Making Health Insurance PortableCommentary by John C Goodman
January 30, 2006
One of the strange features of the U.S. health care system is that the health plan most of us have is not a plan that we chose; rather, it was selected by our employer. Even if we like our health plan, we could easily lose coverage because of the loss of a job, a change in employment or a decision by our employer. These problems affect all Americans, but lack of individually owned, personal and portable health insurance has its greatest impact on older workers, who are more likely to have health problems.
Problem: Lack of Continuity of Insurance. Virtually all employer health insurance contracts last only 12 months. At the end of the year, the employer - in search of ways to reduce costs - may choose a different health plan or cease providing health insurance altogether. Strangely, the only people with private health insurance guaranteed to last longer than one year are people who purchase insurance on their own.
Problem: Lack of Continuity of Care. Employer-sponsored health care largely evolved at a time when most health insurance was fee-for-service. Fee-for-service means an employee can see any doctor or enter any hospital and insurance paid all or most of the bills. As a result, a change of jobs usually did not cause undue disruption, provided that both the new and old employer had health insurance plans.
Things changed after the introduction of managed care. Today, as in the fee-for-service era, employees who switch jobs must also switch health plans. All too often, that means changing doctors as well, since each health plan tends to have its own network. For example, if an employee (or a member of the employee's family) has a health problem, there may be an interruption in the continuity of care. Additionally, different employer plans have different benefit packages. Thus, coverage for some services, like mental health, may be covered under one employer's plan but not under the next employer's plan.
These disruptions affect some families more than others. For people who are healthy, they may amount to minor inconveniences, but for others the problems can be severe. One study of chronically ill workers found that relying on one's employer for health coverage reduces job mobility by 40 percent compared to similar workers who obtain their health coverage elsewhere.
Problem: Perverse Incentives for Employers and Employees. Most employees view health insurance as a fringe benefit. When they enter the job market, they primarily search for employment opportunities that reward them for their skills and abilities. But a growing minority of workers approaches the job market very differently. These are individuals with a family member (often a spouse or child) who has very high health care costs. When these workers compare job opportunities, they are primarily comparing health plans. For them, health insurance is the main attraction, rather than the job or the pay.
Clearly it is not in the financial self interest of employers to attract workers whose primary motivation is to get their medical bills paid. So, to protect themselves from such potential hires, employers are increasingly altering their health plans to attract the healthy and avoid the sick. Having small copayments for routine office visits and higher deductibles for hospitalization is one technique. Having long waiting periods before employees become eligible for the company's health plan is another.
These reactions on the part of employers are rational responses to a labor market that increasingly is looking like a game of musical chairs. But what is good for the employer is not necessarily good for society as a whole.
Problem: Younger Spouses and Retirees on Medicare. The lack of individually owned, portable insurance is particularly burdensome for many women who are married to older men. When a husband retires and enrolls in Medicare, wives may be left without any coverage - and often at vulnerable times in their lives. At the same time, Medicare won't allow members to sign up underage spouses. Until the wife reaches 65 and can also enroll in Medicare, the couple will have to purchase her insurance with after-tax dollars. She'll also be at a time in her life when she's charged higher premiums for health insurance, since health risks tend to rise with age. And she'll pay even more (or possibly even be denied insurance altogether) if she already has an expensive health problem or is recovering from a disease such a breast cancer.
Problem: Federal Laws Designed to Encourage Portability Have Actually Outlawed It. Under the current system, employers cannot buy individually-owned insurance for their employees. Specifically, lawyers interpret the Health Insurance Portability and Accountability Act of 1996 (HIPAA) to say that if employers purchase employee health insurance with untaxed dollars, the insurance must be group insurance. A better alternative would allow employers to purchase individually-owned, personal and portable insurance for their employees. Even though employers would pay some or all of the premiums, employees could take the insurance with them as they move from job to job.
Source of the Problem: Tax Penalties for Portable Insurance. Tax law is the main reason companies provide their workers with health insurance rather than pay higher wages with which employees could buy their own insurance.
People receiving employer-based health insurance enjoy an enormous tax advantage. Employer-paid premiums avoid federal, state and local income taxes, as well as the (FICA) payroll tax. By contrast, people who buy their own insurance get no tax break unless their medical costs exceed 7.5 percent of their adjusted gross income. Even then they get only a simple deduction and must itemize on their tax return. As a result, genuinely portable insurance is actually penalized under the tax law.
For a typical middle class family, government is effectively paying for half the cost of employer-provided health insurance. To see what this means, suppose that insurance for the family costs $6,000. If the insurance is purchased by an employer, it can be purchased with pretax dollars. This implies that the employee must produce and earn $6,000 that will be set aside as pretax payment for insurance rather than as taxable wages. However, if the insurance were to be purchased directly by the family, the employee must earn $12,000 in order to have enough left over after the payment of taxes to pay for the insurance. In terms of the amount of pretax income needed to purchase insurance, insurance purchased directly with after-tax dollars costs the family twice as much!
Creating Personal and Portable Health Insurance. Just because employers pay all or most of the premium does not mean that health insurance must necessarily be employer-specific. As an alternative, why can't employees enroll in health plans that meet their needs and stay in those plans as they travel from job to job? Personal and portable health insurance would solve many of these problems.
Employers should be able to buy personal and portable insurance for their employees. Even though employers initially would pay the premiums (as they do today), this insurance would be owned by the employees and would travel with them as they move through the labor market. Thus employees would get portable insurance (a characteristic of individual insurance), but they would get it at premiums that are closer to the norms of group insurance.
Although it is envisioned that employers initially will buy all their employees into the same health plan, with the passage of time some of those employees will leave and go to work for other firms. Employers will also hire new employees who are members of other plans. And, in most cases, the employer's initial group of employees will be able to switch to other plans after a transition period. The typical employer, therefore, can eventually expect to have employees in different plans. Indeed, it is possible that every employee will be in a different plan.
Advantages of Portable Insurance. Portable health insurance promises a continuing relationship with an insurer and, therefore, a continuing relationship with doctors and health facilities. It also means that people can find a health plan they like and stay in it, without worrying whether they will be forced out of the plan by an employer's decision or by a change in employment.
For employers, portable health insurance means that small groups are no longer treated as a self-contained pool and rated each year based on changes in health status of their employees. Instead, their employees will be members of very large pools in which no one can be singled out because of a sudden large medical expense, and premium increases are the same for all. Under this system, employees can be in a plan of their own choosing and employers can limit their contribution to a fixed dollar amount. New hires will know how much the employer is going to contribute to health insurance, just as they know the amount of their salary. Because the employer's role is largely financial, in a real sense employers will get out of the "business" of health insurance.
The NCPA/Texas Blue Cross/Blue Shield Plan to Create Personal and Portable Insurance at the State Level
The proposal that follows was presented to Gov. George W. Bush's Blue Ribbon Commission on the uninsured by the National Center for Policy Analysis and Texas Blue Cross and Blue Shield in 1999.
How can the purchase of health insurance be changed to allow individual ownership and portability? The goal of this proposal is to combine the advantages of individual insurance with the advantages of group insurance and avoid the disadvantages of both. This new, hybrid form of insurance will be called New System Plans (NSPs). Employers who assist their employees in entering NSPs through the payment of premiums will be called Defined Contribution Employers (DCEs).
Transition. We envision that most employees will enter NSPs by converting from group insurance and that the conversion will be through the actions of an employer. Specifically, an employer will choose an NSP for all the employees, much as employers choose group insurance today. Rules that apply to the group market today probably would still apply, including the requirement that (1) employers pay a substantial part of the premium, (2) a substantial percentage of employees elect to insure, and (3) any new employees elect to insure on a date certain, not of their choosing. In return the group could avoid the administrative cost of individual underwriting (although this would not be a legislative requirement).
A typical transition period may involve a three-year contract. After the three-year period, employees will be free to switch to another NSP if they are dissatisfied with their plan. However, an individual's entry into another NSP is not guaranteed. During the three-year period, new employees who are not members of another NSP will be required to join the employer's selected NSP in order to qualify for an employer contribution.
Some employers may choose to have longer-term relations with an insurer. For example, a NSP may agree to take all of an employer's new employees without underwriting provided that eligible employees (not insured elsewhere) will not receive the employer's insurance contribution unless they join the NSP.
Parallel Systems. No employer will be required to be a DCE. And no insurer will be required to offer a NSP. Therefore it is envisioned that for some time there will be parallel systems - with some employers and employees participating in the new system and others participating in conventional small group or large group markets.
Regulatory Status. Even though DCE employers pay premiums (to take advantage of the tax law), NSPs will be technically considered individual insurance. (Note: In most states individual insurance is not guaranteed issue.)
Relation to HIPAA. Although federal law requires small group insurance to be guaranteed issue, states are free to choose their own mechanism to insure people who convert from group to individual insurance. Most states have chosen to make such individuals eligible for the state risk pool. Under this proposal most employers who become DCE employers will be assisting their employees in converting from group to individual insurance. Therefore, NSPs do not have to be guaranteed issue.
The Role of the Employer. Currently, employers cannot pay premiums for individual insurance for their employees. This proposal would allow them to do so. In return for this right, DCE employers will have certain obligations. One such obligation is to offer a fixed sum contribution toward premiums for every employee. This contribution could vary by age and other factors. But employers could not discriminate against employees based on health status. Another obligation is the requirement to make a full monthly premium payment to each employee's NSP.
For example, Exhibit I illustrates the case of an employer who offers a $600 monthly contribution and who sends checks of varying amounts to cover the full premium to different NSPs. Exhibit II shows an employee whose NSP requires a $700 a month premium payment. The DCE deducts $100 from the employee's wages, adds the $600 employer contribution, and pays the $700 premium each month. In Exhibit III, an employee is in an NSP costing only $500. This means that the employer pays the $500 premium each month and $100 of the employer's $600 contribution may go to the employee's IRA (or to some other designated account).
Note: Employees must be in a NSP in order to qualify for their employer's contribution. Note also: Employers have certain administrative functions under this proposal that are comparable to those associated with administering 401(k) plans.
High Cost Enrollees. We propose several protections. First, NSPs who convert employees from group to individual (NSP) insurance must accept or reject the entire group. If all NSPs reject a group, the group can still go to the conventional small group market, where acceptance is guaranteed. Second, as an inducement to NSPs, we propose that if a NSP accepts a group below a minimum size without individual underwriting, there will be a six month look back period - during which time the NSP will have the opportunity to (a) move the enrollee to the risk pool, (b) qualify for reinsurance or (c) qualify for a direct subsidy.
It is important that all three subsidies (a thru c) be funded through from general revenues and not from a tax on health insurance or health care. The reason: We want to encourage people to purchase health insurance and we want people to obtain health care when they need it - undeterred by taxes.
High Cost Employees in a Mature System. In a mature system, most eligible employees will be members of NSPs, and their membership will be guaranteed renewable. Thus an individual who develops an expensive-to-treat illness need not fear losing coverage because he switches jobs or is laid off, or because his employer switches health plans or arbitrarily changes the benefits covered in the existing plan.
However, some high cost employees may fall through the cracks and become uninsured - because they failed to sign up for insurance when eligible, because they worked for an employer who did not provide insurance, or because they previously had traditional insurance with another employer, etc. What happens to these individuals?
In some cases they will be able to enter an NSP without medical underwriting under the terms of a contract between an employer and an NSP that allows such entry. Moreover, anyone who is entitled to coverage under HIPAA will be able to obtain coverage from the state risk pool. If the individual works for a DCE employer, the DCE's premium contribution will be made to the risk pool - just like an ordinary insurance premium payment.
Specialty Health Plans. We would like to encourage health plans to specialize in the treatment of expensive-to-treat illnesses, such as cancer, heart disease etc. These specialty plans are "focused factories" that are very good and very efficient. It should be a goal of public policy to encourage arrangements whereby individuals can leave NSPs (and perhaps traditional health plans as well) and join a plan specializing in the treatment of their condition. Such movement will require the voluntary agreement of the patient and the two plans and will almost certainly involve a payment to the specialty plan from the original plan. But both plans should gain from the arrangement because of the substitution of more efficient for less efficient care. Patients should gain because they get better care.