Monday, January 28, 2008

Group vs Individual: Mixed Feelings (Part 1)

[Welcome Industry Radar readers!]

Here's the thing: I am not, in general, a fan of tying health insurance to employment. Yes, there are advantages to group coverage, but these are a result of such a system, not a raison d'etre. On the other hand, simply deleting the current system creates its own problems, especially vis folks who might find it difficult to find individual coverage (affordable or otherwise).
In the past, I've pooh-poohed the "105'ers" who champion the idea of wholesale deletion of group plans, with little (if any) regard to those latter folks. I think their approach is simplistic and overly optimistic. And yet...
In a recent USA Today article, writer Julie Appleby looks at one proposed solution to the employer-based insurance conundrum. She also makes some incorrect observations of, and assertions about, how insurance works. We'll want to deal with those, as well; sometimes, there's just so much material that it's difficult to know how to write a meaningful, yet reasonably sized, post. And so, this particular effort will come to you in two parts. In this first post, we'll look at the issues and challenges of the aforementioned "solution" to the employer-based insurance conundrum. In Part 2, we'll debunk some of the side issues raised by Ms Appleby.
Let's begin, shall we?
As mentioned, we've been pretty hard on what we've called the "105'ers." The name comes from their use of Section 105 of the Internal Revenue Code, which (under certain circumstances) extends tax advantages to individual plans that mirror those for group. Our issue with these folks has always been their "I have only a hammer, thus everything looks like a nail" approach to benefits management.
But maybe they were on to something, after all:
And he's not the only one. Recently, Bob and I have had a major email conversation about a friend of his who's doing this kind of work in Florida. Rather than a straight 105 plan, he's using the newer Health Reimbursement Arrangement (essentially the same thing, with a different wrapper). But the end result is the same: a defined contribution plan in lieu of a defined benefit one.
NB: Most group health plans are Defined Benefit plans; that is, there's a group insurance plan (either fully or self-insured) with covered expenses which are clearly stated up-front ('this deductible, that co-pay'). The premiums within the group may differ, depending on age, sex, family status, etc (but not health). A Defined Contribution plan, on the other hand, is one which promises a stated cash contribution, from which employees are free to pick the plan of their choice.
The problem is that the safeguards currently in place for group plans don't exist in the individual market. This is neither good nor bad, it just is. The reason "it's not good or bad" is that, while these safeguards are helpful protections, they come at a (literal) price. So there's a trade-off of safety versus cost.
"The healthy employees don't have to pay for sick employees," says Pilzer [ed: author of a book on this subject]...employers can save money because they contribute a set amount per employee — often far less than they pay for group coverage."
And there's the rub: the basic idea behind insurance is to spread the risk; "spreading the risk" means that healthy folks are, to some extent, subsidizing the unhealthy (younger subsidizing older, etc). When you remove the "invincible youths" from the larger risk pool, you upset that balance.
Now, it's tempting to say "so what?" - and that's what I've called the 105'ers out on in the past. But I also know that insurance costs continue to rise (thanks primarily to more and more government mandates, and the ever increasing cost of health care itself). And that needs to be addressed.
Some folks think that we should do away with group cover in favor of individual plans, but only "if Congress passes national rules requiring insurers to take everyone, regardless of his or her health." Great, more gummint intervention and complication.
Actually, I agree with the first half of that statement: we should do away with group coverage as it exists now. But not for the reasons we've seen thus far. No, my issue with group cover is far more simple, and fundamental: the basic premise behind group health insurance is that "one size fits all" (I know, what about "cafeteria plans?" We'll address that in another post). As anyone who's ever bought gloves can tell you, "one size fits all" is only half of the statement: "but not very well" completes the phrase. Thus, you have folks who really want an HSA forced into an expensive and "ill-fitting" co-pay plan, and folks who just want to know how much the doctor's visit will cost shoved unceremoniously into an HSA plan.
And that's where individual plans become attractive: when you're in charge of buying your own health insurance (just as you're already in charge of buying - if not necessarily paying for - your own health care), you tend to want what you want (and/or need). Yes, many folks buy "too much insurance," but that doesn't negate the basic idea. Under a Defined Contribution plan, each employee can buy the kind of insurance that (hopefully) fits their own needs, rather than those of others in the group. That fits in neatly with another InsureBlog meme: personal responsibility.
What Bob's friend and folks like Pilzer are doing is wrapping that cash contribution in a tax-advantaged HRA (yes, that's redundant, but I'm trying to make a point). By doing so, they hope to give employers and employees the best of both worlds (or at least a part of the best): the tax advantages of group with the flexibility of individual. And that's not necessarily such a bad idea.
Or is it?
For the most part, group insurance is subject to HIPAA. Briefly, this means that they can't exclude or charge unhealthy folks more, and coverage is "portable" (generally, you can go from group plan to group plan without worrying about pre-existing conditions). But group plans can cost considerably more than comparable individual ones; hence the attraction of these new programs. The problem is, I haven't seen either our old 105 "friends" or Bob's colleague address an issue which Ms Appleby throws in at the last minute:
"Berneche had to certify on his individual insurance application that his company was not reimbursing him. Yet the contributions his company provides are at least a partial reimbursement."
That is, carriers who offer individual plans want to make sure that their policies aren't subject to the more regulation-intensive group environment. So they make sure at the outset that there's no connection between the employer and the insurance. But, as Ms Appleby (correctly) points out, the key word in HRA is "reimbursement," which now renders the application (and perhaps the policy itself) suspect. There've been a lot of stories about rescission, both here and in the popular press, and this may be a major can of worms.
"The Department of Labor and the Treasury Department are considering whether federal rules that apply to group insurance also apply in programs such as Zane's, in which an employer makes a contribution but doesn't offer a group plan, a statement from the Department of Labor says."
If they do (and this certainly seems at least plausible), then I really have to question the concept's long-term viability.
In Part 2, we'll discuss some of the problems inherent in group coverage, and another intriguing proposal.
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