Aims and objectives of this chapter:• Explain the challenges of healthcare financing• Discuss various financing approaches of healthcare plans• Explain the relationship between the Employee Retirement Income Security Act (ERISA) and self-funded plans• Provide a comprehensive example of a self-funded plan• Explain the concept of utilization review• Introduce value-based benefit design• Concluding thoughts on healthcare plan financingThe allocation of funds, general or specific, and the mechanisms used for paying these funds, makes up the umbrella topic of healthcare finance. Previously in this book, it has been mentioned that the overall design of employee healthcare benefits in recent years has been primarily, and fundamentally, altered by escalating costs. Healthcare costs have become a primary theme for thousands of published works; a bevy of professional, industry, and advocacy groups; as well as various think tanks. This chapter is dedicated to addressing this particular issue.The magnitude of the healthcare finance challenge is evident from some of the data presented here:Health spending in the U.S. reached an estimated $2.8 trillion in 2012 while overall growth remained low. For 2011, the figure was $2.7 trillion, according to the most recent federal actuary analysis released in Health Affairs in January 2013. The rate of growth nationwide in both 2010 and 2011 was 3.9 percent, and only 0.1 percentage point higher than the 2009 growth rate of 3.8 percent. National health spending averaged $8,680 per person in 2011. Health care accounted for 17.9 percent of the gross domestic product in both 2010 and 2011, according to the report.The major areas where spending growth accelerated in 2011 (over 2010) were:• Physician and clinical services spending (4.3 percent) grew faster in 2011 compared to growth of 3.1 percent in 2010 and was due primarily to increased growth in non-price factors, such as the use and complexity or intensity of services that more than offset slower growth in prices for these services.• Medicare spending (6.2 percent) growth (compared to 4.3 percent growth in 2010) was attributable to a one-time increase in spending for skilled nursing facilities and faster growth in spending for physician services under fee-for-service Medicare and for Medicare Advantage spending.• Private health insurance (3.8 percent) accelerated from 3.4 percent growth in 2010 and was mainly due to private health insurance enrollment increasing 0.5 percent in 2011, after declining each year from 2008 to 2010.• Retail prescription drugs spending (2.9 percent) growth accelerated from 0.4 percent growth in 2010, partly because of price increases in brand-name and specialty drugs. However, the growth is significantly lower than the 2009 figure of 5 percent growth.• Out-of-pocket spending (2.8 percent) growth increased faster in 2011 compared to 2010, when growth was 2.1 percent, and was partially due to higher cost sharing and increased enrollment in consumer-directed health plans.The major areas where spending growth slowed (from 2010) were:• Medicaid expenditures (2.5 percent) growth slowed from 5.9 percent in 2010 and was mainly due to continued financial pressure on state budgets because of the economy and a shift in the share of spending from the federal government to the states (a result of expiration of enhanced federal aid to states in June 2011), as well as slower enrollment growth in the program (from 4.9 percent in 2010 to 3.1 percent in 2011).• Hospital spending (4.3 percent) slowed from 4.9 percent growth in 2010 and was attributable to slower growth in the prices charged by hospitals and low growth in use of hospital services and in Medicaid spending for hospital care.The statistics outlined here are from years ago; however, the data demonstrates various trends that continue into the present and remain a substantial concern. As the discussion throughout this chapter covers the various factors that have led to these trends, keep these statistics in mind. We will also examine both micro and macro efforts to deal with these continually increasing costs.Financing Approaches to Healthcare ProgramsOrganizations have two options when financing their employees’ healthcare programs:• Insurance-based financing• Self-insured (self-funding)Insurance-Based FinancingThe main method for financing healthcare programs is through insurance, which typically has four major characteristics:1. Pooling, or sharing, of losses. These losses are spread over a group of individuals so that each employee pays an average, as opposed to the total, loss that is incurred. Pooling permits the sharing of these costs and allows for more accurate predictions of these losses because a large sample is used for loss calculations.2. Insurance is based on the premise that payments are only made for random losses.3. The risk of payment is transferred from the insured to the insurer; by collecting premiums, the insurer has effectively absorbed all risk of payment from the insured.4. Indemnification, which occurs when an insurer pays the insured—either in whole or in part—for expenses that have arisen from illness or injury.Generally, insurance companies are concerned with another fundamental issue called adverse selection; this occurs when the most “at-risk” individuals submit claims for benefits, which refers to anyone who needs a medical procedure in the first place. This principle is detrimental to the company because it inevitably increases overall costs for the program. Charging higher premiums for high-risk employees usually mitigates this exposure to high losses. This process is called an underwriting provision.Another concern for insurance companies is the concept known as moral hazard, which happens when employees sustain unnecessary expenses specifically because they know that someone else is paying them. A protective measure against this is partial payment, requiring the employee to pay a portion of the costs involved. Primarily, copays are used, alongside co-insurance and deductibles. Traditionally, in a full health plan, the company pays a premium, the rates for which are fixed for one year. Payments are made monthly, based on the number of enrolled employees. The premium changes during the course of the year only if the number of enrollees increases.The insurer collects these premiums, and claims are paid based on predetermined policy benefits. Employees are then responsible for any deductible amounts, or copayments required, for services given under the policy.With an indemnity plan, which is also called a fee-for-service plan, an employee is permitted to use any medical provider. The bill for any medical expenses is sent, by the employee or by the provider in question, to the insurance company, which then pays a percentage of it. Typically, the employee incurs a deductible—that is, a specified amount (for example, $200), which must be paid each year before the insurer begins issuing payment of its own. Once this is met, the majority of indemnity plans then pay a percentage of the “usual” or “customary” charge for the medical services in question. Generally, the insurer pays 80%, and the employee covers the remaining 20%; this is known as co-insurance. If, by chance, the provider happens to charge more than the customary amount, the employee must pay the difference, alongside the co-insurance. For example, if the customary fee for a procedure is $100, the insurer usually pays $80, leaving the remaining $20 to the employee. However, if the doctor charges $105, the insurer will still pay $80, and the employee must pay $25. Keep in mind, though, that many fee-for-service plans pay hospital expenses in full, whereas some reimburse at the 80/20 level just described.It is standard for a policy to have an out-of-pocket maximum. This means that once expenses have reached a certain amount within a given calendar year, costs for covered benefits will be paid in full by the insurer, and the employee pays neither excess charges nor the standard co-insurance. However, if the bill for a procedure equals more than the typical charge, the employee may still be required to pay that portion.Lifetime limits may apply on benefits paid under the policy. Most experts recommend a policy that is limited to a lifetime total of $1 million. Anything less than this may prove to be inadequate.Self-Insurance or Self-FundingAs was discussed briefly in Chapter 2, “Healthcare Benefits,” a major financial issue with regard to healthcare benefits is the option of self-funding these plans. In such a plan, instead of buying a product from an insurance company, an employer funds a given worker’s healthcare plan from the company’s general funding. Considering the rise of healthcare costs previously mentioned in this book, employers are seeking out ways to manage them and improve corporate profitability. Self-funding health plans provide just such an opportunity.Claims submitted under these plans can be paid utilizing a pay-as-you-go process. That is, an employer pays each claim submitted by employees as they are received. Alternatively, the employer may set aside resources in advance specifically for the purpose of self-funded plans and, when claims are received and reviewed to determine eligibility, the claims are paid using these specific resources.Aside from the fact that such an arrangement may be construed as a company insuring itself, there is no element involved in such a healthcare plan that involves actual insurance. By contrast, an insured plan involves an insurer paying the claims submitted by employees, while the company pays the insurance company. The insurance company, based on the company’s claims against the plan for the prior year, adjusts the rate of pay.Note here that medical premiums have seen the highest increase in costs among all market items in the consumer price index. Another point to make here is that usually, on the basis of annual fees, a company will hire a third-party administrator to handle claims received under the company’s self-insured plans because the processing of these claims is a time-consuming effort.ERISA and Self-FundingSelf-funded healthcare plans received a boost to their growth by the Employee Retirement Income Security Act, also known as ERISA. This act covers all benefit plans that are sponsored by an employer for its employees, including pension and welfare plans; welfare plans include any nonpension benefit, including health, life insurance, and disability plans. The emphasis, however, is on pensions.The provisions in ERISA that relate specifically to healthcare can be found in Section 514, known as the preemption clause, which states that: “the provisions of this title and Title 4 shall supersede any and all state laws insofar as they now and hereafter relate to any employee benefit plan.” Under Section 514, all private-sector employee-provided health plans are considered ERISA plans and are therefore exempt from state regulations due to the above-quoted clause. This means that self-insured plans are exempt from state-mandated benefits and from paying premium taxes, because of the fact that employers providing such plans are not, under law, considered insurance companies. However, ERISA does not prevent the state regulation of actual insurance; therefore, states can, and do, regulate health plans covered by insurance contracts, which is an added form of encouragement for the self-funding option.By setting up their healthcare plans as self-funded, companies avoid these state regulations, but also assume the risks normally shouldered by an insurance company. Large companies with broad resources may prefer this option to retain the use of their capital, rather than dealing with an insurance company.1 Further, because of a large employment base, claims are stable from year to year, allowing this financial risk to be taken in relative safety.21 Scammon, D. L. “Self-Funded Health Benefit Plans: Marketing Implications for PPOs and Employers.” Journal of Healthcare Marketing 9, no. 1: 5–14.2 Park, C. H. “Prevalence of Employer Self-Insured Health Benefits: National and State Variation.” Medical Care Research and Review 57, no. 3. Sage Publications, 2000.Funding of Self-insured PlansTwo options have been indicated for such plans: Money is set aside for paying claims, or else the company pays them as they are received in a pay-as-you-go arrangement. However, hybrid options can be utilized, with self-funding as their primary feature.33 EBRI Databook on Employee Benefits. Chapter 28, “Employee Benefits Research Institute.” 2008.In some cases, employers may choose to carve out only certain elements of the full healthcare plan and buy an insurance contract to cover only these elements, permitting the remainder of the plan to be self-funded. Typically, these insured elements would be related to mental health or prescriptions. The state government can regulate these, specifically the states where the benefits are being paid.Another funding mechanism is through the purchase of stop-loss coverage. This is usually done to provide for catastrophic losses. There are, in general, two types of stop-loss coverage:1. Individual (coverage that insures against the risk that a single claim will exceed a certain amount)2. Aggregate (coverage that insures against the entire plan’s losses exceeding a certain amount)Prevalence of Self-insured PlansThe Kaiser Family Foundation and the Health Research and Educational Trust, in their 2012 annual report on Employer Health Benefits, provided the data shown in Table 3.1 on the prevalence of self-insured healthcare plans.Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999–2012*Estimate is statistically different from estimate for the previous year shown (p<.05)Note: Due to a change in the survey questionnaire, funding status was not asked of firms with conventional plans in 2006. Therefore, conventional plan funding status is not included in the averages in this exhibit for 2006. For definitions of Self-funded and Fully Insured plans, see the introduction to Section 10.Table 3.1 Percentage of Covered Workers in Partially or Completely Self-Funded Plans, by Firm Size, 1999–2012Example of a Self-Insured PlanOverview of the Healthcare Plan Accounting ProcessBagan Inc. is a self-funded health care plan administered by Anthem Health Plans, Inc., with a pharmacy plan administered by Delta Dental. This health plan includes deluxe, standard, and economy levels. Alternatively, with proof of another avenue for insurance, employees are permitted to opt out of coverage.Health and accounting are maintained on a fiscal-year basis. The plan incurs costs from medical, dental, and pharmaceutical claims, along with vision plan insurance premiums. Administrative fees are paid to a third-party administrator to process these claims. Funding is received from the company and its employees.Projection of Plan Costs and Funding NeededThe plan is accounted for on a prospective basis. Expenditures are projected before the plan year begins, and this forms a basis upon which decisions are made regarding the level of funding from both the company and the employee that will be necessary during the plan year. A set dollar amount is contributed by the company, as well as a defined contribution per eligible employee. This amount is usually determined prior to the beginning of the fiscal year. The goal is to ensure that the company pays for 80% of the net annual healthcare costs, leaving the remaining 20% to the employees.Setting of Employee ChargesRates for employees are established before each plan year begins based on a variety of factors, including the following:• Projected net costs• Allocated Company funding• The projected number of employees included• The projected enrollment in each plan option available (deluxe, standard, or opt-out)Other considerations also impact rate decisions, including health plans either over- or under-recoveries from previous years; the importance of maintaining the stability of employees’ rates; the desire to maintain rates that compare to their industry average; and, lastly, the need to maintain the rate structure’s integrity between the plan options.Actual Costs and Funding ReceivedDuring each plan year, costs are incurred as the plan is used. Bagan Inc. provides funding, alongside employees, during each plan year based on previously established rates. If costs exceed available funds for that year, the company will advance the plan additional funding without any additional interest. The account would be later reconciled to restore any payments.Healthcare Plan Balance (Over/Under-Recoveries)After the plan year is concluded, actual plan costs are accounted for, and funding is received. If costs exceed funding, this is called an under-recovery. As mentioned previously, the plan would be advanced in such an instance.Conversely, if funding exceeds costs, this results in an over-recovery. First and foremost, this over-recovery is used to offset under-recovery from previous years. Any balance remaining is carried forward into future periods to offset prospective costs to smooth or moderate employee’s charges. As before, when a health plan has an over-recovery, no interest is paid.Because plan rates are set using projections, there is always either an over- or under-recovery for each year. Despite efforts to make accurate projections, actual healthcare costs always vary. However, amounts contributed by companies for healthcare, and amounts collected from employees, must always be used to pay for plan costs, even if not for the current year.Communicating on Healthcare Accounting and BalanceBagan Inc’s Human Resources department presents and reports on healthcare costs and funding on a regular basis throughout each year. Regularly updated information on these costs and company accounting practices are subjects of interest to many employees. Further, the company recognizes that having well-informed employees in this healthcare plan is advantageous, because it provides useful feedback.Healthcare Cost ContainmentOver the past 40 years, healthcare expense inflation has increased roughly twice as much as in the average consumer price index. A number of factors have contributed to this escalation, including the following (arguably the primary impetus):• The world’s population has been aging. It is well documented that the need for medical care increases as a person grows older. Some estimates indicate that in the last two years of life, a person spends more on healthcare expenses than at any other time. Further, more and more people are living longer; therefore, the number of older people is growing and, so, the cost of healthcare is rising at unprecedented rates.• Medical technology, along with technology in a general sense, has expanded rapidly over the past 25 years. Technology-based medical treatment is now widely used; however, these procedures are expensive. Therefore, a widespread use of technology in medical procedures greatly adds to this escalation in costs.• Most healthcare benefits plans designs for plans, provided by employers to employees have been generous in their provisions; employers are providing first-dollar benefit coverage. As a result, this coverage has been used liberally, for conditions of any type regardless of need. There has been little incentive to avoid expensive care.• In the past two decades in particular, we have seen an increase in new and unusual diseases; this phenomenon was first made evident with the spread of AIDS. These diseases require an extraordinary amount of research and development cost outlays. Further, treatment costs are very high.• We live in a litigious society, witnessing an ever-increasing number of malpractice lawsuits; these have been an expensive proposition for doctors and hospitals. They have protected themselves with increasingly high-premium malpractice insurance policies. The costs of these policies were tacked onto the costs of medical services.• Pharmaceutical development has resulted in a bevy of new drugs, the costs of which have been very high. These costs are usually passed on to consumers.• The steadily increasing number of underinsured (and uninsured) who require care adds indirectly to medical costs. Hospitals, doctors, and insurance companies are forced to pass these costs on to paying employees. The Patient Protection and Affordable Care Act attempts to address this.Note that controlling the costs outlined here has occupied the attention of corporate executives and national policymakers alike. The focus of national policy has led to certain changes to the tax code in an effort to curb them. In addition, corporate executives have introduced various programs into their companies to do the same. The most direct and concrete concepts at use here are known as utilization reviews.Utilization ReviewsThe utilization review process is a long-standing one that determines whether medical services and expenses are both appropriate and necessary; this assists in minimizing costs for the organization in question. These reviews take a number of forms:• Pre-admission reviews for scheduled hospitalization—precertification review• Admission reviews for unscheduled hospitalization—precertification review• Second opinions for elective surgeries• Concurrent reviews• Individual case retrospective reviews• Aggregate plan retrospective reviewsThese reviews are performed by various doctors and healthcare professionals in conjunction with insurance companies, but can also be conducted by independent agencies. In utilization reviews, a balance must be struck between reducing the volume of services and increasing the quality of care.The first type of utilization review to consider is known as the precertification review, which is a pre-approval process for treatments designated by the insurance companies. Before medical care is provided, these procedures require precertification to determine whether they are necessary.For the most part, procedures requiring this process include the following:• Nonemergency hospitalization• Outpatient surgery• Skilled nursing and rehabilitation services• Home care services• Home medical equipmentThe review and approval process involves determining whether the requested service is medically necessary.Most insurance plans have pre-established clinical guidelines of care for a given condition. Once the precertification request is submitted to the insurance company, the committee goes through these cases against the provided guidelines and determines if the case in question meets the requirements of the guidelines. The committee can contact the healthcare provider and other individuals who can help them make the determination. The process usually starts with data collection which includes symptoms diagnosis results of lab tests in the list of required services. It also compared the medical information provided against the plan’s medical necessity benchmarks.A second type of review is known as a concurrent review. These are used during active management of a given medical condition, which may be inpatient or ongoing outpatient care. The prime objective of such a review is to ensure that the patient receives the correct care in a timely, cost-effective manner. Once the physician has begun a course of treatment, any new treatments found on the insurance companies’ preapproval list are submitted—along with all relevant information on the procedure, clinical status, and progress (or lack thereof) up to the date of submission—to the insurance company for approval. The physician and other providers are then informed of the insurer’s decision.A particularly important aspect of a concurrent review is assessing the need for continuous hospitalization, as the primary objective of such a review is to decrease the amount of time the employee remains in the hospital. Often, feedback includes a specific discharge plan, which can include transfers to rehabilitation, hospice, or nursing facilities. These plans often change due to complications or abnormal test results involved in treatment of a given condition, but it is still important to minimize hospitalization time, such that cost is contained as much as possible.The final type of utilization review is called a retrospective review, in which medical records are audited on a specific case after treatment has already been completed. This type of review takes two forms; one reviews a specific plan’s aggregate utilization statistics, the other deals with individual cases.The insurance company can use the results of these reviews to approve or deny coverage for treatment that has already been received. Specific elements of individual cases are compared to previous patients with the same condition, and, based on the retrospective review, treatment guidelines and criteria may be revised.The other function of an individual case retrospective review is to request the approval for treatments conducted without precertification approvals; such cases may occur under an extreme medical emergency, when time constraints prevent the parties involved from obtaining precertification. Emergency acute care surgeries are a common example for this type of review. This type of review usually takes place before any payments are made.The second type of retrospective utilization review is the aggregate group review, performed by the insurance company for the plan’s sponsor. Due to confidentiality laws, plan sponsors have no access to individual cases, and instead must use statistical data in aggregates. This means that average statistics on incident experience (compared to the appropriate benchmarks) is provided to the sponsor. The insurance company, an independent review organization, or the providing hospital can conduct these reviews.The term utilization management is often used interchangeably with utilization review. Because the plan’s sponsor is responsible for all medical costs in an employer-sponsored plan, that sponsor often demonstrates the most concern as to the management of those expenses. Due to advancements in the field of information technology, sponsors require intermediaries—such as brokers and insurance companies—to provide them with empirical data; this data is also analyzed to provide appropriate benchmark studies. These studies can help employers with cost-containment efforts because they can lead to utilization improvement, waste management, and adherence to evidence-based medical practices.Value-Based Benefit DesignRecently, we have seen a new feature in healthcare benefits known as value-based benefits design (VBBD). Like other features discussed previously, value-based design is aimed at managing the growth in healthcare costs. Providing value-based services, as opposed to regular services, does this.The VBBD program provides certain incentives to employees to avail of services provided by high-performing healthcare providers. These incentives can include rewards, reduced premium costs, adjustments to deductible and copay levels, and contributions to certain tax-favored funding plans, such as an HSA (health savings account).Value-based benefit design is guided by several principles:• Value provided in healthcare is measured by the medical value gained by the prescribed treatment.• The use of high-performance providers who adhere to evidence-based treatment guidelines.• The use of high-value services, including certain prescription drugs and preventative services.• Healthcare services should be differentiated by the quality of medical intervention from provided services.• The individual healthcare consumer also determines the value received; this is achieved through healthy lifestyle choices, such as increased physical activity or electing to quit smoking.The outcomes of a VBBD program are as follows:• The medical evidence of a treatment’s effectiveness• The treatment’s cost• The resulting benefit of the treatmentAs the value of these services varies depending on the individual, VBBD advocates enrollee cost sharing being based on the net value of the service to each employee; costs should not be the same for all employees or be based on a static price for the service.4 Basic health insurance design should be based on tiered costs for services provided, while prescription drugs are based on efficacy. Another service based on efficacy should be office visit copays. This tier-based system is built to direct employees toward choices, which will result in a superior benefits package.4 Chernew, M., and Frederick, A. M. Editorial. “Value and Increased Cost Sharing in the American Health Care System.” Health Services Research and Education Trust 43, no. 2 (2008).pp. 451-457.It has been demonstrated that financial incentives can influence health-related behavior5 and that the cost of services and prescribed drugs impacts the use of those services.6 Therefore, by the removal of barriers to valuable services, or else by providing positive incentives, VBBD initiatives aim to increase the likelihood of employees complying with recommended treatment plans, in addition to engaging in healthy behaviors. Note here that healthier people tend to have lower overall healthcare costs; there is also evidence that patients with certain chronic conditions, who nonetheless maintain their treatment regimens, have lower overall costs as well.75 See for example, Johnson L, Study: Paying smokers to quit boosts success rate. The Boston Globe, February 12, 2009. Accessed at www.boston.com/news/health/articles/2009/02/12/study_paying_smokers_to_quit_boosts_success_rate/ on February 12, 20096 Wells, D., Ross, J., and Detsky, A. “What Is Different about the Market for Health Care?” JAMA 298, no. 23. Decmber 2007. pp. 2885–28877 In a presentation at the Pacific Business Group on Health’s Pharmacy Symposium, April 2008, Jane Barlow, MD reported study results documenting the reduced costs of diabetics who are compliant with drug regimens.Differentiating VBBD from CDHD and Value-Based PurchasingA VBBD plan differs from a CDHP in a fundamental way. In a CDHP, also known as a high-deductible plan, the enrollee is responsible for the costs of services, and the deductible. This creates greater cost awareness and gives additional incentive to the enrollee to determine proper value. In VBBD, the proposition of value is integrated into the incentive structure. A VBBD plan does not have the potential risks associated with a CDHD plan, namely the risk of deferring needed services to avoid the full cost of services or to build balance in a tax-deferred account.The National Business Coalition published a report called “Value-Based Benefit Design: A Purchaser’s Guide,”8 in which the following steps are outlined for the implementation of such a plan:8 Available online at: www.sph.umich.edu/vbidcenter/registry/pdfs/VBBDPurchaserGuide[1].pdf.1. Population analysis: This is effectively data collection and analysis. This includes data on medical claims as well as prescription drugs. The purpose of this step is to identify areas that are at risk for losses due to health issues but that can be mitigated via treatment tracking and improvements in healthy lifestyles. A medical professional should review this collected data. Once this data is analyzed, a decision should be made as to what employee segment should be targeted by the VBBD program. This is so that incentives can be targeted to specific providers and employees, and ensures that only employees with specific conditions are motivated to seek specific services. To benefit from this targeting effort, the plan sponsor must partner with a clinical decision support organization that can provide support in identifying optimum target population.2. VBBD plan development: Once this data is collected, the plan sponsor can proceed in developing the plan’s initiative. The program that is developed flows directly from the data collected in the previous step. For example, a sponsor may have a large group of diabetic employees who do not follow proper healthy lifestyle guidelines or are noncompliant with regard to their drug regimens. A VBBD program for this sponsor should be geared to increasing positive outcomes related to diabetes. In connection with this example, note that strict adherence to a drug regimen directly reduces healthcare costs.The first element for a strategy in this step is to provide financial restraints on high-value services and to provide positive incentives for lifestyle changes. As discussed previously, high-value services are those that are proven to be closely correlated to improving an individual’s health or wellbeing.Features of a VBBD plan that help to reduce copayment amounts for prescription drugs and equipment include the following:a. A reduction in copayment amounts for specific drugs or equipment when used to treat a specific condition an employee engages in a disease management programb. A reduction in copayment amounts for office visits, billed as wellness visitsc. Modifying deductibles for completing a personal health assessment (PHA)d. Modifying deductibles for participating in a disease-management or a wellness programe. A reduction in copayment amounts for using high-quality servicesThe most common approaches to providing positive incentives are as follows:a. A reduction in premium contributions for completing a PHAb. A reduction in premium contributions for quitting smokingc. A reduction in premium contributions for participating in a disease-management or wellness programd. A contribution to an employee’s HSA for completing a PHAe. A contribution to an employee’s HSA for participating in a disease-management or wellness programAn important aspect of a VBBD program is to provide solid support and education. The plan sponsor must work with vendors and develop a system of support for employees; the vendors must work with noncompliant employees. The vendors should be able to offer these employees disease management, case management, and health coaching if necessary. Due to the complexity of VBBD programs, it is usually prudent for an employee to start off with a pilot program before moving into wide-scale implementation.3. Developing a communication program: An effective communication program should be designed to last up to a year, due to the relative freshness of the concept. Based on this, it will take time for an employee to grasp the true dimensions of the program. For example, plan participants usually have trouble grasping the concept that high-quality services may be less expensive. Senior management support for this system is essential and should be used regularly.4. Vendor management: Effective vendor management is another essential component. Considering the fact that a VBBD program utilizes the services of a number of vendors, it becomes imperative that the sponsor implements an effective method of vendor management. All vendors should understand the program’s objectives and solutions. Procedures should be established for vendor communication and for effective problem identification and resolution. A system of vendor evaluation should be established with clear-cut performance standards established.Legal and Regulatory FrameworkNote that a VBBD program, along with many other benefit programs, is subject to various legal compliance requirements, including the following:• Personal health information must meet HIPAA privacy requirements.• All discussions on health conditions must meet state/federal confidentiality requirements.• Confidentiality protection must be communicated to all employees.• If VBBD initiatives will involve health savings accounts (HSAs), the legality of including preventative services for chronic diseases must be investigated.9,109 Chernew, M. E., Rosen, A. B., Fendrick, A. M. “Value-Based Insurance Design.” Health Affairs 26, no. 2 (2007).10 An IRS Private Letter Ruling (available at www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irlbe82/1/doc) stated that a policy that covered a specified number of prescription drugs was not a permitted coverage or preventive care under section 223 of the Code. However, this Private Letter Ruling did not specifically address the question of whether prescriptions for chronic illnesses are preventive services.• Then there is the issue of discrimination, because the VBBD plan discriminates by its very nature. So far the evidence suggests that plan participants do not consider such a plan as discriminatory. Therefore, it is essential that the plan sponsor make all objectives and specific nuances of the plan known as widely as possible; employee understanding of the program is essential.Concluding Thoughts on Healthcare BenefitsAs this chapter concludes, let’s review the issues impacting healthcare finance today. As discussed here and in Chapter 2, healthcare cost containment is of primary concern. Because healthcare costs have been and (to a lesser extent) continue to spiral out of control so, the entire healthcare industry can benefit from financial and economic analysis.Adding to the general confusion, and complexities, of this subject is the fact that a majority of healthcare consumers know little about the product they are buying; instead, they are usually spending other people’s money provided via third-party payments. Expenditures have risen greatly, and they are forecasted to continue along this path, although at a slower pace than before.Health insurance financing continues to be the primary method of paying for healthcare benefit programs. Risk pooling is the reason that insurance works the way it does; risk aversion is the reason consumers purchase insurance the way it is. However, adverse selection can lead to the failure of insurance markets. Further, the concept of moral hazard can lead to losses due to excess consumption.In summary, here are some of the recent trends in health financing:• A switch from indemnity fee-for-purpose plans to managed-care plans (PPOs and HMOs).• A movement to implement insurance benefits with higher deductibles and copays, as well as the use of medical savings accounts to allow tax deductions for out-of-pocket payments.• Consumers are demanding access to improved drugs, due to recent liberalization in pharmaceutical advertising that is causing consumers to be more selective in their drug choices.• Medical technology is playing, and will continue to play, a larger role in the realm of general healthcare. Therefore, rapid and expansive use of medical technology has dramatically increased healthcare expenses.The consensus among healthcare specialists is that costs can be contained or decreased only by utilizing some combination of the following three elements:1. Decrease the use of healthcare services2. Decrease the reimbursement for services3. Decrease the overall expenses within the entire systemDecreasing the Use of Healthcare ServicesA number of actions can decrease the use of healthcare services; most of these involve limiting access. Insurance companies have done this by denying coverage to those likely to need care (for example, those with preexisting conditions) and by dropping coverage of, or refusing coverage to, the at-risk population. The Affordable Care Act has introduced provisions that have curbed these practices by insurance companies.Payers may also increase out-of-pocket costs, providing economic incentives for patients to limit healthcare use themselves. For example, they may• Limit the type and number of reimbursed visits (for instance, mental health care or physical therapy)• Increase deductibles and copayments• Decrease allowable accounts for procedures• Establish or decrease maximum lifetime expendituresThese strategies seem effective because evidence suggests that many patients avoid necessary care (in addition to unnecessary care). A woman, for example, may avoid screening (for example, a mammography) and subsequently present with late-stage cancer. By erecting administrative hurdles to healthcare—such as requiring approval for tests, referrals, procedures (including enrollment procedures) and regulations—payers are decreasing use by a small amount without technically denying care to employees.Be aware, however, that limiting access to healthcare can also present problems. For example, when people who are denied healthcare become seriously ill (which becomes more likely when routine care is insufficient), they are often treated in public hospital emergency rooms—but this is largely uncompensated and thus increases the burden on those who pay into the healthcare system at large. This scenario might prove more expensive than if routine care had been initially provided. This was a major selling point in favor of The Affordable Care Act.There have also been a number of attempts to eliminate unnecessary care. This is easy to define, as it applies to care that does not improve the outcome of a patient. However, it is often difficult to recognize, and therefore it is even more difficult to eliminate.The first step in this process is to conduct numerous and more extensive studies of comparative effectiveness, as well as cost-effectiveness, to identify the best practices. Comparative effectiveness studies can evaluate areas other than the use of drugs; this includes exercise and physical therapy, in addition to different providers, systems, settings of care, and reimbursement systems. Education and monitoring of providers may result in decreasing practice variation and increasing cost-effectiveness. Better service coordination among providers—because of closer communication and the use of universally readable electronic medical records—may make evaluation and treatment more efficient by eliminating the duplication of tests.An increased use of inexpensive preventive services, such as screening, diagnosis, treatment of diabetes, hypertension, and so on, may decrease the subsequent need for more expensive treatments later. Strategies to increase this type of preventative care include the following:• Incentives to increase primary care physicians who can provide appropriate screening measures and prevent complications• Pay-for-performance measures that reward adherence to preventive care guidelines• The elimination of copayments for preventative procedures• Outright free preventative servicesDecreasing Reimbursement for Care UsedEven when healthcare is provided, strategies can be put in place to limit payments, such as the following:• Lowering fees: Payers, both government and private, may negotiate lower fees with providers or simply dictate the fees. In the United States, reimbursement rates established by Medicare/Medicaid tend to influence rates paid by other plans, which can sometimes lead to a decrease in reimbursement.• Increased use of primary care: Measures can help increase the use of less-costly care versus specialty care. For example, in a patient-centered medical home model, all aspects of care are coordinated and integrated by primary care practitioners. Many authorities believe that this model can decrease unnecessary specialty care and duplicative care, as well as others, which may be inappropriate for a given individual’s health goals.• Prospective payment systems: In these systems, providers are paid a fixed amount regardless of what is provided. This amount may be based on a specific number of care services or a fixed annual reimbursement per patient. For example, some Medicare reimbursement is based on diagnosis-related groups (DRGs). In cases such as these, Medicare pays a fixed amount based on diagnosis. In capitated systems, a fixed annual amount is paid to providers to provide care for patients regardless of services. These systems reward less expensive care and by extension, usually, the use of fewer services, in contrast to fee-for-service systems. However, prospective payment creates disincentive to care for patients with more complex conditions, or who are seriously ill, and this may inhibit the provision of legitimately necessary care. A decrease in the amount of care provided to employees has the potential to decrease the general quality of care. Because of this, quality control systems and organizations that provide professional reviews are often established.• Denial of claims: Unlike most of the developed world, insurance carriers in the United States routinely deny a significant percentage of claims for services. In one study conducted in California, the rate of denial in 2009 averaged roughly 30%. Some claims were paid after appeal, but appealing an insurance claim is costly in both time and effort for patients, providers, and payers.• Competition: Among providers (for patients) and insurance companies (for subscribers), competition is thought to encourage price wars between companies offering similar surfaces. However, ultimately, consumers do not know their providers’ charges in advance. Even if they do, there is no action to be taken based on this information because patients are often limited to certain providers and limited in their ability to judge the quality of healthcare. Also important to consider is the fact that because the cost of medical care is subsidized for most consumers—through employer-paid health insurance, tax deductions, and flexible/medical savings accounts—consumers have less incentive to seek out competitive prices. Therefore, competition is most effective when dealing with large corporations rather than with individuals. For example, an insurance company can compete for contracts from corporations and government agencies. Providers like practitioner organizations and hospitals can also compete for contracts with insurance companies.• Decreased drug costs: Using generic drugs or, when appropriate, more cost-effective drugs can help to decrease costs. These strategies include the following:• Educating providers about cost-effective drug use• Restricting marketing campaigns of drugs• Establishing formularies and using pharmacy benefit managers• Allowing the government to negotiate prices for drugs on behalf of patients covered by government insurance• Allowing the importation of drugs from other countries to the United States• Negative effects on medical research: In many academic medical centers, income from clinical practice enables physicians, and institutions, to participate in medical research. Similarly, income from the sales of drugs supports pharmaceutical research. Therefore, decreasing reimbursement may cause a decline in medical research. If other sources, such as governmental or private grants, are used to fund this research, these funds must be considered healthcare costs, and so may offset savings from the decreased reimbursement.Decreasing Overhead ExpensesThe term overhead expenses refers to healthcare payments that do not go to healthcare providers; this includes administrative costs, malpractice insurance, and corporate profits (in for-profit hospitals and insurance companies).Ways to decrease overhead expenses include the following:• Decreasing payer overhead: Governmental healthcare plans in developed countries, including the United States, along with private health plans outside the United States, have overhead costs that are usually between 3% and 5% of total costs. However, in the United States, private insurers have overhead costs ranging from around 20% to 30%, partly due to the fact that insurers need a large number of staff members for the purpose of underwriting to evaluate claims for denial and to adjudicate appeals by providers. They also need to show a profit. No evidence indicates that the activities described here and their higher administrative costs improve clinical outcomes. Strategies that may help to minimize these overhead costs include the following:• Increasing the use of standardized electronic health records• Increasing the use of government plans, and possibly nonprofit plans• Competition among payers to encourage increased efficiency (but it also increases incentive to deny claims)• Decreasing provider overhead: Any payer reform that eliminates the need for billing and claims personnel who manage the billing of multiple payers, negotiate appeals, and justify claims will decrease provider overhead. For example, some countries with multiple insurance companies vying for business, such as Germany and Japan, require the following:• Payment amounts and rules must be the same for all insurance companies.• In many cases, payers are required to pay all providers’ bills.• The cost for services are the same throughout the country.Although malpractice costs are a small fraction of overall costs, for certain physicians they can consume a considerable amount of annual income. Reforms that decrease the number of lawsuits and settlements should eventually lower premiums and benefit the physicians in question; such reforms may also decrease the use of unnecessary medicine.SummaryAs discussed throughout the last two chapters, the key issue in the whole area of healthcare benefits remains the containment of healthcare costs, which has been and still is (although to a lesser extent) spiraling out of control. Clearly, because of the high costs, the healthcare industry can benefit from financial and economic analysis.Adding to the confusion and complexities of this subject is the fact that a majority of healthcare consumers are buying a product they know little about while spending money using third party payments. Medical expenditures have risen dramatically and are forecasted to continue to rise, albeit at a slower pace. Health insurance financing continues to be the primary method to pay for healthcare benefit programs. Risk-pooling is the reason that insurance works. Risk aversion is the reason why consumers purchase insurance, but adverse selection can lead to the failure of insurance markets. Also, the concept of moral hazard can lead to losses because of the excess consumption in healthcare services.Key Concepts in This Chapter• Insurance-based financing• Self-insured financing• Employee Retirement Income Security Act (ERISA) and a self-funded plan• Value-based benefit design (VBBD)• Consumer-driven health plan (CDHP)• Cost containmentAppendix: Tax Implications of the Affordable Care ActThe Affordable Care Act (ACA) made many changes with respect to healthcare for individuals, employers, and insurers. It also created new taxes and related fees. In summary, the ACA expanded the types of coverage provided under group health plans, the insurance provisions under healthcare plans, and individual health insurance policies.The main provisions of the ACA are:• Required coverage for adult children up to age 26• No pre-existing condition exclusions for children under age 19• Coverage for certain preventive health services with no cost sharingIf a group health plan does not comply with the provisions of the law, excise taxes of $100 per person per day can be imposed if the failure is not corrected in 30 days. The excise tax will increase if the error is not corrected and will also be severe if the failure to provide is because of willful negligence. Grandfathered group health plans that were in effect as of March 23, 2010 are not subject to certain of these requirements.A summary of some of the tax provisions implemented by the ACA follows:• A Medicare tax for high-income earners is being imposed. Prior to the ACA, the Medicare tax rate was a flat 2.9% on all wage income, with both the employer and the employee paying exactly one-half of these amounts. As of 2013, the flat 2.9% Medicare tax continues to apply to wages under $200,000 (or under $250,000 for married couples filing a joint return). There will be an additional 0.9% Medicare tax on wages over $200,000 ($250,000 for joint filers). This additional tax is to be withheld from wages, or if not withheld, it is to be paid directly by the employee. This additional Medicare tax also affects self-employed persons paying the self-employment tax.• The Health Care and Education Reconciliation Act of 2010 (HR 4872) modifies the ACA to impose the expanded 3.8% Medicare tax on net investment income for people with income over $200,000 (or $250,000 for joint filers). Investment income for the purposes of the Medicare tax base would include interest, dividends, royalties, rent, passive activity income (such as income passed through from partnerships and S-corporations), and gain from the sale of property.• Businesses employing 25 employees or less may become eligible for tax credits of up to 35% based on employer-paid health insurance premiums. As indicated earlier, larger employers who fail to provide health insurance coverage may become liable for tax penalties.• A tax penalty is being imposed for individuals who fail to maintain adequate insurance coverage. Individual persons will be required to maintain adequate health insurance coverage starting in the year 2014. A new expression, “minimum essential coverage,” has been introduced. The term is defined in the newly added section 5000A of the Internal Revenue Code. Health insurance provided by employers, Medicare and Medicaid, and individually purchased insurance generally meet the definition of minimum essential coverage. Individuals will also be able to keep their existing health insurance policy as providing essential minimum coverage under a grandfathering provision. This provision is now a topic of much political debate. Individuals who do not maintain continuous health insurance coverage will become liable for tax penalties: $95 per person in 2014, $325 per person in 2015, and $695 per person in 2016, and then adjusted for inflation in the years that follow. Lower-income persons will be exempt from the requirement to maintain coverage. Also exempt are people who have a religious conscience objection to insurance coverage.• Tax credits will be provided to help purchase health insurance for lower-income people. Individuals and families earning between 133% and 400% of the federal poverty level will be eligible for tax credits to subsidize the cost of health insurance coverage. The credits will, in effect, cap the cost of health insurance premiums between 2% and 9.5% of total household income. Medicaid coverage would be expanded to include individuals earning less than 133% of the federal poverty level.• Flexible spending arrangements for health care expenses will be reduced. FSA contributions will be reduced to $2,500 maximum starting in the year 2013.• Health savings accounts will have increased penalties for non-medical withdrawals. The current 10% penalty is doubled to 20% for any withdrawal or distribution made for non-medical expenses. Similarly, the penalty for non-qualifying distributions on Archer medical savings accounts will rise from 15% to 20%.• The floor on the medical expense deduction will rise to 10%. Previously, out-of-pocket medical expenses were tax-deductible to the extent the expenses exceeded 7.5% of a person’s adjusted gross income. As of 2013, only medical expenses that exceed 10% of AGI are tax-deductible.• Adoption tax credit increases to $13,170 and is extended through the year 2011. Also, the adoption credit is now refundable.• Economic substance doctrine is codified as law. Basically, the economic substance doctrine means that a tax strategy can be disallowed as abusive if the taxpayer’s economic situation apart from the person’s tax liability does not change in any substantial way. There are automatic penalties ranging from 20% to 40% for engaging in tax strategies that do not meet this definition.• There will be expanded information reporting for health insurance coverage. The IRS will be in charge of monitoring whether individuals have health insurance coverage, assessing penalties for failing to maintain adequate coverage, and for paying tax credits to subsidize insurance coverage for lower-income people. There will also be information shared between the IRS and the Department of Health and Human Services, particularly to screen health care providers for tax compliance problems and to recover tax debts owed by health care providers directly from HHS payments.• Information reporting for income payments of $600 or more is expanded to include corporations. Currently, businesses are required to issue a Form 1099-MISC to report various types of payments, primarily issued to individuals. Starting in 2012, this requirement has been expanded to include gross payments of $600 or more to both corporate and non-corporate recipients, and is further expanded to include both payments for services and for property.Other tax provisions of the ACA that should be noted include the following:• As of 2013, employers can no longer claim a tax deduction for the portion of the cost of Medicare Part D drug benefits that is reimbursed through the government subsidy program.• Employers must report the cost of employer-sponsored health coverage on each employee’s Form W-2, even though the amount is not taxable to the employee. The employer can calculate the cost based on the rules for determining premiums for COBRA coverage. If this information is not reported on the W-2, the employer may be liable for penalties of up to $200 per incorrect W-2. The IRS has temporarily exempted employers filing fewer than 250 Forms W-2 for the prior year from this requirement.• The cost of over-the-counter (OTC) medications cannot be reimbursed through a flexible spending account (FSA) (or from a health reimbursement account (HRA) or health savings account (HSA)) unless the OTC medication is purchased with a prescription. As of 2013, the ACA limits the amount that can be withheld from an employee’s salary on a pre-tax basis for health expenses to $2,500 per plan year. Although this is not a tax on the employer, employers must monitor payroll systems to make sure the new limit is applied to FSA contributions, and employers may see a rise in payroll taxes due to decreased FSA contributions. Finally, the penalty for a non-qualifying distribution from a HSA increased from 10% to 20% of the amount of the distribution.• Beginning in 2018, the ACA imposes an excise tax on the provider of employer-sponsored healthcare coverage if the aggregate cost for an employee exceeds a threshold amount. The tax is 40% of the amount that the aggregate cost exceeds the threshold. For 2018, the annual threshold amount is $10,200 for self-only coverage and $27,500 for other coverage. Higher thresholds apply to retirees under age 65 and individuals in certain high-risk professions. The threshold amount is adjusted by the health cost adjustment percentage, which will increase if health care costs exceed certain predictions, and by an age and gender adjusted excess premium amount, which will increase the threshold if the employer’s workforce based on age and gender results in higher premiums than the national workforce.The excise tax is not deductible by the insurance company; however, the insurance premiums paid by the employer are generally deductible. For self-insured plans, the excise tax is imposed on plan administrators but is expected to be passed along to plan sponsors.
