Class 16 Insurance and Risk Management

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Class 16Insurance and RiskManagement

• George D. Krempley
• Bus. Fin. 640
• Autumn Quarter 2006

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Group Insurance

• Coverage of many persons under one contract
• Low-cost protection
• Evidence of insurability usually not required
• Subject to experience rating

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Group Underwriting Principles

• Insurance incidental to the group
• Flow of persons through the group
• Automatic determination of benefits
• Minimum participation
• Third-party sharing of cost
• Simple and efficient administration

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Eligible Groups

• Types of groups eligible for group insurance are
  determined by state law
• individual employers
• multiple employers
• unions
• debtors of a common creditor
• miscellaneous groups
• Size requirements
• Traditionally 10 lives
• Now as small as 2 or 3 lives

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Eligibility Requirements

• Be a full-time employee
• Satisfy a probationary period
• Apply for insurance during the eligibility period
• Be actively at work when insurance becomes
  effectives

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Group Life Insurance Plans

• Group Term Life Insurance
• Group Accidental Death and Dismemberment
  Insurance (ADD)
• Group Universal Life Insurance

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Group Life Insurance

• 6.9 trillion group life in force (year-end 2002)
• 42 of total life insurance in force

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Group Term Life Insurance

• Characteristics
• low cost coverage
• yearly renewable term insurance
• convertible to individual cash value policy
  within 31 days after leaving group
• Major advantage low cost

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Group Term Life Insurance

• Disadvantages
• prohibitively expensive for older workers to
  convert
• no savings for retirement
• temporary protection

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Group AD D

• Pays additional benefits if employee dies in an
  accident or incurs certain types of bodily
  injury.
• Benefit is some multiple of the group life
  insurance benefit
• For example 1 or 2 times the insurance on the
  employees life.
• Full ADD benefit (the principal sum) paid if
  the employee dies in an accident.
• Percentage of principal sum paid for certain
  types of dismemberment.

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Group Universal Life

• Similar to individual universal life
• Employees have flexibility in payment of premiums
  
• Can make loans and withdrawals.
• But it is group insurance
• Insurance issued on guaranteed basis up to
  certain limits with no evidence of insurability.
• Employee pays premiums by payroll deduction.
• Option of continuing the insurance after
  retirement.
• Also plan design varies from individual UL.
• See p. 484 of text

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Group Medical Expense Providers

• Commercial insurers
• Blue Cross and Blue Shield plans
• Managed care organizations
• Self-insured plans by employers

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Self-Insured Plans

• Employer pays direct cost of health insurance to
  employees
• Usually have stop loss insurance
• Commercial insurer pays claims exceeding certain
  dollar amount
• Subject to a maximum limit
• Administrative services only (ASO) contract
• Plan design
• Claims processing
• Actuarial support
• Record-keeping

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Self-Insured Plans Advantages

• Under ERISA, self-insured plans generally not
  subject to state regulation
• National employer does not have to comply with
  separate state laws.
• Costs reduced or increase less rapidly because of
  savings in
• State premium taxes
• Commissions
• Insurers profit

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Self-insured Plans

• Employer retains part or all of the funds needed
  to pay claims and earns interest until the claims
  are paid.
• Exempt from state laws that require insured plans
  to offer certain state-mandated benefits.

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Basic Medical Expense Insurance

• Usually provides the following basic benefits
• Hospital expense insurance
• Surgical expense insurance
• Physicians visits
• Diagnostic X-ray and laboratory benefits and
  other miscellaneous benefits

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Major Medical Insurance

• Two Types
• Supplemental major medical insurance
• Comprehensive major medical insurance

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Basic CharacteristicsMajor Medical Insurance

• Broad coverage
• High maximum limits
• Deductible (typically calendar year)
• Coinsurance (typically 80-20 percent)
• Stop-loss limit
• Exclusions

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EXHIBIT 22.1 Total Health Benefit Cost per
Active Employee, 19942003
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Managed Care

• Generic name for medical expense plans that
  provide covered services to the members in a
  cost-effective manner.

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Managed Care Plan Characteristics

• Employees choice of physicians and hospitals may
  be limited to certain health-care providers
• Cost control and reduction are heavily
  emphasized
• Utilization review is done at all levels
• Quality of the care provided by physicians is
  carefully monitored and evaluated
• Health-care providers share in the financial
  results through various risk-sharing techniques
• Preventive care and healthy life styles are
  emphasized.

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Types of Managed Care Plans

• Health maintenance organization (HMO)
• Preferred provider organization (PPO)
• Point-of-service plan (POS)
• Exclusive provider organization (PPO)

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Health Maintenance Organization

• Managed care plan that provides broad
  comprehensive services to its members for a
  fixed, prepaid fee.
• Traditional HMOs limit choice of health care
  providers to providers who are part of HMO
  network.
• Some HMOs allow employees to use health care
  providers outside of plan network by payment of
  higher out-of-pocket fees.
• Cost control and cost reduction are heavily
  emphasized
• Utilization review is done at all levels
• Quality of care provided by physicians is
  monitored and evaluated.

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Preferred Provider Organization

• Plan that contracts with health care providers to
  provide medical services to the members at
  reduced fees.
• Members are free to use any health care provider
  of their choice.
• However, employees have strong financial
  incentive to use preferred provider because
  deductible and coinsurance charges are reduced.
• If health care providers actual charge exceeds
  negotiated fee, provider absorbs excess amount,
  with substantial cost saving to patients.

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Point of Service Plan

• Typically structured as an HMO, but members can
  go outside the network for medical care.
• If patients see health care providers who are
  part of the network, they pay little or nothing
  out of pocket, which is similar to an HMO.
• If patients receive care from providers outside
  the network, they must pay substantially higher
  deductibles and coinsurance charges.

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Exclusive Provider Organization

• Plan that does not cover medical care outside a
  network of preferred providers.
• If patients receive medical care outside the
  network, they must pay entire cost themselves.

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Advantages Managed Care Plans

• Lower hospital and surgical utilization rates
• Members pay substantially lower out of pocket
  costs if they stay in the network
• No claims forms
• Helped hold down rate of increase in health care
  costs
• True earlier
• Major reversal in trend recently

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Disadvantages Managed Care Plans

• Lower quality of medical care
• Failure to promptly refer to specialists
• Not admitting patients to hospital
• Not performing diagnostic tests
• Skimping on preventive care
• Physicians freedom to treat patients impaired
• Prior approval of diagnostic tests
• Must argue for additional days of hospital care
• Delay or denial of specialist referral
• Limitation in use of prescription drugs
• Gag rule on discussing alternative methods of
  treatment

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Disadvantages Managed Care Plans (cont.)

• Network physicians have a conflict of interest
  between
• Providing highest quality care to patient
• Holding down costs to increase plan profits and
  generate higher amount of bonus

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EXHIBIT 22.2 Estimated Deaths Attributable to
Failure to Deliver Recommended Care Selected
Measures/Conditions (U.S. Population)
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Patient Bill of RightsSelected Items Proposed

• Patients harmed by denial of care are given right
  to sue managed care plan
• Plan must pay for emergency room care even if
  hospital outside network
• Allow women to
• See Obstetrician and Gynecologist without prior
  approval
• Designate them as primary doctor

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Patient Bill of Rights (cont.)

• Requires payment of routine health care costs
  associated with clinical trials
• Defines medical necessity
• Prohibits plans from interfering with doctors
  care if services are medically necessary
• Allows patients to appeal denials through an
  internal process and then outside experts

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Current Developments Managed Care Plans

• Declining HMO enrollments
• Changes in plan design. Increases in
• Deductibles
• Coinsurance and co-payment charges
• Annual out of pocket expense limit

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Current Developments Managed Care Plans (cont.)

• Three-tier co-payment for prescription drugs
• Generic
• Brand on approved list
• Brand not on approved list
• Consumer directed health care plans

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EXHIBIT 22.3 National Employee Enrollment in
Health Care Plans, 19932003 ( of All Covered
Employees)
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Health Savings Plans

• Tax-exempt trust or custodial account
• Which pays qualified medical expenses
• Under a high-deductible health insurance plan

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HSA Tax Advantages

• Contributions are tax-deductible
• Investment income accumulates tax-free
• Distributions are tax-free if used to pay for
  qualified medical expenses

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Group Medical Key Contractual Provisions

• Preexisting conditions
• Coordination of benefits
• Continuation of coverage

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Preexisting Conditions

• Under the Health Insurance Portability and
  Accountability Act (HIPAA), a preexisting
  condition is defined as
• A medical condition diagnosed or treated during
  the previous six months.
• HIPAA places limits on the right of insurers and
  employers to deny or limit coverage for
  preexisting conditions.

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Preexisting Conditions (cont.)

• Employer-sponsored group health insurance plans
  cannot exclude or limit coverage for a
  preexisting condition for more than 12 months (18
  months for late enrollees).
• Preexisting condition is defined as a medical
  condition diagnosed or treated during the
  previous six months.
• Preexisting condition exclusion cannot be applied
  to pregnancy, newly born children, or adopted
  children.

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Preexisting Conditions (cont.)

• After initial 12-month period expires, no new
  preexisting condition period may ever be imposed
  on workers who maintain continuous coverage
• with no more than a 63-day gap in coverage, even
  if the workers should change jobs or health
  plans.
• Insurers and employers must give credit for
  previous coverage of less than 12 months with
  respect to any preexisting condition exclusion
  found in the new health plan.

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Coordination of Benefits

• Specifies the order of payment when an insured is
  covered under two or more group health insurance
  plans.
• Total recovery under all plans is limited to 100
  percent of all covered expenses.
• Purpose is to prevent overinsurance and
  duplication of benefits if an insured is covered
  by more than one plan.

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Coordination of Benefits

• Coordination-of-benefit provisions based on
  complex rules developed by NAIC
• Coverage as an employee is usually primary to
  coverage as a dependent.
• With respect to dependent children, if parents
  are married or are not separated,
• the plan of the parent whose birthday occurs
  first during the year is primary
• the plan of the parent with the later birthday is
  secondary.

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Coordination of Benefits (cont.)

• Absent a court order, if parents of dependent
  children are not married, or are separated or are
  divorced
• The plan of the parent who is awarded custody
  pays first.
• The plan of the stepparent who is the spouse of
  the parent awarded custody pays second.
• he plan of the parent without custody pays third.
• The plan of the stepparent who is the spouse of
  the parent without custody pays last.

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Continuation of Coverage

• Consolidated Omnibus Budget Reconciliation Act of
  1985 (also known as COBRA) provides that
• If a qualifying event occurs that results in a
  loss of coverage
• Employees and covered dependents can elect to
  remain in employers plan for limited period
  under
• COBRA applies to firms with 20 or more employees.

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Continuation of Coverage

• A qualifying event includes
• termination of employment for any reason (except
  gross misconduct),
• divorce or legal separation
• death of the employee
• attainment of a maximum age by dependent
  children.

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Continuation of Coverage

• If the worker loses his or her job or no longer
  works the required number of hours,
• Terminated worker and covered dependents can
  elect to remain in the employers plan for up to
  18 months.
• However, they must pay 102 percent of the group
  rate.
• If the worker dies or is divorced or legally
  separated or has a child who is no longer
  eligible for coverage,
• Covered dependents have the right to remain in
  the group plan for up to three years.

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Group Dental Insurance Scheduled Plan

• Various dental services are listed in a schedule,
  
• Flat dollar amount is paid for each service
• If dentist charges more than the specified
  amount, patient must pay the difference

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Group Dental Insurance Nonscheduled Plan

• Also called comprehensive dental insurance
• Most dental services are covered, including
• oral examinations
• X-rays
• Cleaning
• Fillings
• extractions, inlays
• bridgework and dentures
• oral surgery
• root canals
• orthodontia.
• Dentists are reimbursed on the basis of their
  reasonable and customary charges subject to any
  limitations on benefits stated in the plan.

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Group Short-term Disability

• Typically have following characteristics
• benefits paid from 13 weeks to two years
• short elimination period (e.g., one to seven
  days)
• benefits are a percentage of earnings
• only nonoccupational disability covered
• relatively few exclusions

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Group Long-term Disability

• Typically have the following characteristics
• benefits paid to age 65 or later
• dual definition of disability used
• elimination waiting period of 3 to 6 months
• both occupational and nonoccupational
  disabilities covered
• workers compensation and Social Security offset
• accrual of pension benefit
• cost-of-living adjustment

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Cafeteria Plans

• Allow employees to select those employee benefits
  that best meet their specific needs.
• Employees typically are given a certain number of
  dollars or credits that can be spent on the
  different benefits or taken as cash.

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Cafeteria Plans Flexible Spending Account

• Some plans also have flexible spending account
• also called a reimbursement account
• Employee agrees to a voluntary reduction in
  salary.
• Amount of salary reduced is then used to pay for
  any plan benefits.
• Because workers salary is reduced
• taxes deducted are less
• spendable income is increased.