RISK FINAL
trust fund ratio
$ in trust fund / current annual outlay = # of years of benefits payable from trust fund - asses at the BOY as a % of the cost projected for that year
three-year cliff vesting
- 0% vested if YOS are less than 3 - 100% vested if YOS are greater than or equal to 3
graded 2-6 rule
- 20% vested after 2 YOS, 40% after 3... 100% after 6% - not fully vested until year 6, and start in year 2
annuity payments
- DB plans - trust fund purchases a life annuity to pay the promised benefits - if EE is married then a joining 1/2 survivor annuity must be purchased
lump sum distribution
- DC plans, 401(k)s - EE takes the funds and purchases life annuity
contributory financing
- EE + ER share in cost of plan - ER usually pays more - EE can opt in, more likely to encounter adverse selection in this type
flexible spending accounts (FSAs)
- EE agrees to take a pre-tax salary reduction - these funds are deposited into FSA and can be used to pay for certain eligible expenses - health care FSA (deductibles, copayment, coinsurance, cost sharing) and dependent FSA (childcare and eldercare) - advantage: pre tax!
health savings account
- EE gives the EE $ to fund the HSA - EE can use funds to pay deductibles and other OOP costs - unused funds roll over year to year
EE pay-all
- EE pays entire cost - voluntary benefits - examples: dental insurance, vision insurance, supp. life insurance, auto/homeowners insurance, etc - Aflac
tax treatment of GI life insurance
- EEs can receive up to $50k in face amount of GTLI tax free - if more than $50k, EE would be taxed on the value exceeding
3 components of CDHP
- ER offers high deductible health plan (HDHP) - ER offers an EE owned and controlled account (HSA) - information available to insured to help them make better decisions
noncontributory financing
- ER pays entire cost - EE does not have to contribute any funds - once eligibility reqs are satisfied, you automatically become participant - usually requires participation of every eligible employee - little worry of adverse selection here bc everyone basically participates
advantages of ER provided benefits & GI
- GI is generally less expensive than II - admin costs associated with GI < II (no individual underwriting for each EE in GI, commissions lower in GI, ERs help w many administrative tasks) - those with high risk prefer no individual underwriting, so GI is more appealing + lower search costs for II for the EE
examples of social insurance programs
- WC - OASDI - UI
vestment standards
- a vested benefit is one whose payment status at the NRA does not depend on employment status - vesting enhances portability of benefits - EEs are always entitled to keep their own contributions with interest (100% immediately) - ER contributions could be )% vested up to 100% vested
favorable tax treatment for EE benefit plan
- allow ERs to deduct cost of providing benefit programs and amounts they contribute as benefits from their taxable income as business expenses - incentive for ERs to offer these packages to EEs - this tax deduction trickles down to EEs and they are also not taxed on the value of ER provided benefits
section 401(k) plan
- also known as CODA plans (cash or deferred arrangements) - dedicate percentage of pre-tax salary to retirement account - EE has $X compensation from ER: take is now in cash (taxable) or elect to defer to future date (taxable later) - ERs may or may not march EE contributions - EEs generally have choice of investment vehicles for plan assets (stocks, bonds, funds, etc.)
defined contribution plan
- an ER promises a certain % of an EE's salary to a DC plan on behalf of the EE - EEs may or may not also contribute to a DC plan - known: annual contribution made by ER - unknown: annual benefit received at retirement (depends on number of factors: salary increases, # of years of service, EE contributions, etc.) - investment risk rests entirely on EEs
use-it-or-lose-it rule
- any unused funds at end of plan year are forfeited by EEs for the FSAs, so something for EE to keep in mind when deciding to open FSA
tax treatment of disability income insurance
- benefit: replacement of part of the loss of income - taxable: non-contributory: not taxed on premium, but would be taxed of benefits should they become disabled EE pay-all: pre-tax reduction, EEs are taxed on benefits if/when disabled after-tax deduction, EEs are not taxed on benefit should they become disabled contributory: 50/50 EE and ER pay for premium, so 50% of benefits would be taxable for EE
SI program characteristics (4)
- benefits prescribed by law - beneficiaries have little control over the benefits to be paid - usually some compulsory purchase of insurance or compulsory participation in a program by law - often see gov't engaging in risk bearing - benefits are paid as a matter of right not based on need (tied to labor market participation)
indemnity plan
- complete freedom of choice of providers for patient - insurer's role is to reimburse the insured for covered losses at a certain percentage
ERISA
- employee retirement income security act of 1974 - established minimum standards of vestment for pension plans - guard against abuses, preserve retirement benefits for retirees
eligibility to participate
- having certain rules or conditions eliminates adverse selection (so EEs with serious and costly medical conditions do not just take a job to cover their medical expenses and are discouraged from seeking work solely for insurance benefits), - can also reduce ER's administration costs overall - may offer only to full-time EEs, offer only after a waiting period, etc.
managed care plans (HMO)
- health maintenance orgs - provides all the care needed by its members in exchange for a fixed fee - two roles: insurer role(pay for HCGS), provider of HCGS (either provide HCGS directly or arrange for provision of care through some type of contract)
price of PPO
- increased OOP costs (more to go out of network) and reimbursement hassle w out of network
consumer driven health plans (CDHP)
- most traditional HI (indemnity, HMO, PPO) are examples of low deductible health insurance plan (LDHP) - insured is not forced to behave as a traditional consumer when consuming HCGS
further comparison of GI and II
- parties to contract: insurer and ER but not EEs (GI); insurer and individual (EE) - covered parties: EEs and their families/dependents (GI); EE family/dependents (II) - duration of coverage: not related to term of insurance contract, depends on eligibility w ER (GI), from contract inception to termination (II) underwriting: based on entire group's broad characteristics and level of past claims, evidence of insurability not required, potential for adverse selection (GI); applicant may be evaluated or evidence of insurability required, based on characteristics and claim of EE
defined benefit plan (DB)
- pension plan based on monthly retirement benefit rather than contribution rate - known: formula which can be used to determine the benefit at retirement - unknown: amount an ER must contribute in any particular year to fund the promised benefit - ER bares all investment risk in this case - for each YOS, ER promises a stated % of EEs final average salary upon NRA (avg of 3-5 year period leading up to retirement)
HMO structure
- person enrolls in HMO, selects PCP from network - PCP acts as gatekeeper for the referrals to specialist of hospital -
managed care plans (PPO)
- preferred provider org - insured gets choice of provider, but PPO contracts with preferred providers at discounted rates - no PCP required and any physician may make referral - more expensive - no balance billing
plan termination insurance
- public policy issue - DB plans may be underfunded, ER must select an actuarial cost method (usually ROR is most critical), indicates how much $ must be contributed in advance for each year to fund promised benefits - assumption wrong, then may be overfunded or underfunded - might be terminated and EEs may not be able to receive their promised benefits
pension funding
- public policy problem - ERs must pre fund their pension obligations - money must be contributed annually in advance of retirement - funds generally held in trust fund - sources of inflow into the trust (ER contributions and EE contributions if any) - at retirement, funds are released on behalf of a particular EE and paid in one of two forms (lump sum distribution or annuity payments)
individual retirement account (IRA)
- retirement savings plan by which an individual can use tax-deductible and tax-deferred methods for accumulating funds
sources of income and retirement savings
- social security retirement benefits - ER sponsored retirement plans - individually provided retirement plans
vesting standards under ERISA
- three year cliff vesting - graded 2-6 rule
disadvantages of ER provided benefits
- tied to employment for EE, if you leave plan may terminate - conversion option in GI contract, so EE can covert from GI to II without having to provide evidence of insurability, huge potential for adverse selection), COBRA allows for health insurance coverage to continue after an EE leaves firm for a period of time - GI is inflexible in its benefits, little choice in how benefit $s are spent
types of HC plan designs (4)
- traditional indemnity health insurance plans - managed care plans (HMOs) - managed care plans (PPOs - consumer directed health plans (CDHPs)
policy options to prevent trust fund exhaustion
1. increase income (increase wage or remove the cap) 2. decrease expenses (adjust benefit calculation, require more working years to be fully insured); means testing, decrease benefits for higher income workers or beneficiaries still employed; change the cost of living adjustment) 3. longevity indexing (increase normal retirement age or early retirement eligibility, cut monthly payments to account for longer benefit periods)
occupational disabilities (WC dis. benefits); non-occupational disabilities (short or long term dis.); both cases (OASDI, social security benefits) aiding in...
EE loss of income (disability)
pension plan and social security benefits (OASDI - old age) aiding...
EE loss of income (retirement)
health insurance is a benefit aiding...
EE medical expenses
GI vs. II plans
II - covers EE and family members/dependents - individual characteristics are considered in insurability GI - covers EEs, dependents, and former EEs as a whole OR none of it - EEs may be added to and removed from ER's master policy at any time, based on employment, must adhere to requirements as EE to receive - insurer establishes one premium rate / exposure in group (single rate or family rate); based on broad characteristics of group - NO individual underwriting, group underwriting is used instead
government provided health insurance
Medicare and Medicaid - care is part of OASDHI, social insurance that covers medical expenses of individuals 65+ with affordable option - caid provides welfare and assistance for low-income persons
HMO capitation
PCP in HMO network is paid $X/member/month to care of certain # of patients, budget is to take care of patients
social insurance
a program administered or mandated by government to provide coverage for economic hazards
taxes on current workers pay...
benefits to current retirees
patient = insured buyer = ee
classic moral hazard problem, increased demand for HCGS bc patient can use as much as they like at insurer expense
GI health insurance plans can be...
contributory or noncontributory (and also EE pay-all for other coverage)
problem
cost rate is greater than income rate, trust fund surplus will become exhausted by 2034 for benefits
total OOP expenses for insured (indemnity plans)
deductible + coinsurance (80%20% example) factored after deductible
pension plans (2)
defined contribution plans (DC) or defined benefit plans (DB)
employee benefits
from of compensation that workers may receive from their employers in addition to their salaries and wages; health expense benefits, retirement benefits, disability benefits, and unemployment benefits
retirement ages under OASDI
full retirement age moving 65 to 67 as time progresses and people are living longer on average
social security benefits (OASDI, survivor); ER-sponsored life insurance aiding in...
loss of income (death)
severance package, unemployment insurance aiding in...
loss of income (unemployment)
types of loss exposures managed in EE benefit plan:
medical expenses, loss of income (injury, sickness, death, retirement), loss of productivity
PPOs do not place providers at financial risk for ...
over utilization , providers paid by FFS (discounted)
over utilization of HCGS
patients (buyers) who have insurance paid by FFS are more likely to use more services bc it does not affect how much they pay by much), financial risk is bared by insurer (third party)
OASDI program financed on...
pay-as-you-go basis
plan termination insurance pays...
portion of benefits that are not fully funded upon plan termination (mandatory for DB plans), not required for DC plans, sold by pension benefit guarantee corp (PBGC)
HMO risk shifting differs from FFS (indemnity plans)
providers are now at financial risk for over utilization
ideally insurable characteristics (6)
pure risk, fortuitous, definite and measurable, large # of similar exposure units, independent and not catastrophic, premiums are economically feasible
income rate
ratio of non-interest income to OASDI taxable payroll
cost rate
ratio of the cost of the program to OASDI taxable payroll
three parties to a healthcare transaction:
seller of HCGS (providers, doctors, hospitals, drug companies, etc.); buyer of HCGS (patient of doctor, insured person, EE or dependents of EE of EE benefit plan); third party, entity responsible for paying for the HCGS (insurers, ER if self-insured, govt)
indemnity plans have no management of ...
size of loss
which benefits are required to be offered by ER to EE?
social security, workers comp, disability insurance (some states), unemployment, family and medical leave, minimum wage, overtime, COBRA
ER provided benefits rationale
tax advantages, GI rates can offset costs, attract new employees, increase productivity and EE retention
group health insurance policy is purchased and owned by...?
the employer, and coverage is offered to eligible EEs and often to their family members
adverse selection
the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance
OASDI program (social security)
three benefits (Old Age, Survivor, Disability) - compulsory for both ER and EE - payroll taxes on earned income, NOT income taxed - paid by EEs and matched by ERs - benefits are based on taxes paid over your working lifetime