Understanding Health Insurance Jody Blanke Distinguished Professor of Computer Information Systems and Law Mercer University

Chapter Overview  Reviews the basic elements of health insurance  Focuses on: How health insurance operates  Why people buy insurance  Basic terminology/features Managed care  Cost and utilization control tools  Common structures

Opening Vignette (Box 8-1)  How does William keep offering health insurance for his 9-employee small business in the facing of dramatically rising costs? Stop offering it. Offer comprehensive coverage to his employees but pass the cost onto them (making it basically unaffordable). Offer a bare-bones catastrophic plan only. Significantly lower wages and other benefits to defray the cost.

Insurance Coverage Overview  The U.S. does not have a single national health insurance program that covers the entire population.  Approximately 13% of the U.S. population is uninsured.  Of those with insurance, most obtain coverage through their employer.  Medicaid and Medicare are government health insurance programs that cover millions of people in the U.S.

A Brief History of the Rise of Health Insurance in the U.S.  Late 1800s–early 1900s—European social insurance movement resulted in the creation of “sickness” insurance throughout many countries.  1929—Blue Cross established its first hospital insurance plan at Baylor University.  1939—Blue Shield began.  1954—Internal Revenue Service declared that employers could pay health insurance premiums for their employees with pre-tax dollars.  1965—Medicaid and Medicare were created.

Basic Terminology  Beneficiary—Consumer; the individual who is covered by the plan  Premium—Annual fee paid by the beneficiary to the health plan, usually in monthly installments, to secure health insurance coverage  Deductible—Amount of money a beneficiary must pay out-of-pocket before the insurance company assists with paying for services  Cost-sharing—Co-payment or co-insurance, an amount the beneficiary pays per service after the deductible is met

Uncertainty and Risk  People choose to be insured because of uncertainty and risk. There is uncertainty whether an expensive and unforeseen event that impacts their health status will occur. There is risk of financial exposure due to the unexpected event.

Uncertainty and Risk  Insurance companies are concerned about uncertainty and risk because they are businesses that need to cover the cost of their expenditures.  Uncertainty and risk may lead to adverse selection. Unhealthy people over-select a particular plan, making the plan more expensive.

Setting Premiums  Insurance companies set premiums to cover most of their expenses.  Experience rating Based on health status and claims in prior year(s) Also referred to as medical underwriting  Community rating Based on factors unrelated to previous use of medical care, such as geography or age All persons in the community rating system pay the same amount.

Legal Issues  Health Insurance Portability and Accountability Act of 1996 (HIPAA) HIPAA-covered group plans may not exclude or limit otherwise qualified individuals due to pre-existing conditions. HIPAA-covered group plans may not charge different premiums based on identified health factors to similarly situated individuals.  State laws on medical underwriting vary.

Managed Care  Managed care integrates the provision and payment of health care services.  Ideally, managed care contains costs while providing necessary and high quality health care services. Some fear that managed care companies provide fewer services than necessary or lower quality services to save money.

Managed Care— Cost Containment Tools  Performance-based salary Provider receives a salary as a managed care organization employee. Salary is subject to bonuses or withholds.  Discounted fee schedule Provider accepts less than fee-for-service rates to participate in managed care network.  Capitated payment Provider receives a per member/per month payment for all services rendered within scope of practice.

Managed Care— Utilization Control Tools  Gatekeeper Managed care organization uses a primary care provider to make sure only necessary and appropriate care is provided.  Utilization review Managed care organization reviews and approves or denies services requested by provider.  Case management Managed care organization manages and coordinates patient care.

Managed Care—Common Structures  Health Maintenance Organization (HMO) Pays providers a salary or capitation Beneficiaries may only use in-network providers. HMO coordinates and controls receipt of services.  Preferred Provider Organization (PPO) Pays provider on a discounted fee schedule Beneficiary may use in- or out-of-network providers.  Ex. May cover 80% for in-network, 60% out

Managed Care—Common Structures  Point of Service Plans (POS) Combines features of HMO and PPO Pays providers with capitation or other risk sharing arrangement Has a provider network; beneficiaries may use out-of-network provider for designated services Has a gatekeeper to control and coordinate care