Healthcare Policy & Law
Teitelbaum, J. B., & Wilensky, S. E. (2017). Essentials of health policy and law (3rd ed.). Burlington, MA: Jones & Bartlett Learning.
CHAPTER 8
Understanding Health Insurance
By the 1970s a number of factors converged to place rising healthcare costs on the national agenda: advances had been made in medical technology, hospitals expanded and became more involved in high-tech care, physician specialties became more common, hospitals and physicians had a large new pool of paying patients due to Medicaid and Medicare, wages for medical staff increased, and an aging population required an increasing amount of services.3(pp383–384) In addition, the prevailing fee-for-service (FFS) insurance system rewarded healthcare professionals for providing a high quantity of services. As the name suggests, fee-for-service reimbursement means the providers are paid for each service they provide—the more services (and more expensive services) rendered, the more reimbursement the provider receives. From 1960 to 1970, hospital care expenditures tripled from $9.3 billion to $28 billion and physician service expenditures almost matched that growth rate, increasing from $5.3 billion to $13.6 billion.6(pp257–258) Federal and state governments were also feeling the burden of high healthcare costs. From 1965 to 1970, federal and state governments collectively experienced a 21% annual rate of increase in their healthcare expenditures.3(p384)
As is discussed in more detail later in this chapter, managed care moves away from the FFS system by integrating the payment for services and the delivery of services into one place in an attempt to rein in healthcare costs and utilization. The federal Health Maintenance Organization Act of 1973 was intended to spur the growth of managed care by providing incentives to increase the use of health maintenance organizations (HMOs). The act relied on federal loans and grants and a mandate that employers with 25 or more employees offer an HMO option if one was available in their area.6(pp262–263) Even so, managed care did not flourish due to opposition by patients who did not want their provider and service choices restricted, and by providers who did not want to lose control over their practices.
As healthcare cost and quality concerns remained a national priority, the managed care industry eventually found a foothold in the health insurance market. Indeed, enrollment in managed care doubled during the 1990s, with almost 80 million enrollees by 1998. In 2014, less than 1% of workers were in conventional, non-managed-care arrangements.7 Although only about 30% of Medicare enrollees choose managed care arrangements, some 66% of Medicaid beneficiaries receive some or all of their services through managed care, though for many of them it is mandatory that they receive services through a managed care arrangement.8,9
HOW HEALTH INSURANCE OPERATES
This section provides an overview of the purpose and structure of health insurance. It begins with a review of basic health insurance terminology, considers the role of uncertainty and risk in insurance, and concludes with a discussion of how insurance companies set their premium rates.
Basic Terminology
As you read earlier, the health insurance industry first developed when the FFS system was standard. Under this system, not only do providers have incentive to conduct more and more expensive services, but patients are unbridled in their use of the healthcare system because FFS does not limit the use of services or accessibility to providers. As we will discuss later in this chapter, managed care developed as a response to the incentives created by the FFS system. However, even though there are numerous differences between FFS and managed care, many of the fundamental principles of how insurance operates are applicable to any type of health insurance contract. The following discussion reviews how health insurance works generally, regardless of the type of insurance arrangement.
The health insurance consumer (also known as the beneficiary or insured) buys health insurance in advance for an annual fee, usually paid in monthly installments, called a premium. In return, the health insurance carrier (or company) pays for all or part of the beneficiary’s healthcare costs if she or he becomes ill or injured and has a covered medical need. (A covered need is a medical good or service that the insurer is obligated to pay for because it is covered based on the terms of the insurance contract or policy. As discussed in detail elsewhere, the ACA requires many plans to cover all “essential health benefits.”) Insurance contracts cannot identify every conceivable healthcare need of beneficiaries, so they are generally structured to include categories of care (outpatient, inpatient, vision, maternity, etc.) to be provided if deemed medically necessary. Definitions of the term medically necessary vary by contract and are important when determining whether a procedure is covered.
Even if the beneficiary never needs healthcare services covered by the insurance policy, she still pays for the policy through premiums. The consumer benefits by having financial security in case of illness or injury, and the insurance company benefits by making money selling health insurance.
In addition to premiums, the beneficiary typically pays other costs under most health insurance policies. Many policies have deductibles, which is the amount of money the beneficiary must pay on her own for her healthcare needs each year before the insurance carrier starts to help with the costs. For example, if a policyholder has a $500 deductible, the beneficiary must pay 100% of the first $500 of healthcare costs each year. The insurance carrier is not liable to cover any costs until the individual’s healthcare bill reaches $501 in a given year. If the individual does not need more than $500 worth of health care in a specific year, the insurance carrier generally will not help that individual pay her healthcare costs.
Furthermore, a beneficiary generally continues to incur some costs in addition to the premiums even after the deductible has been met. Insurance carriers often impose cost sharing on the beneficiary through co-payment or co-insurance requirements. A co-payment is a set dollar amount the beneficiary pays when receiving a service from a provider. For example, many HMOs charge their beneficiaries $10 every time a beneficiary sees a primary care provider. Co-insurance refers to a percentage of the healthcare cost the individual must cover. For example, 20% is a common co-insurance amount. This means the beneficiary pays 20% of all healthcare costs after the deductible has been met, with the insurance carrier paying the other 80%.
Uncertainty
From a traditional economic perspective, insurance exists because of two basic concepts—risk and uncertainty. The world is full of risks—auto theft, house fires, physical disabilities—and uncertainty about whether any such events might affect a particular individual. As a result, people buy a variety of forms of insurance (e.g., automobile insurance, home insurance, life or disability insurance) to protect themselves and their families against the financial consequences of these unfortunate and unforeseen events.
Although genetic predisposition or behavioral choices such as smoking or working a high-risk job may increase the chances that an individual will suffer from a health-related problem, in general there is a high level of uncertainty as to whether a particular person will become sick or injured and need medical assistance. Health insurance protects the consumer from medical costs associated with both expensive and unforeseen events. Even if the consumer does not experience a negative event, a benefit exists from the peace of mind and reduced uncertainty of financial exposure that insurance provides.
In terms of health status and wise use of resources, when insurance allows consumers to purchase necessary services they would not otherwise be able to afford, it functions in a positive manner. Conversely, when insurance leads consumers to purchase unnecessary healthcare goods or services of low value because the consumer is not paying full cost, it works in a negative manner. The difficult task is trying to figure out how to set the consumer’s share of the burden at just the right point to encourage and make available the proper use of health care, while discouraging improper usage.
Risk
Risk is a central concern in insurance. Consumers buy insurance to protect themselves against the risk of unforeseen and costly events. But health insurers are also concerned about risk—the risk that their beneficiaries will experience a covered medical event.
Individuals purchase health insurance to protect themselves against the risk of financial consequences of healthcare needs. Because of differences in risk level, individuals who are generally healthy or otherwise do not anticipate having health expenses may place a lower value on insurance than individuals who are unhealthy or those who are healthy but expect to have medical expenses, such as pregnant women. Therefore, healthy individuals tend to seek out lower-cost insurance plans or refrain from obtaining insurance altogether if it is not, in their view, cost effective. Unhealthy individuals or healthy individuals who often use the healthcare system would obviously prefer a low-cost insurance plan (with comprehensive benefits) but are generally more willing to pay higher premiums because of the value they place on having insurance.
Health insurance carriers are businesses that need to cover their expenditures, including the cost of accessing capital needed to run their company, to stay in the market.b They earn money by collecting premiums from their beneficiaries, and they pay out money to cover their beneficiaries’ healthcare costs above the deductible amount and to cover the costs of running a business (overhead, marketing, taxes, etc.). One way health insurance companies survive is to make sure the premiums charged to beneficiaries cover these costs. From the insurance carrier’s perspective, it would be ideal to be able to charge lower premiums to attract healthy individuals who are less likely to use their benefits, and higher premiums to unhealthy individuals who are more likely to need medical care.
However, insurance companies have difficulty matching healthy people with low-cost plans and unhealthy people with high-cost plans because of the problem of asymmetric information. This is the term used by economists when one party to a transaction has more information than the other party. In the case of insurance, the imbalance often favors the consumer because insurance carriers generally do not know as much as the individual does about the individual’s healthcare needs and personal habits. Although relatively healthy low-cost individuals want to make their status known because insurance carriers might be willing to sell them an insurance product for a lower price, relatively unhealthy individuals do not want their status known because insurance companies might charge them higher premiums. For this reason, when an insurance carrier lacks complete information, it is more beneficial to unhealthy beneficiaries than to healthy ones.
Together, uncertainty about risk and the presence of asymmetric information lead to the problem of adverse selection. In terms of health insurance, adverse selection is when unhealthy people over-select (that is, select beyond a random distribution) a particular plan. This occurs because people at risk for having high healthcare costs choose a particular plan because of that plan’s attractive coverage rules.10(pp12–13) The consumer who knows he is a high risk for needing services will be more likely to choose a more comprehensive plan because it covers more services, even though it is probably a more expensive option. This leaves the insurer that offers the comprehensive plan with a disproportionate number of high-risk beneficiaries. As a result of the relatively high-risk pool, beneficiaries will have high service utilization rates and, in turn, the insurance carrier would need to raise premiums to be able to pay for the increased cost of covering services for beneficiaries. In turn, some of the healthier individuals might choose to leave the plan because of the higher premiums, resulting in an even riskier beneficiary pool and even higher premiums, and the cycle continues. The healthier consumers may find a lower-cost plan or may choose to go without health insurance and pay the penalty under the ACA, while the insurance plan is left with an increasingly higher percentage of relatively unhealthy people. This is the problem of adverse selection.
One instance where adverse selection is a key concern is with an increasingly popular type of health plan, the high deductible health plan (HDHP). As the name suggests, these plans have very high deductibles (usually defined as at least $1,000 for an individual or $2,000 for a family). In 2014, annual premiums for the average HDHP were $5,299 for individuals and $15,401 for families.7(p20) As with other insurance plans, consumers pay most of their healthcare expenses out-of-pocket until they reach the deductible. HDHPs are often used in conjunction with health reimbursement arrangements (HRAs) or health savings accounts (HSAs), which allow individuals to set aside money for future healthcare needs. Health reimbursement arrangements are funded solely by employers, who usually commit to making a specified amount of money available for healthcare expenses incurred by employees or their dependents, while HSAs are created by individuals, but employers may also contribute to HSAs if the employers offer a qualified HDHP. Individual contributions to HSAs are made with pre-income tax dollars, and withdrawals to pay for qualified healthcare expenses are also not taxed. As shown in Figures 8-1 and 8-2 , high deductible plans are increasingly popular with employers and employees.
Those who support HDHPs assert that high deductible plans promote personal responsibility because enrollees have a financial incentive to avoid over utilizing the healthcare system and to choose cost-effective treatment options. As a result, HDHPs are favored by employers and others as a cost-cutting strategy. Others are concerned that HDHPs will result in adverse selection, harming low-income and unhealthy individuals. Critics argue that enrollees of high deductible plans are more likely to be wealthier and healthier individuals who can afford high out-of-pocket expenses and are less likely to use the healthcare system.11 As a result, relatively poorer and sicker individuals will choose a comprehensive group health insurance plan (assuming one is available and affordable), resulting in plans facing the possibility of adverse selection due to having a relatively high-risk insurance pool. In addition, there are concerns that employers will replace their more expensive comprehensive plan options with HDHPs, potentially resulting in less affordable health care for poorer and sicker individuals. Finally, critics also contend that the lower service utilization associated with HDHP enrollees is due to their better health status, not price sensitivity, undermining one of the main arguments in support of these plans.
These payment methods lead to very different incentives for providers than is the case under the FFS system. Instead of being paid more for doing more, HMO providers are paid the same amount regardless of the number or type of services they provide. Given the use of bonuses and withholdings, salaried providers may be paid more if they make treatment decisions deemed favorable by an MCO. By using these incentives, MCOs encourage providers to render the fewest and most cost-effective services necessary.
Critics of managed care payment methodologies argue that MCO plan members will not receive all necessary care if providers are incentivized to provide fewer services and less-costly care. Instead of treating patients using both the most cost-efficient and medically necessary services, critics claim MCOs encourage providers to save money by providing fewer services and less specialized care than necessary; MCOs counter that their own incentive is to keep their members healthy so they do not need expensive services in the future. In addition, MCOs point to their ability to impose quality control measures on providers as a way to ensure that patients are properly treated. In response, critics argue that because members switch health plans relatively frequently, MCOs do not have an incentive to keep their members healthy because the MCOs will not realize the long-term savings as members come and go.
Which side has the better argument? There is no definitive answer. On the one hand, studies have found that treatment decisions under MCO arrangements are mostly influenced by clinical factors (not economic ones), that there is little or no measurable difference in the health outcomes of patients in FFS versus managed care plans, that the quality of care provided under FFS and managed care plans is basically equal, and that most Americans are satisfied with their health plan, whether it is FFS or through an MCO.16(pp351–352),17(p228) In fact, compared to FFS, HMO enrollees have fewer disparities in terms of access to or utilization of care based on race, ethnicity, or income.17On the other hand, studies have also shown that mental health patients do not fare as well in MCOs as in FFS plans; that nonprofit HMOs (a type of MCO) score better on quality measures than for-profit ones; and that managed care enrollees are less likely than FFS patients to give excellent ratings to their plan overall, the quality of services they receive, access to specialty care, and time spent with physicians.16(pp351–352),17(p228)
Utilization Control Tools
Managed care organizations also employ other techniques, not related to provider payment methods, to control use of healthcare services. Once again, the goal in using these tools is to reduce the use of unnecessary and costly services. We review three common utilization control tools: gatekeeping, utilization review, and case management.
Gatekeepers monitor and control the services a patient receives. Members of managed care plans are often required to select a primary care provider from the MCO network upon enrollment. This provider acts as the member’s “gatekeeper” and is responsible for providing primary care, referring patients for additional care, and generally coordinating the patient’s care. Having a gatekeeper allows the MCO, not the patient or specialty provider, to determine when a patient needs additional or specialty services, diagnostic tests, hospital admissions, and the like. As with the cost containment strategies discussed earlier, there are critics who contend that utilization-based bonuses or salary withholdings give gatekeepers financial incentive not to provide specialty referrals even when it is in the best interest of the patient.
Utilization review (UR) allows an MCO to evaluate the appropriateness of the services provided and to deny payment for unnecessary services. Managed care organization personnel review and approve or deny the services performed or recommended by network providers. Utilization review specialists are often healthcare professionals, and MCOs generally use existing clinical care guidelines to determine whether services are appropriate.
Utilization review may occur prospectively, concurrently, or retrospectively. Prospective UR means that an MCO reviews the appropriateness of treatment before a service is rendered. A request for a recommended service is sent to a UR panel for approval or denial. A denial does not mean a patient cannot move forward with his preferred treatment plan; however, it does mean that the patient will have to pay for the treatment out of his own pocket. Prospective UR is distinguished from concurrent UR, which is when the MCO review of the appropriateness of treatment occurs while treatment is being rendered. For example, a patient may need a procedure that requires hospitalization. Even though the procedure is performed and covered, a UR specialist might still determine the number of days the patient may remain in the hospital or whether certain services, such as home care or physical therapy, will be covered upon discharge from the hospital. Finally, retrospective review means the MCO reviews the appropriateness of treatment (and therefore its coverage) after a service is rendered. In this case, a patient’s medical records are reviewed to determine whether the care provided was appropriate and billed accurately; MCOs will not provide reimbursement for services deemed inappropriate or unnecessary. This latter type of review may also be used to uncover provider practice patterns and determine incentive compensation.16(p339) Regardless of when the review occurs, the use of UR is controversial because it may interfere with the patient–provider relationship and allow for second-guessing of provider treatment decisions by a third party who is not part of the diagnosis and treatment discussions.
Case management is a service utilization approach that uses trained personnel to manage and coordinate patient care. Although gatekeeping serves as a basic form of case management for all members, many patients with complex or chronic conditions, such as HIV/AIDS or spinal cord injuries, may benefit from more intensive case management. These patients may have frequent need for care from various specialists and thus benefit from assistance by personnel who are familiar with the many resources available to care for the patient and who are able to provide information and assistance to patients and their families. A case manager works with providers to determine what care is necessary and to help arrange for patients to receive that care in the most appropriate and cost-effective settings.16(pp336–337)Although the general idea of case management is not controversial, some people believe it can be implemented in a manner that acts more as a barrier than an asset to care because additional approval is needed before a patient receives care and because another layer of bureaucracy is placed between the patient and the provider. Table 8-2 summarizes the three service utilization control strategies just discussed.
As you might imagine, managed care’s use of service utilization control mechanisms frequently leads to disputes between patients and their managed care company over whether the company is improperly affecting the provider–patient relationship (and negatively impacting the quality of care provided) by making decisions as to the type or quantity of care a patient should receive. This is both a highly charged health policy issue and a complicated legal issue, and one that is discussed in more detail in a review of individual rights in health care. For purposes of this chapter, it is enough to note that MCOs must have a grievance and appeal process to at least initially handle these sorts of disputes. Although companies’ processes differ in their specifics, they generally allow members to appeal a coverage decision, provide evidence to support the appeal, and receive an expedited resolution when medically necessary. The ACA included a number of provisions relating to the appeals process required of insurance plans; these provisions establish a federal standard for state external appeals laws governing products in the individual and group markets and create a new federal appeals process for self-insured plans (the provisions do not affect Medicaid and Medicare, which have their own appeals processes).18 The need for adequate grievance and appeal procedures can be particularly acute for patients with special healthcare needs, such as those with physical or mental disabilities, and patients who otherwise use the healthcare system more frequently than most.
Common Managed Care Structures
There are three managed care structures common in the market today: health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point-of-service plans (POS). All three provide preventive and specialty care, but the rules relating to accessing care differ for each. In general, HMOs have the most restrictive rules pertaining to patients and providers, PPOs have the least restrictive rules, and POSs fall in the middle.
As shown in Figure 8-3 , PPOs are the most popular type of managed care plan, while very few people are still insured by a conventional FFS plan. In general, the more control an MCO has over its providers and members, the easier it is to control utilization of services and, therefore, healthcare costs and quality. Conversely, providers and patients prefer to have as much autonomy as possible, so the more restrictive MCO structures may be less desirable in that respect. However, the distinctions among managed care structures have become blurred recently because of the consumer and provider backlash against MCO restrictions.
Health Maintenance Organizations
When managed care first became prominent in the 1970s, HMOs were the most common type of MCO. There are several characteristics shared by all HMOs:
• They pay providers a salary to cover the cost of any and all services that beneficiaries need within a provider’s scope of practice.
• They negotiate a capitated rate with plan purchasers (e.g., employers) that prices the plan based on a per member per month amount for each type of provider.
• They coordinate and control receipt of services.
• They arrange for care using only their network providers.
• They are responsible for providing care according to established quality standards.
Despite these commonalities, HMOs may be structured through a variety of models, including staff-model/closed panel, group model, network model, individual practice associations (IPAs), and direct contract model.16(pp340–344)Each model has advantages and disadvantages from the perspective of the HMO, its providers, and its members, as shown in Table 8-3 .
Preferred Provider Organizations
As is evident from Table 8-3 , every form of HMO is fairly restrictive. In all models, the HMO provides coverage only if members seek care from network providers and providers may or may not be limited to serving only HMO members. As both patients and providers began rebelling over these restrictions, new forms of MCOs emerged, often formed by providers and hospitals themselves.
Like HMOs, PPOs have a provider network, referred to as preferred providers. Unlike HMOs, however, PPOs provide coverage to patients seeking care from any provider, regardless of whether the provider is part of the member’s PPO preferred provider network. However, the amount of the service price that the PPO will cover is greater for an in-network provider than an out-of-network provider. For example, a PPO may agree to cover 80% of the cost for an in-network physician visit, but only 70% of the cost for a similar, but out-of-network, physician visit. PPO patients thus have the option of paying more but choosing among a greater number of providers or paying less but choosing among a more limited number of (in-network) providers. In addition, a PPO member’s cost-sharing responsibilities are often higher than is the case for HMO members.
In exchange for being in the network, providers agree to accept a discounted rate for their services, often 25–35% below their usual rates.17(p226) Because PPO members have a financial incentive to seek providers who are in-network, these healthcare professionals find it worthwhile to accept a reduced rate from the PPO in exchange for the higher likelihood that PPO members will select them over non-network providers. Furthermore, unlike the capitation system found in HMOs, PPO providers do not assume financial risk for providing services. Depending on the terms of their contract with the PPO, preferred providers may or may not agree to limit their practice to PPO members. Although it is rare, PPOs may choose to guarantee preferred providers a minimum number of patients.
Even though an MCO has much less control over service utilization in the PPO model than the HMO model, PPOs still provide more incentives to use care judiciously than is the case in an FFS system. For example, in-network PPO providers are paid less than their customary rate by the company when they provide care to PPO members and often agree to abide by quality control and utilization review strategies used by the PPO. In addition, PPO patients have an incentive to use certain providers who will cost them less and have cost-sharing requirements unlike anything found under FFS. The PPO model attempts to locate a middle ground between the very restrictive HMO models and the FFS structure that resulted in very high healthcare utilization and costs.
Point-of-Service Plans
In another effort to contain costs while still providing patients the freedom to choose their provider, POS plans combine features of HMOs and PPOs. Like an HMO, POS plans have a provider network, use a capitated or other payment system that shares financial risk with providers, and requires members to use a gatekeeper to help control service utilization. However, designated services may be obtained from out-of-network providers who are paid on an FFS basis, but use of these providers costs the member more money, as with the PPO model. A POS gatekeeper must approve all in-network care and may also have some control over out-of-network care, depending on the terms of the plan. The call by many consumers for increased choice in providers has become forceful enough that some HMOs are now offering POS plans, which they may refer to as open-ended (as opposed to closed panel) models.
The Future of Managed Care
Managed care is likely to remain an integral part of the health system despite its drawbacks. Patients chafe at utilization restrictions, as is evident by the increase in PPO popularity and the emergence of the hybrid HMO/POS. Accurate or not, there is a widespread perception that managed care plans deny necessary care and provide lower quality care.16(p352),17(p228) Providers also complain that managed care interferes with their ability to practice medicine in a manner of their choosing, placing them in ethical dilemmas due to the use of financial incentives and possibly lowering the quality of care they provide due to limits on tests and procedures they order. Yet, the key circumstance that led to the creation of managed care—high healthcare expenditures—has not abated. While the country struggles with ever-growing healthcare costs, even under managed care, the willingness to experiment with various cost and utilization containment strategies is likely to remain in place.
CONCLUSION
This introduction to health insurance serves as a building block for additional study, which expands upon many of the key health policy and law themes mentioned here. It should be clear to readers that health policy analysts and decision makers must be particularly attuned to health insurance issues; without knowing both the basic structure of health insurance and how various incentives impact the actions of healthcare consumers, professionals, and insurance carriers, they cannot make informed recommendations and policies addressing the key health issues of the day.