June 1, 2010 - When was the last time you heard of an employer buying homeowner’s insurance for employees, or sweating over each employee’s annual car insurance renewal, or picking up the tab for their personal liability insurance. The idea is ludicrous. And yet, each year nearly every employer in this country goes through the annual ritual of picking health coverage, maybe dental insurance, a life insurance policy, disability and so on for all their employees. And most years, this is a terribly frustrating activity, because the system as it stands is broken in nearly every respect.

The options are just not all that good. Trying to find a single plan that covers the diverse needs of disparate employees is an exercise in futility. Shooting for the middle and finding exactly the right balance simply means that half of your employees are under-insured and half are over-insured. How can that be considered a successful business decision? And everyone who has to make it knows that this result of hours and days of investigation is inherently wrong.

Plus, you have to pay more and more each year for the privilege of putting yourself through this exercise in futility. Call it rate increase, the annual “trend”, premium inflation, whatever the term, paying more money for benefits has become the name of the game. Some unfortunate employers are facing increases of 70% or more.

This situation raises two very important points:

1. Most people in business today did not set out to become benefits experts. You see yourself as an entrepreneur, owner, manager, the “finance guy”. And even those who are pursuing an HR career didn’t set out to deal with the pain of employee benefits. You want to deal with more strategic issue like staffing, compensation and the like.
2. The vast majority of employers have given up on finding a solution to this problem. They are no longer confronting it and trying to solve it, but instead are looking for a “work-around”. They may shift costs to employees, cut back on benefits altogether, even lay people off to reduce expenses, but these tactics only address the pain, but not the underlying problem, and in most cases they create more pain.

But there is a real solution to this situation ... defined contribution. Imagine, you can set a long-term benefits budget and determine what you’re going to spend on benefits – an amount that your business can afford. You treat benefits the same way you handle every other business expense. And then, you allocate a certain amount for each employee to spend on their benefits. It really has nothing to do with benefits anymore, it’s a compensation decision. You’ve defined what you’re going to contribute for benefits each year and gotten yourself out of the spiraling cost increases. As with any budget item, you can build in a reasonable inflation rate of your choosing, perhaps 5 percent a year.

But what about your employees? How are they going to use the allocation you’ve given them to buy the insurance they actually need? The answer is simple, you give them access to a marketplace of benefits – a Benefits Exchange – where they have a range of options for different insurance products and they can buy the benefits that are right for them. This is more than the healthcare insurance exchange that is part of the new reforms, because it deals with far more than just medical insurance. There might be 8 medical plans on the Exchange, or 18, or 28. And then there are also all the other benefits an employee might actually want – dental, vision, life, disability, long-term care, accident, critical illness and so on. Each employee decides what he or she needs. They insure themselves, just as they insure their car and house.

This defined contribution approach to benefits is a real solution, not a work-around. It doesn’t just change the way you pay, it relieves your frustration. And it makes your employees happier. Survey after survey shows that when they are empowered in this way and can buy the benefits they actually need, employees are more aware of and satisfied with their benefits and happier in their jobs.

And speaking of reform, many of the experts have suggested the new law will encourage a defined contribution approach to benefits that separates financing from plan design and administration. Benefits become more logically a compensation decision, and employees, not companies, buy benefits.

“Is it time to rethink the role of your organization in providing healthcare to employees?”
Allen T. Steinberg, noted ERISA attorney, April 15, 2010.

May 21, 2010 - The new healthcare reform laws – the Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act – contain many provisions, mandates and promises of new regulation that will take effect over the next 4 to 8 years. It is easy to get caught up in the cost of compliance, the risks of cost increases, the timetable of provisions, the penalties and the new administrative burdens. But this may be a good time for you to step back and take a different, more strategic view of the implications of these reforms. Perhaps, it is time for you to delink employment and healthcare and seriously consider separating the financing of health insurance from design and administrative considerations. Your businesses might want to change what healthcare represents as part of your total remuneration package.

Over time, the law will commoditize health insurance – making it more broadly available, defining an “essential health benefits package”, mandating coverage and establishing financial incentives and penalties, and creating government-defined “typical” plans on state-run health insurance exchanges. Taken together, these provisions will make it more difficult for you, as an employer, to differentiate your health insurance coverage from your competitors – either across your industry or those drawing from the same labor pool in your locations – and your health benefits will be less of an inducement to attract and retain employees. In effect, health insurance will become more standardized and more “portable” and may no longer keep people in their current jobs because of their health benefits.

One significant result of these changes will be that you could choose to stop spending those hours and days laboring over health insurance designs trying to find that right mix of coverages and costs, looking for the right balance of cost sharing, and worrying that you are under-insuring or over-insuring your employees. Likewise, more standardized plans and a health insurance exchange could reduce your administrative headache, though the new law does require some additional reporting. And this raises the key question posed by Allen T. Steinberg, “What is the role of your organization in sponsoring healthcare insurance, supporting its acquisition and delivering it?”

The answer is that you will be able to uncouple costs from design and administration and yours could be much more of a defined contribution approach to health insurance, similar to the employer’s role in a 401(k) retirement plan. You will simply define your benefits contribution by electing a specific dollar amount to allocate to each employee. Health insurance benefits will become much more of a compensation consideration, than an independent program with increasing costs and huge time obligation for your organization. Defined contribution funding for your healthcare benefits program will actually lower your costs and put you in charge of what you will spend. You will determine an acceptable annual rate of increase and establish a predictable, manageable long-term budget.

Having reduced your cost burden, your next consideration will be to re-examine your entire benefits package. Where the new law addresses only healthcare insurance (and some long-term care features), you have to look at all of the benefits you offer – dental, life, disability, accident/critical illness, wellness, and the like. This will be an excellent opportunity to broaden the scope of the initiative and “reform” your entire benefits package. In fact, the ultimate result of the Act may be to encourage a defined contribution approach to all benefits – a single dollar amount allocation that employees can use to purchase the insurance they need.

This, however, points up one of the limitations of the new law. Its exclusive focus on health insurance may have the effect of uncoupling medical coverage from other benefits, forcing employees to go to different places for their benefits. A better solution will be for you to offer your employees a private exchange that encompasses all benefits – medical coverage that is compliant with the new law along with all the other types of insurance coverages that your employees actually need. This type of benefits exchange will actually release you from the administrative burden you now face. And it will foster a new level of benefits consumerism among employees.

In these ways, the new law will reform not just health insurance but rather the overall picture of benefits – encouraging a defined contribution approach that separates financing from design and administration, makes benefits a compensation consideration, and puts purchasing responsibility in the hands of the benefits user.

April 15, 2010 - Liazon hosted a webinar with Guest Speaker Allen T. Steinberg about the many, many pieces of the new Health Insurance law, The Patient Protection and Affordable Care Act. Mr. Steinberg, a noted ERISA attorney for Hewitt Associates (a Fortune 500-focused benefit consulting firm), discussed a full analysis of the new legislation, in terms of what the legislation actually means for small and mid-sized businesses. In this well-attended webinar he outlined what employers need to do to comply and what they may want to do in response to the legislation. He focused on the key aspects of the law and helped to achieve some perspective for businesses. He also answered questions from small business owners about the law in an interactive Q&A session.

Click below to watch the webinar, The Healthcare Reform YOYO (Your Obligations - Your Opportunities):
https://www2.gotomeeting.com/register/740912194

On February 17, 2009 President Obama signed the American Recovery and Reinvestment Act of 2009 (the “Act”) into law. The Act is over 400 pages long and contains a wide array of spending provisions intended to offset the impact of the economic downturn.

From an employee benefits perspective, the most significant provision of the Act provides a special temporary subsidy toward the purchase of COBRA coverage for employees (and their dependents) who are involuntarily terminated between September 1, 2008 and December 31, 2009. This provision is intended to increase access to health care coverage.

Overview of Cobra

Under the general provisions of COBRA, if an employee loses health care coverage due to termination of employment for any reason (other than “gross misconduct”), the employee can purchase health care coverage from his or her former employer for up to 18 months. COBRA applies only to employers that normally employed 20 or more employees on a “typical” day during the prior year. COBRA coverage must also be made available to the employee’s spouse and dependent children covered by the employee under the health care coverage as in effect before the termination of employment. The maximum premium for COBRA coverage is 102% of the cost of the plan for non-COBRA participants (referred to as the “applicable premium”).

Special COBRA Rules under the Act

The key features of the Act relating to the special COBRA subsidy are as follows:

If an employee is “involuntarily terminated” between September 1, 2008 and December 31, 2009 the employer will be required to reduce the COBRA premium (for the employee and his or her eligible dependents) to 35% of the applicable premium (i.e., 35% of the 102% that could otherwise be charged). These individuals are referred to as “assistance eligible individuals”.

There is no definition of “involuntary” termination under the Act; however, the Department of Labor has indicated that it will interpret the Act in a way that supports former employees’ access to the coverage. In effect, any employee who terminated at the initiation of the employer (i.e., did not voluntarily quit) is likely to qualify for this special subsidy. If there is a dispute over eligibility for the subsidy, the Department of Labor is required to review the dispute and render a decision within 15 business days.

The special subsidy terminates after 9 months (or, if earlier, the date COBRA eligibility ceases—such as upon exhaustion of the 18 month maximum coverage period under COBRA).

The Act makes one significant change to COBRA rules for assistance eligible individuals. Under general COBRA rules, eligibility for COBRA ceases when an individual becomes covered under another group health plan. However, under the Act, an individual ceases to be eligible for this additional subsidy when the individual becomes eligible for coverage under another group health plan. In conjunction with this new rule, the Act requires that an assistance eligible individual must notify the health plan if the individual ceases to be eligible for the subsidy because of eligibility for another plan. If the individual fails to notify the plan, the individual is liable to pay a penalty equal to 110 percent of any subsidy received after eligibility for the other health plan.

Individuals who become eligible for COBRA must now be given a special notice of the new COBRA subsidies. The notice must (among other things) contain the following:

• a description, displayed in a prominent manner, of the qualified beneficiary's right to a reduced premium and any conditions on entitlement to the reduced premium
• the forms necessary for establishing eligibility for premium reduction
• the name, address, and telephone number necessary to contact the plan administrator and any other person maintaining relevant information in connection with the new COBRA subsidy
• a description of the election periods governing this special subsidy
• a description of the obligation of the qualified beneficiary to notify the plan providing COBRA coverage of eligibility for subsequent coverage under another group health plan
• a description of the option of the qualified beneficiary to enroll in different coverage if permitted by the employer under special COBRA rules established as a part of this special subsidy

Employers must start providing this notice no later than April 18, 2009 (60 days after the enactment of the Act). This notice can be provided as part of the overall COBRA notice or as an “add on” notice. The government is required to provide employers with a sample notice containing this information. The sample notice is to be issued by March 19 (30 days after enactment of the Act).

Individuals involuntarily terminated after September 1, 2008 through February 16, 2009 who did not elect COBRA when it was first offered or who did elect COBRA, but are no longer enrolled must now be provided with (1) the notice of the new subsidy provisions, and (2) a new COBRA election opportunity. This special notice must be provided by April 16, 2009 (60 days after enactment of the Act). The election period begins on February 17, 2009 and ends 60 days after the plan provides the required notice. COBRA coverage elected in this special election period begins with the first period of COBRA coverage on or after February 17, 2009 (for most plans, likely to be March 1, 2009). Thus, the subsidy may be elected as late as June 15 and the employer must offer to provide the coverage on a retroactive basis (but the retroactive coverage cannot extend to any period before February 17, 2009).

This special election period does not extend the period of COBRA continuation coverage beyond the original maximum period (generally 18 months from the employee's termination).

Individuals who terminated after February 17, 2009, but before the new COBRA notice provisions are put in place, must also be provided notice of the new subsidy and the opportunity to select COBRA and obtain the subsidy. These individuals have 60 days after receipt of the notice to elect COBRA coverage and obtain the subsidy.

The employer is reimbursed by the federal government for this additional subsidy. This reimbursement is obtained by the employer by filing for a federal tax credit on Form 941 (the employer’s quarterly federal tax return). The employer can decide either to offset its payroll tax deposits or claim the subsidy as an overpayment at the end of the quarter. The employer may receive the 65% subsidy only after it has received the 35% premium payment from the individual. This is noteworthy because an employer can still (retroactively) revoke COBRA coverage for failure to make premium payments. In effect, the employer cannot request reimbursement from the federal government if an employee has not yet paid the remaining 35% COBRA premium and is still in the COBRA “grace period”.

It should also be noted that any employer overstatement of the subsidy will be treated as an underpayment of payroll taxes. In light of the potential penalties for underpayment—and individuals’ ability to appeal denials of the subsidy to the Department of Labor—it is anticipated that employers unsure of an individual’s eligibility for the subsidy may be inclined to deny the subsidy (and allow the individual to appeal), rather than grant the subsidy (and risk penalties for underpayment of payroll taxes).

The IRS has noted that no additional information need be submitted with the Form 941 in order for the employer to receive reimbursement from the federal government. However, the Act requires that an employer must be able to provide reports with additional supporting documentation, including:

• Information on the receipt, including dates and amounts, of the eligible individuals’ 35% share of the premium.
• In the case of an insured plan, copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier required under COBRA.
• Attestation of involuntary termination, including the date of the involuntary termination (which must be during the period from September 1, 2008 to December 31, 2009) for each covered employee whose involuntary termination is the basis for eligibility for the subsidy.
• Proof of each assistance eligible individual’s eligibility for COBRA coverage at any time during the period from September 1, 2008 to December 31, 2009 and election of COBRA coverage.
• A record of the Social Security numbers of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for 1 individual or 2 or more individuals.
• Other documents necessary to verify the correct amount of reimbursement.

The special subsidy is phased out for those with adjusted gross income over certain thresholds. The phase-out begins with adjusted gross income of $125,000 (if filing a single return) or $250,000 (if filing a joint return) and is completely eliminated for those with adjusted gross income over $145,000 (single return) or $290,000 (joint return). These individuals can choose to waive the subsidy. The waiver must occur at the time of COBRA enrollment and is permanent. Or the individual can choose to collect the subsidy and recognize it on their income taxes. To allow collection of these taxes, the employer must report the amount of the subsidy to each employee and to the IRS (presumably on the Form W-2).

The subsidy applies to each health benefit plan that the employer is required to offer under COBRA, except for health spending account. This includes medical, dental, and unfunded health reimbursement arrangements maintained by the employer. Also, this provision does not apply to health savings accounts (“HSAs”). The subsidy also applies to health plans that are not subject to federal COBRA but are subject to continuation of coverage requirements under state law, such as small group health plans. Although this Bulletin focuses on the application of the subsidy to COBRA coverage, the analysis is similar for health plans that are subject to state continuation requirements.

Other Benefits Changes Made by the Act

The Act also made two other changes that directly affect employee benefit plans:

Changes to the Monthly Limit on Transit and Vanpooling Benefits: Effective March 1, 2009, the Act amends Code Section 132 to increase the monthly statutory limit for qualified mass transit and vanpooling benefits. The increase is from $120 per month to $230 per month. This provision is scheduled to expire on December 31, 2010 unless extended in future legislation.

Expansive HIPAA Privacy and Security Changes: The Act includes a number of provisions that modify (and expand) the privacy rules established under the Health Insurance Portability and accountability Act of 1996 (“HIPAA”). Most of these HIPAA changes are effective 12 months after the enactment of the Act. Due to the complexity of these changes, we plan to make these HIPAA changes the subject of a future Special Bulletin.

The information contained in this Special Bulletin to Clients is not intended as legal advice or as a legal opinion on specific facts.

Many of the proposed healthcare reforms for small businesses and their employees referred to in President Obama’s recent speech to Congress are already available for employers to significantly improve what’s largely considered an expensive and difficult process for all involved.

While the final outcome of proposed legislation is unknown, it’s clear the government wants employers to remain in the ‘benefits business,’ even though, as the President noted in his speech, any reforms, when eventually passed by Congress, could possibly take up to four years to implement. Businesses need relief today and their employees can’t wait to have benefits options that are both affordable and consistent with their needs. This is absolutely doable without waiting for government-driven reforms.”

Competition and Choice

As President Obama made clear, competition and choice drive down costs. This truth holds for healthcare benefits, as the consumer-driven healthcare movement has demonstrated. A consumer-driven model is one in which the end-users – employees – self-select the benefits that best meet their individual needs. The hurdle is selection. For choice to be effective, employees need real options, including low premium, high-deductible health plans coupled with a health savings account (HSA), along with tools that enable them to effectively choose and manage their benefits.

Health Insurance Exchange

One cornerstone of Obama’s healthcare reform plan is an exchange where the insurance choices are laid out and made clear. Making present-time decisions about future risks is a complex and difficult task, but we already have decision-making support in the form of an online Benefits Exchange that makes it easy for employees to choose the healthcare and other insurance they need from the diverse options available in a comprehensive insurance marketplace.

Pooling Risk

The President spoke about pooling risk and giving small business owners the leverage and buying power of larger businesses. This is not a new idea. We have that today with forward-looking chambers of commerce that innovate and expand health benefits and other insurance offered to their members. Chambers see sharp growth in their membership when they offer consumer-centric benefits programs, and insurance carriers are embracing this approach as a means of better serving their small business customers.

Insurance Carrier Responsibility and Accountability

The plan the President laid out also calls for greater responsibility and accountability on the part of insurance carriers. The solution here is effective consumer advocacy, giving the consumer a voice in this complex business with knowledgeable insurance professionals who represent the consumer, chase their claims and see their issues through to resolution. Typically, we find the problem is not greed and avarice on the part of insurance carriers, but broken systems and convoluted processes.

Small business in America needs healthcare reform today. And many of the measures being considered in the reform bill are already in place.

Ashok Subramanian
President, Liazon Corporation

The Problem

Today, the American healthcare system is characterized by three core problems:

1. Rising Costs. Healthcare spending totaled $2.4 trillion in 2007 and represents 17% of America’s GDP. Despite numerous cost containment efforts over the last 30 years, healthcare costs have steadily increased at a rate 2x-3x that of CPI. US per capita healthcare spending is at least twice that of other major industrialized countries. By 2017, healthcare costs are expected to equal $4.3 trillion or 20% of GDP.
2. Inadequate Coverage. Despite these high and ever-increasing costs, over 48 million Americans lack health insurance. Of the uninsured, it has been reported that over 70% are employed.
3. Poor Value. While America is well known for staggering medical innovation, cutting-edge pharmaceutical research, and remains the ‘go-to’ destination for the highest-quality specialty care, broad-based healthcare outcomes are poor. The system is riddled with high medical error rates, lack of standardization in care delivery, and poor patient and public health outcomes (e.g. the US’ infant mortality rate ranks 29th in the world).

Elements of a Solution

A range of ideas to address the numerous problems in American healthcare has been well circulated by both federal and state-level policymakers over the past three decades. The debate, typically hotly partisan, has included proposals ranging from a full single-payer financing to a fully individual-based health insurance market. The desire to engineer broad-ranging, comprehensive reform has typically ended in failure –with the ambition of previous efforts, ironically, slowing adoption of even incremental system improvements.

Some basic elements to address the core problems described above and achieve common ground among industry interests could include:

1. Mandates to purchase health insurance
2. Subsidies to help make health insurance more affordable
3. Federal Reinsurance to back-stop severe claims and promote payer innovation & entrepreneurship
4. A True Consumer Marketplace for Health Insurance
5. Consumer-Level Financial Incentives to stimulate greater health, wellness, and personal responsibility
6. Tax Reform

Mandates

Today, unlike auto insurance in most states, it is not required that individuals possess health insurance coverage. The lack of a mandate leads to several key healthcare economic problems, including adverse selection, an unhealthy reliance on therapeutic intervention rather than preventive care misaligned incentives, and free riding on private & public payers.

1. Adverse selection is a major risk in any insurance market, whereby those individuals who are least likely to require insurance protection are typically the first to exit the insurance pool. Among the American uninsured, 40% live in households that earn over $50,000 and many have opted not to pay for coverage available either through employers or on the individual market
2. The uninsured unintentionally drive an inefficient allocation of healthcare resources. Uninsured individuals are more likely to engage in costly emergency care and hospitalization, and less likely to receive preventive care, than those with health insurance. Furthermore, uninsured individuals are 30-50% more likely to be hospitalized for an avoidable condition. Ultimately, the United States spends nearly $100 billion annually to provide uninsured residents with health services, often for preventable diseases or diseases that could have been treated more efficiently with earlier diagnosis.

Implementing an individual-level mandate on all Americans, at least for a basic level of health insurance (e.g. a very high deductible health plan with free coverage for annual preventive care), would strengthen the risk pool, mitigate adverse selection, and encourage access to earlier healthcare intervention. Businesses could facilitate their employees’ ability to comply with a mandate by making individual and/or group insurance coverage available through the worksite (regardless of whether they earmark dollars for their employees to purchase insurance).

Subsidies

The most common counter-argument to mandates is the concern regarding how people with low incomes and/or who lack employment would cope financially with a mandate to purchase health insurance. This should be addressed by federally –funded, state-administered means-tested subsidies (either as a direct transfer payment or through an income tax credit) to enable individuals who do not currently qualify for Medicaid to purchase health insurance coverage either on the open insurance market or through their employer.

Federal Reinsurance / Support for High-Risk Pools

The distribution of healthcare claims within the pre-65 population is decidedly non-normal – a minority of individuals drives a disproportionate share of healthcare costs due to either catastrophic medical events and/or chronic disease. This ‘80/20’ effect has several unintended consequences on insurance markets. First, it increases the gap between the actual cost and the perceived value of health insurance for healthy individuals – contributing to adverse selection in the absence of mandates. Second, it creates an economic incentive for carriers to seek to deny coverage for perceived higher-risk individuals. Rising costs of high-end treatment due to advances in medical technology and biologic drugs further exacerbate these effects.

The federal government can address these concerns by creating a reinsurance entity to guarantee reimbursement to health insurance carriers for catastrophic medical claims over a certain level (e.g. $200,000 per person per calendar year). Alternatively, the federal government could grant dollars to states to create and/or strengthen their own high-risk pools – similar to those operating in 35 states today. In exchange for this new level of financial support, the government could opt to require that private insurance carriers accept new guidelines to provide guarantee issue coverage to all individuals below the age of 65.

A True Marketplace for Health Insurance

Today, most individuals who work for most companies can select, at best, from one or two health insurance plans. A legacy of today’s employer-centered health insurance model, individuals are forced to select from options selected by their employer (often in consultation with a third-party administrator or insurance broker). Needless to say, such a system does not provide adequate choice for individuals to best meet their own personal needs.

A new, fresh approach would allow individuals to access more meaningful arrays of choices of health insurance to better meet their own personal needs. This could be achieved either through changes in regulation to make individual health insurance more attractive or, more feasibly in the near-term, by creating new risk pooling and rating methodologies with group-based insurance (similar to the community rating approaches used in several states).

Creating an open transparent marketplace would force carriers to compete for individuals on meaningful dimensions of choice such as competitive pricing, quality service, and ease of administration. It would foster greater innovation among insurance carriers and drive cost efficiency, in stark contrast to today’s system where individuals are forced to accept choices made for them by third-party decision makers.

A publicly financed and administered health plan to compete with private offerings could be an additional option within the marketplace. The merit of such an option is beyond the scope of this paper.

While giving consumers more choice and responsibility has its definite merits – the transition requires great care because, for at least 30 years, people have not had to make meaningful decisions regarding their own insurance. Therefore, the government could support this paradigm shift by structuring incentives for employers, insurance carriers, and/or other stakeholders to offer online and/or telephone-based resources to help people make good decisions.

Financial Incentives

Ultimately, changing the trendline on America’s healthcare costs will require individuals to take greater personal responsibility for their own health and wellness. While no amount of attention to diet and exercise can help avoid certain diseases and/or the vagaries of the genetic lottery, it is well documented that at least 50% of healthcare costs are due to behavior – and a far higher proportion of chronic disease such as diabetes, heart disease, and respiratory ailments (e.g. emphysema, CoPD).

There are various approaches to institute greater financial rewards & penalties for better healthcare management – most of which should be administered by insurance carriers themselves. The government’s role would be to establish an regulatory framework allowing carriers and employers to more easily and clearly implement policies that reward good behavior and penalize costly healthcare practices.

Tax Efficiency

Today’s employer-centered system provides a substantial subsidy for employer-paid health insurance in the form of tax deductibility. Like the mortgage interest deduction, this subsidy encourages over-consumption of health insurance and is illustrated by the fact that the actual policies purchased through employers typically cost 2-3x more than the policies purchased by individuals, despite the inefficiencies of the individual health insurance market.

The removal of this subsidy, in addition to encouraging more efficient healthcare consumption, could also be an important element of financing the other elements of a comprehensive reform package.

Choice of health insurance will help bring down the cost. We know that when individuals make their own purchase decisions about their health insurance, they tend to pick lower cost coverage. A comprehensive Aetna Insurance study in 2006 of over 2 million individual health insurance policies demonstrated the average cost of purchased insurance is 42% (single coverage) and 52% (family coverage) less than the average employer-paid health insurance cost. The data does not suggest that they get better coverage, but it does show that when consumers have control they routinely choose lower cost options.

This raises an important question which has to be answered if we are going to develop an effective Health Insurance Exchange, as has been proposed. Is the lowest cost health insurance the best policy for each consumer? There is evidence that when employers pick the insurance plan, a majority of employees are over-insured, but it does not logically follow that selecting insurance solely on the basis of the premium cost will yield a more acceptable result. We could end up under-insuring huge segments of the population. It’s hard enough to select the right insurance when there are just two or maybe three plans to consider. What happens when there are many more choices?

The usual side-by-side comparisons of coverage features will not be sufficient. The average consumer is ill-equipped to make these complex, multifaceted comparisons and, on top of that, is insufficiently engaged in the selection process to put in the necessary time. Experience has shown, in employer-sponsored group benefits programs where the total costs of the health insurance are veiled from the employee, that without the right decision support, employee tend to disassociate from the process and merely select the plan closest to the one they are already in. The new Health Insurance Exchange needs to be supported by a sophisticated decision support engine that combines and weighs a number of factors, and actually recommends the appropriate insurance policy for each insurance consumer. In fact, a recent McKinsey Report (“Realizing the Potential of the Retail Revolution in Health Insurance”, McKinsey, 2009) called recommendations “a powerful determinant of choice” when consumers buy health insurance.

Every exchange – the stock market, commodities exchanges, etc. – is based on futures. On the Health Insurance Exchange, those futures must be established for each consumer based on their consumption of healthcare. No one can know how much health insurance to buy until they know how much they’re going to need. To get the healthcare policy that is right for them, consumers cannot merely go on premium cost. Instead, the Health Insurance Exchange needs to help the consumer pick the most cost-effective policy based on total healthcare cost, including premium and out-of-pocket expenses for the coming year. Most consumers cannot accurately predict their annual healthcare expenses, much less apply that number across the dizzying array of co-payments, deductibles, tax advantages, and other complex calculation in the policies that make up the Exchange.

Early in the recommendation process, the decision support system needs to ask them how healthy they feel they are; it has been shown that this one piece of information is a statistically valid predictor of how much health care they will use. Next, we need to know their tolerance for risk. Health insurance, like all insurance, is based on the degree of risk a person is prepared to assume. Another important measure in how engaged the consumer is in managing their healthcare, which again tells us how much they are likely to spend in the coming year on their health. All of this information about the consumer can then be applied to the vast database of government statistics about who spends how much on healthcare. This gives us an accurate projection of each consumer’s cost. And of course, we need to give them a chance to look at and adjust out cost projections, telling us what they think they’ll spend next year and on what.

Equipped with this expense projection, the Health Insurance Exchange can now analyze each available plan against this need and recommend the policy with the lowest total cost – premium plus out-of-pocket expenses. It can also show the consumer which policy offers the most predictable costs and the one that will cost the least if something catastrophic were to happen. The process, the calculation and all the costs should be transparent to the consumer. And of course, the educated consumer is then free to select any health insurance policy that is available on the exchange.

(Note: The analysis above is based on the direct experience with Liazon’s Benefits Marketplace, a health insurance exchange for small businesses and their employees that uses a proprietary decision-support system to recommend health insurance for each consumer.)

Alan Cohen
Chief Strategist

Today, our topic is... the future financing of health care. Hey, where ya goin’? Remember, Al Gore gave a PowerPoint presentation on climate change, a presentation full of charts and data, and he won an Oscar and a Nobel Peace Prize, and he mobilized an entire movement. But if you had asked them going in, most people would have said, “Global warming? No thanks, I’ll pass on that one.” Well, there is a fundamental similarity between what Vice President Gore talked about and what we’re embarking on here, and that is systemic change rooted in human behavior.

Let’s start with the assumption that a sizable percentage of you are covered by health care policies where you work. Your company has picked the plan for you and is picking up some, or all, of the cost. The greenhouse gases of health insurance, if you will, are the rapidly rising costs that are choking the system and making it more and more difficult for employers to offer decent benefits. Think about it. The costs of medical benefits are increasing by double digits every year. Were Al telling this tale, he would now come to his first inconvenient insurance truth: If you make $40,000 a year today and get an annual pay increase of 3%, in just 15 years you’ll actually have to pay more for health insurance than you earn.

It’s a system that is completely unsustainable. When we talk about sustainability, whether in ecology or economics, we’re referring to the potential longevity of a vital support system – a state that can be maintained at a certain level indefinitely. Typically, it is a system that is self-contained and maintains an interior logic and systemic integrity. It’s a system that makes sense, that stands up, that holds together.

So, here’s our next inconvenient insurance truth: if you bought your own individual health care policy, you would be spending about half as much on the premium as you and your employer are paying now for your employee health care benefit. An industry study of something like 3 million policies shows that individuals going into the insurance marketplace and spending their own money take somewhat less coverage and somewhat higher deductibles, and save in the neighborhood of 50% on the premiums.

What this tells us is that employers, already hacking and choking on rising benefits costs, tend to overspend on medical insurance and over-insure most of their employees. It also says that the employees’ varied needs might be better served by a benefits marketplace where they can pick their own plans and coverages. And it suggests that many employees may need a little help in making the necessary trade-offs. Address these behaviors and we will cause a fundamental change in the way health care insurance is purchased and used. And everyone will breathe a lot easier.

Interestingly, the same study of 3 million policies showed that over 85% of consumers purchase either Preferred Provider Organization (PPO) or Point of Service (POS) plans, while only 6% purchase either Health Maintenance Organization (HMO) or indemnity plans. By contrast, over three times as many people (21%) who are covered by insurance offered by their employer are in a network-restricting HMO. This discrepancy seems to be due to the fact that in a group setting HMO plans are typically offered alongside PPO or POS plans, so choosing an HMO plan is the only way an employee can reduce the cost of coverage.

And that brings us to compelling insurance truth number three: a lot of what passes for employee health care insurance today is not actually insurance. It used to be. Back in the 1950s and 60s, when the atmosphere was clear and simple, those old indemnity policies were pure insurance coverage – shifting most, if not all, of the financial risk of sickness or injury to the insurance company. But by the late 60s and early 70s, rising health care costs made indemnity policies too expensive and unwieldy. And in 1973, Congress passed the HMO Act, changing the nature of the relationship from insuring the risk of contingent loss to pre-paying for medical services. This managed care model based on prepaid medical expenses has led to stricter and stricter rationing of health care to control costs. In this regard, POS and PPO plans are in fact HMO derivative – a POS plan can really be described as an HMO with a costly out-of-network option, and a PPO is really an HMO-like network based on discounts for services. Any significant cost savings created by an HMO and its derivatives have long since been realized. And over the last ten year, especially with the development of the consumer-driven health (CDH) plan, we have seen a movement toward health care insurance once again.

The sustainable health care solution begins by releasing the employer from the burden of picking health care plans for employees. This is particularly valuable to small and mid-sized business, let’s say those under 2,500 employees which is 63% of all U.S. businesses, who are feeling the full weight of today’s burden. It changes the way they perceive and pay for benefits. At the risk of straining the comparison, these employers can reduce their “benefits footprint”. They can define their contribution to employee benefits and allocate a benefits budget to each employee – a dollar amount which is set by the employer rather than the insurance company – it is an amount employers can live with and manage, not just today but year over year. Imagine, instead of facing double-digit premium increases every year – usually unpredictable increases, about the only thing certain is that they will go up – your employer can now budget for benefits costs over several years and build in a reasonable, acceptable annual increase.

In stark contrast to today’s planned economy of employee benefits – a huge industrial machine which is driven from the top in the hands of the big insurance carriers and which has created inefficiencies and higher costs at reduced quality – health care now enters a consumer-centric era based on a market economy where businesses and consumers decide of their own volition whether and what they will purchase. Practically speaking, employers no longer pick the insurance plans; they instead offer their employees a range of choices in a benefits marketplace where employees can address their own demands and needs for health and wealth benefits. This brings up inconvenient insurance truth number four: The experience of over 3 million individuals shows that consumers purchase a wide range of health insurance policies in the open market to meet their clearly differing needs – far more variety than in a typical employer-based insurance offering.

So let’s go back. As an employee with your employer-allocated benefits dollars in your pocket, you enter the new benefits marketplace which is sponsored by your employer and which offers a range of plans and programs to choose from. One of the important features of this new marketplace for benefits consumers is that it broadens the number and types of available options and yet still offers many of the advantages of group insurance – negotiated rates, coverage guarantees, and the like. Think of this as a virtual marketplace that you get into through the Internet. In this new marketplace, right there among all the other more traditional coverages, you find an interesting new medical insurance plan – a consumer-driven health (CDH) plan. It makes pretty good sense, offering a much lower premium and a higher deductible before the insurance coverage kicks in. Now, let’s say that there are decision support tools on the Internet to help you understand these new plans and see if they’re right for you.

Ready for the fifth inconvenient insurance truth? For 60% to 70% of all consumers, a CDH plan will save them money. This stands in stark contradiction to the industry data which shows that fewer than 10% of employees actually enroll in these plans today. But most people have healthcare expenses that are well under the CDH deductible, and more importantly, the scale of their savings in the CDH plan is far more significant than the possible risk. Combine this with the fact that CDH plans generally come with a health savings account (HSA), and consumers can now set aside pretax dollars to cover their deductible. These savings accumulate year to year, even earning their own interest, so the consumer has money for health care when they retirement. Which is important, when you consider that according to Fidelity Investments, the average couple will have medical expense of around $240,000 in retirement.

But you might ask how all this add up to a sustainable health care system? Remember at the beginning we said that the goal was to examine a systemic change rooted in human behavior. Well first, CDH plan enrollees are more likely to have annual physicals, participate in wellness programs and meet preventive care guidelines that those in other types of plans. One study demonstrated that people in CDH plans are 25% more likely to follow healthy behavior guidelines, 20% more likely to participate in company-sponsored wellness programs and 30% more likely to have annual physicals. When asked why, CDH members routinely said that preventive medicine saves them money in the long run. And they are right, wellness programs and preventative care procedures are early interventions which promote healthy lifestyles, catch conditions early, and reduce overall medical care costs.

And too, various studies over the past couple of years provide direct evidence that people in consumer-centric plans become active health care consumers. CDH members are 50% more likely to inquire about cost, 33% more likely to identify treatment alternatives, and 3 times more likely to choose a less expensive, less extensive treatment. Hospital admissions go down, although cost per admissions increases slightly, indicating that consumers are not foregoing high-cost, non-discretionary spending. The number of office visits is similar between CDH and non-CDH members, but the cost per visit is over 10% less, suggesting that consumers spend their money more wisely and are more cost-conscious. In the area of prescription drugs, compliance rates are 23% higher among CDH participants than people in traditional plans, and medication compliance for chronic conditions improves significantly. CDH members are 20% more likely to report that they follow overall treatment regimens for chronic conditions very carefully. And there is a significant reduction in emergency room visits. By every measure, consumerism results in dramatic reductions in what people pay to receive health care services – 12% lower in one study relative to the costs for HMO and PPO members.

Most importantly, every study concluded that the greater consumer sensitivity of the CDH member results in a significant reduction in health care premiums, as well. The inflationary trend in premiums for CDH plans has shown to be less than half the trend of traditional plans. Debunking the concern that CDH plans have lower trend because they are attracting only healthier people, one insurance industry study showed that employers who moved all employees into CDH plans had the lowest annual trend – only 1.6%. Another study demonstrated that CDH members had 5.6% annual trend, versus 14.1% for similar members in traditional plans. And yet another showed that after adjusting for demographics, health status and geography, the cost trend for CDH plans was a 3%-5% decrease versus an 8% to 10% increase in the PPO plans.

Human behavior does change the system. But we face the same challenge that Al Gore does: how to get people to behave in a new way, to embrace change, and to make decisions for their own good? The answer . . . tell them the truth, give them all the numbers, give them new tools to understand the numbers, give them recommendations, and most important, give them credit for being intelligent and acting rationally. Ultimately, people need a convenient way to act on the decision they make. Treated this way about 70% of an employee population will make the decision to enroll in a consumer-centric plan.

But is it green . . . is the system sustainable? Well, employers reduce their costs and establish a solution that makes their benefits budgets predictable for the next ten years or more. Employees reduce their premiums and begin saving for future health care needs. And consumers act in ways that reduce the inflation in the system. It all holds together because it has an interior logic, the pieces fit and support one another. There is an integrity to it that is lacking in today’s system.

As Al Gore said, “The good news is we know what to do. The good news is, we have everything we need now to respond to the challenge. We have all the technologies we need, more are being developed, and as they become available... they will make it easier to respond. But we should not wait, we cannot wait, we must not wait.”

Tim Godzich
Cofounder and CEO of Liazon