Sources of Health Care Financing

1
Sources of Health Care Financing

• Health care in the U.S. is financed directly by
  the recipients of services, by government, and by
  private insurance
• 1. Federal and state government 47
• 2. Private insurance 35
• 3. Private out-of-pocket 19

2
Coverage by Social Insurance Programs

• 1. Workers compensation pays medical expenses for
  work-related injuries.
• 2. Federal Government is a major source of health
  care financing under two programs
• Medicare for persons over age 65.
• Medicaid, a needs-based program for the poor.

3
Private Medical Expense Insurers

• 1. Commercial insurance companies
• 2. Blue Cross and Blue Shield
• 3. Capitating health care providers
• 4. Self insurers
• corporate employers
• Multiple Employer Trusts
• MEWAs
• 5. Federal CHAMPUS program

4
Distribution of Health-Insured Population

• Percent of Population
• Commercial Insurers 29.14
• Blue Cross/Blue Shield 24.94
• HMOs 22.45
• Self-Insured Plans 23.20
• Total Private Sector 68.96
• Medicare 14.16
• CHAMPUS 1.38
• Total Government 15.54
• Total Insured 84.50
• Uninsured 15.50
• Medicaid 13.94

5
Extent of Medical Expense Coverage

• 1. Most individuals under 65 (slightly less than
  two-thirds) are covered as employees or
  dependents under employer-sponsored medical
  expense plans.
• 2. Where employer-sponsored coverage is not
  available, individual coverage may be purchased.
• 3. Approximately 85 of Americans under age 65
  were covered by private medical expense insurance
  in 1998.

6
Traditional Medical Expense Insurance Plans

• GROUP MEDICAL EXPENSE INSURANCE
• 1. Less than 10 million persons (under 5 of
  population) are insured under individually
  purchased medical expense insurance.
• 2. Overwhelming dominance of group approach is
  due to
• lower cost of group insurance
• favorable tax treatment of employer-provided
  health insurance

7
Traditional Medical Expense Insurance
Fee-For-Service Plans

• Historically, commercial insurers and Blue
  Cross/Blue Shield organizations have provided
  fee-for-service benefits.
• 1. insured sought services from a provider.
• 2. insurance would pay some or all of the
  providers charge, directly or by reimbursing the
  insured.
• 3. provider and insured agreed on the level of
  care and the insurer paid the bill.

8
Managed Care Plans

• 1. Many experts argued that the fee-for-service
  approach provided an incentive to overutilize
  health care.
• 2. Trend in recent years is away from traditional
  indemnity fee-for-service plans toward programs
  with a more direct relationship between the
  provider and the insurer.
• 3. Newer approach includes HMOs, PPOs, and
  point-of-service plans.
• 4. These programs are often referred to as
  managed care plans.

9
Traditional Fee-For-ServiceMedical Expense
Insurance Plans

• 1. Hospital expense coverage
• 2. Surgical expense
• 3. Physicians expense coverage
• 4. Major medical coverage

10
Hospitalization Insurance

• 1. Hospital service benefit contracts
• 2. Hospital reimbursement contracts
• 3. Indemnity (cash payment) contracts

11
Surgical and Physicians Expense Contracts

• 1. Surgical service plans
• 2. Surgical expense reimbursement contracts
• 3. Physicians expense reimbursement insurance

12
Major Medical Insurance

• 1. High maximum (or unlimited)
• 2. Deductible
• 3. Coinsurance or share-loss provision

13
Major Medical With Base Plan
1,000,000 maximum Insurer pays 100 of costs up
to maximum
10,000 Coinsured Layer of Coverage
Insured pays 20 of Costs
Insurer pays 80 of costs in excess of basic
policies 80 of costs in excess of deductible
on expenses not covered by basic
100 Corridor Deductible
Basic hospitalization and surgical expense
coverage (same or different insurer)
14
Comprehensive Major Medical
1,000,000 maximum Insurer pays 100 of costs up
to maximum

10,000 Coinsured Layer of Coverage
Insured pays 20 of Costs
Insurer pays 80 of costs
250 per person/500 family Deductible
15
Illustrated Payment Under Major Medical

• Amount of loss 20,000
• Less deductible 250
• ______
• 19,750
• Insured pays 20 of expenseover deductible up to
  10,000 2,000
• Insurer pays balance 17,750

16
The Health Insurance Market Today

• Although about 1,200 insurers that offer health
  insurance for medical expenses, traditional
  insurance plans no longer dominate the insurance
  market.
• Many employers now offer health care coverage
  under alternative mechanisms.
• 1. Health Maintenance Organizations
• 2. Preferred Provider Organizations
• 3. Point-of-Service Plans

17
GENERAL NATURE OF HMOs

• Provide a wide range of comprehensive health care
  services to members in return for a fixed
  periodic payment.
• Sponsored by a group of physicians, hospital,
  employer, labor union, consumer group, insurance
  company, or Blue Cross/Blue Shield plans.
• HMO provides for the financing of health care and
  also delivers that care.

18
TYPES OF HMOs

• Staff model
• Group model
• Individual practice association
• Network model

19
Provider Sponsored Organizations

• 1. Also sometimes called
• Physician-Hospital Organizations (PHOs)
• Integrated Delivery Systems (IDSs)
• 2. Similar to HMOs
• PHOs are paid a capitated fee
• fee is divided among providers on a prenegotiated
  basis

20
Preferred Provider Organizations (PPOs)

• 1. Doctors or hospitals with whom employer or
  insurer contracts to provide medical services.
• 2. Provider discounts services and sets up
  utilization control programs to control costs.
• 3. Employees not required to use PPO, but if they
  go elsewhere they must pay more.

21
Point of Service Plans (POS)

• 1. POS plans are the newest development in health
  insurance field.
• 2. In one respect, POS plans operate like a PPO,
  since the employee retains right to use any
  provider but will pay a higher part of the cost
  for a provider outside network.
• 3. At same time, POS is like an HMO, since care
  received through network is managed by primary
  care physician or gatekeeper.
• 4. POS plans were created when HMOs allowed
  subscribers to use nonnetwork providers.

22
Cost Containment Provisions

• In addition to managed care arrangements such as
  HMOs, PPOs, and POS plans, most traditional
  indemnity plans have adopted cost control
  provisions.
• 1. Increased employee cost sharing
• 2. Coordination of benefits
• 3. Covering alternative sites of care
• 4. Addressing utilization

23
Limited Health Insurance Contracts

• Dread disease policies
• Travel accident

24
Dental Expense Insurance

• Written with a dollar reimbursement limit or on a
  service basis.
• Coinsurance may require different cost-sharing in
  earlier years (e.g., 50 first year, 60 second
  year, 70 third year, 80 fourth year and 90
  thereafter).
• Coinsurance may also be structured to encourage
  or discourage utilization (100 for preventive
  care, 50 for orthodontics)

25
Prescription Drugs

• Usually written on a group basis, as an adjunct
  to other coverage.
• Reimbursement Basis Coverage
• Generally a coinsurance or deductible.
• Deductible per prescription or annual.
• Service basis Coverage
• Operates similar to the Blue Cross model.
• Insurer payments directly to pharmacists.
• Payment limited to the amount payable to a
  participating pharmacy.

26
Medical Savings Accounts

• Medical savings accounts (MSAs) have been
  discussed for years and HIPAA-96 established an
  experimental MSA program
• 750,000 MSAs will be available to small business
  employees (50 or fewer employees) and
  self-employed individuals.
• The MSA pilot program will end in the year 2000
  or, if earlier, when the limit on the number of
  MSAs has been exceeded.

27
Medical Savings Accounts

• Basic idea of the MSA is to allow individuals to
  make tax-sheltered contributions into a fund to
  be used to cover medical expenses.
• Fund is used with a high deductible insurance
  policy and covers expenses within deductible.
• 1998 deductibles for the high-deductible policy
• Individual coverage only 1,500 to 2,250
• Family coverage 3,000 to 4,500
• Amounts will be adjusted for inflation after 1998.

28
MSA Contributions

• Generally, MSA contributions may be made by
  either the individual or his or her employer.
• If made by an employer, MSA contributions are
  excluded from the employee's income.
• If made by individual, contributions are
  deductible from income, subject to limits.
• maximum limitation of 65 of the annual
  deductible for individual coverage and
• 75 of the annual deductible for family coverage.
  

29
MSA Distributions

• Distributions from an MSA that are used to pay
  for qualified medical expenses are not taxed to
  the MSA holder.
• Distributions not used to medical expenses are
  taxable and subject to a 15 penalty.
• Tax, but not penalty, for distributions received
  after MSA-holder becomes disabled, dies, or
  reaches Medicare eligibility.

30
Medicaid

• Title XIX of the Social Security Act, known as
  Medicaid, is a federal-state program of medical
  assistance for needy persons that was enacted
  simultaneously with the Medicare program.
• provides medical assistance to low income persons
  and certain needy persons who are not at the
  poverty level.
• the federal government sets regulations and
  minimum standards.
• federal share of cost is based on a formula tied
  to state per capita income and varied from 50 to
  80 in 1998.

31
Medicaid Benefits

• Medicaid benefits are quite comprehensive.
• Benefits includes services traditionally included
  in a commercial group-health-insurance plan and
  some services, such as long-term care, that are
  not.
• Mandatory benefits in all states include
  inpatient and outpatient hospital services,
  physician services, and home health care.
• Optional services include outpatient prescription
  drugs, prosthetic devices and hearing aids, and
  dental services.

32
Child Health Assistance Program

• BBA-97 introduced Child Health Assistance Program
  (Title XXI of the Social Security Act), from
  fiscal years 1998 through 2007.
• New federal spending of 24 billion over 5 years
  for childrens health, with 48 billion for the
  initiative over the next 10 years.
• Funding will allow states to provide health
  insurance coverage to poor uninsured children who
  do not qualify for Medicaid.
• States can provide coverage by expanding Medicaid
  or under a State Childrens Health Insurance
  Program (or by a combination).

33
Buying Health Insurance

• 1. When a noncontributory plan is provided by
  employer, no decision required by consumer,
  except perhaps a choice between traditional
  health insurance and a HMO.
• 2. When and individual must choose, the primary
  emphasis should be on protecting against
  catastrophe losses.

34
Taxes and Health Care Costs

• 1. Cost of employer-provided group plans is
  deductible by employer and nontaxable to the
  employee.
• 2. For the individual,
• health insurance premiums receive no special tax
  treatment.
• premiums are combined with other health care
  costs and deductible to extent total exceeds 7.5
  of AGI.

35
Health Insurance for Self-Employed

• TRA-86 authorized self-employed persons to deduct
  25 of cost of health insurance. The 25 later
  increased to 30 and then 40.
• TRA-97 phases in 100 deductibility.
• Fiscal Year Deductible
• 1998-99 45
• 2000-01 50
• 2002 60
• 2003-2005 80
• 2006 90
• 2007 100

36
The Health Insurance Problem

• Access to health care
• High cost of health care

37
The Access Problem

• 40 million Americans have no health insurance
  coverage
• Another 70 million are underinsured
• Over 85 of the population with private insurance
  obtain coverage through employment

38
High Cost of Health Care

• 1. Medical care costs growing faster than the
  average cost of living
• 2. Consuming an increasing share of GNP
• 1950 4.4 of GNP
• 1998 13. of GNP

39
Some Causes of High Cost of Health Care and
Health Insurance

• Aging population
• Improved (high-cost) medical technology
• Excessive capacity
• Defensive medicine
• Insurance-encouraged utilization
• Cost-shifting from government funded plans
• Mandated benefits

40
Previous Attacks on the Problem

• 1. State / federal legislation have addressed
  availability and to a lesser extent cost
• COBRA
• subsidized state health insurance pools
• small-group reform
• Oregon Medicaid experiment

41
COBRA

• 1. Requires continuance of employer-sponsored
  group health insurance under specified
  circumstances.
• 18 months for terminated employees.
• 36 months for spouses of deceased, divorced or
  separated workers or dependent children whose
  eligibility for coverage ceases.
• Generally, COBRA participant pays a premium based
  on the existing group rate.

42
Health Insurance Portability and Accountability
Act of 1996 (HIPAA)

• Health Insurance Portability and Accountability
  Act of 1996 (HIPAA) also known as
  Kassebaum-Kennedy, become effective on July 1,
  1997.
• Primary purpose of HIPAA-96 was to ensure the
  security of health insurance coverage for those
  that already have insurance.
• HIPAA-96 was significant because, for the first
  time, minimum federal standards were applied
  nationally and to all plans, including
  self-insured plans.

43
HIPAA Reforms

• HIPAA-96 imposed reforms on the
• large group market (over 50 employees),
• small group market (2 to 50 employees), and
• individual market.
• Reforms in the group market (both large and
  small) include
• guaranteed renewability,
• limitations on preexisting conditions, and
• portability.

44
Small Group and Individual Market Reforms

• In the small group market an insurer must provide
  all products on a guaranteed issue basis.
• In the individual market, policies must be
  guaranteed renewable, as in the group market.
• Individual market must provide access to health
  insurance to eligible individuals. An eligible
  individual is a person
• who has at least 18 months prior health insurance
  coverage
• most recent coverage being employer-provided and
• no break in coverage lasting greater than 63
  days.

45
Access for Eligible Individuals

• HIPAA permits states to use one of two approaches
  to meeting the access requirement in the
  individual health insurance market.
• Federal fallback approach applies if the states
  does nothing else.
• Under federal fallback option, all insurers who
  operate in the individual market must offer
  eligible individuals at least two health plans.
• Alternatively, a state may adopt an acceptable
  alternative mechanism, such as a high-risk pool
  or other mechanism to guarantee access.

46
Absence of Rating Reforms

• Federal fallback standards contained no rating
  reforms.
• Critics pointed out that access at an unlimited
  premium is not really access.
• In response, Senator Edward Kennedy proposed
  legislation that would cap premiums to eligible
  individuals at 150 of the standard premium.
• State small group reform programs and high risk
  pools that predated HIPAA include limits on
  rating and subsidized coverage.

47
HIPAA and Federal Regulation

• A major development in HIPAA is the possibility
  of federal regulation of a states health
  insurance market.
• If a state does not enact legislation to enforce
  federal standards, the Department of HHS performs
  the enforcement function.
• Five states (California, Massachusetts, Michigan,
  Missouri, and Rhode Island) failed to comply and
  HHS now actively regulates insurance plans in
  those states.

48
State Efforts to Increase Access

• Prior to the enactment of HIPAA, many states had
  addressed the problem of access to health
  insurance by
• establishing subsidized state health insurance
  pools for the uninsurable.
• enacting small group reforms.
• Unlike HIPAA, these state initiatives addressed
  the issue of cost.

49
Subsidized State Health Insurance Pools

• 1. Individuals not eligible for Medicare or
  Medicaid and who cannot obtain insurance in
  conventional market may obtain coverage from
  state pools, usually at a subsidized rate.
• 2. Pools provide comprehensive coverage including
  in-hospital services, skilled nursing facility
  care, and prescription drugs.
• 3. The pools are subsidized, but even with the
  subsidy, premiums range from 125 to 200 percent
  of the states average premiums.
• 4. By 1998, 30 states had created such pools.
• 5. Costs in excess of premiums are covered by a
  subsidy, in most states from health insurers.

50
Small Group Reform

• Prior to HIPAA, many states had passed
  small-group reform to improve availability of
  health coverage to small businesses and
  employees.
• Typically, laws require insurers to offer plans
  to small groups on a guaranteed issue basis.
• Insurer may not exclude individual employees and
  may exclude preexisting conditions only for a
  limited period.
• If preexisting conditions requirement in one plan
  is met, coverage must be portable without a new
  preexisting conditions requirement.
• Rules limit rates and annual rate increases.

51
Previous Attacks on the Problem

• In addition to government efforts, the private
  system is continually searching for ways to
  reduce the cost of financing health care
• managed care systems
• increased employee contributions
• increased deductibles and cost sharing

52
The Quality Debate

• Managed care was conceived as one answer to
  increasing health care costs in the country.
• It has been reasonably successful in controlling
  utilization and associated costs.
• The costs controls have been accompanied by
  changes in the traditional relationship between
  patients and providers.
• The debate over managed care and consumer choice
  in health care reminds one of the admonition be
  careful what you wish for, because you might get
  it.

53
Consumer Bill of Rights

• Advisory Commission on Consumer Protection and
  Quality in the Health Care Industry (appointed by
  President Clinton in 1997) to recommend measures
  to promote and assure health care quality and
  value and to protect consumers.
• Many members of the Commission were members of
  the task force that designed the Clinton 1993
  health care plan.
• The Commission delivered a report on a Consumer
  Bill of Rights and Responsibilities in November
  1997.

54
Consumer Bill of Rights

• The report contained a series of eight areas of
  consumer rights
• the right to information disclosure,
• a choice of providers and plans,
• access to emergency services,
• participation in treatment decisions,
• respect and nondiscrimination,
• confidentiality of health information, and
• a fair and efficient process for resolving
  complaints and appeals, including an independent
  system of external review.

55
Proposed Solutions

• Single-Payer Plan
• Employer-Mandated Health Insurance
• Individual Mandates
• Managed Competition

56
Managed Competition

• 1. Aims to create a market structure that
  encourages efficient purchase of health insurance
  and efficient delivery of care by centralized
  purchasing
• 2. Health Insurance Purchasing Cooperatives
  (HIPCs) or alliances in each geographic region
  purchase health insurance and health care on
  behalf of their members

57
Managed Competition

• 3. Under some proposals all small businesses and
  individuals would be required to join an HIPC.
  Large employers would not be required to join
  HIPCs
• 4. Health care providers cooperate to form
  accountable health plans (AHPs) that offer a
  package of benefits
• 5. HIPCs (and large corporations) contract with
  AHPs to provide health care, and offer the AHPs
  to their membership