In a previous post, I covered some of the non-intuitive aspects of designing health insurance products for employees of a company. I said I bet that if you were to look at the trends in medical insurance premium growth for companies in the US, you would find a bimodal distribution. Some will have experienced a rate of premium growth lower than the average, and others will have experienced a rate above the average. What might account for this?
I'd like to suggest that a factor in the differential premium growth rates relates to whether companies have affirmatively counteracted the strategic plans of health insurers to migrate employees to plans that correspond to greater use of health care services.
Several commenters questioned this conclusion, noting that many employers self-insure and so would not be affected by the strategic aims of insurers. Well, the answer to this is that self-insured employers tend to listen to the advice given by the insurance company that administers their plan.
So, let's spend a little time talking about self-insured companies. First, it will certainly be to the advantage of employers, once Obamacare kicks in, to self-insure. Estimates call for dramatic increases in insurance premiums with the cost add-ons that result from the Affordable Care Act. Today, there is about an 8 to 12% difference in the cost of carrier-provided insurance and self-insurance, and this difference will be amplified in coming years. In the past, some employers have shied away from self-insurance because of the possible volatility in claims year to year. Those with self-insurance often buy aggregate coverage, which creates a band around that volatility, but there was always the potential (even with that insurance) that the costs paid would have exceeded the higher, but more stable, carrier insurance. With the increases from Obamacare, the chance of even volatile costs exceeding the carrier insurance costs will be dramatically diminished.
But that still leaves the question of plan design. Our goal as an employer should be to encourage younger, low-cost staff to join our plan and to encourage older, high-cost staff to join their spouse's plan at another employer or to go to an exchange. (Age is the primary determinant of utilization.) We want to minimize the number of claims we have to pay and also the size of those claims. This will put us on the path to be in the left-hand side of the bimodal distribution, facing increases in healthcare costs well below the regional trend.
But many self-insured employers undercut this objective. For reasons of perceived employee equity and in the name of "consumer-driven health care," they offer two or three options to their staff. The one that is often offered at a discount is a high deductible plan with a moderate annual out-of-pocket maximum--let's say a $500 deductible with a $2000 OOP maximum. This plan might have a predicted actuarial value --the percentage of total average costs for covered benefits that the plan will cover--of say, 80%, leaving the consumer responsible for 20% of the costs. This plan is not attractive to healthier workers who are unlikely to be hospitalized but are likely to incur the deductible in office visits. It is extremely attractive, though, to staff members who expect to have lots of medical bills, and especially those who expect hospitalization. The employer has given a discount to precisely the wrong people, the ones who will end up driving up the firm's health care cost trend because of their higher utilization of services.
Instead, imagine a plan with zero deductibles, but with an OOP maximum of $5000. The actuarial value might be in the range of 95%, leaving the consumer responsible for only 5% of the costs. This is much more attractive to the younger, healthier group. It is clearly unattractive to the high-risk segment of staff, and they will seek alternatives. It does not take many of them to move out of the company's plan to make a huge difference in costs and the cost trend. Indeed, even if the actuaries predicted that the zero-deductible plan would be more expensive to the company than the first design described above, the ultimate expense would actually be lower because of this out-migration.
If you consider that the younger workers also tend to be the lower paid workers, you see also that the typical discounted program is playing reverse Robin Hood, assigning higher costs to the lower income staff and lower costs to the higher income staff. In terms of equity, its application is actually backward--all in the name of consumer-driven health care.
Does it make you feel uneasy to think of firms encouraging some (older, less healthy, more highly paid) staff out of their self- insurance plan? Recall what I said in the last post on this topic You may ask, where will they go? Well, here is an unpleasant aspect, but one that is inherent in the employer-based insurance system we have in the US. As a colleague has said to me, "If I invite bad risk, it comes from somewhere. If I encourage it to leave, it goes somewhere. This is a zero sum game." Specifically, a working couple will sit around the kitchen table comparing the health plans offered by their respective two employers. They will transfer coverage to whichever spouse's firm offers the larger subsidy for their high-risk plan. That company will find itself shifted to a higher cost curve and will find itself moving up that cost curve at a rate greater than the average trend. The company that has systematically acted to reduce untoward subsidies will find itself shifted to a lower cost curve and will find itself moving more gradually up that cost curve. Simple mathematics drives this result.