PH 150 D [Midterm 1]

In Section 1, you will be introduced to the underlying ideological divides in U.S. healthcare, trends in health care costs, the important role of employers in U.S. health care, the structure of private insurance, and basic economic concepts as they apply to insurance. You will then be introduced to the two main public health coverage programs in our country: Medicare and Medicaid. At the end of the section, you will know how our health care delivery system is financed, organized and delivered. There is a lot of material in this section, but it provides the necessary vocabulary and foundational concepts for the remainder of the course. This will likely be the most difficult (and fastest and overwhelming) section of the course. Think about it as learning a new language. I will move very quickly through the material, but don't worry, I'll be coming back to the material over and over again. You will get it. (I promise!)

Market system

• Views health care as an economic good

• Assumes free market conditions for health care service delivery

• Assumes that markets are more efficient in allocating health resources equitably

• Private solutions to social problems

• Access to medical care viewed as an economic reward for personal effort and achievement

• Individual responsible for own health

• Rationing based on ability to pay

Social Justice System

• Views healthcare as a social resource

• Requires active governemrnt involvement in health service delivery

• Assumes that government is more effective in allocating health resources equitably

• Public solutions to social problems

• Equal access to medical services viewed as a basic right

• Collective responsibility for health

• Planned rationing of health care

Most Americans have Employer Based Health Care but, it is

… AN ACCIDENT

Accident #1:

During Depression

• Hospitals had hard time staying open as people could not afford care

• Established “Blue Cross” programs in which people could pay a monthly amount (a “premium”) in the event they would sometime need hospital care.

• not-for-profit

• Way to pay in anticipation of what they needed

• Paid a premium that would cover hospitals costs

• Doctors too were feeling the effect of the Depression

• Doctors followed suit and established “Blue Shield” programs.

Accident #2-4

During WWII the Federal Government made

three important decisions

2. Placed price controls on consumer goods (including salaries)

• During WWII, in order to prevent inflation, the federal government…

3. Excluded “fringe benefits” from the price controls

4. Decided that “fringe benefits” did not count as taxable income

Indemnity plan

• Common plan up until 1980s when costs started skyrocketing

• Patient, plan, and provider are fully indemnified (protected)

• Employers are charged a premium based on a “experience rating”

  • Uses past year’s experiences to plan for this year’s costs

Incentive:

Providers are incentivized to do more services. There are no incentives to control cost of care

Who likes?:

• Patient: fully protected, can choose any doctor or hospital

• Providers: Paid for service (FFS)

• Plan: passes all risk to employer

RISK?

• employer

****also called conventional, fee-for-service plan, self-insured

Experience Rating (predicting cost)

<1980s, insurance companies were able to “accurately” predict the next year’s costs for health care

• The premiums paid by employer increased at gradual, predictable amounts each year

• In 1980s, costs increased substantially more than predicted (due mainly to advances in medical and pharmaceutical technology )

• Insurers would add the “loss” to the following year’s premium

• Employer would be hit with a double increase

• Projected increase for costs over the upcoming year

• Increase due to underwriting loss of pervious year

• Became too risky/unpredictable for employers

looked for alternatives

Service Plan/HMOs/MCO/HP/ACO

Paid set amount per person per year/month – CAPITATION (per member per month) (pmpm)

• Called “premium” when paid to insurance company

• The Plan is at risk:

• If use all payment early

• lead to budget shortfall

• If use less than receive more make $$

• Plan is careful to provide only necessary care

• Note: The Plan may in turn choose to pass the risk on

Health Maintenance Organization (HMO)

• The HMO model emphasizes care within a defined network, meaning that the plan only covers services provided by network providers.

• Patients are required to select a Primary Care Provider (PCP) who acts as a gatekeeper for all healthcare services, coordinating care and referrals.

• Referrals from the PCP are mandatory to see specialists, ensuring that care is managed and appropriate.

• The focus of HMOs is on wellness and disease prevention, often providing preventive services at no additional cost to encourage healthy behaviors.

• Premiums for HMO plans are generally lower compared to other managed care models, making them an attractive option for cost-conscious consumers.

• Example: A patient with an HMO may receive free annual check-ups and vaccinations as part of their preventive care benefits.

***HMOs deemed “the winner” when compared to indemnity plans in battle to save $$ for

employers

Definition:

• Employer/consumer pays $ per member per month/year to HMO

• HMO contracts with set network of providers and hospitals

• Patient is covered if they seek care in network

• HMO is obligated to provide all necessary care

Incentives:

• Incentive is to keep cost of care low perhaps

  by:

  - keeping patients healthy

  - utilization controls

  - doing bare minimum

Who likes? Employers: Pay a fixed amount

RISK:

• Health Plan

• *Provider: can hold risk if plan pays sub- capitation to doctor (as opposed to salary or FFS) (depending on where the capitation occurs – between the employer-plan, or plan-doctor)

Managed care

• is a means of organizing, paying for, and providing health care directly to consumers. Typically paid for through capitation. The “responsible group” manages the care process to make sure the budget isn’t exceeded.

• Responsible group can be insurance company, nonprofit corporation, for-profit corporation, or physicians and hospitals.

• Why does managed care exist? In part, because of moral hazardFor Profit Health Plans: the tendency to use more (or more expensive) health care or engage in riskier behavior when one is insured

For- Profit Health Plans

• Goal is to please “shareholders” —> make $$

• Plans developed mechanisms to ensure “efficient” care a.k.a “control/minimize” use of care “Utilization-control”

Utilization Controls

Emerged with the new for-profit HMOs.

1. Gatekeepers

• Primary care physician is responsible for determining when and what services a

  patient can access and receive reimbursement for.

2. Networks of contracted physicians

3. Utilization Review (UR)

• Staff of physicians and nurses were responsible for reviewing the care provided by physicians. For a physician to hospitalize a patient or order an expensive test, he/she had to obtain permission from a utilization review department. Examples of this practice include prior authorization, concurrent review, and discharge review.

1. Prior Authorization

2. Discharge Review

4. Physician Practice Profiles

• Managed care companies gathers statistics on how often each physician used expensive resources and penalized physicians whose profile exceed what reviewers thought was appropriate.

5. Financial Incentives

• Managed care organizations developed a variety of financial incentives intended to encourage physicians to reduce the amount of care provided. Incentives included holdbacks and direct/indirect bonuses.

1. Holdbacks

2. Direct/Indirect Bonus

6. Others

Scrutiny of For-Profit Plan

Needed data to ensure financial controls didn’t detrimentally harm health care quality

• Medical Loss Ratio

• Health Plan Employer Data and Information Set (HEDIS)

• Consumer Assessment of Healthcare Providers and Systems (CAHPS )

Medical Loss Ratio

The % of every health care dollar taken in as premium that is spent on medical care. A basic financial measurement used to encourage health plans to provide value to enrollees. If an insurer uses 80 cents out of every premium dollar to pay its customers' medical claims and activities that improve the quality of care, the company has a medical loss ratio of 80%. A medical loss ratio of 80% indicates that the insurer is using the remaining 20 cents of each premium dollar to pay overhead expenses, such as marketing, profits, salaries, administrative costs, and agent commissions.

Health Plan Employer Data and Information Set (HEDIS)

HEDIS measures how often MCOs follow established process guidelines for prevention or treatment of certain conditions

• Examples:

• immunization rates for children

• frequency of Pap smears and mammograms,

• extent that treatment schedule is followed by patients with diabetes

Consumer Assessment of Healthcare Providers and Systems (CAHPS )

Patient satisfaction survey

Preferred Provider Organization (PPO)

Definition:

Hybrid of HMO and indemnity Employer/consumer pays per member per month/year to PPO PPO contracts with providers and hospitals Plan covers most or all costs if patient stays in network; if out of network plan pays smaller %

Incentive:

• Little downside, but there is no cost containment (no rules or strategies in place to control or limit health care spending.) Physicians/Hospitals have little stake in financial success of PPO.

• Consumers pay more to get more choice

• Employers cap their cost (contribute to a fixed amount)

Who likes?

• Patients: get more choice than --HMO

• Employers: pay fixed amount

• Providers

RISK:

• Health Plan

• *Patients: somewhat, only in that they pay more if they go out of network

Premium

The amount that must be paid for your health insurance or plan. You and/or your employer

usually pay it monthly, quarterly or yearly.

Deductible

The amount you owe for covered health care services before your health insurance plan begins to pay.

• For example, if your deductible is $1,000, your plan won’t pay anything until you’ve paid $1,000 for covered services. Some plans pay for certain health care services before you’ve met your deductible. Copayments do not count towards your deductible

Copayment

a fixed amount paid by the consumer per visit. Do not count towards deductible

Amount paid at each time care is accessed

• Physician services

• Hospital services

Co-insurance

Your share of the costs of a covered health care service, calculated as a percentage (for example, 20%) of the allowed amount for the service. You pay coinsurance after you’ve met your deductible.

• For example, if the health insurance plan’s allowed amount for an office visit is $100 and you’ve met your deductible, your 20% coinsurance payment would be $20. The health insurance plan pays the rest.

Paying Providers for Services

1. Fee-for Service

2. Capitation

3. Salary

4. Bundled Payments

5. Value Based Payment (pay for value)

Fee-for Service

Definition:

Providers are paid a separate fee for each service they provide (ex: use of equipment, piece of medication, service event, etc.)

Incentives:

Providers are incentivized to do more services. There are no incentives to control cost of care

Who likes?

• Providers: paid for all work they do

• Patients: usually shielded from costs and might feel like they get more care

RISK: Depends

• i.e. in case of indemnity plan

• health plan

Capitation

Definition:

Service provider (can be physician or health plan) receives a fixed sum per patient and

must provide all necessary care.

• Providers know what they will be paid in total for treating a defined group of people

• Loses are not added to the next year; the plan (or physician) is at risk and loses $$ if overspends

Incentives:

• to keep cost of care low perhaps by:

  • doing bare minimum

  • keeping patients healthy

Who like?

• employers

RISK:

• Provider

• Depends on who receives capitated rate in payment chain from patient/employer —> plan —> provider. Usually provider or plan holds risk. Can be a benefit if the risk pool is balanced

Bundled Payments

A single price is set and paid for a bundle of related services (e.g. pregnancy, heart attack). The payment is distributed among all providers involved in the episode (nursing home, primary care physician, surgeon, anesthesiologist, etc.) The incentive is to coordinate and cooperate to reduce the overall cost of an episode of care while maintaining quality

Pay for Performance:

Provider is paid a bonus if it meets certain quality and performance criteria. Move towards outcome data. Usually done through medical group (not independent physicians)

Pay bonus if meet certain outcome criteria

 Performance based Quality measures

 Requires ability to provide data (done via medical group)

Pay for VALUE

 Ex. Not for checking blood pressure BUT for controlling blood pressure

Traditional Insurance Model

• Insurance is based on the concept of random hazard (e.g., car accident, house fire)

• Purchase insurance as protection against likelihood of a “random event” happening Health Insurance ≠ Other Insurance

Health Insurance ≠ Other Insurance

• likely all people will use health insurance

• Use of health care is not random. In fact, if insured more likely to use: Moral Hazard

 Risk pool

One of the forms of risk management mostly practiced by insurance companies. It is the  spreading of financial risks evenly among a large number of contributors to the program. Insurance is  the transference of risks from individuals or corporations who cannot bear a possible unplanned  financial catastrophe. Health insurers strive to maintain risk pools which, on average, has a population  with health status similar to the general population. If a plan attracts a disproportionate share of  people in poor health, the average cost of treating its population will increase 

• People with a higher than average risk of needing health care are more likely than healthier people to seek health insurance 

• People in better health will be unwilling to pay more than they would use and thus not enroll

Adverse selection:

Refers to the market process whereby riskier enrollees choose more generous health insurance plans because they aren’t charged higher premiums

Underwriting

is the process of determining whether or not to accept an applicant for coverage, what the terms of the coverage will be, and what the cost of the coverage will be. Used by health insurers to obtain/maintain a predictable and stable level of risk within their risk pools (RISK ASSESSMENT)

• Variables looked at:

  • Variables looked at:

    • Health history

    • Age

    • Gender

    • Occupation

    • Geographic location

    • Genetic makeup?

    
    

Underwriting and Employer Coverage

All employees in one pool → large # people

• “Community rating” → assume a balanced risk pool

• Younger employees offset older

• Healthier offset less healthy

• Nonusers of health care offset users

• Employer pools over 200 persons presume → community rate

• If less than 200 persons, do underwriting (occupation becomes a variable insurance is concerned with)

Underwriting in Individual Market

No community → individual rating

• Want health history/needs of each individual

• “pick” healthier members: “Cherry Picking”

• Don’t want

• Sick, old, may get sick…

• Avoid those with Preexisting medical condition: an illness or

medical condition for which a person received a diagnosis prior to

enrolling in a plan

• May exclude if appears that that spurred need to get coverage

• Example: pregnancy

Individual Market

Individual incentives

• Withhold truth

• Assess need (current/future) for insurance

• Not spend more than own value

Insurance Companies’ incentive

• Achieve balanced risk pool

• Avoid adverse risk → cherry pick

• Only cover healthy

• Ensure get paid enough to cover sick/future sick

• Drop high users

Individual Market → SPIRALS OUT

Who wants/needs insurance:

• People at high risk, older, planning to use

• Lower risk/young unlikely to choose to enroll

• Insurance pool likely ends up with adverse selection

• Need charge each person more than their cost to cover adverse selection (cost shift from healthier to cover sicker)

• Premiums increase for all

• People at lower end of risk pool see premiums increase, unwilling to pay more than what would cost them for their care → unenroll

• As more dis enroll, the average cost will increase (cheaper people left), so now those at bottom see cost increase and dis enroll → SPIRAL

Why Employer-Based Coverage?

• Coverage is usually very comprehensive

• Insurers accept all applicants

• Risk Pool is diverse

• Various “types” of people = variety of risks → balanced risk if >200

• Overhead costs per person comparatively low

• Premiums are subsidized and are tax free

• Everyone in the group is charged same Fringe benefit amount

Fringe benefit:

Collection of benefits provided by an employer, which are exempt from taxation as long as certain criteria are met.