Switch from Two tier to three tier dependent coverage

[Guest DavidRein]

Hello, My name is David Rein, I am a doctoral student at Georgia State University. I am looking to speak with benefit administrators of self insured companies about the way they finance dependent coverage for dental, vision and other ancillary health services. Particularly, I am interested in speaking to managers with experience going from a two-tiered dependent option (payer or payer + family) to a three tiered structure (payer, Payer +1, Payer + family). Any information at all on this topic would be appreciated.

[Guest DavidRein]

Hi all, an interesting person was kind enough to write me with the following example:

---------

For example; assume that the employer has 1,000 employees broken down as follows; 200 singles, 300 employee + 1 dependent and 500 employee + 2 or more dependents.

If the two-tiered rates are $200.00 single and $500.00 family, and the employer wants to get a 30% per month employee contribution then under this structure the employer is going to get $132,000 per month (200x$200 + 800x$500) x.30 = $132,000.

Now, if the employer wants to get the same $132,000 from employees under a three-tiered structure he might charge the following; $200.00 single; $453.41 two person, and $527.95 family. The employee contributions will be the same (200x$200 + 300x$453.41 + 500x$527.95) x .30 = $132,000.

—---------------

This perfectly illustrates the paradox, and interesting point of this question.

From an accounting perspective this example is correct in asserting that thing alteration in benefits would generate the same amount of premium revenue.

What I am curious about is how this change in premium structure effects total net program costs, and employee utilization of services.

Because of issues of risk selection and moral hazzard, its possible that families with pretty good teeth might opt for the Single + 1 option as oppsed to the family rate. It is also possible that families with only one child might opt for a single +1 and omit the spouse from coverage. The result of this might be to load up single child families in the payer +1 and load up on big families, or families with lots of dental problems in the family category.

The cost of benefits for families might be much more than the extra $27 premium charged, because currently all the cost of low cost families off sets the cost of high cost families in the general family category. Offering a payer +1 option allows low cost families the ability to opt-out of the higher cost family option, leaving only high risk families in the family pool.

Another issue is that families who are short on cash, might opt for the payer + 1 option despite high insurance needs. After doing this, they may act in one of two ways, neither of which are desirable:

1. They may commit mild fraud - call all their children by the same name for example while visiting different dentists,.

or

2. Reduce the amount of care that their families receive.

While to many businesses, reducing utilization is a good thing, an altruistic entity that cares about the level of access to dental care of their employees (for example a government agency), might be very upset by such an outcome.

What I would love to identify are people who have had experience with this issue, or identify plans going through such a change, to determine how much of these concerns are just academic theorizing, and how much are justified.

Any thoughts?