Private health insurance, New measures in a complex and changing industry

The estimates of private health insurance prepared in conjunction with estimates of national health spending have undergone major revisions. The need to revise estimates for private health insurance became apparent during an investigation into changes in the taxation of employer-sponsored health insurance. … The total amount of employer contributions has been revised as it determines the size of the impact on federal revenue for both the proposed limit on employer contributions and those proposed to allow for widespread use of expense accounts flexible in cafeteria plans.

Comparison with other independent indicators showed that the previous HCFA estimates were too low. For example, the share of spending on personal health care in hospitals and health services covered by insurance has decreased in national health spending accounts. This decline seemed unreasonable, as it happened at a time when the proportion of the population covered by insurance remained constant. Additionally, benefits continued to increase as deductibles and cash limits are generally set in dollar terms.

The review found that important industry components previously excluded from the estimates because they could cause double-counting do not duplicate each other. The main items omitted were the insurance premiums for “administrative services only” and “minimum premium plan”. Besides, provisions were created for new components of the industry that had not been previously estimated. An example is a new form of insurance management known as third-party administrators.

An approach was developed to accommodate these considerations and reflect new data sources, improved estimation methods, and a revised conceptual framework for estimations. As a result, benefits for 1982 increased by about 19 percent, and total benefits increased by $ 14.2 billion, from $ 76.6 billion to $ 90.8 billion. The revised approach affects pre-1975 estimates and is implicit in the new 1983 estimates.

This article discusses a new methodology for measuring private health insurance and summarizes the results of the revised approach. It also explores health insurance concepts such as management, risk, regulation, provider choice, and others. The last section provides a summary of the results and indicates the need for further research in this area.

New estimates for private health insurance

In recent years, there have been several fundamental changes in the financing and management of private health insurance plans. Insurers increasingly provide administrative services only for many of the employer’s health insurance plans and no longer carry any risk.1 For many other employers, contracts have been divided into self-financed and insurance parts, with the insurer providing coverage equivalent to a traditional insurance plan2. Other employers are self-insured, but receive protection against catastrophic claims. This type of insurance is known in the industry as incremental loss insurance, loss limitation insurance, or reinsurance. In this document, it will be referred to as excessive loss insurance.

These changes came at a time when a large number of employers were converting insurance contracts into some form of self-insurance or self-financing. Here, “self-insurance” means that an employer, union, or other group assumes all or most of the claims risk during the policy year. Whether a self-funded plan is self-insured depends on whether steps have been taken to transfer risk to another party through an insurance contract. Self-insurance and self-financing provide employers with several benefits. Self-insurance plans are exempt from state regulation under federal law in the Employee Retirement Benefits Act of 1974. Accordingly, state laws require that insurance from certain institutions (such as alcohol treatment facilities), medical ( such as orthopedists, chiropractors or clinical psychologists) or therapies (such as outpatient mental health services) do not apply. The potential benefits of self-funded plans are avoiding most premium taxes, giving employers access to claim reserves for business use, and receiving tax-free interest on the reserves.

The self-insurance and self-financing trends have opened up new market opportunities for independent asset managers called “third-party managers” (or TPAs), and these companies have claimed a significant market share. Other significant changes were the growth of health maintenance organizations (HMOs) and other alternative health systems, including preferred provider organizations (or PPOs) and “cafeteria plans.” All these changes fundamentally affect the distribution of risks between employers and insurers, the responsibility to determine the amount of compensation, and other important aspects of insurance contracts.

Review of previous methods

Previous estimates for HCFA’s private health insurance were based on three main data sources: Blue Cross and Blue Shield Association (Blues), Health Insurance Association of America (HIAA), and the HCFA Annual Survey of Independent Prepaid Self-Insurance Plans. These sources are still available. Blue Cross / Blue Shield provides estimates of national totals for financial coverage and records.4 HIAA provides similar estimates for the regular business of an insurance company and, since 1978, for administrative service contracts only (ASO) and minimum premiums. business plans (MPP). These estimates are based on an annual sample survey conducted by health insurance companies.

The results of your regular business survey are tracked with totals drawn from annual reports filed with government insurance departments5. Finally, the HCFA survey was designed to cover the rest of the health insurance industry. Self-insured employer and union plans were surveyed, as well as prepaid plans such as HMOs and dental and vision plans.

Many of the problems with previous estimates are related to the processing of independent plans and, in particular, the correct measurement of self-insurance plans. The independent health plans of the HCFA have been reviewed annually since 1942. This annual survey is compared with figures from the independently designed periodic universe census. The last census was conducted in 1978 based on data from 1977.

A recent evaluation of the process has revealed two common weaknesses. First, the set of stand-alone plans was incomplete because virtually all of the workforce management plans in the census are self-insured and self-administered. Self-insured plans that are administered by a third party, an insurance company, a Blue Cross or Blue Shield plan, or TPA, for the most part, do not appear in the database. Second, there was no method to measure annual changes in the number of new independent planes in the universe. These issues are especially serious because, according to the HIAA, most of the participating experience plans insured by commercial insurers were converted to ASO or MPP during this period. The ASO and MPP scores were available in 1978. However, they were not included in the estimates for private health insurance because they were thought to duplicate the HCFA estimates for self-insurance plans.

In addition to ASO and MPP, TPA grew rapidly. Hundreds of TPA companies have been identified, but only a few were operating in 1975. Finally, new developments have led to an increase in the number of self-directed plans. Among these developments are timeshare software and specialized consultants to assist plan administrators.

A fixed and incomplete sampling frame for surveys conducted in 1978 and later resulted in a downward bias in the valuation of self-insurance plans. TPA business plans were not examined and relatively few ASO or MPP plans were included in the sample frame. Furthermore, the fixed sampling frame avoided an increase in the number of self-insured self-managed plans. These results were highlighted in a special study of 66 self-insurance plans included in the HCFA annual survey. Only two of them had an ASO arrangement and neither used TPA. The plans were also asked about their management in 1977, the year of the census, and the answers were the same.

Revised methodology

The main information gaps listed above are that neither the self-insurance plan evaluations, the HIAA, nor the HCFA is comprehensive measures of self-insurance. Each measures different types of self-insurance plans: HIAA measures those that are administered by insurance companies and HCFA measures those that are self-administered. Furthermore, none of them include another type of self-insurance plan, namely those administered by TPA. As noted, the above methodology used only the results of the HCFA study to avoid presumed double counting. The current research conclusion is that data from both the HIAA and HCFA surveys should be used as the basis for evaluating the relevant components of self-insurance plans. Additionally, a measure is needed from TPA’s self-insurance plans.

The data required to make changes to the ASO and the MPP were available from HIAA. No information was available on external administrators and it was necessary to develop an evaluation procedure for these new private health insurance measures. These estimates are a compilation of information from a variety of sources, primarily from Business Insurance, an industry weekly magazine, and Temple, Barker, and Sloane, Inc., industry management and consulting firm.

Additional information is available for some of the TPAs from the Temple, Barker, and Sloan survey that was used to supplement the commercial insurance TPA list. This information includes estimates of the total claims paid, the number of employees paid, and the dollar amount of claims paid. TPA handles

claims for many organizations, including self-insurance plans, insurance companies, associations, and prepaid plans. TPA ratings are for management, providing for self-insurance plans only. From all sources, information was available for 137 TPAs serving the health insurance industry. Since many more APRs are known to exist, these estimates should be considered preliminary and most likely the lower bound of the actual level.

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