A Refresher on Employee Health Benefits
by Kai-Lit Phua, Ph.D.

Introduction

What is meant by the term "employee benefits"? One can use a broad definition or a narrow definition. A broad definition would include programs as the company pension plan, paid vacations, subsidized housing and car loans, company-financed training and education programmes, perquisites such as the company car, staff rates for goods and services, on-site childcare facilities provided by employers, company dinners, company trips, etc. A narrow definition would refer to categorical benefits such as employee health benefits.

In turn, "employee health benefits" can also be broadly defined to include any of the following (provided free or subsidized by employers):

Healthcare plans for employees and their dependents;
Paid maternity leave;
Company-sponsored fitness programmes;
Smoking cessation and other Healthy Lifestyle programmes;
Health education programmes;
Stress management programmes;
Worksite safety programmes.

Classification of Employee Health Benefits I

One can classify employee health benefits into categories such as those that are required by law (i.e. mandatory such as Socso in Malaysia); those negotiated with a trade union; those that are "customary", i.e., benefits that follow general business practice and are customarily provided in a particular industry within a specific country; and extra benefits that are given by a specific company to its workers such as dental benefits, coverage for mental health services or for other healthcare services that are not usually covered in standard healthcare plans. These extra benefits can sometimes be provided with the aim of giving the company an edge in recruiting staff in highly competitive job markets (EBRI 2002a).

Classification of Employee Health Benefits II

Another way to classify employee health benefits is by eligibility, e.g.,

General health benefits available to all workers (however, workers may be given a menu of health plans to choose from);
Optional benefits (partially subsidized by the company) available to all Tiered benefits, e.g., eligibility is by staff rank, by full-time status, by "permanent employee" status, by length of service and so on;
Individually-negotiated benefits, e.g., as part of the compensation package of the CEO and other high-ranking corporate staff;
Benefits open only to some, e.g., female workers who have just given birth, or company employees working in particular regions of the world ("hardship benefits") in the case of multinational corporations;
Benefits given as rewards for performance or to motivate staff to work harder.

Level of Subsidy by the Employer/Cost-Sharing with the Employee

Besides questions such as what to cover and whom to cover, the employer also needs to consider the important question of extent/intensity of coverage and related questions such as the level of subsidy to be provided by the employer and how much cost-sharing there should be between the employer and the employee.

If an employer decides to provide healthcare coverage beyond what is mandated by law, the employer would need to determine whom to cover (e.g. employees only versus employees and their immediate families), what to cover (e.g. whether to purchase basic health plans versus extended health plans) and the extent/intensity of coverage. An example of the latter would be, assuming a company has not contracted with a health insurance plan that covers outpatient care, how much an employee can claim for each visit to the General Practitioner and how many visits to the GP are reimbursable in one year.

In order to discourage frivolous visits to the GP, a company can require an employee to pay "co-payments", "deductibles" and "co-insurance" as many commercial health insurance plans that cover inpatient care. Thus, a company can require the employee to personally bear at least $10 for each GP visit (a co-payment); to pay the first $20 of each visit (a deductible) or to pay additionally a certain percentage of the bill after the employee has already paid the deductible (a co-insurance). Such systems of cost-sharing would theoretically lead the employee to seek care from the GP only when medically necessary and discourage GP visits for trivial complaints that are more likely when all expenses are borne by the employer. In order to avoid the potential problems of neglect of preventive care or delay in essential care-seeking because of financial reasons, an employer can implement a policy of reimbursing an employee's co-payment, deductible and co-insurance charges under certain circumstances.

Varieties of Employee Health Benefits

As mentioned above, when we talk about "employee health benefits", we should not restrict ourselves only to health insurance plans but include any employer-provided or employer-subsidized programmes that can affect the health of employees. Thus, we should also include paid maternity leave, company-sponsored fitness programmes, smoking cessation and other Healthy Lifestyle programmes, health education, stress management and worksite occupational safety programmes.

Some companies may only allow new mothers to take one month of paid maternity leave while other companies may allow three months or even six months. In Scandinavian countries like Sweden, new fathers may also take paid paternity leave to help take care of newborn babies.

Companies may sponsor fitness programmes or even set up onsite fitness centers, gymnasiums or swimming pools in order to encourage employees to exercise regularly. The aim is to improve the health of employees and thus to reduce employee medical bills that are paid for by the company.

Similarly, Healthy Lifestyle programmes that encourage proper nutrition, smoking cessation, control of alcohol intake, road safety, stress management etc. can also be included under the rubric of "employee health benefits" if they are partially or fully sponsored by the employer.

Finally, occupational safety and health programmes should definitely be included under "employee health benefits". These can include training programmes, safety equipment provided by the employer and the presence of occupational health technicians, nurses or doctors at the worksite if any.

Types of Healthcare Plans for Employees

We will now discuss the different kinds of private sector, employer-provided healthcare plans available to employees (or to employees and their immediate dependents). These include self-insured plans, traditional indemnity plans, managed care plans, critical illness/dread disease plans and "defined contribution" plans.

"Self-insured plans" refer to plans whereby the employer undertakes the financial burden of paying for health expenses generated by their employees. This is done by putting the money which would have been used to pay the health insurance premiums (payable to an insurance company) into a fund to cover employee health care expenses. Employee contributions will also go into this fund. The fund can be set up in association with other employers or organizations in order to spread the risk. The fund can also be professionally managed by a third party administrator. Sometimes, the employer will self-insure but also purchase "stop-loss" insurance from a commercial company (SIIA 2002).

Traditional indemnity plans typically rely on a fee-for-service mechanism to reimburse doctors and other health care providers or a fixed schedule of benefits to reimburse policy-holders. Traditional indemnity plans are riddled with all sorts of terms and conditions, e.g., limited coverage or exclusions for chronic diseases or high cost conditions, waiting periods, no coverage for pre-existing conditions, annual or lifetime monetary limits, maximum number of outpatient visits or inpatient days per year and so on (Chollet and Lewis 1997). Traditional indemnity plans are purely financing systems and have been criticized for practicing risk selection, i.e., attempting to exclude the sick from coverage and trying to cover only the young and healthy. The insurance premium for the following year (at renewal) can rise by large amounts if employees covered by the plan become seriously sick and run up enormous medical bills. This will increase the healthcare bill for the employer. Traditional indemnity plans that reimburse providers on a fee-for-service basis or policy-holders on the basis of a fixed schedule of benefits have also been criticized for contributing to healthcare cost inflation, i.e., they encourage moral hazard on the part of covered employees and also increase the incentives for overtreatment on the part of providers.

In Malaysia, there is also the critical illness or "dread disease" insurance plan. A dread disease plan will pay the policy-holder a fixed sum of money upon diagnosis of a major disease (as listed in the insurance contract). Unfortunately, dread disease health plans can also come with terms and conditions such as exclusions, waiting periods and so on.

Managed care plans provide healthcare coverage in a special way, i.e., they combine financing with organization of how healthcare is provided (Enthoven 1997). Managed care plans attempt to influence both the supply side and demand side of the healthcare equation. On the supply side, there are attempts to influence the behaviour of healthcare providers. Similarly, on the demand side, there are also attempts to influence the behaviour of patients and their families in care-seeking. Thus, steps are taken so as to:

  • Encourage appropriate utilization of health services by patients, e.g., to visit GPs rather than specialists for minor health complaints;
  • Encourage appropriate supply of health services by doctors, hospitals and other health care providers, e.g., avoid unnecessary tests or medical procedures. (Phua 2000)

:The main kinds of managed care organizations or MCOs include the Health Maintenance Organisation (HMO), Preferred Provider Organisation (PPO) and Point of Service (POS) plans. MCOs keep on evolving and thus hybrids, variants and new kinds of MCOs continue to appear especially in the United States where managed care was invented.

Another kind of health plan is the "defined contribution" plan, e.g., Medical Savings Account (MSA), Health Care Reimbursement Account (HCRA) and Comprehensive Individual Medical Account (CIMA). Defined contribution plans are plans whereby the employer, employee or both put funds into individualized accounts to pay for healthcare expenses. When the individual incurs medical expenses, funds from this account will be used to pay his or her medical bill. There is no cross-subsidy from the individualized accounts of other employees. Governments often exempt funds put into defined contribution plans from taxes in order to encourage individuals to save for future medical expenses.

The MSA differs from the HCRA in that unspent funds at the end of the year in an MSA are allowed to accrue while unspent funds in a HCRA cannot be accrued. Another difference between the MSA and the HCRA is that in the case of the MSA, funds can be withdrawn for non-health related spending but this cannot be done with HCRA funds. The CIMA is a variation of the MSA and the HCRA. Employees use funds from the CIMA to purchase health insurance and to pay for medical expenses. The idea is to encourage each employee to customise his or her health benefits package.

The most famous example of the Medical Savings Account is, of course, Singapore's Medisave system. Singapore's Medisave MSA is mandatory and funded by employer and employee contributions as defined by law. One of its unique features is the possibility of using funds from one's account to pay for the healthcare expenses of close relatives such as one's parents. Singapore's Medisave system is actually a system of forced savings to cover future health care expenses that an individual or his or her close relatives may incur.

Besides the above, health plans available to employees can also include public sector plans whether mandatory or voluntary or a mixture of both. Thus, in the United States, there is Medicare. In Singapore, there is Medishield to protect against expenses arising from catastrophic illness. Some of the European nations also have national health insurance plans. Thus, when analyzing employee health plans (broadly defined) in Malaysia, one should also include public sector plans such as Socso that compensate workers for injuries that occur on the job, health care provided by the Government to special groups such as the military and their dependents, etc.

The Issue of Efficiency

This is a wide-ranging and complicated subject. Basically, as mentioned earlier, it involves factors that can affect the care-seeking behaviour of patients and their families and the care-providing behaviour of doctors and other healthcare personnel.

The care-providing behaviour of doctors and other health personnel is powerfully affected by the economic incentives and disincentives arising from different payment mechanisms (Glaser 1970). Thus, it is well known that fee-for-service reimbursement tends to encourage overtreatment while capitation tends to encourage undertreatment. From my personal experience, when Singapore's first Managed Care Organisation was launched and began paying its GPs on a capitation basis, the GPs immediately reacted by giving smaller amounts of medication to their MCO patients!

MCOs in the United States have come up with all sorts of incentives and disincentives and administrative mechanisms to try to influence the behaviour of doctors and other health care providers on the supply side as well as patients on the demand side. These include:

  • Utilisation review (pre-admission review, concurrent review and retrospective review);
  • Medical practice profiling;
  • Mandatory second opinions;
  • Clinical practice guidelines;
  • Drug formularies;
  • Cost-sharing by patients (co-payments, deductibles and coinsurance);
  • Case management. (Phua 2000)

"Defined contribution" plans such as the Medical Savings Account, the Health Care Reimbursement Account and the Comprehensive Individual Medical Account are individualized and given tax advantages. The idea is that individualization would induce account-holders to seek care more judiciously and avoid the moral hazard problem associated with traditional indemnity insurance plans. Tax advantages are given by the public authorities in order to encourage the growth of such plans and therefore, encourage individual saving for future medical expenses. In the case of MSAs such as Singapore's Medisave scheme, one justification is to mobilize more resources for healthcare financing and to reduce the burden on the Government.

Health benefits can be designed and differentially awarded to employees in order to serve as motivators or as rewards for service to the company. Thus, certain benefits can be made available only to staff who have worked for many years for the company, to staff who have been promoted to positions of great responsibility and so on.

Finally, there are other issues arising from the different types of employee health plans such as the issue of equity but these are beyond the scope of this paper.

References

Chollet DJ and Lewis M. Private Insurance: Principles and Practice. In: Schieber GJ ed. Innovations in Health Care Financing. Washington, DC: World Bank, 1997: 195-214.

EBRI. EBRI General benefits research: 2002 findings.

Enthoven AC. Market-based Reform of U.S. Health Care Financing and Delivery: Managed Care and Managed Competition. In: Schieber GJ ed. Innovations in Health Care Financing. Washington, DC: World Bank, 1997: 195-214.

Folland S, Goodman AC and Stano M., The Economics of Health and Health Care. Englewood Cliffs, New Jersey: Prenctice Hall, 1993.

Glaser WA. Paying the Doctor: Systems of Remuneration and their Effects. Baltimore and London: Johns Hopkins University Press, 1970.

HealthyBenefits. http://www.healthybenefits.com .

Higgins CW, Finley L and Kinard J. Managing Healthcare Costs: Strategies Available to Small Businesses. Health Care Superv 1990 Jul; 8(4): 65-70.

Phua KL. HMOs and Managed Care in Malaysia: What Can We Anticipate From the Experience of Singapore and the United States? Bulletin Kesihatan Masyarakat 2000; Isu Khas : 167-175.

SIIA. Self-Insurance Institute of America, Inc. 2002. http://www.siia.org .


Dr. Phua received his PhD from the Johns Hopkins University and currently teaches public health at the International Medical University in Kuala Lumpur, Malaysia. Prior to this, he worked for the Maryland Department of Health and Mental Hygiene in Baltimore and with an insurance company in Singapore in its managed care division. His personal website is at http://phuakl.tripod.com/index.html .

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Copyright 2002 by Kai-Lit Phua. All rights reserved.

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