risk and insurance chapter 16

Employee Benefits

Employee benefits are employer-sponsored rewards, other than regular pay, that improve the financial security and well-being of workers and their families.

• Example: Health insurance, paid vacation, or tuition assistance offered by an employer.

Fundamentals of Group Insurance

• Group insurance covers many people under a single policy.

  • Master contract

• Coverage usually costs less than individual insurance.

• Individual evidence of insurability is often not required.

• Experience rating (based on the group’s claims history) is used to set premiums.

Master Contract

A master contract is the main insurance agreement between the insurer and the group sponsoring the coverage.

• Example: A company signs one master contract with an insurance company to cover all employees under a single health insurance plan.

Group Insurance

• Group insurance follows key principles to work properly.

• The group shouldn’t exist just to get insurance.

• There should be a natural flow of people joining and leaving the group.

• Benefits are usually determined by a formula (like tenure, position, or earnings), not individual needs.

• A minimum percentage of employees must participate (typically 50–75%).

• The plan should be simple to manage.

Group Insurance Eligibility

• Eligibility for group insurance depends on the insurer’s rules and state laws, usually requiring a minimum group size.

• Employees must meet participation requirements:

  • Be a full-time employee.

  • Complete a probationary period.

  • Apply for coverage during the eligibility period.

  • Be actively at work when coverage begins.

Eligibility Period

The eligibility period is the time frame during which an employee can enroll in a group insurance plan without proving health status.

• Example: A new employee has 30 days after starting the job to sign up for health insurance without needing a medical exam

Key Features of Group Life Insurance

• Almost 50% of all owned life insurance is provided through group life plans.

• Group life insurance usually provides yearly term insurance coverage, offering low-cost protection.

• The basic coverage can be based on earnings, position, or a flat amount (commonly 2× earnings, range 1–5×).

• Coverage typically ends when the employee leaves the company.

• Supplemental term insurance lets employees buy extra coverage without proving health status.

Yearly Term Insurance Coverage

Life insurance that provides coverage for one year and can be renewed annually.

• Example: An employee has $100,000 in coverage each year, renewed automatically while employed

Supplemental Term Insurance

Extra life insurance an employee can purchase beyond the basic group plan without medical exams.

• Example: An employee buys an additional $50,000 of coverage on top of the basic $100,000 plan

Group Life Insurance: Accidental Coverage

• Many group life plans also include group accidental death and dismemberment (AD&D) insurance.

• AD&D pays extra benefits if an employee dies in an accident or suffers certain serious injuries.

• The benefit is usually a multiple of the basic group life insurance.

• The full benefit, called the principal sum, is paid if the employee dies in an accident.

Group Accidental Death and Dismemberment (AD&D) Insurance

Insurance that pays additional money if an employee dies or loses certain body parts in an accident.

• Example: An employee dies in a car accident, and their family receives an extra $50,000 on top of regular life insurance.

Principal Sum

The total amount paid by AD&D insurance if the employee dies accidentally.

• Example: If the principal sum is $100,000, that full amount is paid to the beneficiary after an accidental death.

Group Life Insurance: Plan Types and Features

• In a noncontributory plan, the employer pays the full cost of the insurance.

• In a contributory plan, the employee and employer share the cost.

• Some plans require employees to complete a probationary period of 1–3 months before joining.

• Experience rating is often used to set premiums based on the group’s past claims.

• Most plans also provide some coverage for spouses and dependent children.

Noncontributory Plan

A plan where the employer pays the entire insurance cost.

• Example: A company fully pays for each employee’s $100,000 life insurance policy

Contributory Plan

A plan where both employer and employee share the insurance cost.

• Example: The company pays 70% and the employee pays 30% of a $100,000 life insurance policy.

Probationary Period

The waiting period an employee must complete before being eligible for benefits.

• Example: An employee must work 2 months before being allowed to enroll in the company’s health plan.

Experience Rating

Premiums are set based on the group’s previous claims history.

• Example: A company with few past claims may pay lower premiums than a company with many claims.

Group Life Insurance: Conversion and Special Options

• Employees may convert their term insurance to an individual cash value policy if they leave the company.

• Some plans offer a portable term insurance option, allowing coverage to continue after leaving employment.

• Credit life insurance is offered by banks to cancel outstanding debt if the borrower dies.

Portable Term Insurance Option

Insurance that an employee can keep even after leaving the company.

• Example: An employee leaves a job but continues their $100,000 life insurance by paying premiums directly

Credit Life Insurance

Insurance that pays off a borrower’s debt if they die.

• Example: A person with a $20,000 car loan dies, and the insurance pays off the remaining loan balance.

Employee Group Health Coverage

• Group medical expense insurance is an employee benefit that covers hospital care, doctors’ fees, and related medical costs.

• Coverage can come from:

  • Commercial insurers

  • Blue Cross and Blue Shield plans

  • Managed care organizations

  • Self-insured employer plans

Group Medical Expense Insurance

Insurance provided to a group of employees that pays for medical care and hospital expenses.

• Example: A company health plan pays for an employee’s hospital stay and doctor visits.

Commercial Group Health Insurance

• Commercial insurers sell both individual and group medical plans.

• Most people insured by commercial companies are covered under group plans.

• The health insurance market is highly concentrated: in 37 states, the top three insurers cover at least 80% of enrollees.

Blue Cross and Blue Shield Plans

• Blue Cross and Blue Shield plans cover medical expenses including hospital care, doctor fees, and other related charges.

• Blue Cross covers hospital expenses.

• Blue Shield covers physicians’ and surgeons’ fees.

• Most plans include both BC and BS coverage.

• Most operate as non-profit organizations, though some have converted to for-profit status.

Blue Cross and Blue Shields plans

Health insurance plans that cover hospital (Blue Cross) and doctor (Blue Shield) expenses, often combined.

• Example: An employee’s plan pays for both a hospital stay and a surgeon’s procedure under one BC/BS policy.

Self-Insured Employer Health Plans

• Many employers self-insure some or all employee health benefits.

• Stop-loss insurance protects employers by having a commercial insurer pay claims that exceed a set limit.

• Some employers use an administrative services only (ASO) contract with a commercial insurer to handle plan administration.

• Self-insured plans are generally exempt from state-mandated benefit laws.

Self-Insurance

When an employer pays part or all of employee health claims instead of buying insurance.

• Example: A company directly pays its employees’ medical bills up to a set limit.

Stop-Loss Insurance

Insurance that covers very large claims beyond a set threshold for self-insured plans.

• Example: If an employee has $200,000 in medical costs and the stop-loss limit is $100,000, the insurer pays the excess $100,000.

Administrative Services Only (ASO)

A contract where an insurer handles only the administration of a self-insured health plan, not the risk.

• Example: The insurer processes claims and manages paperwork, but the employer pays all actual medical claims.

Managed Care Plans

• Managed care plans aim to provide medical services to members efficiently and cost-effectively.

• Employees may have limited choice of doctors and hospitals.

• Cost control and reduction are major goals.

• Utilization review is performed at all levels to monitor care.

• Physician quality is monitored.

• Providers share financial results through risk-sharing.

• Preventive care and healthy lifestyles are emphasized.

Managed Care

A type of health plan that controls costs and care by monitoring services and restricting choices of providers.

• Example: An HMO requires members to see in-network doctors and get referrals to see specialists to keep costs down.

Health Maintenance Organizations (HMOs)

• A health maintenance organization (HMO) is a prepaid, organized system providing comprehensive medical services to members.

• HMOs negotiate rates and contracts with hospitals and physicians.

• They provide broad, comprehensive medical services.

• Members usually have a limited choice of providers.

• Cost-sharing provisions (like copays) apply.

Health Maintenance Organization (HMO)

A prepaid health plan that provides a wide range of medical services with limited provider choice.

• Example: An employee’s HMO plan requires them to use in-network doctors and pay $20 per doctor visit.

Cost Control in HMOs

• HMOs focus heavily on controlling costs.

• Modified fee-for-service: Network physicians are paid based on a negotiated fee schedule.

• Capitation fee: Providers receive a fixed annual payment per member, regardless of services used.

• Purchasing cooperatives: Employers join together to get better rates on health coverage.

• Gatekeeper physician: A primary care doctor who decides if a specialist visit is necessary.

Modified Fee-for-Service

Payment system where doctors are paid according to a pre-negotiated fee for each service.

• Example: A doctor receives $100 for a standard office visit under the HMO agreement.

Capitation Fee

A fixed yearly payment to a doctor for each patient, no matter how many services are used.

• Example: A doctor gets $500 per year for each patient on the HMO plan.

Purchasing Cooperatives

Groups of employers that combine to negotiate lower health insurance costs.

• Example: Ten small businesses join together to buy health coverage at a discounted rate.

Gatekeeper Physician

A primary care doctor who must approve specialist visits.

• Example: An employee must see their PCP before visiting a cardiologist.

Types of HMOs

HMOs can operate under different models:

• Staff model: Physicians are HMO employees, paid a salary or salary + bonus to control costs.

• Group model: Physicians belong to a separate group that contracts with the HMO.

• Network model: HMO contracts with two or more independent physician groups.

• Individual Practice Association (IPA): Independent doctors see HMO members in their own offices at reduced fees.

Staff Model

HMO physicians are salaried employees of the HMO.

• Example: A doctor works at the HMO clinic and receives a fixed salary plus a bonus for efficiency.

Group Model

Physicians are part of a group that contracts with the HMO to provide services.

• Example: An HMO has a contract with a local medical group to treat its members.

Network Model

The HMO contracts with multiple independent physician groups to cover its members.

• Example: An HMO contracts with two different clinics so members can choose either one.

Individual Practice Association (IPA)

Independent doctors see HMO members in their own offices for reduced fees.

• Example: A patient visits a private doctor who treats HMO members at a discounted rate.

Preferred Provider Organizations (PPOs)

• A preferred provider organization (PPO) contracts with healthcare providers to offer services at discounted fees.

• PPO providers are usually paid on a fee-for-service basis.

• Patients can see any provider, but costs are lower if they use preferred providers.

• If a provider’s charge exceeds the negotiated fee, the provider absorbs the difference.

• Most PPOs do not require a gatekeeper physician.

Preferred Provider Organization (PPO)

A health plan that offers lower fees if patients use certain preferred providers but allows flexibility to see other doctors.

• Example: An employee pays a smaller co-pay when visiting an in-network doctor but can still see an out-of-network specialist at a higher cost.

Point-of-Service (POS) Plans

• A point-of-service (POS) plan combines HMO structure with the option to go outside the network.

• In-network care usually has low or no out-of-pocket costs.

• Out-of-network care comes with higher deductibles and copayments.

Criticisms and Trends in Managed Care

• Managed care plans are criticized for:

  • Potentially reducing quality of care due to cost-control emphasis.

  • Delaying care because gatekeepers may not promptly refer patients to specialists.

  • Limiting physician freedom, which can affect the doctor-patient relationship.

• Current trends:

  • HMO enrollments are declining, while PPO enrollments are rising.

  • Cost sharing is increasing via higher premiums, deductibles, coinsurance, and copayments.

Employee-Controlled Health Spending Plans

• A consumer-directed health plan (CDHP) combines a high-deductible health plan with a health savings account (HSA) or health reimbursement arrangement (HRA).

• High-deductible health plan: A medical plan with a higher annual deductible before coverage begins.

• Health reimbursement arrangement (HRA): Employer-funded plan that reimburses employees for medical expenses not covered by standard insurance.

Consumer-Directed Health Plan (CDHP)

A health plan that pairs a high-deductible insurance plan with an HSA or HRA to give employees more control over medical spending.

• Example: An employee has a CDHP with a $3,000 deductible and an HSA to pay medical costs before the deductible is met.

High-Deductible Health Plan

Insurance with a high deductible that must be paid before the plan starts covering costs.

• Example: An employee must pay the first $2,500 of medical bills before insurance covers anything.

Health Reimbursement Arrangement (HRA)

Employer-funded account that reimburses employees for medical expenses not covered by insurance.

• Example: A company contributes $1,500 to an HRA, which the employee can use for doctor visits or prescriptions.

Key Contract Provisions in Group Medical Plans

• Group medical plans include important contractual provisions.

• Coordination-of-benefits provision: Determines which plan pays first when an employee is covered by multiple health plans.

• COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985): Allows employees to remain in their employer’s health plan for a limited time after leaving the job.

Coordination-of-Benefits Provision

A rule that decides the payment order when someone has more than one health insurance plan.

• Example: If an employee has coverage through both their job and their spouse’s job, the COBRA plan may pay second.

COBRA (Consolidated Omnibus Budget Reconciliation Act)

Federal law letting former employees keep employer health coverage temporarily after leaving a job.

• Example: An employee quits but can continue their health insurance for 18 months by paying the premiums.

Preexisting Conditions and Health Coverage Laws

• The Health Insurance Portability and Accountability Act (HIPAA, 1996) limited insurers’ ability to restrict coverage for preexisting conditions.

• The Affordable Care Act (ACA) further strengthened protections: insurers cannot deny or limit coverage due to preexisting conditions.

Preexisting Conditions

Health problems an individual has before enrolling in a new health insurance plan.

• Example: Diabetes or asthma diagnosed before getting a new employer health plan.

Cafeteria Plans: Flexible Employee Benefits

• A cafeteria plan lets employees choose the benefits that best meet their needs.

• Employers may give each employee a set amount of dollars or credits to spend on benefits or take as cash.

• Many plans allow premium contributions with before-tax dollars.

• Under a full choice or full flex plan, employees select from a complete range of benefits.

Cafeteria Plan

A benefits plan that allows employees to pick and choose from a variety of options.

• Example: An employee uses allotted credits to get extra vacation days, dental coverage, and life insurance.

Full Choice (full flex) plan

A cafeteria plan where employees can choose from the entire range of available benefits.

• Example: An employee can select health, dental, vision, and retirement contributions from the full menu of options.

Cafeteria Plans: Tax-Advantaged Options

• A premium conversion plan lets employees pay for benefit premiums with before-tax dollars.

• Many plans include a flexible spending account (FSA), allowing employees to use pre-tax dollars for certain unreimbursed medical expenses.

• To avoid losing FSA funds, plans may allow a carryover or a grace period to the next year.

Premium Conversion Plan

A plan that lets employees pay insurance premiums with pre-tax money.

• Example: An employee’s $200 monthly health insurance premium is deducted before taxes, reducing taxable income.

Flexible Spending Account (FSA)

An account that allows employees to pay for certain medical expenses with pre-tax dollars.

• Example: An employee uses FSA funds to pay $300 for prescription medications.

Carryover

A provision that allows unused FSA funds to be used in the next plan year.

• Example: An employee has $100 left in their FSA at year-end and can use it next year instead of losing it.

Cafeteria Plans: Advantages and Disadvantages

• Advantage: Employees can choose benefits that best fit their individual needs.

• Disadvantage: Employers may face higher costs to develop and manage the plan.