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Health Insurance for Part Time Workers

September 15, 2010 in Health Insurance, HSA | 6 comments

The goal of LyfeBank is basically to serve as a 401(k) for health insurance.  Employers can make contributions to the employees health insurance into a fund and workers can use this money to buy various health insurance products, reimburse themselves for co-payments or deductibles, or pay for medical costs directly.

LyfeBank has two key innovations.  The first is that part-time workers can still receive money for health insurance on a pre-tax basis.  Further, multiple employers can contribute the the worker’s health insurance premiums as these funds go directly into the employee’s LyfeBank account.  Second, workers can apply for a LyfeBank Visa which will automatically deduct covered medical expenses from their bill.  If this credit card works well, it could reduce paperwork needed to reimburse providers.  However, there will likely still be arguments from benefciaries about what is or is not covered by the insurance company they choose.

The main drawback of Lyfebank is that workers must purchase health insurance on the individual market.  There is no pooling mechanism.  Thus, although part-time workers can now receive funding from multiple employers, the cost of their health insurance premiums will still be much higher than it would be if they worked at a large firm.

LyfeBank thus helps reduce the health insurance complexities for individuals working multiple part-time jobs.  It does not, however, offer these individuals a mechanism to pool their risk with other part time workers.  It will be interesting to see how this innovation will evolve when Health Insurance Exchanges appear in a few years.

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California’s Current Health Insurance Market

January 6, 2010 in Health Insurance, HSA, Managed Care | No comments

The California Healthcare Foundation looks at the latest health insurance trends in the nation’s most populous state.

  • In California, like in many states, there is a blurring line between what defines an HMO compared to other forms of health insurance.  Almost all insurance carriers now offer “a broad array of products, some of which do not conform to traditional product designs.”
  • While HMO enrollment has declined in other states recently, HMO enrollment has been steady in California.  Over 60% of commercial enrollees have either an HMO or POS plan.
  • California has 2 health insurance regulatory bodies: the Department of Managed Heath Care (DMHC) and the California Deparment of Insurance (CDI).  DMHC is responsible for regulating all HMO plans and some PPO plans, while CDI regulates other PPO plans.
  • Consumer Directed Health Plans are gaining ground.  Most large employer offer CDHPs as one choice among many health insurance options.  On the other hand, many small businesses are replacing traditional health insurance products with CDHPs as the employees only option.
  • Anthem, Aetna and Cigna have introduced 3 tiers of network physicians.  There is a high-performance tier (based on physician cost and quality), a second in-network tier, and an out-of-network tier.
  • Some employers have cut cost by giving employees a narrow network plan, which gives them access only to a narrow set of physicians out of the carrier’s entire network.  For instance, when Scripps Health System in San Diego started paying doctors via fee-for-service, many plays excluded Scripps doctors from many benefit packages.  Other plans are attempting to remove the UCSD Medical Center physicians.

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Are HSAs the solution to health care reform?

December 3, 2009 in Health Insurance, HSA | No comments

Many economists feel that Health Savings Accounts (HSAs) are the direction in which health reform needs to head. HSAs combine high-deductible health plans with tax-deferred savings account. The theory behind HSAs is for the patient to pay for ‘basic’ health care to reduce the problem of moral hazard while letting insurance pay for catestrophic illnesses.

Kroncke and White (2009) wisely note that the devil is in the details.  ”The most puzzling detail is how to draw an unambiguous legislative line between basic and catastrophic health care.”  In the long-run, legislators will have an incentive to categorize more and more care as catastrophic to appeal to specific disease-related lobbying groups.  The authors provide a list of important questions which need to be answered if HSAs are to gain a significant foothold in the health insurance marketplace.

Basic Insurance Questions

  • Should HSAs be regulated at the state level or the  federal level or by the free market? 
  • Should HSAs be voluntary or mandatory? 
  • Should  legislatively mandated minimum or maximum limits be placed on the size of the  accounts? 
  • What percentage of one’s personal income should be dedicated to health  savings in comparison to other goal-directed savings plans, such as for a new house,  education for one’s children, and retirement? 
  • What role should fourth-party employers play in any future HSA program?

Catastrophic Insurance Questions

  • Should the content of these policies be shaped by politically sensitive legislation?  
  • If so, should the new policies be community rated or experience rated? 
  • What specific treatments are to be covered by the catastrophic insurance policies? 
  • Will insurance companies be forced to pay for extraordinarily expensive new drugs with uncertain or marginal benefits? 
  • Will government continue to regulate the formation of risk pools? 
  • Should government act as a single payer in order to maximize economies of scale?
  • If the system is to be funded by tax write-offs, who should receive the tax benefits—individual buyers of health care or their employers?
  • What role, if any, should employers play in the distribution of catastrophic insurance or HSAs?

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Federal Health Care Regulation: Taxation

November 4, 2009 in HSA, Public Policy, Taxes | 1 comment

Today we will discuss how the tax code affects health care.

  • Tax exemption of employer-provided health insurance. “In 1943, the Internal Revenue Service (ruled) that employees could exclude the value of employer-paid health insurance premiums from their taxable income. In 1954, Congress excluded by statute the value of employer-purchase health insurance from gross income.” To this day, employees essentially receive a subsidy to buy health insurance from their employers; this is because they can use pre-tax dollars to purchase employer-provided health insurance benefits.
  • Tax-deductibility of individually purchased health insurance. Individual health insurance benefits are tax deductible only if the individual itemizes deductions on their tax return. Since it is more likely wealthier individuals itemize, the benefits of this rule are more likely to accrue to the rich.
  • Deductibility of medical expenses. The IRS tax code states that individuals can deduct medcial expenses that exceed more than 7.5% of their gross income.
  • Health Savings Accounts (HSA). An HSA is a trust similar to a 401(k) where individuals can use pre-tax money to pay for medical expenses. HSAs must be linked to an high deductible health plan (HDHP) which was defined in 2006 as a plan that had a deductible not less than $1050 for the individual or $2100 for a family. Money left in an HSA account at the end of the year can be carried over to future years.
  • Flexible Spending Accounts (FSA). Individuals can deposit pre-tax dollars into a fund to pay for health care expenses. Unlike HSAs, FSAs need not be tied to a HDHP. Also, unlike HSAs, money deposited in an FSA that is not spent by years end is lost. This is why FSAs are considered “use it or lose it” accounts.

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Adverse Selection in Action

May 5, 2009 in Health Insurance, HSA | 4 comments

For individuals who have recently lost their job, Carolyn’s Blog advises them how to get health insurance coverage.

“Unless you have a pre-existing condition you should only stick with COBRA until you find a private health insurance plan.  Believe it or not, if you go with a High Deductible Health Care Plan (HDHP) for a middle aged guy of 35, private health insurance can be around $75 a month — even with such well known companies as Humana and Blue Cross Blue Sheild when you live in the city of Chicago (very expensive health insurance here!)”

Healthy people sort to the less generous HDHP, sick people choose to the more generous COBRA.

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HRAs vs. HSAs

May 12, 2008 in Health Insurance, HSA | Permalink

On Friday I posted on Consumer Driven Health Care.  These consumer driven health plans (CDHPs) involve individuals having direct discretion about how health care dollars are spent.  If you are interested in CDHP, there may still be some confusion over which H?A you prefer.  Is a HRA (Health Reimbursement Account or Health Reimbursement Arrangement) or a HSA (Health Savings Account) better?  Scott Borden of OFM Benefits Consulting gives some simple explanations in his Kansas City Star article (“…Health Insurance for Workers“).

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CDHPs and Small Business

May 7, 2008 in Health Insurance, HSA | 1 comment

Consumer directed health plans (CDHP) seem like an attractive option for small businesses. CDHPs utilize high deductible health plans (HDHP) making patients pay more money out of pocket. Because of this, insurance premiums are lower. These HDHPs can be linked to Health Reimbursement Arrangements (HRAs) or Health Savings Accounts (HSAs). Since small businesses do not benefit from economies of scale with respect to the purchase of insurance, HDHPs may be especially attractive for this group.

A paper by Gates, Kapur and Karaca Mandic (2008) find this not to be the case, however. Firms employing 3-49 people are no less likely to offer high deductible health plans than are large firms–conditional on offering insurance. Midsize firms employing 200-499 workers are less likely to offer HDHPs than larger firms.

If the firm offers a HD health plan, will they offer an HSA? One may guess that small firms are less likely to offer HSAs if there are fixed costs to implementing an HSA. Small firms will have higher average costs to offering HSAs, if offering HSA is a true fixed cost and its cost to the employer is not proportional to the number of employees in the firm.

It turns out that small firms between 3-49 workers and firms with 200-499 workers are less likely to offer HSAs–conditional on offering HDHPs–than large firms with 500 or more workers. Middle sized firms with between 50 and 199 workers are just as likely to offer HSAs as large firms.

Other findings of the study include that HSAs are most popular in the Midwest and the South and, surprisingly, firms with a higher proportional of low-income workers are more likely to offer HSAs.

All Firms Firms w/ 3-49 employees Firms w/ 3-199 employees Firms w/ 200+ employees
% offer Health Insurance 61% 58% 60% 99%
% offer HD conditional on offering 14% 14% 14% 14%
% offer HSA conditional on offering HDHP 17% 16% 17% 21%

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Health Insurance: Why rent when you could own?

March 31, 2008 in Health Insurance, HSA | Permalink

Devon M. Herrick writes an article (“Why rent…“) creating a clever analogy comparing HSAs to equity in a house. He likens traditional health insurance to renting a home, while having a Health Savings Account (HSA) is more like owning the home. Making contributions to HSAs in essence gives you “equity” towards future health care expenses. On the other hand, if you do not use any medical care with traditional insurance, you lose all of your rent annual health insurance premium.

Mr. Herrick claims that he could cut his health insurance premiums by half if he had an HSA. There are 3 main reasons why health insurance premiums are lower. First, in a mechanical sense, health insurance plans are combined with HSAs which have higher deductibles. This means the insurance company will not pay for the first $1000 or so of medical care. Secondly, since there are high deductibles, utilization will decrease because of a reduction in the moral hazard problem. Finally, healthier people sort into HSAs and thus if everyone was compelled to have HSAs, health insurance prices would not decrease as much because there would be less advantageous selection.

As I have mentioned before in this blog, HSAs are highly unequal, since the rich 1) are the ones most likely to benefit from this legislation and 2) they have higher marginal tax rates and thus will receive a larger tax break for every dollar contributed.

Nevertheless, shifting more costs to the consumers and forcing consumers to face the true cost of medical procedures will help to reduce costs and to ensure than only necessary medical procedures are conducted.

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Product Design and Consumer Choices in the Individual Insurance Market

February 18, 2008 in Health Insurance, HSA | Permalink

What is the cost of the last article of clothing you bought. This is easy to determine, just check your credit card statement.

Which is cost of health insurance? This answer is more difficult to find. Sure, there is the price of the premium, but different insurance plans have different co-pay/co-insurance levels and different deductible amounts. How do these insurance product design parameters affect the demand for insurance?

This is the question tackled by Marquis et al. (2007). The authors use a nested logit model to examine plan characteristics within the individual insurance market. In their nested logit, the authors assume individuals first choose whether to be insured or not. Then, they must choose which type of insurance (PPO, POS, HMO, etc.). After they choose which type of plan they prefer, then a carrier is chosen. This methodology is based on the work of McFadden (1978).

The authors find an elasticity estimate of -2.0 for plan choice among purchaser. This means that those who are insurer are very price sensitive. However, Marquis and co-authors also find that once a particular company is selected, there are significant switching costs to changing companies. The elasticity of switching companies once a plan type (PPO, HMO etc.) is chosen is only -0.4.

The authors also find that:

…a 3 percent decrease in the actuarially adjusted price (or a 4 percent decrease in the nominal premium) would induce a healthy consumer to switch to a plan with a 50 percent higher deductible. For a riskier consumer, however, it would take a 4.5 percent decrease in the actuarially adjusted premium (or a 5.5 percent decrease in the nominal premium) to make the switch. This suggests that there is potential for selection in consumer-directed health plans—an outcome that concerns many critics of these new plans. In addition, the findings suggest that introducing new high-deductible products is unlikely to play a major role in reducing the number of uninsured.

Consumer education regarding the choice of different plans and help to expand coverage by introducing consumers to low-cost (actuarially) insurance options.

Tax-preferred health savings accounts

March 7, 2007 in HSA, Optimal Ins (Theory) | Permalink

Health savings accounts (HSAs) have been a major point of contention for health care reformers. Supporters claim that HSAs can reduce health care costs by decreasing the moral hazard problem inherent when third parties—such as insurance companies or the government—pay for medical services. Opponents claims that HSAs will attract rich and healthy individuals, leaving only poor or sick individuals in the ‘regular’ insurance pool.

One interesting point made in Cardon and Showalter (JHE 2007) is the following:

“Both opponents and advocates of HSAs tend to argue that HSAs will lead to less reliance on insurance, either through higher coinsurance rates and deductibles, or through fewer purchases of policies. This line of reasoning ignores the fact that accumulated HSA balances are wealth, and health insurance protects this wealth. Even individuals with large HSA balances would typically value insurance to protect those balances for future use. HSAs will tend to reduce levels of insurance coverage, but the effect seems unlikely to be as large as some previous researchers suggest.”

The Cardon and Showalter article also gives a nice description of the five main types of tax-preferred health savings accounts.

  1. “Archer medical savings accounts (MSAs): accounts in which an individual and/or an employer can contribute pre-tax dollars to pay for most health care services. The tax advantage is the same as for employer-provided health insurance premiums. Unused monies can accumulate over time. An experiment authorized under the Kassebaum-Kennedy bill (Health Insurance Portability and Accountability Act of 1996) allowed for restricted introduction of MSAs which included the requirement of purchasing a catastrophic, (high-deductible) health insurance policy (MSA/CHP).
  2. Flexible spending accounts (FSAs): like HSAs, but with no link to insurance coverage. Funds not used by the end of the year revert to the employer.
  3. Rollover FSAs: these would allow limited rollover of FSA monies without the restrictions on insurance choices that the current HSA rules require.
  4. Health reimbursement arrangements (HRAs): tax-exempt individual accounts used to pay for medical expenditures. Accounts are funded by employers; employee contributions are not allowed. Ownership of the accounts remains with the employer, unlike HSAs and FSAs.
  5. Medical IRAs. This proposal would allow consumers to make penalty-free early withdrawals from their retirement plans to pay for allowable medical expenditures.”