COMPARISON OF TYPICAL MEDICAL EXPENSE PLANS

There are various types of medical expense plans and how they differ. While variations within each type of plan exist, some generalizations can be made. These are summarized in Table below. The degree of managed care increases as one moves from left to right in the table. However, the cost of the plans, on the average, decreases as the degree of managed care increases. In addition, a higher degree of managed care is generally associated with lower annual premium increases by a plan.

BASIC MEDICAL EXPENSE COVERAGES

Historically, medical expense coverage consisted of separate benefits for hospital expenses, surgical expenses, and physicians' visits. Coverage was limited, and many types of medical expenses were not covered. In this environment, two developments took place: (1) basic coverages for other types of medical expenses were developed (2) and a vast majority of employers began to provide more extensive benefits to employees than had previously been available through the commonly written basic coverages. While this broader coverage is often provided through a single comprehensive contract, many employees who have medical expense benefits under traditional plans are still covered under medical expense plans that consist of selected basic coverages supplemented by a major medical contract. This is particularly true for large employers, while small employers are much more likely to use a single major medical contract. Basic plans consist of three traditional coverages:

- Hospital expense benefits

- Surgical expense benefits

- Physicians' visits expense benefits

In addition, other types of medical expense coverage can be written as a basic benefit. While many of these basic coverages can be written separately, it is common for them to be incorporated into a single contract.

Development of Medical Expense Coverage

To understand the wide array of medical expense plans available today, it is appropriate to understand their historic development.

Until the 1930s, medical expenses were borne primarily by ill or injured persons or their families. It was not unusual, however, for hospitals and physicians to provide care on a charity basis if the patient lacked the resources to pay. What have been described as the earliest "health insurance" plans were in reality disability income coverage. However, at that time medical costs were relatively low, and the continuation of income was often the difference between a person's ability to pay medical bills and the need to rely on charity.

Birth of the Blues
The Great Depression saw the development of the first organizations that would later be called Blue Cross. These organizations, which were initially controlled by hospitals, were designed to provide first-dollar coverage for hospital expenses, but with a limited duration of benefits. In the late 1930s, physicians followed the hospitals' approach and established Blue Shield plans. Through the 1940s, the Blues were the predominant providers of medical expense coverage.

Early HMOs
Although it is often thought that health maintenance organizations were a product of the 1970s, some HMOs were among the earliest providers of medical expense coverage. What is usually considered to be the first HMO, the Ross-Loos Clinic, was founded in Los Angeles in 1929. Other HMOs, such as the Kaiser Plans, had their beginnings in the 1930s. However, HMOs remained only a small player in the marketplace for medical expense coverage until the past two decades.

Early Efforts of Insurance Companies
Insurance companies, seeing the success of Blue Cross, entered the market for hospital insurance in the 1930s and later added coverage for surgical expenses and physicians' expenses. However, insurance companies were only modestly successful in competing with the Blues until a new product was introduced in 1949—major medical insurance. As a result, by the mid-1950s insurance companies surpassed the Blues in premium volume and number of persons covered.

The 1960s—Era of Government Involvement
The number of persons covered by medical expense insurance plans grew rapidly during the 1950s and 1960s. Much of this growth was in employer-sponsored plans as a result of a 1949 Supreme Court ruling that employee benefits were subject to collective bargaining.

While the types of products available underwent little change during this period, there were two major developments in the mid-1960s. For the first time, the federal government became a major player in providing medical expense coverage by creating national health insurance programs for the elderly and the poor. Medicare provides benefits for persons aged 65 and older. The financing of the benefits under this program comes from three sources: government revenue, premiums of Medicare beneficiaries, and the FICA taxes paid by most working persons and their employers.

The second program—Medicaid—provides medical benefits for certain classes of low-income individuals and families. There is little doubt that both Medicare and Medicaid provide benefits to major segments of the population with large numbers of persons who would otherwise be unable to receive adequate medical care. However, the effect of so many additional persons with coverage beginning at the same time created shortages of medical facilities and professionals. This increased demand for medical care is one reason for the high rate of inflation for health care costs that soon developed.

The 1970s—First Reactions to Spiraling Costs
In 1950, expenditures for health care equaled 4.4 percent of GNP; they increased to 5.4 percent in 1960 and 7.3 percent in 1970. When these spiraling costs received the attention of employers and the federal government, large employers started turning to the self-funding of medical expense benefits. In addition to improved cash flow, savings were achieved by the avoidance of state-mandated benefits and state premium taxes. The passage of ERISA in 1974 thwarted initial state attempts to bring self-funded plans under their insurance regulations. This federal legislation freed self-funded plans from state regulation and hastened the growth of this financing technique.

The 1970s also saw the first large-scale debate over national insurance. As in the mid-1990s, the majority of the members of Congress supported one of the many plans that were introduced, but opinions were diverse and little common ground was found. However, one significant piece of legislation was passed—the Health Maintenance Organization Act of 1973. This legislation sought to encourage the growth of HMOs by providing funding for their development costs and mandating that certain employers make these plans available to employees. There is little doubt that the growth of HMOs is a result of this legislation.

The 1980s and 1990s—Continued Change
Attempts to rein in the cost of medical care in the 1970s seemed to have little effect. By 1980, expenditures for health care reached 9.2 percent of GNP. This figure was 12.2 percent by 1990, and nearly 14 percent by the end of the decade. In addition, about 14 percent of the population, including many employed persons and their families, remained uninsured.

Reactions to these statistics came from many sources. Many state governments adopted programs to make coverage more available and affordable to the uninsured. At the federal level, there were suggestions that the entire health care system needed an overhaul. While the initial national health insurance proposal by the Clinton administration was dead, there was still continued support by members of Congress for changes in the nation's approach to providing and financing health care. Significant federal legislation was enacted in 1996, but little new and significant legislation was enacted after that.

The many efforts by employers to contain costs included the following:

- Growth in the self-funding of benefits. Much of this growth came from small- and medium-sized employers.

- Cost-shifting to employees. It became increasingly common for employers to raise deductibles and require that employees pay a larger portion of their medical expense coverage.

- Increased use of managed care plans that are alternatives to HMOs, such as PPOs and point-of-service plans. These approaches often overcame the reluctance of some employees to participate in managed care plans.

- Requiring or encouraging managed care plans. Some employers dropped traditional medical expense plans and offered managed care alternatives only. A more prevalent approach was to offer employees a financial incentive to join managed care plans.

Many of these reactions are reflected in changing statistics about the extent of varying types of medical expense coverage; unfortunately, precise statistics are difficult to obtain. For example, many Blue Cross and Blue Shield associations and HMOs report only the total number of persons covered and make no distinction between individual coverage and group coverage. Many persons receive portions of their coverage from different types of providers, such as hospital coverage from a Blue Cross plan and other medical expense coverages from an insurance company under a supplemental major medical contract. In addition, self-funded plans may operate as HMOs, purchase stop-loss coverage, and/or utilize PPOs.

Even though precise statistics cannot be obtained, there is no doubt that a significant change took place in the 1990s. In 1980, approximately 90 percent of all insured workers were covered under "traditional" medical expense plans, and 5 percent were covered under HMOs. Under a traditional plan, if a worker or family member was sick, he or she had complete freedom in choosing a doctor or a hospital. Medical bills were paid by the plan, and no attempts were made to control costs or the utilization of services. It is estimated that between 10 and 15 percent of the employees under these traditional plans were in plans that were totally self-funded by the employer; the remainder of the employees were split fairly evenly between plans written by insurance companies and the Blues.

By the end of the 1990s, the figures had changed dramatically, with the majority of employees covered under plans that controlled costs and the access to medical care. Close to 85 percent of employees were enrolled in managed care plans—HMOs, PPOs, or point-of-service plans, often owned by insurance companies or the Blues. Of the remaining employees, few were in traditional plans. Many were still with insurance companies and the Blues, but under traditional plans that had been redesigned to incorporate varying degrees of managed care.

One important change is hidden in these statistics—the increasing trend toward self-funding of medical expenses by employers. It is estimated that over 50 percent of all workers are covered under plans that are totally or substantially self-funded. Self-funding is more prevalent as the number of employees increases, with between 80 and 90 percent of persons who work for employers with more than 20,000 employees being covered under self-funded plans. However, employers with as few as 25 to 50 employees also use self-funding. It should be noted that the way benefits are provided under a self-funded plan can vary—the employer may design the plan to provide benefits on an indemnity basis or as an HMO or PPO.

Despite the difficulty in obtaining precise statistics, the data collected by the Health Insurance Association of America[1] show that enrollment in medical expense plans that can be characterized as traditional indemnity plans dropped from more than 70 percent to 14 percent since 1990. During the same time period, the number of enrollees in plans that use PPOs increased significantly to 34 percent. Point-of-service plans and HMOs grew more slowly and now account for about 30 percent and 22 percent, respectively, of the number of enrollees.

Into the New Millennium
Just as in past decades, the health care system will continue to evolve in the first decade of the new millennium. What the changes will be is only speculation, but a few observations can be made about the current environment:

- Renewal rates in 2000 for employer-provided medical expense plans are increasing at the highest percentage since the early 1990s, and these high percentage increases are predicted to continue in the foreseeable future.

- Surveys indicate that the vast majority of Americans are satisfied with their own health care plans. The relatively low degree of dissatisfaction, however, is higher for plans with the greatest degree of managed care.

- Despite satisfaction with their own coverage, surveys also indicate that Americans are becoming less satisfied with and less confident about the health care system.

- There is a growing backlash against managed care, particularly HMOs. Two observations can be made about this trend. First, many persons appear to have based their opinions on media reports and stories from friends, not on their own experiences. In this regard, opinions about managed care and Congress tend to be somewhat similar, with a high percentage of negative attitudes, although most persons give high ratings to their own managed care plans and their own Congresspersons. Second, this backlash has gotten the attention of Congress and the states. Some legislation has resulted at the state level. However, managed care plans are also becoming increasingly flexible and consumer-friendly, possibly to prevent further legislation aimed at managed care reform.

- There was little federal health care legislation during Clinton's second term, at least partially due to a Congressional majority of a different political party from the President. While there seems to be bipartisan agreement that there are some problems with the current system, there is bipartisan disagreement about what should be done.

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The Age Discrimination in Employment Act

The Age Discrimination in Employment Act applies to employers with 20 or more employees and affects employees aged 40 and older. With some exceptions, such as individuals in executive or high policymaking positions, compulsory retirement is no longer allowed. Employee benefits, which traditionally ceased or were severely limited at age 65, must be continued for older workers. However, some reductions in benefits are allowed. While the federal act does not prohibit such discrimination in benefits for employees under age 40 or for all employees of firms that employ fewer than 20 persons, some states may prohibit such discrimination under their own laws or regulations.

The act permits a reduction in the level of some benefits for older workers so that the cost of providing benefits for older workers is no greater than the cost of providing them for younger workers. However, the most expensive benefit—medical expense coverage—cannot be reduced. The following discussion is limited to reductions after age 65, by far the most common age for reducing benefits, even though reductions can start at an earlier age if they are justified on a cost basis. It should be emphasized that these restrictions apply to benefits for active employees only; there are no requirements under the act that any benefits be continued for retired workers.

When participation in an employee benefit plan is voluntary, an employer can generally require larger employee contributions instead of reducing benefits for older employees, as long as the proportion of the premiums paid by older employees does not increase with age. Thus, if an employer pays 50 percent of the cost of benefits for younger employees, it must pay at least 50 percent of the cost for older employees. If employees pay the entire cost of a benefit, older employees may be required to pay the full cost of their coverage to the extent that this is a condition of participation in the plan. However, this provision does not apply to medical expense benefits. Employees over age 65 cannot be required to pay any more for their coverage than is paid by employees under age 65.

In cases where benefits are reduced, two approaches are permitted: a benefit-by-benefit approach or a benefit-package approach. Under the more common benefit-by-benefit approach, each employee benefit may be reduced to a lesser amount as long as each reduction can be justified on a cost basis. Under a benefit-package approach, the overall benefit package may be altered. Some benefits may be eliminated or reduced to a lesser amount than can be justified on a cost basis, as long as other existing benefits are not reduced or the benefit package is increased by adding new benefits for older workers. The only cost restriction is that the cost of the revised benefit package may be no less than if a benefit-by-benefit reduction had been used. The act also places two other restrictions on the benefit-package approach by prohibiting any reduction in medical expense benefits or retirement benefits.

In reducing a benefit, an employer must use data that approximately reflect the actual cost of the benefit to the employer over a reasonable period of years. Unfortunately, such data either have not been kept by employers or are not statistically valid. Consequently, the reductions that have taken place have been based on estimates provided by insurance companies and consulting actuaries. This approach appears to be satisfactory to the Equal Employment Opportunity Commission (EEOC), which enforces the act's provisions. The act allows reductions to take place on a yearly basis or to be based on age brackets of up to five years. Any cost comparisons must be made with the preceding age bracket. For example, if five-year age brackets are used, the cost of providing benefits to employees between the ages of 65 and 69 must be compared with the cost of providing the same benefits to employees between the ages of 60 and 64.

While reductions in group insurance benefits for older employees are permissible, they are not required. Some employers make no reductions for older employees, but most employers reduce life insurance benefits at age 65 and long-term disability benefits at age 60 or 65.

Group Term Life Insurance Benefits
Based on mortality statistics, most insurance companies feel that group term life insurance benefits can be reduced to the percentages of the amount of coverage provided immediately prior to age 65 as shown.

Age Percentage

65–69 65

70–74 45

75–79 30

Over 79 20

Therefore, if employees normally receive $40,000 of group term life insurance, those employees between the ages of 65 and 69 can receive only $26,000, employees between the ages of 70 and 74 can receive $18,000, and so forth. Similarly, if employees normally receive coverage equal to 200 percent of salary, this may be reduced to 130 percent of salary at age 65, with additional reductions at later ages.

Reductions may also be made on an annual basis. If an annual reduction is used, it appears that a reduction of up to 11 percent of the previous year's coverage can be actuarially justified, starting at age 65 and continuing through age 69. Starting at age 70, the reduction should be 9 percent.

In a plan with employee contributions, the employer may either reduce benefits as described above and charge the employee the same premium as those employees in the previous age bracket or continue full coverage and require that the employee pay an actuarially increased contribution.

Group Disability Income Benefits
The Age Discrimination in Employment Act allows reductions in insured short-term disability income plans, but no reductions are allowed in uninsured sick-leave plans. While disability statistics for those aged 65 and older are limited, some insurance companies feel a benefit reduction of approximately 20 percent is appropriate for employees between the ages of 65 and 69, with additional decreases of 20 percent of the previous benefit for each consecutive five-year period. However the laws of the few states that require that short-term disability income benefits be provided allow neither a reduction in benefits nor an increase in any contribution rate for older employees.

Under the act, two methods are allowed for reducing long-term disability income benefits for those employees who become disabled at older ages. Either the level of benefits may be reduced without altering benefit eligibility or duration or the benefit duration may be reduced without altering the level of benefits. These reductions again must be justified on a cost basis. Unfortunately, no rough guidelines can be given because any possible reductions will vary considerably, depending on the eligibility requirements and the duration of benefits under a long-term disability plan.

Group Medical Expense Benefits
The Age Discrimination in Employment Act requires that employers offer all employees over age 65 (and any employees' spouses who are also over age 65) the same medical coverage they provide for younger employees (and their spouses). Consequently, benefits cannot be reduced for older employees because of increasing cost to the employer. In addition, older employees cannot be required to contribute more than younger employees.

The employer's plan is the primary payer of benefits, with Medicare assuming the secondary-payer role. However, employees may reject the employer's plan and elect Medicare as the primary payer of benefits, but federal regulations prevent an employer from offering a health plan or option designed to induce such a rejection. This effectively prohibits an employer from paying the Part B premium or offering any type of supplemental plan to employees who elect Medicare as primary. (However, supplemental and carve-out plans can be used for retirees.) Therefore, most employees elect to remain with the employer's plan unless it requires large employee contributions. When Medicare is secondary, the employer may pay the Part B premium for those employees who elect Medicare, but the employer has no legal responsibility to do so.