Second in a Series: For years, the Coca-Cola Bottler’s Association (CCBA) administered two health care plans. One was for small bottlers with fewer than 100 people, and the other was for larger bottlers. The small-member health care plan was able to significantly reduce the cost of insurance by combining more than 60 small employers in the pooled program, which helped keep administrative costs down to about 7 percent of total costs, according to CCBA Executive Director W. Thomas Haynes.
But eventually the cost benefits evaporated, Haynes explained, because state regulations and coverage mandates forced plan administrators to design distinct plans and distinct claims-processing rules for every state. In CCBA’s case it meant nearly every small bottler participant required different policies.
After 2000, Haynes says, the CCBA dropped its small business pooling program because “well-meaning” but complex and expensive state health insurance laws caused virtually all insurance companies to cease participating in multistate pooling arrangements.
“Since then, health insurance premiums for our smaller member bottlers have increased from 20 percent to 25 percent annually,” he testified recently before the House Small Business Committee. “Further, their plan offerings have increasingly utilized higher co-pays, higher deductibles, and higher annual out-of-pocket maximums. These changes have greatly reduced the employees’ participation rates, effectively pricing 50 percent of the employees out of insurance and increasing the number of uninsured employees.”
The CCBA commissioned an independent analysis of the problem and discovered that so-called “non-actionable claim costs” — the actual amounts paid to providers of medical services — are roughly equal for small, medium, and large groups. But administrative and risk underwriting expenses are dramatically different, depending on the size of the employer or group.
“In my view, any solution to the health care challenge facing small business and its employees, which is a large part of the overall health care challenge, must significantly shrink those hundreds of billions of dollars in nonprovider costs, since they are not likely to be affordable to any of the players — the small business community, its employees, or the federal government and the federal taxpayer,” he said.
The association’s experience is instructive because pooling across state lines, through trade associations for example, has been one of the most widely discussed ways to give small businesses more negotiating clout in the marketplace and reduce administrative costs. As the CCBA learned, pooling alone will not solve the problem. Something must also be done to address the administrative burdens of a wide variety of state mandates.
Many of those mandates, however, offer important consumer protections or impose “community rating” systems so insurance companies can’t cherry pick customers, and deny coverage or charge exorbitant rates to older or chronically ill people. Important policy decisions need to be made about how to deal with those issues, and the proposals put forth by the presidential candidates addresses them from two very different directions.
Democrat Barack Obama’s plan proposes building upon the existing system of employer-sponsored insurance (ESI) and expanding the government’s role in providing insurance for those without employer-sponsored insurance. Of significance, the Obama plan calls for the creation of a new federally run insurance pool that will offer coverage to those not covered by an employer plan or who are ineligible for existing public plans, such as Medicare and Medicaid.
The insurance pool would be folded into the Federal Employee Health Benefits Program (FEHBP). It currently provides coverage for more than 8 million federal employees and retirees, including members of Congress. It offers a wide variety of coverage options and rates are governed by a community rating system. Obama’s plan also provides subsidies to ensure affordability, but largely leaves employer tax breaks for health insurance premiums intact, according to several widely accepted interpretations of his proposal.
Obama’s hybrid plan has been branded as “liberal,” but the ultra-conservative Heritage Foundation, a Washington-based think tank, has also endorsed insurance exchanges. Although it suggests creating them on the state level, it cites the FEHBP as a model for how they could be organized.
Republican John McCain’s plan would eliminate the nearly 65-year-old income tax exclusion for health insurance premiums paid by employers and would replace it with a direct, refundable tax credit of $2,500 for individuals and $5,000 for families. The move would probably sever the traditional tie between employer and health insurance, because employers most likely would stop paying for employee insurance without the tax incentive.
Employees would be left to shop for a policy in the private market, which McCain would expand nationwide by allowing insurers to sell any plan across state lines. It would also provide incentives for people to buy less comprehensive insurance coverage, typically with higher deductibles or co-pays.
The Obama plan would have a somewhat similar effect. Employers would likely stop offering coverage because his plan would let them opt out — and avoid unpredictable and expensive annual premium increases — by paying a more predictable payroll tax. Certain small businesses, however, would be exempt. Employees, in turn, would enter the Federal Employee Health Benefits Program, or they could buy private insurance on their own.
The net effect of both proposals is the likely end of traditional employer-based health insurance as we know it. In this brave new world of health care, several questions need to be answered. For example, what kind of coverage would most average Americans end up with, and at what cost? Which plan would cost taxpayers the most? Which would control health costs the best, and which would provide the broadest coverage of small business employees? I’ll tackle those questions next week.