Healthcare Financing

PART II
 Private Health Insurance

In 1930 the idea for medical care insurance

developed in Texas.
These plans later developed into the not for profit,
private Blue Cross insurance empire.
Slow transition for insurance against sudden loss of
income due to injury or illness to a reimbursement of
costs incurred due to illness ie medical care.
Transition from insurance against unforeseen rare
occurrence, to coverage for predictable/routine
unavoidable costs.
 Contd.

Resulted in hospitals becoming centers of medical

delivery and higher hospital admission rates, insulation
of patients from costs, and a viable alternative to a
public healthcare system.
Initially Blue Cross plan premiums were calculated using
Community rating.
But, other commercial plans entered the market with
Experience Based ratings. Healthier people switched to
cheaper commercial plans. Blue Cross switched to
experience-rating.
In the 90s, several states Blue Cross programs switched
status to for profit insurance due to mergers and
consolidations.
 HMO act of 1973

Health Maintenance Organization Act of 1973

initiated by the Nixon Admin.

Provided loans and grants to develop and implement

combined insurance and delivery centers of
healthcare.

Connected payment for and delivery of healthcare

services.
 Payment Methods

Capitation: Amount paid to provider at the beginning of

the month whether or not services used by member.
If services exceed pre set amount, provider may pay penalty. If
services are below amount, provider retains excess as profit.

Withholds: Certain amount of money is withheld from a

physician to accommodate potential cost overruns.
Depending on financial performance, some, all or none of the
withhold may be returned to physician.

All pre payment capitation schemes are designed to

encourage cost conscious behaviors in physicians.
 Two Types of HMO

1. Staff Model
a) Physicians and some specialists on HMO staff
b) Facilities owned and operated by HMO
c) In 1988 this was 42% of managed care. In 1998 was <0.5%

2. Independent Physician Association (IPA)

a) Group Practice: HMO contracts with multispecialty group
practice to provide all physician services needed.
b) Network: HMO contracts with multiple groups to cover all the
primary and specialty care needed by enrollees
c) Direct Contract: HMO contracts directly with individual
physicians
 Concerns and Backlash

Lack of Choice Patients felt constrained by

networks

Point of Service: Patients can go out of network but

are charged higher co-payments and deductibles.

Quality Compromised? States championed consumer

and patient protections, enacting over 900 laws
 PPOs

Preferred Provider Organizations developed in the 90s

as a result of dissatisfaction with traditional MCOs.
PPOs guarantee a certain amount of business to
providers in an area in exchange for negotiated
discounted rates.
Physicians do not have to share risk, and are reimbursed
fee for service.
Members have to go to preferred provider list, hospital
admissions have to pre authorized, second opinions reqd
for major procedures.
In 2012, PPOs represented 56% of employer-covered
workers
A quick comparison
 Managed Care Effects

Initially showed a decline in the rate of growth of

costs, but did not continue with the trend in the long
run.
However, overall MCOs had failed to change clinical
practice and improve quality while lowering costs
 Managed Care and Quality

Two managed care groups formed the National Committee on

Quality Assurance (NCQA)
Non-profit which provided accreditation services.
Online publishes quality indicators for ~500 health plans
Organizations participate voluntarily (MCO, PPO, etc.)

Initiated HEDIS scores (health plan employer data information set)

Allow employers, other purchasers and consumers to compare plans across eight
domains
(1) Effectiveness (2) Access (3) Satisfaction (4) Plan stability
(5) Use of services (6) Cost of care (7) Informed care choices
(8) Health plan descriptive information

All Medicare managed care plans must publicly report HEDIS data
and all NCQA accredited sites must publicly report
 Self Funded Plans

Large employers (most Fortune 500 companies) collect premiums and pool
funds into accounts to pay medical claims instead of using a commercial
carrier

Actuarial firm helps set premium rates

Third-party firms administers benefits, pay claims, collect utilization

data; third parties may provide case management services

Employer advantages: avoid commercial carrier administrative charges

Accrue interest on cash reserves, tax exemptions

dont have to pay taxes on the premiums
dont have to follow required guidelines on plan coverage
 Control Costs Video

Atul Gawande Ted Talk