Lecture 10 Medical Benefits: The Changing Environment

1. Lecture 10Medical Benefits: The Changing Environment • Health Care in United States • Taxation • Development of Medical Expense Coverage • Cost Containment and Managed Care • State Reforms • Federal Role in Health Care

2. Health Care Costs in United States • Total costs in excess of $1 trillion • 14% of GNP (in 1960, 5.4% of GNP) • Health care costs in 1998 • Per employee $3,817 • Per retiree $4,984 (under 65) $2,092 (65 and older) • No other country devotes more than 10% of GNP to health care • US rank on health status (of 24 OECD countries) • Male life expectancy 17th • Female life expectancy 16th • Infant mortality 21st

3. Health Care Costs in United States - (cont.) • Salaries of Doctors to Average Worker • US 5.4 • Germany 4.2 • Canada 3.7 • England, France, Japan 2.4 • Incentives to specialize • Fraud • Unnecessary treatment • 1/7th of health care dollars spent for treatment during last 6 months of life • 28% of Medicare expenditures for those over 65 spent for last year of life • Administrative costs over $200 billion

4. Taxation • Employer paid premiums are tax deductible for employer and not taxable income for employee • Employee paid premiums can be paid in pre-tax dollars • Medical expense benefits received are tax free except • if they exceed medical expenses • if they are paid for cosmetic surgery • if they are paid to a Highly Compensated Individual (HCI) under a self-funded discriminatory plan

5. Development of Medical Expense Coverage • Prior to 1930 medical expenses paid by individual • Blue Cross and Blue Shield (1930s) • Health Maintenance Organizations (HMOs) • Initially (1929 and 1930s) • Growth (1970s) • Insurance Companies • Early efforts (1930s) • Major medical (1949) • Government Involvement • Medicare (1960s) • Medicaid (1960s)

6. Development of Medical Expense Coverage - (cont.) • Reaction to Spiraling Costs • ERISA (1974) • HMO Act (1973) • Continued Change • National Health Insurance Proposal • Self-funding of benefits • Cost-shifting to employees • Managed care • in 1980 90% of insured employees under traditional plans • by 1995 75% of insured employees under managed care

7. 1970-1993 Medical component of CPI increased over twice as fast as the general inflation rate 1994-1997 Medical costs in line with inflation 1998- Medical costs increasing over the rate of inflation again Reasons for cost increases Technology Malpractice suits Third-party payments Undercapacity Design of medical plans AIDS Aging population Reason for slowing rate Managed care Cost-shifting Cost Containment and Managed Care

8. Cost Containment Measures • Benefit plan design • Alternative providers • Alternative funding methods • Claims review • Health education and preventive care • External cost-control systems • Managed care • Controlled access to providers • Comprehensive case management • Preventive care • Risk sharing • High-quality care

9. State Reforms • NAIC Small Employer Health Insurance Availability Model Act • Tort reform • Claim administration reform • Health Insurance Purchasing Cooperatives

10. Federal Role in Health Care • National Health Insurance Proposal • Medical Savings Accounts • Managed Care Reform Legislation • Health Care Quality Choice Act