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Feb 1993

Health insurance in the 1990s.

by Gilfillan, Sally W.

    Abstract- The continued escalation of health care costs has become one of America's most serious social and economic problems. It is estimated that the amount large companies spend on health care increases by an average of 22% annually. Health-related spending is currently placed at 12% of the GNP and is expected to reach 17% by the year 2000. Several solutions to this problem have already been proposed and are presently being discussed, including a universal health insurance scheme, an expansion of Medicaid and mandated employer-provided health insurance. Any discussion of such solutions should consider the limited resources of small businesses since they comprise 87% of all business enterprises in the US. In a recent survey, small-business owners offered several suggestions of their own regarding the health care problem. Among these were the regulation of medical care providers and insurers and a tax reform to spur the establishment of nonprofit health care providers.

A politician's dream is health coverage for everyone. Here are the proposals and what small business thinks about them. Whatever course is taken, the CPA will want to be involved on behalf of his or her employer or client.

Health care costs and insurance are a social and economic problem. Due to complex factors, the cost of health insurance has increased dramatically. At the same time, health insurance has shifted from a traditional role of excellent fringe benefit to a new role of necessary entitlement. The aging of our population, more and better preventive medicine, new and expensive technology, the effect of malpractice claims on liability insurance, administrative costs, significant numbers of uninsured, and inefficient use of facilities and equipment are factors which interact to intensify two serious problems: health care cost and health care access.

Our society has become sensitive to the social cost and social injustice of failing to provide medical care to all who need it. Our medical community successfully treats many conditions that in the past would have left persons less productive members of society. Unfortunately, medical advances are accompanied by significant financial cost and ethical issues concerning right to care and level of care.

Impact on Business Profitability

The majority of employees, especially those working for firms consisting of more than twenty-five employees, now expect employers to provide health insurance. Health care management, including choice of insurer and benefit plan, cost containment, and administration have become business rather than individual concerns. Health care costs for large businesses recently have risen an average of 22% a year and are currently about 12% of GNP. In 1965, health care consumed about 6% of GNP. Richard Darman, former U.S. Budget Director, estimated health care costs will be 17% of GNP by the year 2000. Clearly, these costs will increase dramatically and quickly in the upcoming years. Cost-benefit considerations are made more complex by society's unresolved debate as to access and level of care that we merit.

Proposed Solutions

Our national health care debate revolves around several proposed solutions to the problems of health care cost and availability. The following proposals are under consideration both individually and in various combinations:

* Universal health insurance. This could be administered Federally as in Canada or by each state in plans modeled after Germany's national insurance.

* Expansion of Medicaid to include most of the currently uninsured.

* Regulation of insurers and/or health care providers including cost controls.

* Solutions based on free market theory. Private insurers retain a major role in market based health insurance; cost control and quality assurances are left to market forces. These proposals often include future elimination of both Medicare and Medicaid.

* Adjustment of deductibility and taxation of benefits to either encourage or discourage types of health insurance.

* Health insurance obtained by individuals rather than employers.

* Mandated health insurance provided by employers has been proposed in two forms. All employers must provide a basic, mandated level of insurance and contribute a determined portion of the cost; or employers must either provide mandated insurance or be assessed a payroll tax to be used by the government in providing health insurance to the uninsured population. The latter proposal is known as play-or-pay.

Congress has already considered mandated health insurance based on the concept of play-or-pay. In 1991, Senate Majority Leader George Mitchell, with Senators Kennedy, Riegle, and Rockefeller, sponsored a play-or-pay proposal. This legislation would amend the Public Health Service Act, the Social Security Act, and the Internal Revenue Code of 1986. All businesses would be required to offer health insurance to all employees (play) or pay a payroll tax (pay). Payroll taxes collected from employers choosing to pay rather than play will be combined with Medicaid and Medicare into one fund, Americare. Thus, all Americans would have a form of health insurance; the level was not specified.

Under play-or-pay, responsibility for health insurance is placed squarely on the employer and the government, not the individual. This legislation included provision for special assistance for small and medium-sized businesses, yet there is real concern in the business community that assistance would be minimal.

Benefits and disadvantages of play-or-play and other proposed solutions are currently being debated. Unfortunately, none of these proposals addresses the critical issue of defining the standard medical care that is desirable for each individual. These proposals also do not include a good estimate of future costs or specify how funds will be collected. In addition, business viability has not been seriously addressed by these various solutions.

Survey of Small Businesses

Proposed solutions to American health care problems should include an assessment of the status of small businesses and carefully consider any anticipated effects of legislation on small businesses, their resources, and our economy. Eighty-seven percent of the businesses in the United States are small businesses with finite resources. Legislation that affects the well-being of small businesses affects most Americans.

A survey was sent to 200 small businesses in an attempt to evaluate current and anticipated health care and insurance problems, 45 of the 200 responded. The key areas surveyed were: current status of small businesses and health insurance, the effect that small business owners and managers anticipate play-or-pay will have, the alternate solutions to health care and insurance problems preferred by small business, and general attitudes concerning health care issues.

Seventy-three percent of respondents were businesses located in small towns or rural areas. These were truly small businesses: 73% have fewer than 25 employees, 82% had fewer than 50. How these businesses are coping with health care insurance is important to our economy. Many of the 34 to 37 million uninsured are working people employed by small businesses. Small businesses have incentives to offer their employees health insurance. Firms surveyed find health insurance to be important in hiring and retaining good employees. More than 75% of the respondents said health insurance is an attractive benefit; 62% considered health insurance to be necessary to obtain a stable, productive workforce. Sixty-nine percent of respondents were currently offering health insurance to their employees and more than half paid more than 51% of that health insurance.

Cost Increases: A Serious Problem

Small business is experiencing problems with the cost of health insurance. Firms surveyed had experienced significant premium increases; 51% had rate increases up to 50% in each of the last three years. Many firms are just beginning to suffer the combined effects of the recession and health care cost increases.

A roofing firm reduced its workforce from 18 to 11 employees in the last year due to the economy. This decline placed the firm in a new insurance category. The insurance carrier notified the firm that a premium increase of approximately $26,200 a year was necessary to maintain the current level of insurance in the new category. Management and employees spent significant man-hours completing forms to qualify for more favorable rates under a different plan. To date, none of the employees has been accepted by the carrier for the plan. This firm is searching for the usual solution, a new insurer. However, two potential insurers have notified the firm that an employee's spouse with an adverse claims history may be uninsurable.

Small businesses appear to be having significant problems with both cost increases and insurability of certain employees or family members; two problems which are related. Adverse claims history is one of the causes of stiff increases in premiums. The frustration and costs of resources expended in dealing with these problems are significant burdens on businesses.

Coping with Cost Increases

Small business has coped with health insurance problems by changing the type of policy offered, adjusting employer or employee contributions, and changing insurers. Sixty-nine percent of respondents to this survey have significantly increased the deductible during the last few years. Many respondents indicated that employee contributions have also increased. Forty-four percent of these businesses have changed insurers in the past year. Small firms often change insurers in response to premium increases. In fact, 40% indicated the change in insurers was due to a rise in premiums.

A little more than one-tenth of respondents discontinued offering health insurance due to rate increases, claims history, or insurer requirements, a small but significant percentage considering health care costs. Many small businesses may be forced to discontinue offering health insurance as predicted cost increases become reality. Play-or-pay legislation may force some of these companies out of business unless the cost of "pay" is significantly less than "play."

Another Serious Problem

Costs are only part of small business health care problems. Administration of health insurance is an important concern. Seventy-one percent of respondents indicated that small business is currently experiencing problems in administering health care coverage. Sixty-seven percent indicated that time and resources are not available to sort out insurers, types of plans, and the costs involved. This problem is closely related to premium increases and the solution of changing insurers, a complex and time-consuming process. Evidence exists that a significant number of insurers offer lower than average rates the first year with significant increases each year thereafter.

Employee Relations

Health insurance concerns extend to the area of hiring and employee relations. A third of the respondents reported friction with employees over health insurance; 44% expected friction in the future. Slightly more than a third experienced problems with insurability of certain employees. As a result, several respondents indicated that hiring practices are affected by health insurance. Over a third indicated employee health would be considered in reducing the workforce.

These results indicate that an employee's health may become a determinant of employability in the future. Legislators should consider this possibility carefully.

Proposed Solutions

Small businesses are as concerned with the paperwork and complexity of play-or-pay legislation as with cost. Over three-fourths of respondents were concerned that costs to comply with mandated health insurance of this form will be significant and paperwork will increase. Eighty-four percent believed administrative costs will increase. Interestingly, 82% felt these costs will cause small businesses to find ways around the legislation.

Any solution to health insurance problems must consider the significant past and forecasted increases in health care costs. Small businesses surveyed felt that both health care providers and insurers should be strongly regulated to control costs. In addition, 40% of respondents thought our tax structure should encourage the health care industry to be nonprofit. The profit aspect of health care needs to be considered carefully.

Although 53% of respondents to this survey indicated everyone should be guaranteed a basic form of health insurance, many prefer this be accomplished other than by linking our Federal tax system and employers. Many also preferred administration by private insurers rather than state or Federal government. More than half of the respondents would choose state administration of mandated insurance through non-profit corporations over Federally administered play-or-pay. A non-profit corporation would pool small businesses enabling them to deal with insurers as large groups, thus spreading risks. In addition, the non- profit corporation would relieve firms of some of the costs and time involved in health insurance administration.

The Canadian model of health insurance has been often proposed as a solution. Only 38% of the respondents would prefer national health insurance on the Canadian model to the play-or-pay proposal. Forty-seven percent would not choose a Canadian-type health system.

These results indicate that small businesses are feeling the effects of rising premiums and increasing complexity in administration of health insurance. However, respondents to this survey do not consider the play- or-pay proposal to be the best solution. The very real problems that small businesses are currently experiencing in offering and administering health insurance have not been addressed. In addition, the existing regulatory environment that small businesses deal with must be considered. Legislation should not place additional costs on small businesses in terms of taxes or administrative costs, especially in the current recessionary environment. Current and proposed health insurance systems need to be assessed in terms of the market place and economic efficiencies.

Tax Code Changes

One solution to businesses' health care problems may lie in changing the tax code. The IRC has been used, most effectively, to encourage employers to offer employees health insurance. Instead of enacting play- or-pay legislation, Congress may be better advised to removed, or limit, the preferential treatment of employer provided health insurance. Employer provided health insurance currently is deductible to the employer and tax-free to the employee.

Possible changes in tax treatment include limiting the employer's deduction for health insurance to the cost of an identified minimum benefit plan. However, limiting deductibility is probably not the best solution. Excess insurance benefits would most likely be considered payment for employment which is deductible as compensation. Instead, a limit could be placed on income exclusion. An employee's tax benefit of exclusion from gross income could be limited to a minimum benefit plan or eliminated altogether. Health insurance benefits above the minimum, or all benefits, would be taxable compensation. Limiting the tax benefit for insured employees could be combined with a tax credit for health insurance purchased by the uninsured. Tax treatment of the insured and uninsured would be essentially equal. Removing or limiting the tax benefit to the employee might ameliorate some of the inefficiencies in the area of health care, help to control costs, and address issues of justice and fairness. If employer-provided health insurance is taxable income, employees will presumably be more careful in their use of health care and more cost conscious. In addition, employees of certain businesses would not have a tax advantage available only to employees of businesses with non-discriminatory plans.

Changes in the tax treatment of health insurance are proposed both by groups who favor free market solutions and by groups who favor a form of national health insurance. Those in favor of free market solutions propose eventually eliminating both Medicaid and Medicare along with changes in the tax code to make treatment of employees and on-employees equal. Health care would be reprivatized, and individuals would make all decisions concerning health care and insurance.

Proponents of national insurance prefer a combination of tax code changes with health insurance treated much like Social Security. Either the government or all employers would provide health insurance or all individuals would be required to purchase insurance and provide proof of the purchase on the tax return.

Solving Insurance Problems

Health care and insurance costs and availability are areas of concern to CPAs in both public practice and industry. CPAs in industry will be increasingly called upon to analyze and propose solutions to health care problems. Businesses must develop expertise in health care issues to participate fully in the national debate. CPAs in public practice have clients, especially small businesses, whose profitability and viability are seriously affected by current health care problems and proposed future solutions. Small businesses offer an opportunity for CPA firms to develop and utilize expertise in the health insurance area.

Therefore, it will be beneficial for CPAs in both public practice and in industry to be knowledgeable about comprehensive health care management.

Comprehensive health care management includes analyzing past, current, and projected future health care and insurance costs. Data collection and analysis are an important part of this process. Review of the client's current health care administration to determine inefficiencies and areas that need to be changed may also produce benefits.

Analyzing and controlling health care is enhanced with software obtained to control and monitor both overall and per employee costs. A review would be designed to determine if expectations of health care costs and administration match reality. A wide divergence has been found in charges of health care providers in proximate geographical areas. Through reviews of several businesses in an area, CPAs could assemble information concerning health care providers who provide quality care at reasonable cost. Thus, the CPA would help the small businesses manage both the cost and administration of health insurance.

The Debate Goes On

The national debate concerning health care costs and insurance will continue to be an important discussion over the next years. Current health care and insurance problems are caused by several factors: shift in the health care industry to an increasing for-profit focus; development of sophisticated, costly technology; an aging population; the rising cost of malpractice insurance; and tax laws. These factors have changed society's perception of health insurance from a fringe benefit to a necessity. Because of its complexity, this national debate will be lengthy. CPA firms have an essential role in this debate. Health care costs and insurance are areas in which CPA firms can offer important service to both small businesses and society.

Sally W. Gilfillan, CPA is an Assistant Professor of Accounting at Longwood College, Farmville, Virginia.

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