Sn 107-03 An Employer's Guide To Patient -Directed Healthcarebenefits

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Patient-Directed Healthcare Benefits (PDHB’s)

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 PDHB’s are a range of defined-contribution approaches to employer-provided healthcare that can appeal to a broad employee audience.

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Defined Contribution

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 Defined Contribution means the er contributes a core amount of money or a fixed percentage of plan costs.

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How PDHB’s Address the Challenges in Employer-Sponsored Healthcare

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Challenge How PDHB programs can overcome it

Offering enough choices for ees FSA’s and PHA’s give ees more choices
Administrative burden Automated enrollment; E-commerce
Communication / Education of ees Web-enabled decision support
Coverage security for retirees and dependents PHA accounts are portable

Affordability for small ers  By pooling er & ee & spouses’ funds
 By avoiding state-mandated benefits laws.
Cost control  Ee-funded FSA accounts encourage prudent spending
 Ees know the true healthcare costs;
 Make insurers compete to offer value.
Quality and Access Ee choice fosters competition among insurers
Consumer backlash against MC Ees given more control over providers and networks.
Increased Consumer Expectations Ees given more independence and responsibility
Er’s legal exposure Increased responsibility by ees, rather than er.

However, PDHB’s will not necessary reduce the employer’s costs:

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Advantages of Voluntary Employer Funding of healthcare benefits

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 attracts and retains workers
 helps achieve the minimum ee participation %
 Tax advantages

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TWO TYPES OF HEALTH CARE SPENDING ACCOUNTS
Fundamental components of many PDHB’s.

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Flex Spending Account (FSA)
Personal Health Account (PHA)

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Flex Spending Account (FSA)

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 Section 125
 ee money (or, rarely, er money)
 Pre-tax
 Can only pay for non-covered health services, not premiums.
 Use-it-or-lose-it.

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Personal Health Account (PHA)

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 “Interpretation of Section 105”
 er money
 Pre-tax
 Can be spent on premiums or health goods-and-services. But not cash.
 Accumulates; not use-or-lose
 Portable. After retirement, too.
 (requires IRC regulation changes) Could allow family to pool money into a “Joint PHA Account”.

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Personal Health Account (PHA)

Advantages of the Accounts:

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 flexibility and freedom
 especially useful for retirees
 Encourage ee prudence and spending
 All the advantages of PHA’s, above

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Disadvantages (most apply only to FSA accounts):

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FSA’s:
 use-it-or-lose-it;
 makes ee spend money unnecessarily at EoY
 can’t be used to pay insurance premiums.
 nonportability
Both:
 Regulatory restrictions

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ISSUES IN IMPLEMENTING A PDHB PROGRAM

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 setting objectives
 analyzing cost
 access and quality
 administration
 vendor selection
 core contribution strategy
 antiselection
 communication / education
 transition issues

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EXAMPLES OF PDHB PLAN STRUCTURES
From least “patient-directed” to most “patient-directed”:

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Only One Plan Option and more

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Only One Plan Option

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 Ee can opt in or out

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Multi-Plan Option

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 Very common
 choice of HMO, PPO, POS

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Multi-Plan Option plus FSA Account

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 most flexible in use today.

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Supermarket plus PHA and FSA Accounts

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 A third party provides the plan choices
 Ee’s cost varies depending on which plan he buys.
 Lower prices, since more competition
 Accounts add flexibility

ER’s burden low, because the supermarket:
 offers the plans
 negotiates with the carriers
 communicates to and enrolls the ees (website marketing)

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High-Deductible Plan Menu plus PHA and FSA Accounts

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 Menu is limited to high-deductible plans
 separates “insurable” from “uninsurable” benefits
 Emphasizes ee prudence

This program favors:
 Young or uninsured ees who need low-cost coverage
 Higher-salary workers who can afford the risk

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PHA plus FSA

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 Ee need not even purchase insurance.

Advantages:
 Greatest flexibility
 Er’s who can’t afford insurance can still contribute funds.

Disadvantages
 Ee’s might not insure themselves
 Assumes that Individual Health Insurance is available

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Next-Generation PHA (Joint PHA)

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 Would require several changes in current IRC regulations.
 Ee, Er, Ee’s spouse, and Ee’s spouse’s er, would pool $ into a Joint PHA
 Full choice of spending
 Portable; Accumulating

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THE 5 KEY DIMENSIONS OF A PDHB PROGRAM
Similar to “Design Considerations” in McKay 2, 4, 5.

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The higher the first four are, and the lower the Er’s administrative burden is, the more patient-directed a healthcare system is.

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1. Ee’s choice of Coverage:

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 plan design
 richness
 carrier
 network

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2. Continuity of coverage

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Today, coverage is disrupted if:
 er changes the menu
 termination or retirement
 the next employer uses a different health plan

COBRA does not provide the former ee with:
 funding of the COBRA coverage
 Ability to keep the same provider on re-employment
 coverage after retirement.

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3. Ee’s stake in spending decisions

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Consumers are the most prudent if:
 it’s ee’s own money
 They know the cost of the plan
 high-deductible plan.

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4. Flexibility of Funding Options for the Ee

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 The choice between buying insurance and saving for out-of-pocket costs.

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5. Er’s administrative burden (administrative stewardship)

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no more

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SUGGESTED TAX AND REGULATORY MODIFICATIONS (page 6)
Taxability and Deductibility

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 Repeal the “Use-it-or-lose-it” laws for FSA’s
 Permit purchase of Insurance through FSA’s
 Clarify Rollover Treatment
 Clarify the uses of accumulated PHA funds
 Allow tax-efficient portability of PHA’s

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Regulatory Changes

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 Create insurance providers for small groups that are not subject to state mandated benefits.
 allows lower prices

Examples:
 Association Health Plans (AHP’s)
 HealthMarts

These would still be subject to:
 State premium taxes
 State & federal reserve requirements.

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FINANCIAL AND ACTUARIAL ISSUES IN PDHB PLAN DESIGN

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Antiselection (“Selection Issues”)
Contribution Level and Subsidies
Self-Insuring vs. Fully Insuring
Issues for Small Employer Groups — Joining a Purchasing Coalition

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Antiselection (“Selection Issues”)

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 Antiselection leads to increased utilization and cost.
 Worst in most patient-directed options
 damages employers who self-insure.

Health Services Vulnerable to Antiselection
 Immunizations
 Pregnancy / Maternity
 Physical examinations
 All are elective

See the list entitled “Antiselection Controls” in my notes to McKay, Ch. 2.

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Contribution Level and Subsidies

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 Er should vary it by
 family size
 demographics
 claim amounts
 use of preventive care (healthy behavior patterns)
 geog. location

Problems:
 Difficult to explain these variations to the ees.
 subsidies must be equitable
 HIPAA prevents use of health status

The Employer also must:
 Use financial models to predict plan costs
 Decide how the core contribution will increase in the future

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Self-Insuring vs. Fully Insuring
Advantages of Self-Insuring:

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 control of cash flows
 Exemption from state-mandated benefits and premium taxes
 Avoids profit/risk charges

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Difficulties with Self-Insuring

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 deciding the core contribution amount in advance
 difficult to predict the year’s plan costs
 s/use Stop-loss reinsurance

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Issues for Small Employer Groups — Joining a Purchasing Coalition

Small er groups are disadvantaged (must pay higher insurance premiums), because:

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 no economies of scale
 claims are more volatile
 antiselective tendencies
 one individual with a pre-existing condition damages group’s rating
 higher marketing costs
 they cannot self-insure

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Solution:

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Join a Health Insurance Purchasing Cooperative (HIPC).
 Individuals and Ers that band together to purchase health insurance.
 better bargaining power

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The following text is not on the syllabus. It is on p. 41-42. However, the concepts needed to answer it are fair game, and therefore, a question on this topic could be asked.
Issues a Small Employer Group Should Consider When Choosing a PDHB Plan Strategy:

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 the disadvantages above
 employees’ readiness for decision-making
 time commitment for communication / education
 the local plans available (often limited)
 using an agent/broker to design the plan
 joining a Purchasing Coalition
 using a PHA account
 outsourcing the administration.