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The Managed Care Insider eNews
Volume Three Number 5
May 2001
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The Managed Care Insider eNews is committed to publish readers' responses to
our columns. This month, we present a viewpoint from Chris Sipes, offering his
opinion on defined contribution. (See TMCIe, April 2001, Vol. 3, n 4 at http://www.scheur.com/smghome.nsf/enews/eZineArchVol3No4Part1.html )
Mr. Sipes makes some valuable comments.
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Defined Contribution Medical Plans
Although there is a lot of discussion and some activity going on with Defined
Contribution Plans, the largest disadvantage is often overlooked. This was also
true in your newsletter. This is the cost discrepancies that develop under employee
choice plans due to anti-selection. That is, the healthy individuals buy the
lower cost plans generating less premium and the higher cost individuals select
the richer plans. Actuarially the value difference in benefits may only be 10%
but after employee choice the actual cost differences may be closer to 50%.
Let me give you two real life examples. Maternity used to be an optional coverage
offered by many small group health insurers. However as groups elected maternity
coverage only when they thought they needed it, the cost differential between
coverage with and without maternity continued to spread. Eventually the cost
of the maternity option got prohibitive, even though employers didn't always
know when their employees would or would not need the coverage. Their effort
to buy the coverage needed created a significant bias in the rates. The solution
was offering maternity to all groups and reflecting the maternity risk in the
age/sex factors of the individual employer's census.
Another example is the state employee program here in Kentucky. Employees are
offered both a Plan A and Plan B benefit for HMO, POS or PPO. The benefit difference
between Plan A and Plan B is less than 10%, but the experience difference is
close to 50%. The state limits the insurance carriers' rate difference to 10%
thus requiring that the Plan B premium be loaded substantially to subsidize the
Plan A experience. Employees/dependents who have health problems buy the rich
benefit (even though they pay for the difference) while healthy employees/dependents
choose the lower cost benefit.
As more benefit choices are offered, more and more subsidy of the individuals
selecting the richer benefits is required from the individuals selecting lower
benefits. These healthy individuals should be able to buy more preventive benefits
and healthy lifestyle choices, but because of the subsidy situation, if they
add these choices they can actually end up contributing more for their health
care package than an individual buying only the richer benefit plan without healthy
lifestyle choices.
If the employer is paying all of the cost on a self-funded basis this is not
a significant problem. For a self-funded program with payroll deduction for part
of the coverage it can create a large disparity between employees based on their
health as reflected in the coverages they elect. However if it is an insured
program, employee choice of benefits can also create an overall increase in cost,
especially if more than one carrier is offered. The carrier with richer benefits
continually has to raise rates above what the benefits would require without
employee choice. The greater the range of benefits and the greater the number
of benefit options, the greater the amount of anti-selection that occurs.
If poor health or higher medical cost were entirely within an individual's control,
employee choice of benefits would at least be fair. However because most of the
cost difference between employees reflects age and sex differences as well as
claims unrelated to an individuals lifestyle, making healthy people pay a greater
subsidy for coverage than they do under the current spreading of risk premium
for similar benefits seems grossly unfair.
You might find it of interest to know that medical spending accounts (MSAs) are
subject to the same anti-selection impact, except that the high risk or high
cost individual is the one that is hurt. The employer changes from a normal small
group program (either HMO, POS or PPO) with limited out-of-pocket expenses for
his employees when they have claims to a high deductible, high out-of-pocket
benefit plan under the MSA. The difference in cost is given to the employee for
his/her MSA. The healthy employee builds up a cash balance in the MSA to use
to cover other medical expenses. However the individual with ongoing medical
expenses, whether drugs, frequent office visits or more serious problems that
occur in the first year finds that they never get a chance to build up a cash
balance and thus end up with a significantly higher out-of-pocket cost every
year under the MSA plan. The result is that the 20% or so of employees in the
most need of medical coverage are the ones that lose coverage under an MSA. This
is one reason many small employers have not implemented MSAs - it often hurts
their older or long term employees (including the owners) who happen to have
more medical problems. Again giving the employee the choice of how much coverage
they need creates a large disparity in costs.
Thanks,
Chris Sipes
As always, The Managed Care Insider eNews wants to hear from you. Email your
comments to insider@scheur.com. Viewpoints are published with permission.
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What's New at SMG/VHPG:
The OATH, A Health Plan for Alabama names new president and COO, see more at http://www.theoathofalabama.com/pr/releases/041701-01.htm
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Speaking Engagements:
September 9, 2001
NAHQ's 26th Annual Educational Conference
Reno, NV
Topic: "Resuscitating Managed Care: Getting Off Life Support and Recovering
Credibility"
Speaker: Barry S. Scheur
October 12, 2001
ViPS interAct 2001 Customer Conference
Monarch Hotel, Washington, DC
General Session: "E-Health"
Speaker: Barry S. Scheur
If you are interested in contracting either Barry Scheur or any SMG/VHPG associate
for your organization, please contact Nancy Belle at nbelle@scheur.com
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End of The Managed Care Insider eNews,
Volume Three, Number 5.
Scheur Management Group (SMG) is one of the most experienced specialized healthcare
operations management and business revitalization consulting firms in the country.
Our expertise is in time-sensitive analyses, strategic business and market planning,
operational re-engineering, and communications, as well as implementation of
start-ups, expansions, and new products. The firm's clients cover the spectrum
of insurers, managed care organizations, physician groups, integrated delivery
systems, hospitals, employers, governmental entities, vendors, and other providers.
Contributing to this edition is Chris Sipes. Editing and Research by Judith A.
Jaffe. Production Coordination by Nancy K. Belle.
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