Principles of risk management and insurance 12th by rejde mcnamara chapter 18

18-2 Agenda • Social Insurance • Old-Age, Survivors, and Disability Insurance OASDI • Medicare • Impact of the Affordable Care Act on Medicare • Problems and Issues in OASDI and Medicar

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Chapter 18

Social Insurance

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Agenda

• Social Insurance

• Old-Age, Survivors, and Disability Insurance (OASDI)

• Medicare

• Impact of the Affordable Care Act on Medicare

• Problems and Issues in OASDI and Medicare

• Unemployment Insurance

• Workers Compensation

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Reasons for Social Insurance

• Social insurance programs are necessary for several reasons:

– To help solve complex social problems

– To provide coverage for perils that are difficult to insure privately

– To provide a base of economic security to the

population

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Basic Characteristics of Social

Insurance

• Social insurance programs have certain characteristics that distinguish them from other government insurance programs:

– Most programs are compulsory

– Programs are designed to provide a floor of

income– Programs pay benefits based on social adequacy rather than individual equity

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Basic Characteristics of Social

Insurance

– Benefits are loosely related to earnings

– Programs, benefits, and benefit formulas are

prescribed by law

– A formal means test is not required

– Full funding of benefits is unnecessary

– Programs are designed to be financially

self-supporting

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Old-Age, Survivors, and Disability

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Old-Age, Survivors, and Disability

– You are currently insured, and eligible for

survivor benefits, if you have earned at least 6 credits in the past 13 calendar quarters

– The number of credits required to receive

disability benefits depends on your age when

you become disabled

– A duration of work test must be satisfied before

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OASDI: Retirement Benefits

• Social security retirement benefits are an important source of

income for most retired workers

– For persons both in 1937 or earlier, full

retirement age for unreduced benefits is age 65– The full retirement age will increase gradually to 67

– Workers and their spouses can retire at age 62 with actuarially reduced benefits

– Monthly retirement benefits can be paid to

retired workers and their dependents

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Exhibit 18.1 Social Security Full Retirement

Age and Reduction in Benefits by Age

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• The monthly retirement benefit is based on the worker’s primary

insurance amount (PIA)

– The PIA is based on the worker’s average

indexed monthly earnings (AIME)

– The AIME is based on a weighted benefit formula which weights the benefits heavily in favor of

low-income groups

– Social Security actuaries calculate each year the indexing factors that are used to determine the worker’s average indexed monthly earnings

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Exhibit 18.2 Estimated Annual Retirement Benefits1 for Retired Workers with Various Pre-Retirement Earnings (2008–2030)

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Exhibit 18.2 Estimated Annual Retirement Benefits1 for Retired Workers with Various Pre-Retirement Earnings (2008–2030) (cont.)

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• Each additional year of work adds another year of earnings to your Social Security earnings record

• A delayed retirement credit is available if you delay receiving

retirement benefits beyond the full retirement age

• Cash benefits are automatically adjusted each year for changes in the cost of living

• The program has an earnings test that can result in a reduction or loss of monthly benefits for workers with earned incomes above

certain annual limits

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Insight 18.1 Taking Social Security: Sooner Might

Not Be Better

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OASDI: Survivor Benefits

• Survivor benefits can be paid to dependents of a deceased worker who is either fully or currently insured

• Survivors include:

– Unmarried children younger than age 18

– Unmarried disabled children

– Surviving spouse with children younger than age 16 – Surviving spouse age 60 or older

– Disabled widow or widower, ages 50-59

– Dependent parents

• The benefits provide a substantial amount of financial protection to families

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OASDI: Disability Benefits

• Disability income benefits can be paid to disabled workers who meet certain eligibility requirements

– The benefits provide protection against the loss

of income during a long-term disability

– The worker must meet a five-month waiting

period, and satisfy the definition of disability

– The worker must have a physical or mental

condition that prevents him or her from doing

any substantial gainful activity and is expected

to last at least 12 months or is expected to result

in death

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OASDI: Disability Benefits

• Major groups eligible to receive OASDI disability income benefits

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Taxation and Financing of OASDI

– In 2012, the Social Security portion is 6.2% on

covered earnings up to a maximum of $110,100;

it was reduced to 4.2% for 2011 and 2012

– The Medicare portion is 1.45 % on all earned

income

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• Medicare covers the medical expenses of most persons age 65 and older

• Beneficiaries can select among an array of plans including

prescription drug plans and health care plans of private insurers

• Under the original Medicare plan,

– Beneficiaries can elect any provider that accepts Medicare patients

– Medicare pays its share of the bill, and the

beneficiary pays the balance

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Medicare

• Hospital Insurance (Part A) provides coverage for

inpatient hospital stays and other services including skilled nursing facility care, home health care,

hospice care, and blood transfusions

– Inpatient care is covered for up to 90 days for each benefit period

– Inpatient care in a skilled nursing facility is covered up to a maximum of 100 days in a benefit period

– Hospitals are reimbursed for inpatient services under a

prospective payment system

– A flat amount is paid for each service based on its

diagnosis-related group (DRG)

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• Medical Insurance (Part B) is a voluntary program that covers

physicians’ fees and related medical services

– Covered services include physician services,

clinical laboratory services, home health care,

outpatient hospital services, and blood

– Beneficiaries must pay a monthly premium for the benefits

– The beneficiary must meet an annual deductible– The program pays 80% of the Medicare-

approved amount for most services

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Medicare

• Medicare hospital insurance (Part A) is financed by a payroll tax paid

by covered employees, employers, and the self-employed

– Payroll tax is 1.45 percent on all covered

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– Medicare Private Fee-for-service plans

– Medicare Medical Savings Account Plans

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Medicare

• A Medicare Health Maintenance Organization (HMO) is a managed care plan operated by a private insurer

– The plan may require members to choose a

primary care physician and get a referral to see

a specialist

– If the plan covers prescription drugs, members must pay a co-payment or coinsurance charge for each covered prescription

• Beneficiaries in a Medicare Preferred Provider Organization (PPO) can generally see any doctor or provider that accepts Medicare patients

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• Under a Medicare Private Fee-for-Service Plan, the private company, rather than Medicare, decides how much it will pay and the amounts members must pay for the services provided

• A Medicare Special Needs Plan provides more focused care for

specific groups of people, such as those with chronic illnesses

• Under a Medicare Medical Savings Account Plan, Medicare deposits money that the beneficiary can use to pay health-care costs

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– Medicare Cost Plans

– Demonstrations and pilot programs

– PACE programs

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Medicare Prescription Drug Plans

• Medicare prescription drug coverage (Part D) is available to all

beneficiaries

– Beneficiaries in the original Medicare plan can

add prescription drug coverage by joining a

stand-alone plan

– Monthly premiums depend on the plan chosen, and vary in the cost and types of drugs covered– Plans must provide at least standard coverage

– Beneficiaries pay part of the cost of prescription drugs, and Medicare pays part of the cost

– For 2012, the average monthly premium for the private plans is an estimated $30

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Medicare Prescription Drug Plans

• The cost sharing provisions are complex

– Beneficiaries must meet an annual deductible

that cannot exceed $320 in any plan

– After the deductible is met, beneficiaries must

meet a copayment or coinsurance charge

– Most plans have a coverage gap, or “donut hole”, which refers to drug costs that must be paid

completely out of pocket, after an initial amount has been covered by the plan, and until the

annual out-of-pocket limit

– In 2012,once a beneficiary spends $4700 pocket for the year, the coverage gap ends, and catastrophic coverage, with a lower deductible, applies

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out-of-Exhibit 18.3 Example of Cost-Sharing Provisions Under

Medicare Prescription Drug Coverage

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Medigap Insurance

• Medicare beneficiaries can purchase a Medigap policy to cover part

or all of medical expenses not paid by Medicare

– The policies are sold by private insurers, and are strictly regulated by federal law

– There are 10 standard policies (A-N) which offer different sets of benefits; some policies are not longer available

• A Medicare SELECT plan requires the policyholder to use specific

health-care providers to receive full coverage

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Impact of the Affordable Care Act on Medicare

• Some provisions of the Affordable Care Act will have significant

impact on the Medicare program:

– Rebates for the Part D coverage gap (donut hole)– Cracking down on health-care fraud

– Providing free preventive care to seniors

– Reducing overpayments to Medicare Advantage Plans

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Impact of the Affordable Care Act on Medicare

– Improving health-care quality and efficiency

– Reducing unnecessary hospital readmissions

– New innovations to hold down Medicare costs

– Linking payments to quality outcomes

– Bundling of payments

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OASDI: Problems and Issues

• The program is running an annual surplus, but the OASDI trust funds will soon experience serious financial problems

– The combined OASDI trust funds will be

exhausted in 2033

– In 2033, non-interest income will be sufficient to pay only about 75 percent of scheduled benefits– To pay all scheduled benefits over the next 75

years, the trust funds require an additional $8.6 trillion in present value dollars

– The Disability Income trust fund is projected to

be exhausted in 2016

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• The deficit can be reduced or eliminated by:

– Increasing payroll taxes

– Decreasing benefits

– Using general revenues to pay benefits

– Some combination of these

• Recent proposed changes include:

– Using “progressive indexing” to determine benefits – Increasing the Social Security payroll tax for both employers and employees

– Moving up scheduled increases in the full

retirement age

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• Recent Proposed Changes, continued

– Reducing benefits for future retirees across the board

– Increasing the OASDI taxable wage earnings base– Subjecting all OASDI benefits to the federal

income tax

– Extending OASDI coverage on a compulsory basis

to all new state and local government employees– Increasing the number of years used in

calculating retirement benefits from 35 to 38

– Investing part of the trust fund assets in private

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Insight 18.2 What Are Your Solutions for

Reforming Social Security?

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Medicare Financial Crisis

• Medicare Part A also has financial problems

– The projected 75-year deficit in the Hospital

Insurance Trust Fund is 13.35% of taxable payroll– The fund is projected to be exhausted by 2024

• The poor financial condition is affected by:

– Higher prices for medical service

– Increased volume and complexity of medical

services

– Aging of the population and increased enrollments– Overpayments to private insurers

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Medicare Financial Crisis

• Efforts to hold down costs include:

– Reducing payments to hospitals and physicians– Limiting spending on specified services

– Implementing a diagnosis-related group method for reimbursing hospitals

– New provisions of the Affordable Care Act

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Unemployment Insurance

• Most jobs in private firms, state and local governments, and

nonprofit organizations are covered for unemployment benefits

– Private firms are subject to the federal

unemployment tax

• To be eligible, an unemployed worker must meet the following

monetary eligibility requirements:

– Have qualifying wages and employment during the base year

– Be able and available for work

– Be actively seeking work

– Meet a one-week waiting period

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• Regular state benefits depend on the worker’s past wages, within certain limits

– Most states use a formula that pays weekly

benefits based on a fraction of the worker’s high quarter wages

– The maximum duration of regular benefits is

limited to 26 weeks in most states

• Under the extended-benefits program, an additional 13 weeks of

benefits is paid during periods of high unemployment

• Extended benefits are also available to workers to exhaust their

regular benefits in states with high unemployment

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• Programs are financed largely by payroll taxes paid by employers on the covered wages of employees

– For 2012, covered employers paid a federal

payroll tax of 6.0% on the first $7000 of annual wages

– To strengthen reserves and maintain fund

solvency, most states have a taxable wage base that exceeds $7000

– Experience rating is also used, by which firms

with favorable employment records pay reduced tax rates

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• Problems with state unemployment compensation programs include:

– Programs do not cover all unemployed persons– State fund balances are inadequate

– A high percentage of claimants are exhausting their regular state unemployment benefits

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Workers Compensation

• Workers compensation is a social insurance program that provides medical care, cash benefits, and rehabilitation services to workers who are disabled from job-related accidents or disease

– The benefits are important in reducing the

economic uncertainty that may result from a related disability

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