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

deductibles, or co-payments from the patient; balance billing is not allowed. 1

THE UNITED STATES HEALTH CARE SYSTEM:

KEY HEALTH INSURANCE TERMS

2/9/2021

1. TYPES OF HEALTH INSURANCE PLANS: TRADITIONAL HEALTH INSURANCE PLANS:

Traditional health insurance plans are risk bearing health insurance plans.

This means the following: An employer offers health insurance coverage to their employees and may offer a variety of health insurance plans. Employees choose a plan, and the employer then forwards the monthly premiums for that plan to the insurance company which both offers and manages the plan. The insurance plan takes full risk for that plan, meaning that if there is money from the premiums left over at the end of the year, the insurance plan would keep it. If the amount that the plan has to pay out for health care goods and services exceeds the premiums received, the plan has to cover the loss. SO – responsibility for accurately pricing premiums; for establishing deductibles, coinsurance, copayments, and plan financial limits; and for running the plan in an efficient and effective way – is in the hands of the insurance company. These health insurance plans are regulated by the individual States.

• INDEMNITY PLANS – DOMINANT POST 1930 THROUGH 1988.

• SERVICE PLANS – DOMINANT POST 1930 THROUGH 1988.

• DIRECT SERVICE (PREPAID HEALTH SERVICES) – EARLY FORM OF MANAGED CARE HEALTH INSURANCE PLANS; MAINLY IN CALIFORNIA, WASHINGTON STATE, NEW YORK CITY, AND WASHINGTON, D.C. – DOMINANT 1930 THROUGH EARLY 1970.

• AFTER 1973 - MANAGED HEALTH INSURANCE PLANS – DOMINANT EARLY 1990S TO THE PRESENT: Health Maintenance Organizations (HMOs), POS (Point of Service Plans), or PPOs (Preferred Provider Organizations.

Under indemnity plans, the patient may go to any provider; the provider bills the insurance company directly, only collecting any applicable coinsurance, deductibles, or co-payments from the patient; OR the provider may bill the patient directly, relying on the patient to pay the bill from the payment provided to the patient by the insurance company; balance billing may be allowed.

Under service plans, there is a large but defined and contracted provider network; the provider bills the insurance company directly, only collecting any applicable coinsurance,

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Under a direct service plan (Prepaid Health Services plans, or as they were eventually called, Managed Care plans), all services (including many preventive services) are covered by the monthly payment made to the insurer. Except for some co pays, deductibles, or coinsurance (Preferred Provider Organizations have those), the patient does not have to pay the doctor or hospital for each episode of care. The providers may bill the insurer based on a contracted rate, or in the case of primary care doctors the provider may receive a monthly capitation payment rather than billing on and episodic basis.

2. SELF-INSURANCE:

In self-insurance arrangements, an employer takes on their own risk. They establish their own version of a health insurance plan for their employees, collect and manage the premiums themselves, and bear the financial risk rather than passing it on to an insurance company. The employer hires a Third-Party Administrator (TPA) to manage the health benefits plan on behalf of the employer, but the TPA does not take on financial risk. Such plans are regulated (in theory) by the Federal government rather than the States.

3. INSURANCE PREMIUMS; EXPERIENCE AND COMMUNITY

RATING:

Insurance premiums are paid on a regular basis (monthly, quarterly) to the insurance company, and guarantee the coverage of a member (and his/her family) under a plan in which they are enrolled. Premiums are usually paid through the employer, with the member and his/her family contributing some proportion of the premium.

An enrollment period is a specified period of time within a calendar year in which a member may change the insurance plan to which he/she and their family subscribe and belong.

Under community rating, premiums which insurance plan subscribers pay reflect expected expenditures for medical services utilization averaged out across all members. Under experience rating, premiums reflect the expected medical utilization and expenditure experience (actuarially determined) of a particular group. Thus, under experience rating, the premium paid by a young single male office worker would be significantly different from that paid by a 50-year-old male steelworker. Community rating spreads the burden of paying for medical services as expressed in premiums fairly evenly across all subscribers. Experience rating clearly differentiates the financial burden for the premium based on relative subscriber risk, making high-risk individuals and families subject to significantly higher premiums since there is no averaging of premiums across a broad range of subscribers.

Originally, Blue Cross and Blue Shield plans were community rated (at least the group plans were: individual policies were always higher). The loss of business over time to commercial plans that were experience rated led to an overall decline in the use of community rating. All insurance plans by the 1970s were using experience rating as the basis for determining and assigning premiums.

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4. 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.

Also note that health insurance usually involves a variety of plan-specific limitations on what services are and are not covered.

5. OTHER OUT - OF – POCKET EXPENDITURES:

Expenses paid by the subscriber that will not be reimbursed by the insurance company. Technically includes that portion of the insurance premium paid to the insurance company which comes out of the employee’s pocket rather than the employer’s pocket.

6. SERVICE CARVE-OUTS:

Some selected services may not be covered by the health insurance plan. The patient is 100% liable for payment to the provider for those services.

7. ANNUAL AND LIFETIME LIMITS:

Prior to the passage of the Affordable Care Act in 2010, it was possible for health insurance plans to have Annual and Life-Time limits. These are limits on the annual or total (across the lifetime of an insurance policy) amount of money which the insurance plan must pay out for personal health care goods and services. All expenditures beyond the limit would be the responsibility of the health insurance plan member, not the employer, nor the health insurance plan itself.