Insurance Markets Small Businesses and Individuals Face Greater Cost-sharing and Increasing Complexity April 2002 Introduction T RENDS & A NALYSIS HMO and PPO Benefits In recent months, there have been marked shifts for Small Businesses in the types of benefits offered in California’s Small businesses (up to 50 employees), like small group and individual health insurance other health insurance purchasers, face many markets. Early results from a California choices when selecting health insurance cover- HealthCare Foundation study tracking changes age. At the most basic level, purchasers choose in benefits and prices show that health plans are between two broad classes of products: HMOs, developing a wide array of new benefit offerings. which typically provide comprehensive coverage Many of these new benefit packages contain with limited cost-sharing but a restricted extensive consumer cost-sharing not previously network of providers; and PPOs, which typically included in managed care products. These require greater cost-sharing but offer more complex new cost-sharing requirements make it choice of providers. Two benefit packages, which increasingly difficult for purchasers to evaluate illlustrate prototypical benefits available to small their health insurance options and to under- businesses as of summer 2001, are shown in stand the tradeoffs between lower monthly Table 1. The packages represent a traditional premiums and higher cost-sharing at the time HMO as well as a “mid-level” (neither extremely of service. comprehensive nor very minimal) PPO benefit package. Actual benefit packages have additional features and may limit coverage or require additional cost-sharing for outpatient surgery, infertility, and other specialty services. Table 1: Examples of Benefit Packages Offered to California Small (2-50 employees) Businesses as of Summer 2001 Annual Annual Maximum Deductible Office Visit Hospital Pharmacy Out-Of-Pocket Product (single) Cost-sharing Cost-sharing Cost-sharing (Single/Family) HMO $ 0 $10-$15 copay generally $0 two or three tier plan $1,500/$3,000 in-network; out-of- with copayments network not covered from $10 to $35 PPO $250 $10-$20 copay in- 10-20% two or three tier plan $2,000/$4,000 network; 30-50% coin- coinsurance with copayments surance out-of-network after deductible from $10 to $35 Additional Cost-sharing duced in some small group HMO and PPO products for Small Businesses since the summer of 2001. The approaches shown are Annual spending on health care was more than not limited to one low-cost option offered by one $4,600 per person nationally in 2000, up from health plan but have been incorporated in some of about $1,100 in 1980, and is expected to continue the benefit options offered by at least two large to rise. Spending increases are due in part to rising 1 California health plans. prescription drug and hospital costs and the introduction of new technologies that add to the As premiums increase and benefit designs change, complexity of medical services. purchasers have a greater need to understand the tradeoffs between monthly premiums and cost- Rising health care costs cause the price of insurance sharing at the time of service. Most small businesses, to increase. Rising insurance costs, in turn, can be however, do not have the resources to carefully passed on to consumers either through increased evaluate health insurance options. Many new cost- monthly premiums or through additional cost- sharing arrangements have the potential to leave sharing at the time that care is delivered (the “point purchasers confused and enrollees facing of service”). Cost-sharing at the point of service unexpectedly high medical bills. For example, provides potentially desirable incentives for cost- enrollees accustomed to comprehensive HMO conscious care. A challenge for health plans is to set benefits may be surprised by the introduction of cost-sharing at levels that discourage unnecessary care, PPO-style cost-sharing in HMO benefit packages, yet do not set up barriers to needed care. such as two-tier pricing for in-network hospitals and the use of copays or deductibles for hospital care. In 2001, the average premium increase for California An individual with HMO coverage who had been small businesses was 11.5 percent.2 To be responsive hospitalized at no charge in the summer of 2001 to price-sensitive small businesses and avoid still and who had, due to changes in employment, sub- higher premium increases, health plans are developing sequently enrolled in a new HMO product, might and marketing products with increased cost-sharing pay $1,500 (three days at $500 per day) for a similar at the time of service. Tables 2 and 3 provide ex- in-network hospitalization in the summer of 2002. amples of cost-sharing features that have been intro- Table 2: HMO Cost-sharing Approaches Introduced Between Summer 2001 and Spring 2002 HMO Cost-sharing Approach Example Separating hospitals into tiers with different levels of cost $0 copay for 1st tier hospitals; $100 per day copay for 2nd sharing tier hospitals Annual deductible for hospital-based services and ambulatory $240-$1,500 per member surgery centers In-network hospital copay $50-$500 per day (with 3-7 day maximum) Deductible for brand name prescription drugs $150-$250 per member 2 | C ALIFORNIA H EALTH C ARE F OUNDATION Table 3: PPO Cost-sharing Approaches Introduced Between Summer 2001 and Spring 2002 PPO Cost-sharing Approach Example Separating hospitals into tiers with different levels of 10% coinsurance for 1st tier hospitals; 20% coinsurance and cost-sharing $500 admission charge for 2nd tier hospitals Setting a maximum per diem payment for out-of- Plan pays $400–$650 maximum per day; patient pays 100% network inpatient care, with patient responsible for all of remaining costs (and these are not subject to annual out-of- additional charges pocket maximum) Increased coinsurance for in-network hospital services 25% coinsurance Coinsurance rather than copayments for professional services 25% coinsurance such as x-ray and laboratory Hospital copay and coinsurance for maternity services $1,000 copay plus 25% coinsurance Maximum number of physician visits per year at the standard 2 visits per adult per year covered at $20 copay; patient pays for copay or coinsurance level additional visits until reaching out-of-pocket maximum Deductibles and copays for brand drugs $500 deductible, then $25 copay While it has always been difficult for purchasers and nor allowable amounts for particular services and enrollees to evaluate the tradeoffs between lower levels of care are specified in benefit descriptions and monthly premiums and higher out-of-pocket costs, can be difficult to ascertain prior to obtaining care. new benefit features have added another layer of Even if fee information were available, complicated complexity to the task. Benefits involving cost- rules regarding deductibles and annual maximums sharing based on provider fees can be particularly make predicting a patient’s total share of costs difficult to understand. Complicated terminology and exceedingly difficult for all but the most sophisticated inadequate information are both sources of con- consumers. fusion. For example, purchasers may be asked to New benefit features allow purchasers to obtain compare two options for care at in-network facilities: health coverage at more reasonable monthly one with coinsurance at 25 percent of a “negotiated premiums. Healthy enrollees who rarely need care fee” and another with coinsurance at 25 percent of an may fare relatively well under these new arrange- “allowable” or “usual and customary” amount. (The ments. For regular users of health care services and negotiated fee is based on a contracted amount, higher-risk enrollees, however, new cost-sharing whereas an “allowable” or “usual” amount is based on approaches can result in additional charges and regional average fees for these services. Providers agree uncertainty about just how much they will pay for to accept negotiated fees as payment in full, but may a given course of care. bill consumers for the portion of their fee that exceeds the plan’s “allowable” or “usual” amount.) Neither full charges (“sticker prices”), negotiated fees, Insurance Markets | 3 Cost-sharing for Looking to the Future Individuals and Families Because these cost-sharing approaches are being Conventional wisdom holds that the individual offered to small businesses and individuals for the market, in which individual enrollees bear the full first time, it is difficult to know how purchasers will cost of coverage, is even more price-sensitive than the respond. In an era of double-digit premium increases, small group market. In an effort to keep premiums however, pressure on purchasers to seriously consider as low as possible, health plans have historically less comprehensive coverage options is inevitable. In- incorporated greater cost-sharing requirements in creased cost-sharing at the point of service can help products for individuals than for small businesses. For limit premium increases, allowing more Californians example, pharmacy deductibles of $250 to $500 have to maintain health insurance coverage. But the added been available for some time among individual PPO complexity associated with these new benefit products but are only beginning to be seen among approaches has important, and potentially negative, small group PPO products. consequences for purchasers. As with the small group market, a number of new Although policymakers, regulators, and other cost-sharing features have been introduced in the stakeholders may not be able to control premium individual market since summer 2001. These include: increases, they may have a role in helping enrollees to navigate the increasing complexity of health insurance s Among less comprehensive HMO products, introducing an in-network maternity copayment benefits. One step toward improving the purchasing of as much as $1,000, plus meeting a standard process would be to require standardized benefit deductible across all services. terminology across products and plans. Health plans could also be required to provide standardized s Among some PPO products, limiting the annual number of physician office visits (for example, examples of reimbursement levels and out-of-pocket 2-12 visits) that are covered at a stipulated copay costs for a set of pre-defined medical conditions. or coinsurance level before incurring a significant deductible. s Among some PPO products, increasing coin- surance for well-baby care (ages 0 to 2-6 years) to as much as 30 to 50 percent. s Among some PPO products, raising annual out- of-pocket maximums for in-network providers to $2,500 to $4,000 for a single person or $5,000 to $8,000 for a family, while excluding certain services (such as maternity copays or deductibles) from the maximum. 4 | C ALIFORNIA H EALTH C ARE F OUNDATION Methodology ENDOTES In June 2001, the California HealthCare Foundation initiated a project to track premiums, products, and 1. Levitt, Katharine, et al., “Inflation Spurs Health Spending in 2000,” Health Affairs 21: 172-181, benefits being offered by health plans with a January/February 2002; Diede, Mick L. and Richard substantial presence in California’s commercial small Liliedahl, “Getting on the Right Track,” Managed Care group and individual health insurance markets. The February 2002. study, still ongoing, involves quarterly analysis of the 2 Kaiser Family Foundation/HRET, “California Employer benefits and prices being offered by health plans in Health Benefits 2001,” February 2002 six California counties: San Francisco, Sacramento, (www.kff.org/content/2002/3205/). Shasta (Redding), Fresno, Los Angeles, and San Diego. Research for this project is being conducted by Joan B. Trauner, Ph.D., in conjunction with Acordia of California and Katherine B. Wilson. Future Trends and Analysis in Insurance Markets pieces will identify trends in California’s insurance markets, analyze regulatory and policy issues, and provide industry updates. Analyses will be posted as they become available at the California HealthCare Foundation’s Web site at www.chcf.org. The California HealthCare Foundation’s program area on Health Insurance Markets and the Uninsured seeks to improve the functioning of California’s health insurance markets, particularly the small group and individual markets, and to expand coverage to the uninsured. For more information on the work of Health Insurance Markets and the Uninsured, contact us at insurance@chcf.org. Insurance Markets | 5