance increased from 31.2% to 32.2%.• The percentage of people covered by Medicaid—the federal healthcare program for families and individuals with low income—increased, from 15.8% in 2010 to 16.5% in 2011. For Medicare—the federal healthcare program for the elderly—the percentage increased from 14.2% to 15.2%.• In 2011, 9.7% of children under the age of 19 (7.6 million) were without health insurance, statistically unchanged from the 2010 estimate. Similarly, those aged 26 to 34, and those aged 45 to 64, remained roughly the same. The percentage declined, however, for people aged 19 to 25, 35 to 44, and those aged 65 and older.• In 2011, the uninsured rates decreased as household income increased—from 25.4% for households with an annual income below $25,000, to 7.8% in households with an annual income of $75,000 or more.Figure 2.1 shows another set of data on the prevalence of healthcare plans from the Kaiser Family Foundation and the Health Research & Educational Trust 2012 report.*Estimate is statistically different from estimate for the previous year shown (p<.05).Note: As noted in the Survey Design and Methods section, estimates presented in this exhibit are based on the sample of both firms that completed the entire survey and those that answered just one question about whether they offer health benefits.Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2012Figure 2.1 Percentage of firms offering health benefits, 1999–2012The Structure of Healthcare Benefit PlansThe reimbursement process for these medical expenses can be managed and administrated by a number of entities, including a governmental agency, a private business, or a nonprofit organization. Healthcare financial protection—the reimbursement of incurred expenses—can be channeled through insurance companies or health maintenance organizations (HMOs), by preferred provider organizations (PPOs), by Blue Cross, and by Blue Shield. These programs have evolved from associations into insurance offerings licensed by the respective associations, as discussed in more detail later in this chapter.The company sponsoring a healthcare program can, itself, pay the expenses on behalf of the employees and their dependents via a self-insured plan. Covered expenses can be limited to specific types of medical expenses or broad enough to cover all types of expenses.Evidence suggests that, among all the functional benefits provided by an employer as part of the employment contract, workers regard healthcare benefits as the most important by a wide margin. As medical care costs increase, the importance of healthcare benefits to employees also increases, because of the fact that medical costs, particularly major medical procedures, can be financially ruinous if company-sponsored healthcare benefits do not exist. People are often forced to declare bankruptcy under the burden of attempting to pay for an unexpected and catastrophic medical incident.It is imperative to note that healthcare benefit plans that are sponsored by employers are undergoing fundamental structural changes. In 2012, the management consulting firm Oliver Wyman3 conducted a healthcare benefit study that indicated that companies are faced with a major conundrum, now more than ever: With the passage of the healthcare reform legislation (the Patient Care and Affordable Care Act of 2010), companies are suggesting, rather strongly, that they will continue to protect their employees by providing them with a company-sponsored healthcare program. However, at the same time, these companies are also indicating that the cost of providing this healthcare is unsustainable in the long run. So, employers are now at a crossroads. The next few years will be crucial as the real impact of the Affordable Care Act manifests.3 Kairey, M., Rudoy, J., and Oliver, W. “Employer Sponsored Healthcare: What Happens Now?” Oliver Wyman, Marsh & McLennan Companies. 2012. Found online at www.oliverwyman.com/media/OW_EN_HLS_PUBL_2012_Employer_Sponsored_Healthcare_What_Happens_Now.pdf.Healthcare Benefit Plan Design ConsiderationsThe definition of healthcare benefits has evolved over the years; currently, healthcare benefits include doctor charges—including tests and associated procedures—hospitalization, dental, and vision expenses. Healthcare can also involve lost income, staying-well expenses, addiction-suppression expenses, and other costs.For our purposes, we define healthcare benefits as including medical expenses, dental expenses, and vision-care expenses.Healthcare benefit plan design is influenced by a number of factors and features. Recently, many design decisions, such as the following, have been influenced by the need to control escalating costs:• Deductibles• Co-insurance• Copayments• Exclusions and limitations• Maximum benefits• Preadmission testing• Second surgical opinions• Coordination of benefitsThe PayersIn the United States, public health insurance is relatively new, but private insurance for healthcare has been quite prevalent. Commercial insurance has existed for healthcare benefits for some time. Casualty and life insurance companies usually extend their services to the healthcare field.Examples of commercial insurance companies include Aetna, Humana, and United Health Group. These companies usually provide group insurance coverage. Traditionally, healthcare benefits have been structured by these insurance companies through a process called an indemnity plan. With such a plan, also called a fee-for-service, an employee can use any medical provider—such as a doctor or hospital. Chapter 3, “Healthcare Benefit Financing,” covers this concept in more detail.Insurers have also created managed-care organizations, which strive to combine healthcare services and insurance into a single entity. These organizations are created by insurers that own their own providing network or that contract with other providers to form a network. The most common type of managed-care organization is the health maintenance organization (HMO), the development of which was encouraged by the Federal Health Maintenance Act of 1973.Under this particular law, HMOs were provided grants and loans to provide, start, or expand their organizations. The law removed certain state restrictions for federally qualified HMOs, and it required employers with 25 or more employees to offer federally certified HMO options if they offered traditional health insurance to employees. It did not require employers to offer health insurance.HMOs, at their core, attempt to control costs and, at the same time, provide effective healthcare by limiting patients to specific providers, through both a mechanism known as a provider panel and through primary care physicians who must authorize specialized care and other referral services; payments are not paid to employees who bypass this review process.HMOs grew in numbers throughout the 1980s and 1990s, but became less popular with employees because of the aforementioned limitations placed on them. In response to this, insurers developed an alternative program called a preferred provider organization (PPO). PPOs do not require their participants to use specific providers, electing instead to provide incentive for participants to do so anyway; the network providers typically agree to reduce prices for their services. Also, PPOs do not always require participants to go through the gatekeeper of a primary care physician review.Both HMOs and PPOs have ushered in the era of managed care. In general, these plans and organizations have been built to manage medical expenses by taking control of the decision-making process from their participants. These plans typically have five guiding characteristics:1. They control access to providers.2. They engage in comprehensive utilization management.3. They encourage preventive care.4. They facilitate risk sharing among the provider community.5. They ensure the delivery of quality healthcare.Payment OptionsHealthcare programs’ payment methods fall into two primary processes: fee-for-service and capitation. For fee-for-service programs, three methods are offered:1. Cost based: The payer agrees to pay for the costs incurred in providing services to the insured. Cost-based reimbursement is limited to allowable costs, which typically refers to costs directly related to the provision of healthcare services.2. Charge based: When payers are billed for services, they are paid on a rate schedule. Most are paid as negotiated, discounted charges. Managed-care plans, due to large member groups, have the power to negotiate these discounts. The discount range fluctuates between 10% and 50%, or even more, on stated charges.3. Prospective payments: The rates in this system are determined before services are provided and are not related to costs or charges. Instead, the common units of payment are per procedure, per day, or a global reimbursement process. In this last category, a single payment is given that covers all services for a single treatment or medical intervention.Capitation is a different process altogether. Under capitation, the provider is paid a fixed amount per covered life, per period (usually monthly), regardless of services provided. Payments are based on the number of participants assigned to the provider. The reimbursement is, therefore, fixed on the basis of population.Consumer-Driven HealthcareMany organizations are adopting another option for healthcare: the consumer-driven health plan (CDHP). The main philosophy at work in these programs is to involve the consumer directly to contain costs. Another guiding principle is that individuals will become better healthcare consumers if they are given the proper information, tools, and financial incentives. A CDHP thus empowers the consumer with personal responsibility to facilitate this.Typically, a CDHP such as this includes a high deductible alongside an individually controlled healthcare account, which would include one of two things: either a health savings account (HSA) or a health reimbursement account (HRA). These programs are discussed in detail later in this chapter. The pairing of a high-deductible plan and one of these two options is envisioned to introduce and advocate responsible behavior on the part of the consumer. These plans also provide information, and tools, to facilitate informed decision-making.Key components of a CDHP are as follows:• A high-deductible health plan• An individual health account to pay for expenses not paid by the plan• Adequate information and tools to help participants make informed decisions• A comprehensive communication program developed to assist with decision-making• Access to a healthcare coach or consultant• Severe chronic illness management with a licensed medical practitionerKeep in mind that consumer-driven healthcare is a comparatively recent design feature. In general, this type of initiative follows one of two approaches. The first is normally called a defined contribution medical expense plan. In this, the employer provides a variety of options, such as HMOs, PPOs, or an indemnity plan. The employer’s contribution is then set to be equal to the lowest-cost item, which is usually the HMO plan. If employees want to participate in a more expensive (which is to say, better) option, they must then pay a higher out-of-pocket premium. This is called a high-deductible healthcare plan (HDHP).The employer then offers a portion of the deductible. For example, if the plan’s deductible amounts to $6,000, the employer might make a $3,000 contribution. If the employee chooses this plan, a savings account is set up into which the contributions are deposited. From this account, the employee can withdraw funds for medical expenses. The employee can forward unused funds to the next year.These plans are designed to offer incentive to choose wisely when seeking out medical care services, because any expenditures that exceed the funds in the savings account must be paid by the employee in full.The high deductible plans significantly reduce the cost of providing healthcare benefits. Secondly, many employers see these plans as very effective because they make the employee an informed consumer of expensive healthcare services. As of 1996, employer contributions to the savings plan became non-taxable to employees.To make such a plan effective, emphasis must focus on educating employees on the subjects of medical needs, costs, and outcomes. Armed with their employers’ contributions to the account, alongside their own, employees are thus motivated to make informed decisions (to shop around, in other words, for the most economical and cost-effective medical service).In the second approach to consumer-driven healthcare, the employees remain in charge of directing their expenditures with funds that they sets aside specifically for these expenses. After all, when employees are spending their own money, a high incentive exists to be responsible when purchasing healthcare, and the necessary cost-containment measures are created by the employees for themselves.This second approach involves various government-supported, tax-favored incentives and programs, such as the following:• HSAs (health savings accounts)• HRAs (health reimbursement accounts)• FSAs (flexible spending accounts)(An FSA cannot truly be classified as consumer-driven, but rather should be known as a pretax spending provision. A detailed discussion of these tax-favored plans is provided in the “Tax Dimensions” section of this chapter.)Accounting Implications and Issues Affecting Healthcare Benefit PlansThis section covers various technical dimensions of healthcare plan design, including accounting, tax, legal, financial, and auditing.The Standards FrameworkIn the United States, the accounting of health and welfare programs is influenced by two significant guiding principles, as codified in the U.S.: generally accepted accounting principles (GAAP), Financial Accounting Standards Board (FASB), and the Employee Retirement Security Act (ERISA). Internationally, this principle is the International Financial Reporting Standards (IFRS).In the U.S. GAAP, health/welfare plan accounting is codified in FASB Accounting Standards Codification (ASC) Regulation 965, and IFRS codification is in IAS 19.These rules, regulations, and principles (both under the U.S. GAAP and the IFRS, FAS 965, and IAS, 19, respectively) guide the discussion throughout this section. You will learn about the salient elements of accounting requirements under both relevant codes. For a detailed analysis and understanding of these codes, review these websites:• www.fasb.org• www.ifrs.orgCompanies in the United States have been analyzing the differences between the IFRS and the U.S. GAAP in anticipation of a convergence of standards. All parties are waiting to see when an imposition will be made by rule-making bodies requiring U.S. companies to adopt IFRS standards.Analyzing, interpreting, and understanding FASB standards, with respect to benefits accounting, is a worthwhile exercise. This same analysis must also be made with regard to IFRS standards, due to the potential for convergence in the near future.Understanding the accounting principles under both standards will assist in the execution of this convergence if and when it is needed. IFRS regulations pertaining to health and welfare are also discussed later in this chapter.The current discussion is based on a direct analysis and discussion of the standards.44 FASB 965 Plan Accounting—Health and Welfare Plans (based on an analysis of FASB 965).Defined Contribution Versus Defined Benefit PlansDefined contribution health and welfare plans differ from defined benefit plans. A defined contribution plan keeps a record of each participant’s account. Records are kept of each contribution, made both by the participants and their employers. Flexible spending arrangements, vacation plans, and HSAs may be included in such a plan.A defined benefit plan,5 in contrast, specifies a particular benefit—perhaps a reimbursement to the covered participant, or a direct payment to providers or third-party insurers, for the costs of stipulated services. These plans provide participants with a specific benefit based on a formula provided in the plans themselves, whereas defined contribution plans provide benefits based on amounts contributed to an individual account.5 Hicks, S.W. “Accounting and Reporting of Health and Welfare Plans.” Journal of Accountancy 174, no. 6 (1992).Both types adjust values based on the following factors:66 FASB – 965-325-05-2, www.fasb.org.• Forfeitures• Investment experience• Administrative expensesEach type provides a benefit with value. Therefore, the defined benefit plan’s financial statements must provide financial information to aid in understanding and assessing its present and future ability to pay its benefit obligations once they become payable. To meet this requirement, a plan’s financial statements should provide information about its assets and benefit obligations, the results of transactions or events affecting its assets and liabilities, and all other pertinent information necessary for report users to analyze the information provided.The different types of defined benefit plans (multiemployer and single employer) should separately report benefit obligations, including those for post-retirement.Section 965 Explained77 In this part of the chapter, we are interpreting, adapting, and explaining relevant code sections (stating the relevant section) of FASB 965, www.fasb.org.• Benefit payments (965-30-25-1): Health and wealth plans can process benefit payments directly, or the employer may utilize a third-party administrator (TPA) through an administrative service arrangement (ASA). Benefits are paid by either fully or partially self-funded plans.• Premiums due under insurance arrangements (965-30-25-3): Premiums due, but not yet paid, should be part of the accounting in any obligation.• Post-employment benefits (965-30-25-3): Plans for post-employment benefits must recognize a benefit obligation for current employees, based on amounts to be paid in future periods, if certain conditions are met. The conditions are as follows:1. The employee’s right to receive the benefit must be based on services already provided.2. The employees must have a vested benefit.3. There is a high probability of making the payment.4. The amount must be estimated accurately.5. An exception: All employees are provided the same benefits due to another event, such as medical benefits provided under a disability plan; in these plans, medical benefits are paid regardless of the length of service. These plans usually do not have a vesting provision.6. Disability benefits must be accrued from the starting date of the disability (965-30-25-4).• Obligations for premium deficits (965-30-25-5): In fully insured experience-rated plans, experience ratings determined by insurance companies directly, or estimates developed by those companies, can result in deficits. Premium deficits must be included in the total benefit obligation, assuming the following criteria are met:1. It is probable that the deficit will be applied against the amounts of future premiums or future experience-rated refunds; the following must be considered:a. To what extend the insurance contract requires deficit paymentsb. The plan’s desire to transfer coverage to another insurance companyc. Whether the amount of the deficit can be estimated in a reasonable manner• Recognition of employer contributions (965-310-25-1): If a formal commitment is made by the employer to make contributions, this must be documented. Sufficient evidence can include the following:1. The resolution of a governing body that has signed off on the commitment.2. Proof of a pattern of making payments after the end of a plan year; this must be made under a funding policy.3. Evidence of a deduction taken for federal tax purposes; this should be for periods ending on, or before, the financial statement date.4. Evidence of an accounting recognition as a current liability. It is insufficient to show in the balance sheet that there is accrued liability, or if the statement reflects that there is a liability amount that exceeds the plan’s assets.• Recognition of premiums paid to insurance companies (965-310-25-2): This depends on if a premium is paid to an insurance company and also depends on whether the payments are for the transfer of risk or as a deposit. Analysis is necessary to determine the extent of the risk transfer. To mitigate this, insurance companies may require that a deposit is placed that can apply toward potential losses. These deposits must be reported as plan assets until they are used toward premiums. If these reserves are forfeitable when the insurance contract is terminated, this possibility should be considered when making asset calculations. If experience-rated premium refunds are expected, and if the policy year does not coincide with the plan, refunds due should also be reported as plan assets. Finally, it is assumed that all calculations can be reasonably performed (965-310-25-3).• Calculating plan benefit obligations (965-30-35-1): All obligations for single/multiemployer defined health and welfare plans should include the actuarial present value of the following:1. Claims payable.2. Claims incurred but not reported (IBNR).3. Premiums due to insurance companies for accumulated credits and for postemployment benefits. These should be premiums for retired participants, including beneficiaries and dependents, for other eligible participants, and for participants not yet fully eligible. Relevant information must be in the body of the financial reports rather than in footnote disclosures.Claims Incurred But Not ReportedAn important concept that affects both that actuarial valuations of plan assets and liabilities is the IBNR (claims incurred but not reported).8 According to www.healthdictionaryseries.com, an IBNR claim is a concept that signifies healthcare services have been rendered but not invoiced or recorded by the healthcare provider, clinic, hospital, or any other health service organization. IBNRs are usually an integral part of a risk-adjusted contract between managed-care organizations and healthcare providers. An IBNR claim refers to the estimated cost of medical services for which a claim has not been filed. These claims are normally monitored by an IBNR collection system or control sheet.8 Adapted from a blog authored by Dr. David Edward Marcinko, “What is an IBNR medical claim?” Medical Executive Post…Insider News and Education for Doctors and Their Advisors, October 2008, http://medicalexecutivepost.com/2008/.10/07/what-is-an-ibnr-claim/.More formally, an IBNR is the financial accounting of all services that have been performed but as a result of a time element or a “lag” have not been invoiced or recorded as of a specific date. The transactions covering medical services that were provided should be accounted for using the following accrued but not reported IBNR entry:• Debit—accrued payments to medical providers or healthcare entity• Credit—IBNR accrual accountAn example of an IBNR in a hospital is a coronary artery bypass surgery for a managed care plan member. The surgeon and/or healthcare organization has to pay for all related services, such as physical and respiratory therapy, rehabilitation services, drugs, and durable medical equipment (DME), out of a future payment fund. These payments are contractual obligations, which is a liability.The health plan might not be completely billed until several weeks, months, or quarters later, or even further downstream in the reporting year after the patient is discharged. In order to accurately project the health plan’s financial liability, the health plan and hospital must estimate the cost of care based on past expenses.Since the identification and control of costs are paramount in financial healthcare management, an IBNR reserve fund (an interest bearing account) must be set up for claims that reflect services already delivered but, for whatever reason, have not been recorded by a particular deadline, nor yet reimbursed.From the accounting point of view, the IBNR needs to be accrued as an expense and a short-term liability for each fiscal month or accounting period. Otherwise, the organization may not be able to pay the claim if the associated revenue has already been spent. The proper handling of these “bills in the pipeline” is crucial for proactive providers and health organizations. IBNRs are especially important with newer patients who may be sicker than prior norms. Amounts that hospitals hope to recover (recoverables) are posted as part of their reserve charges. In many cases, these recoverables will wind up being IBNR losses. They are recorded as IBNR claims on the balance sheet. Once these book losses start becoming actual losses, the hospital may look to the insurer to pay a part of the claim. This might end up being a disputable charge.For self-funded plans, the IBNR cost should be measured at the present value of the plan’s estimated ultimate cost of settling the claims. Estimated ultimate costs should reflect the plan’s obligation to pay claims to or for participants (for example, continuing health coverage or long-term disability), regardless of employment status and beyond the financial statement date if stipulated. (965-30-35-1A)Other Benefit Obligations1. Administrative expenses incurred by the plan can be recognized by including the estimated administrative expenses in the benefits expected to be paid or by reducing the discount rate. (965-30-35-2)2. Postretirement retirement benefit obligation should be measured as the actuarial present value of future benefits that are tied into the participant’s service performed as of the cost measurement date. The calculation should be reduced by projected future contributions from plan participants. The determined calculation represents the employer’s funding requirement and the accumulated plan assets. This calculation should also consider the following variables:a. Continuity of the planb. That all assumptions made about future events for the calculation will indeed be met.c. Any anticipated forfeitures and integration with other plans.d. The discount rate used assumes a rate of return that matches high-quality fixed income investments.3. Any insurance premiums paid for plan participants who have accumulated enough eligibility credits or hours of employment. This is usually calculated by multiplying eligibility credits by the current insurance premium; and for self-funded plans, by using the average of all benefits per eligible participant. Mortality, expected employee turnover, and other required assumptions should be considered in the calculation.4. Any additional premiums as a result of the loss ratio exceeding present percentage.5. Additional payments to insurance companies resulting from stop-loss arrangements. (965-30-35-9 + 965-30-35-12)Additional Obligations for Postretirement Health PlansIf a benefit is provided as part of a postretirement health plan, the estimated payments to participants needs to be a part of the accounting. These benefits usually trigger starting on the retirement date, but sometimes these benefits trigger at a certain age. The calculation of the estimated obligation as of a given date is based on an actuarial preset value of all future benefits that can be attributed to the participant’s period of employment. Benefit recipients should covered the following:• Retirees• A terminated employee, if benefits have been earned• A beneficiary (or a covered dependent)• Active employees, their beneficiaries, and any covered dependentsBenefit obligation calculations need to include the following assumptions and calculation elements:• Appropriate discount rates to account for the time value of money• Per capita cost of claims by age• Healthcare cost trends• Medicare reimbursement rates• Retirement age• Dependency status• Mortality• Salary progression• Probability of payment calculation• Participation ratesBenefit obligations should not include death benefits that might need to be paid during employees’ active service period. This benefit obligation is generally determined by applying current insurance premium rates or, for a self-funded plan, the average cost of benefits per eligible employee. In either case, the calculation should consider assumptions on mortality rates and the probability of employee turnover. (965-30-35-15 to 22)Fair Value MeasurementFair value, in the context of healthcare benefits, refers to “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participations at the measurement date” (FASB ASC 820-10-20). This concept is closely related to the accounting and reporting of these benefit plans. FASB ASC 820 defines fair value and establishes a framework to measure it as well as to set certain disclosure requirements.To meet these requirements, a joint effort between management, custodians, investment fiduciaries, and plan auditors is required. Sponsors and administrators are responsible for ensuring that the proper valuation process and effective data are available to determine this fair value. They must also ensure that the measuring framework is conducted and that the proper disclosures are included.The following is a summarized review of FASB ASC 820:Noncash contribution must be recorded at fair value (FASB ASC 965-20-30-1). If this contribution is to be sold, the sale value will be set at the fair value minus the cost. Total assets, liabilities, and net assets available for benefits, as well as net assets reflecting investments at fair value, are presented in the statements available for the plan (FASB ASC 965-20-45-1). All accounting associated with these assets that reflect the investments in question need to ensure that the amounts are presented at fair value (FASB ASC 965-20-45-2-5). In terms of unusual or infrequent statements, or transactions made after the financial statement date, disclosures are required if these events or transactions significantly affect the efficiency of the financial statements. A significant change made to the fair value of plan assets is a required disclosure event (FASB ASC 965-20-50-1). Equity, debt securities, real estate, or other investments are required to be recorded, at their fair value, at the date of the financial statements (FASB ASC 965-320-35-1 / FASB ASC 965-325-35-1). Net appreciation, or depreciation, of the investments’ fair value must be disclosed in the notes for the financial statements (FASB 965-320-50-1). According to the Employee Retirement Income Security Act, insurance contacts must be presented at fair value, or at the amount determined by the insurance company (for instance, the contract value) (FASB ASC 965-325-35-3).Financial Statements of Defined Benefit/Contribution PlansThe objective of a financial statement made regarding a defined benefit health and welfare plan, or a defined contribution plan, is to provide relevant financial information to evaluate a plan’s present and future ability to pay benefit obligations when due. To achieve this goal, the plan resources, benefit obligations, transactions, and events related to the plan must be provided in the financial statement. Supported information that helps to understand this financial information may also be included in the statement.Defined benefit plans should be prepared on an accrual basis of accounting. Several items are required for the financial statement related to this plan. First is a statement of net assets available for the year’s benefits, which contains information related to investments, insurance contracts, and investment contacts. Second, a statement of changes for these assets is necessary. These changes must be significant and have occurred during the established year.These changes include the following:• Contributions• Changes to the value of investments and income• Changes of income taxes either paid or payable• Changes of payments to claims and to premiums• Changes of operating and administrative expensesIf any changes are made to contributions made from employers, both cash and noncash components must be addressed separately. The nature of noncash contributions must be described in a note. Other issues regarding changes to contributions, as well as contributions from other identified sources (for instance, sate subsidies or federal grants), can be related to employees, collected or remitted.Regarding changes of investment value, regardless of whether the investments result in net depreciation or appreciation: they must be addressed separately based on the measurements of the investment’s fair value. Fair value measurements refer to whether value is measured by a quoted price in an active market or by another method.The changes of a payment for a claim do not include changes to the contacts by the insurance company, which are not included in plan assets.The third item included in the financial statement of a defined benefit plan is information about the plan’s obligations throughout the year.The final inclusion item for a defined benefit plan is information regarding the impact made by changes in the plan’s obligations. All factors resulting in these changes throughout the plan’s period must be identified: Amendments, changes in the nature of the plan, and changes in actuarial assumption are the minimum disclosures about changes in benefit obligation.Certain defined contribution plans have balance limitations in the participant’s accounts (for example, vacation plans, holiday plans, and legal plans) (FASB ASC 965-205-10-1-2). The required financial information includes plan resources, how these resources are working and are managed, and the result of transactions and events that influence these resources (in addition to other factors that may help to understand the provided information). A statement of net assets available for the plan benefits throughout the year is required information, as is the statement of changes in net assets.Self-Funding of Healthcare BenefitsA major financial consideration for benefit programs deals with self-funding. In such a plan, instead of buying a product, an employer funds an employee’s plan from the company’s general resources.Healthcare costs have been rising steadily over the past many years. Due to this, employers seek out ways to bring these costs down. Self-insuring health plans provide just such an opportunity. Companies are permitted to pay submitted claims in such plans utilizing a pay-as-you-go process. Self-funding will be discussed in detail in Chapter 3.Tax Dimensions of Healthcare PlansAs described previously in this chapter, IRS tax codes have introduced certain healthcare initiatives. This section covers these initiatives.Health Savings AccountsHealth savings accounts, also known as HSAs, were created in 2003 so that individuals covered by high-deductible health plans (HDHP) could receive tax-preferred treatment for funds used for medical expenses. Generally, any adult who is covered by such a HDHP (and has no other coverage) may establish an HSA.A high-deductible health plan is so named because it has a higher deductible (but also with lower premiums) than a traditional health plan. These are usually meant for specific, catastrophic illnesses. HSAs were established as a part of the Medicare Prescription Drug Improvement and Modernization Act, which was signed into law on December 8, 2003, by President George W. Bush.In a survey conducted by the Kaiser Family Foundation in September 2008, it was found that 8% of covered workers were enrolled in a CDHP (including both HSAs and HRAs), up from 4% in 2006. The study also found that roughly 10% of firms offered such plans. There is evidence that the majority of HSA plans were employer sponsored and that about 25% of them were individually set up. Another survey, by America’s Health Insurance Plans (AHIP), provides evidence that confirms this. This study reported that the number of Americans covered by HSA plans had grown to a total of 6.1 million as of January 2008; 4.6 million of these were employer sponsored, and 1.5 million were individually purchased.Evidence gleaned from other sources regarding HSAs shows that, since their inception, contributions to these plans outstrip withdrawals by a considerable amount, usually nearly double.Contributions to an HSA may be made by any individual member of an HSA-eligible HDHP, by an employer, or by any other person. If an employer makes a contribution to such a plan, the plan in question is considered the same as any other ERISA-qualified plan, and nondiscrimination rules become effective. However, if contributions are made through a Section 125 plan, nondiscrimination rules do not apply. Employers have some flexibility in the distribution of these plans, in that they have the option of treating full-time and part-time employees differently; they may also treat individual and family participants differently.Contributions from an employer or employee may be made on a pretax basis. In the absence of employer contributions, they may be made on a post-tax basis and used to decrease gross taxable income the following year. The main advantage of pretax contributions is avoiding the FICA and Medicare tax deduction, which amounts to a savings of 7.65%. This percentage applies to both employer and employee (subject to limits of the Social Security wage base). Regardless of the method or savings associated with them, deposits may only be made for those covered under an HSA-eligible HDHP.Initially, the annual maximum deposit to an HSA was less than the actual deductible or specified IRS limits. Congress later abolished this limit based on the deductible and set limits for maximum contributions. All contributions to an HSA, regardless of the source, count toward an annual maximum. A catch-up provision also applies for plan participants aged 55 of over, allowing the IRS limit to be increased.All deposits to an HSA become the property of the policyholder, regardless of its source. Funds that are deposited, but not withdrawn, carry over each year into the next. If the policyholder ends her HSA-eligible insurance coverage, she is no longer permitted to deposit further funds; however, funds already in the HSA remain available for use.The Tax Relief and Health Care Act, signed into law on December 20, 2006, added a provision that allowed a one-time rollover of Individual Retirement Account (IRA) assets to be used to fund up to a year’s worth of a maximum HSA contribution. State tax treatment of HSAs varies.According to IRS Publication 969: Health Savings and Other Tax-Favored Health Plans, an individual can generally make contributions to an HSA for a given tax year until the deadline for filing returns for that year, which is typically April 15.The IRS stipulated contributions for the years 2012 and 2013, respectively, as follows:Funds in an HSA can be invested similarly to the method used for IRAs. Investment earnings are sheltered from taxation until money is withdrawn.HSA funds can be rolled over to other HSAs, but not into an IRA or a 401(k); further, funds from IRAs and other investments cannot be rolled into an HSA, barring the one-time IRA transfer mentioned previously.Unlike some employer contributions to, for example, a 401(k) plan, all HSA contributions belong to the participant as soon as they are given, regardless of the source. HSA participants are not required to obtain advance approval from their trustee, or their medical insurer, to withdraw funds. These funds are not subject to income tax if made for qualified expenses. These include services and items covered by the health plan, but they are subject to cost sharing, such as a deductible and co-insurance or copayments. Funds can be withdrawn for expenses not covered under medical plans, such as dental, vision, and chiropractic care; medical equipment such as eyeglasses and hearing aids; and transportation expenses (as long as they are related to medical care). Through December 31, 2010, nonprescription over-the-counter medications were also eligible.Beginning on January 1, 2011, the Patient Protection and Affordable Care Act, also known as Healthcare Reform, stipulates that HSA funds cannot be used to buy over-the-counter drugs without a doctor’s prescription.HSA funds can be withdrawn in numerous ways—debit cards, personal checks, and so on. These withdrawals can be made for any reason, but withdrawals that are not for documented and qualified medical expenses are subject to income tax alongside a 20% penalty. This tax penalty is waived for anyone who has reached the age of 65, or has become disabled, at the time of the withdrawal. Then, only income tax is paid on the withdrawal, and, in effect, the account has become tax deferred (similar to an IRA). Medical expenses continue to be tax-free. As of January 1, 2011, rules governing HSAs in the Patient Protection and Affordable Care Act went into effect, and the penalty for nonqualified withdrawals was 10%.Account holders are required to retain proper documentation for their medical expenses. Failure to do this may cause the IRS to rule their expenses as unqualified, and thus subject the taxpayer to additional penalties.An HSA plan is an innovation created primarily to contain healthcare costs for employers, and thus increase the efficiency of the healthcare system. The guiding principle at work is that when individuals spend their own money, it makes them more responsible when purchasing healthcare benefits, because they will pursue cost-effective choices. It is further believed that individuals required to pay for their own expenses will consume less medical care, be more studious in gathering information, specifically seek out lower-cost options, and be more vigilant against excess and fraud. For these reasons, the HSA program has great value as a cost-containment measure.Two other plans fall within the purview of CDHPs: HRAs and FSAs. They have similar objectives but different structures.Health Reimbursement AccountsHealth reimbursement accounts, also known as health reimbursement arrangements or HRAs, are IRS-approved programs that permit employers to set aside funds to reimburse medical expenses paid by employees. These programs have tax advantages for both employees and employers.An account such as this is offered both to employees and retirees. The participant can use the money to pay for deductible and co-insurance accounts or covered medical expenses. Like an HSA, leftover funds can be used from year to year, as long as the employee is a member of the plan. The money is contributed by the employer and therefore doesn’t count as income, thus saving valuable tax dollars.HRA programs are set up by employers, which are then managed by a third-party administrator. A possible feature of this plan would allow participants to roll over plan balances from one year to the next. However, the employee must decide how to decide how much can be rolled over. This can be stipulated as a percentage or as a flat amount. According to the IRS, an HRA program “must be funded solely by an employer,” and contributions cannot be paid through a voluntary salary reduction agreement. There is no limit on an employer’s contributions, as they are excluded from an employee’s income.As per IRS regulations documented in IRS Publication 96, “employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period.” HRAs reimburse only those items agreed to by the employer—copays, co-insurance, deductibles, and services—that are not covered by the company’s standard insurance plan. With an HRA, employers fund individual reimbursement accounts for their employees and define how these funds can be used.Before a plan can be implemented, qualified claims must be laid out in a plan document. Approved reimbursements may be medical services, dental services, copays, co-insurance, and deductibles. However, these guidelines can vary from plan to plan. The employer is not required to prepay into a fund for reimbursements and can choose instead to reimburse employee claims as they come.Reimbursements under an HRA plan can be made for the following:• Current and former employees• Spouses• Any person the employee may have claimed as a dependent on his or her tax return (with stipulated exceptions)The biggest cost-containment advantage in a plan like this is that employers will have predictability for their expenses when providing healthcare benefits to their employees.Flexible Spending AccountsAs indicated previously, flexible spending accounts (FSAs) cannot be classified as a cost-containment device to be used by the employer. Instead, an FSA is more useful as a program to facilitate an employee’s usage of his own money to spend on healthcare and dependent care expenses. In a program such as this, an individual can set aside a certain percentage of his earnings to pay for these expenses; these funds are not subject to payroll taxes. A major disadvantage of an FSA, however, is that these funds are lost at the end of the year, unlike the funds in an HSA account.The most common type of FSA is one for medical expenses. HSAs and FSAs are similar in nature, with the primary difference being that an HSA is a component of a consumer-driven plan, whereas an FSA can be offered alongside a traditional healthcare benefit plan. An FSA can have two components: one for qualified medical expenses and the other for dependent care expenses.Medical Expense FSAThe most common type of FSA is utilized for medical expenses not paid by insurance, such as deductibles, copayments, and co-insurance amounts. As of January 1, 2011, over-the-counter medications are permissible only when purchased with a doctor’s prescription; a sole exception is made for insulin. However, over-the-counter medical devices such as bandages, crutches, and eyeglass repair kits are allowed.Prior to the enactment of the Patient Protection and Affordable Care Act, the IRS permitted employers to set any maximum for their employees. This act amended Section 125, such that FSAs cannot allow employees to choose an annual election in excess of a limit, determined by the IRS, of $2,500 for the first plan year, beginning after December 31, 2012. Subsequent plan years’ limits will be indexed based on cost-of-living adjustments. Employers are permitted to limit their employees’ annual elections further. This limit is applied to each employee without regard to whether that employee has a spouse or children. Nonelective contributions not deducted from the employee’s wages are not counted against this limit. A worker employed by multiple, unrelated employers is permitted to choose an amount up to the limit under each employer’s separate plan. This limit does not apply to HSAs, reimbursement arrangements, or the employee’s share of the cost of employer-sponsored coverage.Dependent Care FSAFSAs can also be established to pay for expenses for an employee’s dependents. This dependent care FSA is capped federally at $5,000 per year, per household. Married spouses can each elect a separate FSA, but their combined elections cannot exceed $3,000. All withdrawals in excess of $5,000 are taxed.In recent years, the FSA debit card was developed to allow employees to access the account directly. It also simplified the substantiation requirement, which initially called for labor-intensive claims processing.A drawback to this system is that money set aside must be paid “within the coverage period,” as defined by the coverage’s definition. This period, or plan year, is typically defined as the calendar year. Funds left unspent at the end of this coverage period are forfeited.These funds can be used for administrative costs or can be equally distributed as taxable income among all participants. The coverage period ceases with the termination of employment, regardless of who initiated this termination. The sole exception is when the employee continues coverage with the company under COBRA or some other arrangement.International Financial Reporting Standards and Employee Health and Welfare PlansUnder the International Financial Reporting Standards (IFRS), accounting for employee benefits is addressed in IAS 19. Here we cover only the provisions that affect benefit items only. Note that IAS 19 also covers items that are termed employee compensation for the purposes of this book. The main provisions of IAS 19 that fall under this purview include the following:• Short term: Benefits payable within 1 year. The employee will have to provide the services for which required compensation has been earned. These items cover medical benefits provided to regular employees, vacation, and sick pay, as it relates to the employee benefits categorization. IAS 19 requires that the undiscounted amount of these benefits are expected to be paid after service has been rendered.• Post-employment: Benefits payable after the employment term is completed. These benefits include pensions, retiree health benefits, life insurance, and the continuation of medical and life benefits after employment has concluded. No termination benefits are included here. In this category, IAS 19 states that if the benefit program is a defined contribution plan, the costs recognized in the period are contributions made in exchange for employee services during said period. For defined benefit plans, the amount recognized in the balance sheet must equal the present value of the defined benefit obligation, as adjusted for unrecognized actuarial gains or losses. Also included are unrecognized past service costs for pension plans (see Chapter 5, “Retirement Plans”). The balance needs to be reduced by the fair value of plan assets at the date of the balance sheet’s creation.• Termination: Benefits paid upon involuntary termination, or a voluntary termination, where compensation has been paid for a temporary period. For these benefits, IAS 19 specifies that the payable amounts should be recognized after the company has made a decision to either terminate an employee (or group of employees) before retirement or to provide termination benefits as a result of an offer made to encourage voluntary terminations.Under IAS 19, a company is required to show that planned termination is being done within the terms and provisions of a formal, written plan, and that the company does not intend to cancel this plan after termination has taken place. IAS also allows the discounting of action costs (from the balance sheet) as a result of termination after 12 months have expired and if benefits are currently being paid.SummaryThis chapter covered various issues related to healthcare benefit plans, including a brief history of healthcare benefit programs. Because of changes in healthcare policies, healthcare benefit plans sponsored by employers are undergoing some fundamental structural changes. This chapter addressed a number of healthcare benefit plan design considerations, including the ever-important factor of cost containment within the plan.The concept of consumer-driven healthcare is a quite new aspect to consider when designing healthcare benefit plans. This chapter covered two consumer-driven approaches: defined contribution medical expense plans and consumer-driven healthcare plans.With regard to accounting issues and implications, ASC regulation 965 is the major accounting rule regulating healthcare plans in United States; this chapter briefly reviewed the ASC 965 rules. Regarding the international standard, IAS 19 is the major international accounting rule regulating healthcare plans.One of the major financial issues of the healthcare plan is self-funding, and this chapter provided a comprehensive example to explain how to self-fund the health plan.This chapter also covered tax dimensions related to healthcare plans. The IRS tax code has introduced certain tax-favored healthcare initiatives, such as health saving accounts, health reimbursement accounts/arrangements, and flexible spending accounts.The final part of the chapter summarized the International Financial Reporting Standards related to healthcare plans.Key Concepts in This Chapter• Healthcare benefits• Health maintenance organization (HMO)• Preferred provider organizations (PPOs)• Patient Care and Affordable Care Act 2010• High-deductible healthcare plan (HDHP)• Employee Retirement Security Act (ERISA)• FASB ASC regulation 965• IFRS codification IAS 19• Defined contribution plans and defined benefit plans• Claims incurred but not reported (IBNR)• Health saving accounts (HSAs)• Health reimbursement accounts (HRAs)• Flexible spending accounts (FSAs)Appendix: Definitions Of Health Insurance Terms99 For informational purposes, we have included these definitions and as were found on the Bureau of Labor Statistics website: www.bls.gov/ncs/ebs/sp/healthterms.pdf.In February 2002, the Federal Government’s Interdepartmental Committee on Employment-based Health Insurance Surveys approved the following set of definitions for use in federal surveys collecting employer-based health insurance data. The BLS National Compensation Survey currently uses these definitions in its data collection procedures and publications. These definitions will be periodically reviewed and updated by the Committee.ASO (Administrative Services Only)—An arrangement in which an employer hires a third party to deliver administrative services to the employer such as claims processing and billing; the employer bears the risk for claims. This is common in self-insured health care plans.Coinsurance—A form of medical cost sharing in a health insurance plan that requires an insured person to pay a stated percentage of medical expenses after the deductible amount, if any, was paid.• Once any deductible amount and coinsurance are paid, the insurer is responsible for the rest of the reimbursement for covered benefits up to allowed charges: the individual could also be responsible for any charges in excess of what the insurer determines to be “usual, customary and reasonable.”• Coinsurance rates may differ if services are received from an approved provider (i.e., a provider with whom the insurer has a contract or an agreement specifying payment levels and other contract requirements) or if received by providers not on the approved list.• In addition to overall coinsurance rates, rates may also differ for different types of services.Copayment—A form of medical cost sharing in a health insurance plan that requires an insured person to pay a fixed dollar amount when a medical service is received. The insurer is responsible for the rest of the reimbursement.• There may be separate copayments for different services.• Some plans require that a deductible first be met for some specific service services before a copayment applies.Deductible—A fixed dollar amount during the benefit period—usually a year—that an insured person pays before the insurer starts to make payments for covered medical services. Plans may have both per individual and family deductibles.• Some plans may have separate deductibles for specific services. For example, a plan may have a hospitalization deductible per admission.• Deductibles may differ if services are received from an approved provider or if received from providers not on the approved list.Flexible spending accounts or arrangements (FSA)—Accounts offered and administered by employers that provide a way for employees to set aside, out of their paycheck, pretax dollars to pay for the employee’s share of insurance premiums or medical expenses not covered by the employer’s health plan. The employer may also make contributions to a FSA. Typically, benefits or cash must be used within the given benefit year or the employee loses the money. Flexible spending accounts can also be provided to cover childcare expenses, but those accounts must be established separately from medical FSAs.Flexible benefits plan (Cafeteria plan) (IRS 125 Plan)—A benefit program under Section 125 of the Internal Revenue Code that offers employees a choice between permissible taxable benefits, including cash, and nontaxable benefits such as life and health insurance, vacations, retirement plans and child care. Although a common core of benefits may be required, the employee can determine how his or her remaining benefit dollars are to be allocated for each type of benefit from the total amount promised by the employer. Sometimes employee contributions may be made for additional coverage.Fully insured plan—A plan where the employer contracts with another organization to assume financial responsibility for the enrollees’ medical claims and for all incurred administrative costs.Gatekeeper—Under some health insurance arrangements, a gatekeeper is responsible for the administration of the patient’s treatment; the gatekeeper coordinates and authorizes all medical services, laboratory studies, specialty referrals and hospitalizations.Group purchasing arrangement—Any of a wide array of arrangements in which two or more small employers purchase health insurance collectively, often through a common intermediary who acts on their collective behalf. Such arrangements may go by many different names, including cooperatives, alliances, or business groups on health. They differ from one another along a number of dimensions, including governance, functions and status under federal and State laws. Some are set up or chartered by States while others are entirely private enterprises. Some centralize more of the purchasing functions than others, including functions such as risk pooling, price negotiation, choice of health plans offered to employees, and various administrative tasks. Depending on their functions, they may be subject to different State and/or federal rules. For example, they may be regulated as Multiple Employer Welfare Arrangements (MEWAs).Association Health Plans—This term is sometimes used loosely to refer to any health plan sponsored by an association. It also has a precise definition under the Health Insurance Portability and Accountability Act of 1996 that exempts from certain requirements insurers that sell insurance to small employers only through association health plans that meet the definition.Health Care Plans and Systems• Indemnity plan—A type of medical plan that reimburses the patient and/or provider as expenses are incurred.• Conventional indemnity plan—An indemnity that allows the participant the choice of any provider, without an effect on reimbursements. These plans reimburse the patient and/or provider as expenses are incurred.• Preferred provider organization (PPO) plan—An indemnity plan where coverage is provided to participants through a network of selected health care providers (such as hospitals and physicians). The enrollees may go outside the network, but would incur larger costs in the form of higher deductibles, higher coinsurance rates, or non-discounted charges from the providers.• Exclusive provider organization (EPO) plan—A more restrictive type of preferred provider organization plan under which employees must use providers from the specified network of physicians and hospitals to receive coverage; there is no coverage for care received from a non-network provider except in an emergency situation.• Health maintenance organization (HMO)—A health care system that assumes both the financial risks associated with providing comprehensive medical services (insurance and service risk) and the responsibility for health care delivery in a particular geographic area to HMO members, usually in return for a fixed, prepaid fee. Financial risk may be shared with the providers participating in the HMO.Examples of health maintenance organizations include the following:• Group Model HMO—An HMO that contracts with a single multi-specialty medical group to provide care to the HMO’s membership. The group practice may work exclusively with the HMO, or it may provide services to non-HMO patients as well. The HMO pays the medical group a negotiated, per capita rate, which the group distributes among its physicians, usually on a salaried basis.• Staff Model HMO—A type of closed-panel HMO (where patients can receive services only through a limited number of providers) in which physicians are employees of the HMO. The physicians see patients in the HMO’s own facilities.• Network Model HMO—An HMO model that contracts with multiple physician groups to provide services to HMO members; may involve large single and multispecialty groups. The physician groups may provide services to both HMO and non-HMO plan participants.• Individual Practice Association (IPA) HMO—A type of health care provider organization composed of a group of independent practicing physicians who maintain their own offices and band together for the purpose of contracting their services to HMOs. An IPA may contract with and provide services to both HMO and non-HMO plan participants.• Point-of-service (POS) plan—A POS plan is an “HMO/PPO” hybrid; sometimes referred to as an “open-ended” HMO when offered by an HMO. POS plans resemble HMOs for in-network services. Services received outside of the network are usually reimbursed in a manner similar to conventional indemnity plans (e.g., provider reimbursement based on a fee schedule or usual, customary and reasonable charges).• Physician-hospital organization (PHO)—Alliances between physicians and hospitals to help providers attain market share, improve bargaining power and reduce administrative costs. These entities sell their services to managed care organizations or directly to employers.• Managed care plans—Managed care plans generally provide comprehensive health services to their members, and offer financial incentives for patients to use the providers who belong to the plan. Examples of managed care plans include:• Health maintenance organizations (HMOs),• Preferred provider organizations (PPOs),• Exclusive provider organizations (EPOs), and• Point of service plans (POSs).• Managed care provisions—Features within health plans that provide insurers with a way to manage the cost, use and quality of health care services received by group members.Examples of managed care provisions include the following:• Preadmission certification—An authorization for hospital admission given by a health care provider to a group member prior to their hospitalization. Failure to obtain a preadmission certification in non-emergency situations reduces or eliminates the health care provider’s obligation to pay for services rendered.• Utilization review—The process of reviewing the appropriateness and quality of care provided to patients. Utilization review may take place before, during, or after the services are rendered.• Preadmission testing—A requirement designed to encourage patients to a preadmission certification in non-emergency situations reduces or eliminates the health care provider’s obligation to pay for services rendered.• Utilization review—The process of reviewing the appropriateness and quality of care provided to patients. Utilization review may take place before, during, or after the services are rendered.• Preadmission testing—A requirement designed to encourage patients to obtain necessary diagnostic services on an outpatient basis prior to non-emergency hospital admission. The testing is designed to reduce the length of a hospital stay.• Non-emergency weekend admission restriction—A requirement that imposes limits on reimbursement to patients for non-emergency weekend hospital admissions.• Second surgical opinion—A cost-management strategy that encourages or requires patients to obtain the opinion of another doctor after a physician has recommended that a non-emergency or elective surgery be performed. Programs may be voluntary or mandatory in that reimbursement is reduced or denied if the participant does not obtain the second opinion. Plans usually require that such opinions be obtained from board-certified specialists with no personal or financial interest in the outcome.• Maximum plan dollar limit—The maximum amount payable by the insurer for covered expenses for the insured and each covered dependent while covered under the health plan.• Plans can have a yearly and/or a lifetime maximum dollar limit.• The most typical of maximums is a lifetime amount of $1 million per individual.• Maximum out-of-pocket expense—The maximum dollar amount a group member is required to pay out of pocket during a year. Until this maximum is met, the plan and group member shares in the cost of covered expenses. After the maximum is reached, the insurance carrier pays all covered expenses, often up to a lifetime maximum (See previous definition).• Medical savings accounts (MSA)—Savings accounts designated for out-of-pocket medical expenses. In an MSA, employers and individuals are allowed to contribute to a savings account on a pre-tax basis and carry over the unused funds at the end of the year.One major difference between a Flexible Spending Account (FSA) and a Medical Savings Account (MSA) is the ability under an MSA to carry over the unused funds for use in a future year, instead of losing unused funds at the end of the year. Most MSAs allow unused balances and earnings to accumulate. Unlike FSAs, most MSAs are combined with a high deductible or catastrophic health insurance plan.• Minimum premium plan (MPP)—A plan where the employer and the insurer agree that the employer will be responsible for paying all claims up to an agreed-upon aggregate level, with the insurer responsible for the excess. The insurer usually is also responsible for processing claims and administrative services.• Multiple Employer Welfare Arrangement (MEWA)—MEWA is a technical term under federal law that encompasses essentially any arrangement not maintained pursuant to a collective bargaining agreement (other than a State-licensed insurance company or HMO) that provides health insurance benefits to the employees of two or more private employers.Some MEWAs are sponsored by associations that are local, specific to a trade or industry, and exist for business purposes other than providing health insurance. Such MEWAs most often are regulated as employee health benefit plans under the Employee Retirement Income Security Act of 1974 (ERISA), although States generally also retain the right to regulate them, much the way States regulate insurance companies. They can be funded through tax-exempt trusts known as Voluntary Employees Beneficiary Associations (VEBAs) and they can and often do use these trusts to self-insure rather than to purchase insurance policies.Other MEWAs are sponsored by Chambers of Commerce or similar organizations of relatively unrelated employers. These MEWAs are not considered to be health plans under ERISA. Instead, each participating employer’s plan is regulated separately under ERISA. States are free to regulate the MEWAs themselves. These MEWAs tend to serve as vehicles for participating employers to buy insurance policies from State licensed insurance companies or HMOs. They do not tend to self-insure.• Multi-employer health plan—Generally, an employee health benefit plan maintained pursuant to a collective bargaining agreement that includes employees of two or more employers. These plans are also known as Taft-Hartley plans or jointly administered plans. They are subject to federal but not State law (although States may regulate any insurance policies that they buy). They often self-insure.• Premium—Agreed upon fees paid for coverage of medical benefits for a defined benefit period. Premiums can be paid by employers, unions, employees, or shared by both the insured individual and the plan sponsor.• Premium equivalent—For self-insured plans, the cost per covered employee, or the amount the firm would expect to reflect the cost of claims paid, administrative costs, and stop-loss premiums.• Primary care physician (PCP)—A physician who serves as a group member’s primary contact within the health plan. In a managed care plan, the primary care physician provides basic medical services, coordinates and, if required by the plan, authorizes referrals to specialists and hospitals.• Reinsurance—The acceptance by one or more insurers, called reinsurers or assuming companies, of a portion of the risk underwritten by another insurer that has contracted with an employer for the entire coverage.• Self-insured plan—A plan offered by employers who directly assume the major cost of health insurance for their employees. Some self-insured plans bear the entire risk. Other self-insured employers insure against large claims by purchasing stop-loss coverage. Some self-insured employers contract with insurance carriers or third party administrators for claims processing and other administrative services; other self-insured plans are self-administered. Minimum Premium Plans (MPP) are included in the self-insured health plan category. All types of plans (Conventional Indemnity, PPO, EPO, HMO, POS, and PHOs) can be financed on a self-insured basis. Employers may offer both self-insured and fully insured plans to their employees.• Stop-loss coverage—A form of reinsurance for self-insured employers that limits the amount the employers will have to pay for each person’s health care (individual limit) or for the total expenses of the employer (group limit).• Third party administrator (TPA)—An individual or firm hired by an employer to handle claims processing, pay providers, and manage other functions related to the operation of health insurance. The TPA is not the policyholder or the insurer.Types of health care provider arrangements include the following:• Exclusive providers—Enrollees must go to providers associated with the plan for all non-emergency care for the costs to be covered.• Any providers—Enrollees may go to providers of their choice with no cost incentives to use a particular subset of providers.• Mixture of providers—Enrollees may go to any provider but there is a cost incentive to use a particular subset of providers.• Usual, customary, and reasonable (UCR) charges—Conventional indemnity plans operate based on usual, customary, and reasonable (UCR) charges. UCR charges mean that the charge is the provider’s usual fee for a service that does not exceed the customary fee in that geographic area, and is reasonable based on the circumstances. Instead of UCR charges, PPO plans often operate based on a negotiated (fixed) schedule of fees that recognize charges for covered services up to a negotiated fixed dollar amount.
