EVOLUTION OF EMPLOYER-BASED GROUP HEALTH INSURANCE: FROM INDEMNITY/SERVICE PLANS TO MANAGED HEALTH INSURANCE PLANS – THROUGH 2000

INDEMNITY AND SERVICE HEALTH INSURANCE PLANS IN THE U.S.: NATURE AND EVOLUTION FROM THE 1930’s THROUGH THE 1970’s.

         

I. The management of health insurance risk under Indemnity and Service health insurance plans: 1930’s through the 1970’s.

NOTE: Indemnity and Service Health Insurance Plans, and initially the Medicare and Medicaid insurance programs, were based on the principles of non-interference in the practice of medicine, the choice of a health care service provider, and the decisions of patients and physicians about the preferred treatment for a given medical condition. SO - Initially all those plans were opposed to the basic principles of Managed Care in health insurance and the delivery of health care goods and services.

A. OVERVIEW OF INDEMNITY AND SERVICE PLANS:

These plans developed in the 1930’s (Blue Cross and Blue Shield plans) and in the 1940’s and 1950’s (commercial health insurance, whose rapid and massive expansion of coverage for American workers was facilitated by Federal regulation and law, including provisions of the Federal tax code.)

The focus under these plans, which represented the bulk of the health industry’s insurance products through the 1970’s and even into the late 1980’s, was to properly price insurance products through relatively accurate actuarial projections of expected health services usage for selected communities or for experience-rated subgroups such as employees of a particular firm. Properly priced premiums, sometimes associated with expense-sharing features such as consumer deductibles, coinsurance, and co-payments, were expected to ensure that outlays for services did not exceed a health insurance plan’s inflow of premium funds.

Risk was looked at solely in terms of financial risk to the insurer and the consumer associated with treatment for episodes of acute care. Risk was further managed by establishing annual and lifetime limits on the insurance company payout for health services provided to individual consumers and their families.

Risk was seen neither in terms of a population’s health status or an individual’s health status, nor in terms of the quality and appropriateness of services delivered. The quality of the inputs to the health services delivery process (modern hospitals, well-trained board-certified physicians) and the adherence of health care professionals to the standards of conduct for their chosen profession were implicitly assumed to address those risks.

The purpose of this kind of health insurance was to make acute and catastrophic care affordable and available to consumers without affecting the character and operation of the health care delivery system. Preventive Care and Wellness Services were not seen as the proper target of these plans, nor were they seen as appropriate objects for the expenditure of premium dollars. These health insurance plans paid out money for services, but did not see themselves as responsible for the size and shape of the network of health services providers available to serve their publics, nor for the quality and appropriateness of the health care services which were delivered.

In the 1970s and 1980s employers and the major private insurance companies (Blue Cross/Blue Shield, the major private commercial insurance companies) started to introduce elements of Managed Care such as big case management, disease management, and inpatient utilization review to the management of those Indemnity and Service plans. These changes in insurance plan approach, however, did not significantly impact rapidly rising prices of health care goods and services, nor did they affect the significant year-to-year increases in national health expenditures and health insurance premiums.

B. OUT-OF- POCKET EXPENDITURES: Coinsurance, co-payment, deductible, period of eligibility:

A deductible is a fixed dollar amount, either paid annually, or for each period of eligibility, which a subscriber must pay before their health insurance starts to pay for a particular set of services. For instance, an annual deductible of $800 might have to be paid for hospital services before the subscriber or provider may bill the insurance plan for expenditures incurred above that amount.

A co-payment is a fixed dollar amount paid for each service provided. For instance, for each office visit to a specialist, a subscriber may have to pay a co-payment of $10. A coinsurance is a percentage of the charge for a service which a subscriber must pay each time a service is accessed. For instance, for a Magnetic Resonance Imaging scan received on an outpatient basis, the member might have to pay 20% of the reasonable charge as defined by the insurance company and charged by the physician and/or the imaging center.

A period of eligibility is a period during which the deductible paid for a set of services is, once paid, not required. If a subscriber, or instance, has to go to the hospital twice in a year, and a certain amount of time has elapsed between the first and the second stay, a new period of eligibility may start, and a new deductible may have to be paid.

PLEASE NOTE:

· Health insurance usually involves a variety of plan-specific limitations on what services are and are not covered.

· Until the passage of the Affordable Care Act of 2010, insurance plans often had annual and lifetime financial limits to how much the insurance plan was liable to pay out to cover a plan subscriber’s medical expenditures. This is being phased out of existing insurance plans, and does not exist for health insurance plans marketed and sold in the State Exchanges/Marketplaces for individuals and small businesses established under the ACA.

THE PRECONDITION FOR PROVIDER ACCEPTANCE OF PRIVATE GROUP HEALTH INSURANCE, WHETHER IN THE FORM OF BLUE CROSS/BLUE SHIELD PLANS, OR IN THE FORM OF COMMERCIAL HEALTH INSURANCE, WAS THAT THE SOLE PURPOSE OF HEALTH INSURANCE WAS TO PAY PROVIDERS REASONABLE COMPENSATION FOR THEIR SERVICES. IN MATTERS OF QUALITY OF CARE, MEDICAL PRACTICE, AND CHOICE OF PROVIDER THE INSURANCE COMPANIES OF ALL STRIPES WERE EXPECTED TO KEEP THEIR NOSES OUT OF THE BUSINESS OF HEALTH CARE DELIVERY. AS LONG AS INSURANCE WAS ALL ABOUT PAYMENT, AND NOT ABOUT INFLUENCING OR INTERFERING IN THE DECISIONS ABOUT PROVIDER OR MEDICAL PRACTICE, IT WAS OK.

II. The 1960s AND THE 1970s: CHANGES IN INDEMNITY AND SERVICE PLANS SINCE THE 1930s AND 1940’s.

· Cost-sharing: The use of cost-sharing (deductibles, coinsurance, co-pays) to limit employer and insurance plan liability by requiring that workers pay out-of-pocket for some portion of the health care goods and services they used started to erode in the 1960s. Health care prices and total expenditures were still at relatively low levels, and employers felt that they could afford to pay more and hold workers responsible for less.

· Services covered: Over time, and especially in this time period, the originally relatively limited coverage of physician and hospital services that had been central to Indemnity and Service group health insurance plans became much more expansive. Starting with the introduction and growth of major medical converge in the 1950s, by the 1970s these insurance plans were very comprehensive in terms of the types of providers and services they covered, and limits on what was covered were substantially reduced. Again, relatively slow growth in health care expenditures, and the low levels of health care services prices and expenditures, made employers comfortable with increasingly generous health insurance benefits coverage.

· Non-interference: The same principles of non-interference in decisions about choice of provider and choice of medical intervention (treatments, procedures, etc.) prevailed as they had since the 1940s.

1