HD20 - The Feasibility and Potential Cost Benefits of Implementing Risk-Rated Health Insurance for State Employees and Retirees

  • Published: 1992
  • Author: Department of Personnel and Training
  • Enabling Authority: House Joint Resolution 345 (Regular Session, 1991)

Executive Summary:
I. INTRODUCTION

In view of the rising cost of health care and the potential for controlling these increases through healthier employee lifestyles, the 1991 General Assembly passed House Joint Resolution (HJR) 345 (see Appendix A). HJR 345 directed the Department of Personnel and Training (DPT) to evaluate the feasibility and potential cost benefits of providing risk-rated health insurance for all state employees and retirees.

As health insurance companies, employers, and others search for a means to control health care costs, one group of health care expenses which has received increasing attention are those associated with illnesses or accidents which the patient could have prevented. studies have shown that a significant portion of health care costs could have been avoided if persons exhibited healthier lifestyles.

"Healthy" lifestyles typically describe persons who:

• do not smoke or abuse alcohol;
• exercise regularly:
• maintain appropriate body weight, cholesterol, and blood pressure levels; and
• exhibit safe driving habits (e.g. wear safety belts and do not drink alcohol and drive).

To respond to the issues presented in HJR 345, DPT employed three major study methods. DPT surveyed other states, local governments, and private employers; reviewed the current literature pertaining to risk-rated health insurance; and estimated the potential cost benefits of risk-rated health insurance.

II. FINDINGS

A. Overview of Risk-Rated Health Insurance

1. Description and Objectives of Risk-Rated Health Insurance (see page II-I)

• Risk-rated health insurance attempts to control costs by encouraging healthy or preventive behaviors, and penalizing unhealthy or risky behaviors.

• The encouragement is provided by adjusting an individual's premium or level of benefit reimbursement according to one's lifestyle. Thus, persons with unhealthy lifestyles are charged a higher premium or receive lower benefit reimbursements than those persons with healthy lifestyles.

2. Types of Risk-Rated Health Insurance (see page II-2)

• There are two critical components of a risk-rated health insurance program:

-- the lifestyle behaviors (e.g. smoking, alcohol abuse, failing to exercise, etc.) used to determine which employees are considered to be "at risk;" and

-- the means by which an incentive or disincentive is used to encourage employees to adopt healthier lifestyles.

• Risk-rated health insurance programs typically address one or a combination of the following lifestyle behaviors: smoking, diet and exercise, and automobile driving habits.

• Employers must decide whether an incentive or a disincentive will be used to encourage healthy lifestyles (or discourage unhealthy lifestyles). The three basic approaches are: premium reductions, benefit enhancements, and financial disincentives.

3. Advantages and Disadvantages of Risk-Rated Health Insurance (see page II-3)

• The principal advantage of risk-rated health insurance is that risk-rating provides an incentive for employees to become healthier.

• By improving employees' health, risk-rating should help control health care costs. (However, because risk-rating is such a new concept, further research is necessary to develop accurate estimates of the savings.)

• The primary disadvantages of risk-rated health insurance are:

-- Risk-rating contradicts a basic concept of traditional group insurance pricing, that of spreading the risk equally among all group members.

-- Some employees classified as being "nonhealthy" will view the program as "punishment" for not being a healthier person.

-- Some health conditions, such as obesity, high cholesterol, and high blood pressure may be beyond the employee's control. Thus, an employee may not be able to change the physiological condition. Risk-rating may lead to charges of illegal discrimination.

-- Risk-rated health insurance programs, particularly the more complex designs, will incur administrative costs.

B. Other Employers' Use of Risk-Rated Health Insurance

1. Recent Employer Surveys (see page III-1)

• A 1990 survey conducted by a national benefits consulting firm found that only four of the 910 employers responding had implemented a risk-rated health insurance program.

• Johnson & Johnson Health Management Inc. reports that only 1 to 2% of major united states corporations currently use financial incentives in their employee health benefits plans.

2. The Department of Personnel and Training's Survey of Employers (see page III-1)

• The Department of Personnel and Training (DPT) sent surveys to all other states, 42 local governments, and 41 private employers to determine what types of risk-rated health insurance are being utilized by other employers.

• None of the private employers who responded to the survey have implemented any form of risk-rated health insurance. Only five of the government respondents (four states and one local government) reported that they had instituted a risk-rating program.

• Two states, Kansas and Colorado, .currently charge smokers a higher premium than nonsmokers. Oregon has decided to institute a similar program in 1993.

• The state of Utah and Ventura County, California provide financial incentives to employees who achieve and/or maintain healthy lifestyles.

• Those employers responding to the survey who have not implemented a risk-rated health insurance program indicated that the primary reasons for not instituting such a program were administrative costs, union and labor group concerns about the fairness of risk-rated health insurance, and concerns about potential charges of illegal discrimination.

C. Potential Cost Benefits of Risk-Rated Health Insurance for State Employees and Retirees

1. General (see page IV-1)

• The potential cost benefits of four risk-rated program designs were estimated. These estimates should be used only as a very general guide to savings which may be obtained from any risk-rated program that the Commonwealth might implement.

• William M. Mercer, Inc. (Mercer), DPT's actuary and benefits consultant, provided actuarial estimates of the potential cost savings of the four risk-rated health insurance program designs.

2. Estimated Cost Savings of Four Risk-Rated Health Insurance Programs (see page IV-1)

• Design #1: Premium Differential for Smokers and Non-Smokers

-- Under this design, state employees and retirees would pay a higher premium if they or anyone covered under their health benefits policy smoke tobacco products. The premium differential would be an incentive for smokers to quit smoking.

-- Mercer estimated that by increasing the number of non-smokers, the Commonwealth's medical claims could be reduced by approximately $540,000 during the five-year period 1991-1995.

• Design #2: Benefit Differential For Insured Who Causes An Alcohol-Related Automobile Crash

-- Under this design, state employees and retirees (or any covered dependent) injured as a result of an automobile crash that they caused while under the influence of alcohol will have to pay 10% more out-of-pocket for medical services related to those injuries.

-- Assuming that a 10% benefit penalty could reduce alcohol-related crashes by 5%, Mercer estimates that this program could save approximately $680,000 per year in medical claims paid by the Commonwealth.

• Design #3: Benefit Differential For Insured Who Is Not Wearing A Seat Belt At The Time Of An Automobile Crash

-- Under this design, there would be a 5% penalty (maximum of $1,000) imposed on the benefit payments made on behalf of state employees, retirees, and their dependents who utilize their medical benefits as a result of an automobile crash in which the injured person(s) was not wearing a seat belt.

-- Assuming that a 5% benefit penalty would increase seat belt usage, Mercer estimates that this program could save approximately $1.3 million in medical claims payments per year.

• Design #4: Offering Financial Incentives To Employees And Retirees To Lower Their Health Risks

-- Under this design, an incentive (e.g. cash award, or premium rebate) would be provided to employees and retirees who maintain or achieve healthy lifestyles (i.e. appropriate weight, cholesterol and blood pressure levels, and proper amount of exercise). An incentive also would be provided to encourage covered dependents to maintain/achieve healthy lifestyles.

-- Assuming that financial incentives would increase the number of healthy employees, retirees, and dependents, Mercer estimated that the potential savings for the period 1991-1995 could range from $1.2 million to $3.7 million.

-- A critical component of this type of program is the amount of the incentive. The greater the incentive provided, the more likely the medical claims savings will approach $3.7 million. However, the net savings of the program would be reduced according to the amount of cash incentives provided.

III. CONCLUSIONS AND RECOMMENDATIONS

A. Conclusions (see page V-1)

1. Based on the advice of the Office of the Attorney General, a risk-rated health insurance program should be limited to factors which are largely unrelated to the issue of disability, such as smoking/non-smoking.

2. While a risk-rated health insurance program which attempts to reduce smoking likely would not violate the Americans with Disabilities Act, smokers and various interest groups likely will oppose such a program.

3. While there are significant cost savings associated with Design #2 and Design #3, DPT concludes that because of the negative reaction that would result from reducing a person's health benefits at the very time the benefits are of critical importance, neither of these alternatives should be implemented at this time.

4. Due to the administrative costs (e.g. medical testing, record-keeping, etc.) of implementing Design #4, the uncertainty of the cost savings of this type of program, and the potential for the program to be viewed as discriminatory, DPT concludes that this type of risk-rated health insurance should not be implemented at this time.

B. Recommendations (see page V-2)

1. Should the Commonwealth decide to implement risk-rated health insurance for state employees and retirees, the program recommended would be Design #1. Thus, the Commonwealth would charge smokers a higher premium than that charged to non-smokers. The premium differential should be revenue neutral.

2. If Design #1 is adopted, Section 2.1-20.1 of the Code of Virginia should be amended to allow premium payments to be required from all smokers.

3. To assist employees and their families in lowering their health risks, the CommonHealth wellness program should continue to be promoted and expanded as necessary to provide wellness activities, medical screenings, and other effective interventions.