Employer Sponsored Insurance is already a Defined Contribution analogue

Earlier this week in the post on the wide amount of state discretion in the ACA an interesting and valuable comment was made by Ohio Mom that I want to engage on a bit more:

IANADavidAnderson but my suspicion is that this is the first step to doing to employer-provided health coverage what was done to defined-benefit pension plans. You’re going to end up with a health coverage version of a 401k.

In my opinion, employer sponsored insurance (ESI) is already a kissing cousin to a defined contribution plan than a defined benefit plan when we look at ESI offerings over a several year period.

My parents are retired. My parents have two very different retirement funding streams beyond the baseline of Social Security.

My dad has a union backed defined benefit plan. He gets a direct deposit of $XXX per qualified work year per month for the rest of his life and if he dies before my mom, she gets .67(XXX) per qualified work year per month for the rest of her life. The benefit dies with them. The union pension fund is currently over-funded (the construction actuarial tables understate mortality for the cohort of folks who had significant pre-OSHA/pre-EPA careers, so it will be interesting/scary when more cohorts like my Dad start to retire when most/all of their work years are post-OSHA) as the union fund is on the hook for longevity surprises and market shocks. If the retiree cohort dies quicker than projected OR the markets do better, my parents get no new upside but they also don’t face any downside. My dad effectively signed a 50 to 70 year contract for his pension benefit.

My mom has a 401-K. She explicitly contributed to it during the 20 years she spent at a particular employer. Her employer kicked in their contractually obligated match. The employer had a legal obligation to make sure the promised payments cleared and that the advisors were not complete, total and blatantly obvious frauds that a 3 year old could check. Once the matching and lump sum payments landing in my mom’s account, her employer had no further obligations. The matching rate and lump sum payments could and did vary by year and by who owned the corporate entity. My mom bears all the longevity risk and all the market risk. If both my parents die before her 401-K is empty, the remaining benefits can be passed along. If the 401-K is empty before mom and dad are dead, they are SOL unless my siblings and I can step in.

Employers sign short term contracts for health insurance. Most employer health insurance contracts are between one to three years with a few four and five year contracts. Unless there is a specific contract, there is no obligation for an employer to offer the same plan at a predefined price schedule to employees for one, three, or fifty years in a row. Instead, the benefit is re-adjusted every year. If the employer believes that they are spending too much on insurance and insurance is not a marked labor market differentiation, they have numerous ways to change the benefit while still offering some form of insurance in the next year.

An employer can reduce costs by shifting from a PPO to an HMO, or going from a broad network to a narrow network or a network with multiple tiers. An employer can move from an inefficient insurer to an efficient insurer. An employer can lower their total costs by shifting from a low deductible, high actuarial value plan design to high deductible, low actuarial value plans. All of these changes happen on a frequent basis. Employers offering insurance have very few obligations over time.

An HRA arrangement like that in the proposed rules just moves the behind the scenes decision making that is barely noticed on Box 12-DD of an employee’s W-4 and makes it explicit. I don’t think it moves employer sponsored insurance from defined benefit to defined contribution as it is, in my opinion, far closer to defined contribution in reality than it is to a defined benefit plan once we get past a single contract year.

The ACA is going back to SCOTUS next year

The Affordable Care Act is heading back to the Supreme Court for next session.

But this is case will not rule on the constitutionality of a bananapants lawsuit from Texas saying that Congress truly meant to repeal the ACA when they made the mandate penalty a zero dollar penalty. That case is still percolating. Instead, this is a case about the risk corridors that weren’t paid out from 2014-2016.

The fundamental question at issue is where does the “full faith and credit” of the United States end when Congress wants “take backsies?”

Nick Bagley of the University of Michigan Law School has been bird dogging this case as a matter of administrative and appropriations law. He has a great summary at The Incidental Economist:

In a surprise, the Supreme Court agreed this morning to hear cases arising out of the risk corridor mess. At issue is $12 billion in federal money, and the case’s outcome will hinge on what Congress meant when it placed limits on the use of appropriated funds in an effort to sabotage the Affordable Care Act.

The Federal Circuit held that Congress, in placing those limits, qualified an earlier promise made in the ACA to make risk corridor payments to insurers that lost big on the exchanges. As I’ve explained many times, I think that decision is wrong. We’ll see if the Supreme Court agrees….

I will let the lawyers lawyer. The relevant question I can poke at is what does this mean for premiums and plan offerings going forward? Read more

Churn and auto-enrollment

Auto-enrollment is a nifty idea where a governing entity would use administrative data to put people into zero net premium plans that they qualify for even if the individual does not actively sign-up for the plan.  Administratively, it is massive challenge, especially in the individual market where there are several distinctive populations: long term individual market enrollees who are there for business reasons, individuals who aren’t covered through work but are working in fields where employer sponsored coverage or Medicaid is likely to occur, and people who are uninsurable in an underwritten world at a reasonable premium.

The individual market for the second group can be thought of as a holding area until something better comes along.  We live in an economy where jobs and incomes change fairly frequently.  There is a lot of eligibility churn in the status of insured vs. uninsured.  There is even more variance in income which is what would drive the availability of a zero premium plan.

The Brookings Institute’s Sobin Lee and Christen Linke Young look at the challenge of using administrative records for auto-enrollment.  There are big pragmatic challenges as the data gets stale fast.

This analysis shows that when using insurance status information that was just one month old, 5% of the group designated for auto-enrollment would actually have obtained other coverage, and, conversely, 5% of the “true” uninsured would not be auto-enrolled. If the insurance status information was 5 months old, 20% of those auto-enrolled would in fact have other coverage, while 20% of the truly uninsured would not be auto-enrolled.

If we assume fragmented insurance markets and insurance programs (ESI, exchange, Medicare, Medicaid, CHIP etc) with different and mutually exclusive eligibility requirements, auto-enrollment runs into massive data problems every time it is implemented without a real time eligibility check. Auto-enrollment works well when it is the second step of a process such as when an individual qualifies for Medicaid in a Managed Care state and does not make an active selection; they will be sent to an insurer on some pre-specified system that operates silently behind the scenes.

The new Health Reimbursement Account rule for employer sponsored insurance

Last week, the Trump Administration released a new rule that will allow business to put money into a couple of different types of Health Reimbursement Accounts (HRA) for their employees to use that money to buy individual market insurance.  It is an interesting rule on several front; notably it presumes a well functioning (or at least not a dysfunctional individual market) and it advances a long term health/economics policy wonk goal of disconnecting insurance from employment.

The theory of change behind the rule is that employer sponsored insurance operates under price and scream at HR constraints which leads to broad networks at high reimbursement rates for all providers.  Moving people to the exchanges means people with low willingness to pay for access to a broad network won’t be paying for those broad, expensive networks.  And that will place downward aggregate pressure on medical prices.  This is not banana pants.

Below is a good summary of what the different types of HRAs do:

The other big part of the rule is that it is a radical transparency experiment on a quasi-hidden part of the compensation package of employees.

Right now, I can’t compare the value of my Duke employer sponsored insurance all that well to the employer sponsored insurance of any other employer.  There are too many hidden attributes that I can’t figure out how to value well (and this is what I do for both a living and for fun!) However I can see what Duke would offer if I was to buy on the Exchange vs what any other employer would offer if I was to buy on the Exchange.  That would provide tremendous clarity.

The Brookings Institute crew has been following this rule making process hard.  They’ve identified a potentially significant problem with the rule.  The employer contribution can vary no more than 3:1 by age.  This means that unless the employer is paying 100% of the premium, older employees are worse off.

Let’s walk through an example.  Let’s say Company X employs a 21 year old and a 64 year old.  Right now they are in the small group market and only offer a single plan.  Total monthly premiums for the group are $1,200/month of which the company pays 75% or $900.  Each employee than gets a $150/month payroll deduction  for their employer sponsored insurance.  Now fast forward and move these two people to the exchanges with an HRA.  The company will still  pay $900/month to the HRAs.  However the rules say that the 21 year old will face a $300 premium while the 64 year old will see a gross premium of $900/month with standard ACA 3:1 age banding.  The HRA contribution is split $225 to the youngster and $675.  The net premium for the 21 year old is now $75/month while the 64 year old will see a net out of pocket premium of $225.  The older workers are worse off in this scenario.

Here is how I visualize the impact of this rule on people who are currently buying insurance in the individual market.  These are mainly directional estimates that are highly sensitive to the number of people who will get their health insurance through employer provided HRA but buy their plans on the individual market.

There is a secondary HRA proposal that will allow employers to lightly fund ($1,800/year) anything goes purchases such as short term limited duration plans.  I think this would be attractive to fast food/low wage franchise operations only.  However, most of the action would be HRAs funding Exchange/ACA regulated plans though.

State discretion and the ACA

At Health Services Research**, I have a commentary out this morning that looks at the wide amount of discretion that states have in promoting a wide variety of goals for their specific individual health insurance market.  The ACA has always been a story of 51 states (including DC) and 3,000 counties but since October 2017 with the termination of CSR payments, the possibility space has widened dramatically.

Here the big decisions state regulators and elites can make:

  • Expanding Medicaid to 138% FPL instead of not expanding or expanding only to 100% FPL — Yes lowers non-subsidized premiums and slightly increases subsidized net premiums
  • Silver loading and/or Silver Switching vs Broad Loading — 3 states broad load which raises costs for everyone and lowers enrollment
  • Managing Monopoly and spread games
  • Messaging support and advertising
  • Reinsurance and subsidization to support net prices paid by people earning over 400% FPL
  • Managing the allowable parallel markets such as Short Term Plans and Farm Bureau Plans

State regulators and insurers have tremendous discretion to shape their states’ markets however they wish.  Some states will make choices that I normatively like and others will make choices that make me gag.  The ACA requires states to make decisions and states will choose who to prioritize and how to do so from a very wide toolbox.



** https://doi.org/10.1111/1475-6773.13189