Leadership in the Healthcare Payer Ecosystem - Notes

Chapter 17: Leadership in the Healthcare Payer Ecosystem

Learning Objectives

Outline the evolution of the health insurance industry and its contribution to the current reimbursement landscape.
Compare the principles of supply and demand in the traditional market economy versus the healthcare marketplace.
Discuss and explain health insurance coverage options in the United States, including both public and private options.
Differentiate the different functions within health insurance companies and give examples of how these functions support healthcare delivery.
Examine the evolving changes with Obamacare and differentiate the pros and cons of these changes.
Evaluate the effectiveness of health insurance companies in executing their three primary roles: providing access, providing payment, and providing value, considering current U.S. healthcare trends in cost, quality, and access.

Introduction

Leaders must understand the complexities of the healthcare system.
They need to manage resources and lead people to achieve organizational goals.
Knowledge of health insurance companies is a vital leadership competency.
Healthcare funding dominates the U.S. economy, with national expenditures expected to reach 19.7% of GDP by 2028, growing at an annual rate of 5.4%.
Health insurance companies manage payments on behalf of the government, employers, and beneficiaries.
Understanding the internal workings of health insurance organizations is essential for healthcare leaders.
The chapter aims to provide insight into the health insurance industry and its role in healthcare delivery.
It describes the healthcare payer ecosystem, its evolution, coverage options, and the functions within a health insurance plan.

Understanding Health Insurance and Macro Model Competency Integration

In 2022, the health insurance industry was a $1.1$ trillion industry with an annualized growth of $2.9\%$ per year between 2017 and 2022.
Knowledge of health insurance is a key competency for healthcare leaders but is often lacking.
This lack hinders understanding of how health insurance companies impact access, delivery, value, and cost.
Health insurers have historically been viewed as a mysterious black box with limited transparency.
Conflicts arise from provider contract negotiations, payment inaccuracies, and authorization challenges.
Complex benefit rules and payer-provider interactions contribute to this mystery.
Basic health insurance terms are often misunderstood by the population.
Health insurance companies are referred to as health plans, health plan carriers, and managed care companies (MCOs).

The Macro Model and Leadership Competency Integration

The macro model outlines the complex healthcare system and the skills needed by healthcare leaders.
It shows the flow of information and interconnections between healthcare structure, process, and outcomes.
The model integrates public health, healthcare delivery, sociodemographic factors, resources, reimbursement, and funding.
Understanding the model and developing associated leadership competencies will improve the efficacy and value of the healthcare system.
Health insurance companies are key participants in the healthcare system, acting as fiscal intermediaries.
They oversee, administer, and process healthcare payments to providers on behalf of various entities.
Health plans ensure the efficacy and value of healthcare delivery services related to cost, quality, and health outcomes.
They have evolved into managed care organizations (MCOs).
MCOs impact the macro model, including domains like legislation and statutes.
They played a significant role in the design of new products and services mandated by the Affordable Care Act (ACA) in 2010.
MCOs were key stakeholders in the implementation of the ACA, driving new reforms and consumer-directed approaches.
MCOs also play a role in public health, population health, and sociodemographic factors.
They use data to interface with providers, community organizations, and other entities.
Health plans impact healthcare delivery to improve efficacy and value, ensure quality, promote health equity, and ensure access to care.
MCOs ensure appropriate utilization of services and manage costs through data-driven payment models.

Three Foundational Roles of Health Plans

Providing access to services.
Providing payments to providers for services.
Ensuring value from the services that are delivered.
Understanding MCOs develops competencies in insurance, risk, and reimbursement, as well as population and community health needs.
It also enhances competencies in finance, healthcare operations, and the components of quality, cost, and access.

The Complex and Changing Dynamics of the U.S. Healthcare Payer Ecosystem

Change and complexity are common in the healthcare delivery system.
The health system is described as a complex adaptive system.
Significant drivers of change and reform include Medicare's rollout in the 1960s, payment modernization in the 1970s, and the ACA in 2010.
The COVID-19 pandemic caused more change than any similar period in modern U.S. history.
Escalating healthcare costs and legislative changes to the ACA continue to drive change.
The shift in reimbursement methodologies by CMS (Quality Payment Program) to MIPS and API is a further driver.
MCOs must collaborate with providers to ensure high-quality healthcare for at-risk and underserved populations.
The COVID-19 pandemic led to high death tolls, economic shutdowns, and overloaded healthcare capacity.
The post-pandemic new normal has changed social interaction norms and healthcare delivery.
The pandemic amplified the debate on telehealth reimbursement, forcing MCOs to adjust policies and procedures.
Virtual office visits shifted from a nice-to-have to a must-have interaction modality.
The shift of employees to home offices had a significant impact, with automation replacing heavy hands-on processes.
Policy debates are continuously needed to reduce rising healthcare spending and costs.
Healthcare delivery will not be the same in the future, with potential impacts and events during subsequent COVID-19 waves.
Increases in mortality and morbidity have led to resource restrictions, interruption in chronic condition management, and psychic trauma.
Policy decisions on delivering less care, shifting to technology, and hands-on intervention will be a focus.
MCOs will play a key role in these discussions.
The changes produced by the COVID-19 pandemic will permanently alter the funding and delivery of healthcare services.

The Free Market Realities in the U.S. Healthcare Market

Many healthcare leaders focus on clinical aspects and less on economic and financial principles.
Healthcare leaders need competencies around insurance, risk, and reimbursement, as well as a basic understanding of the principles of the free market.
This allows them to have an expanded view of their leadership responsibility and contribute to healthcare financing policy discussions.

Free Market Basics

Consumer purchases are influenced by price, wants, and needs.
Supply and demand directly impact price and influence consumer purchases.
The U.S. healthcare system is viewed by many as a free market of goods and services.
Advocates promote free market economic principles to drive the cost and use of healthcare services.
Regardless, price, supply, and demand drivers deviate from traditional free market economic principles.

Five Key Components of the Standard Theory of Supply and Demand Model

There are two interested parties, buyers and sellers.
Buyers can determine the value of what they are getting from sellers.
Buyers purchase goods and services directly from sellers.
Price is the primary driver for purchase decision making.
The invisible hand will work invisibly behind the scenes to influence price and the efficient distribution of goods and services.

In the healthcare market, these components are significantly impacted by other forces.

Patients and providers are influenced by third-party stakeholders, including health insurers, employers, and governments.
Patients have limited healthcare knowledge and are often unable to determine what they need to purchase or how to evaluate the product or service.
Provider payments are often made not by the patient but by insurers or the government.
Health insurer rules set price more frequently than market demand.
In the healthcare market, the invisible hand does not work, leading to wide price fluctuation and the inefficient distribution of healthcare goods and services.

Government plays a significant role in the healthcare system through legislative mandates and financial subsidies.
The government intervenes to improve healthcare quality and safety, purchase health care, provide health care through government-sponsored providers, ensure access for vulnerable populations, and regulate healthcare markets.

The History and Evolution of the U.S. Health Insurance Industry

Understanding the history of health insurance provides historical context on current practices.
It equips leaders to understand the current landscape of who has and does not have health insurance.

The Great Depression and Before | The Dawn of Health Insurance in the United States | The Beginning of the Blue Cross Blue Shield Syndicate

Before the 19th century, hospitals were primarily for the poor.
Advances in medicine and formalization of training expanded hospital use to treat illness.
Hospitals faced challenges due to being labor intensive and expensive with high fixed costs.
Hospital use decreased during the Great Depression in 1927.
The first insurance plan providing payment to hospitals was born in Dallas, Texas, in 1929.
Baylor University offered teachers hospital insurance (21 days of hospital care a year for $6$ per year) to improve hospital utilization.
Hospitals collaborated to form the first provider networks.
The development of these networks administered by insurance plans led to the national syndicate of Blue Cross Blue Shield plans.
Blue Cross plans introduced multi-hospital networks and community rating (everyone paid the same premium rate regardless of age, sex, or condition).
Community rating spread the burden of cost across healthy and sick individuals.
State governments partnered with Blue plans and began to regulate these not-for-profit health insurance plans.
Commercial or private insurance carriers began to enter the health insurance market.
These companies developed experience rating, which used the experience of a population or group to determine premiums.
For-profit companies could target large national employers with younger working populations and offer health insurance at reduced rates.
They offered employers one-stop insurance shopping packaging lower-cost health insurance with other insurance products.
Blue Cross plans pushed state governments to be given not-for-profit status in exchange for enrolling anyone who applied for coverage.
This drove an increase in patients seeking care, provider and hospital incomes, and new state government regulations.
By 1940, Blue Cross dominated the market, holding about half of the policies in the United States.

1940s–1950s | The Health Insurance Explosion

In 1942, a third health insurance model was introduced: the managed care model.
Industrialist Henry Kaiser offered comprehensive coverage for employees within a closed delivery model that owned hospitals and employed staff.
Having health insurance became more important due to rising healthcare costs, hospital utilization, and new medical breakthroughs.
In 1950, health expenditures accounted for only $4.6\%$ of the gross domestic product (GDP).
By 2020, it accounted for $19.7\%$ of the GDP (Figure 17.5).
European Union (EU) countries devoted an average of $8.3\%$ of GDP to healthcare spending in 2019.
Government mandates were introduced in the 1940s and 1950s.
In 1942, Congress implemented wage and price controls to stabilize the World War II economy.
Employers were permitted to provide health insurance to their workers equal in financial value up to $5\%$ of wages without violating wage limits.
In 1952, Congress legislated that health insurance would not be considered income for income tax purposes.
The rise of labor unions and collective bargaining also played a key role in the expansion of health insurance.
Throughout the 1940s and 1950s, policy discussions about comprehensive health insurance occurred at the national level.
In 1954, Oveta Culp Hobby advocated for affordable care for the uninsured but could not gain traction in Congress.
By the beginning of the 1960s, the current private healthcare financing system was firmly in place.
Less than half of the elderly were covered by health insurance.
The federal government responded by enacting Medicare and Medicaid in 1965.
These programs expanded coverage to the elderly and the poor.
The Medicare and Medicaid models followed an allowable cost reimbursement system, borrowed from Blue Cross and Blue Shield plans.
State-based Blue Cross and Blue Shield companies partnered with the federal government to administer the Medicare program.
In 1966, more than 19 million individuals enrolled under the new Medicare legislation.
In 1966, 4 million individuals enrolled in the new state-administered Medicaid program, which has since grown to over 75 million Americans as of 2019.
The new Medicare and Medicaid programs gave access to health care for millions of Americans
Per-member annual healthcare spending has increased from $209$ in 1965 to $11,172$ in 2018.

1970s-1990s | ERISA, HMOs, the Introduction of Managed Care, and Medicare Advantage

In the 1970s through the early 1980s, the U.S. economy saw record-setting inflation.
Healthcare prices between 1974 and 1982 experienced an unsustainable average annual increase of $14.1\%$ .
The Employee Retirement Income Security Act (ERISA) of 1974 was passed to address the mismanagement of pensions plans.
The legislation allowed employers who elected to self-fund the healthcare costs of their employees to no longer be held to specific state-level regulations and mandates.
This benefited large employers, allowing for more consistent benefit offerings and administration.
The legislation limited the state's ability to impose health insurance requirements on state employers if they are self-insured.
In 1973, President Richard Nixon signed into law the Health Maintenance Organization (HMO) Act of 1973.
The intent of this law was to reduce the cost of health care by increasing competition in the market and increasing access to coverage for individuals.
HMOs could negotiate lower rates based on the type of insurance product an employer purchased for its employees.
HMO plans mandated that all enrolled members be assigned to a primary care physician.
Providers were reimbursed at a set capitation fee, which received stiff opposition from the provider community.
With the emergence of new products, the concept of managed care emerged, offering the marketplace the preferred provider organization (PPO), point of service (POS), and exclusive provider organization (EPO) products.
During this same period, consolidation among healthcare providers was occurring at a new pace.
As consolidation was occurring, providers began to push back against the new HMO utilization management practices and capitation reimbursement methodologies.
Both the provider and consumer drivers helped launch the new set of plan options that increased patient-provider reimbursement and administrative options.
These new PPO, POS, and EPO products were born, offering varying levels of utilization management practices and more access to a wider range of provider networks.
These plans did offer expanded network options, but they were available with a higher patient cost to access care outside the plan network.

For-Profit Blue Plans: A Major Shift in the Blue Cross Landscape

By the 1970s and 1980s, nonprofit Blue plans began to face greater competition from commercial insurance companies.
Because Blue plans practiced community rating and accepted everyone regardless of age, illness, or other factors, their premiums were higher.
To address this issue, in 1994 the Blue Cross Blue Shield Association allowed member plans to convert from nonprofit to for-profit status.
The change created additional competition within the health insurance market and opened up Blue plans to become publicly traded companies and raise much-needed cash.
With this change Blue plans began to enter into new markets to diversify their health insurance base business.
This also resulted in new merger activity with several state Blue Cross plans, resulting in the formation of huge national Blue Cross plans such as Anthem.

Introduction of Payment Caps: Diagnostic Related Groups

With health care consuming $10.8\%$ of the U.S. GDP by 1983, Congress enacted legislation to cap hospital reimbursements for the Medicare program with these subsequent capped reimbursements being based on diagnostic related groups (DRGs).
DRGs take into account a hospital's case mix and the costs incurred by the hospital to provide care.
An unintentional development of this legislation was to push hospitals to change practices to find new and alternative options to expensive inpatient care.
This further accelerated already advancing medical technology, which led to the beginning of the shift in care delivery away from the inpatient setting to the outpatient setting.

The Health Insurance Portability and Accountability Act

In 1996, the Health Insurance Portability and Accountability Act (HIPAA) became law to guarantee health insurance portability and personal healthcare information privacy for all Americans.
This legislation created national standards to protect sensitive health-related patient information from being disclosed without the patient's consent or knowledge.
These standards helped protect data as health plans began to systemically utilize their rapidly growing data pools to convert healthcare data to information with the analysis of trends around cost, utilization, and other care management strategies.
The legislation pushed health plans to move data and information from paper to electronic tools and formats and helped promote the development of today's healthcare analytics and care management interventions to help improve quality, cost, and access.

Medicare Advantage

Given the crisis of rising healthcare expenditures and maturing managed care capabilities and practices, a major enhancement to the Medicare program, the Medicare Advantage (MA), or Medicare Part C was enacted into law in 1982.
The program introduced the concept that Medicare beneficiaries could choose to enroll in a Medicare Advantage program offered by a private insurance company.
The program gave beneficiaries the choice of health insurance plans beyond the fee-for-service Medicare program.

2000s: Consumer-Directed Health Plans, Obamacare, VBC, and ACOs

In the early 2000s, consumer-directed health plans (CDHP), at times referred to as high-deductible health plans, began to emerge in the healthcare marketplace.
Tax-free savings accounts that are funded by individuals and employers can be utilized for the high-deductible upfront costs.
Critics of these plans express concern that policyholders may avoid needed care.

The Affordable Care Act / Obamacare

Perhaps the most sweeping healthcare reform legislation signed into law in recent history is the Affordable Care Act (ACA/Obamacare), signed into law by President Obama in 2010.
The goal of the ACA was to expand access to affordable quality health care to all Americans.
Based on 2021 data, about 31 million Americans were enrolled in coverage related to the ACA.

Values-Based Care

The idea of shifting from a fee-for-service reimbursement model to a values-based reimbursement system was first discussed by American healthcare academics Michael Porter and Elizabeth Olmstead Teisberg in their 2006 Harvard Business Review article on the topic.
Values-based care (VBC) focuses on putting patient outcomes first and rewarding providers for improved clinical outcomes that are demonstrated through data.

Accountable Care Organizations

Accountable care organizations (ACOs) were created in 2011 by the U.S. Department of Health and Human Services to combat rising healthcare costs as a component of ACA.
ACOS were designed to achieve the triple aim of improving population health, improving the patient experience, and lowering costs.
When an ACO successfully delivers high-quality care and saves healthcare dollars, the ACO shares in the financial savings it achieves.
ACOs originally were targeted for traditional Medicare beneficiaries but over time expanded to include commercial, Medicare Advantage, and Medicaid beneficiaries.

The Role and Function of the Health Insurance Plan | Facilitating Healthcare Delivery

The overarching aim of the health insurance plan is to facilitate healthcare delivery.
Plans achieve this by ensuring that individuals receive the healthcare services they need, that providers are properly reimbursed for these services, and that purchasers of health care for either themselves or their stakeholders can be confident that their healthcare dollars are well spent.
By understanding the internal functions and operations of a health insurance plan, healthcare leaders will gain competency in their ability to address issues related to insurance, risk, and reimbursement that impact the external or internal healthcare environments in which they lead.
Health plans have moved from a strictly financial role in administering provider payments to developing utilization and care management functions to add the focus on managing cost and care to their program offerings.
Health plans evolved from having partnerships with individual providers in the early days of health insurance to offering and administering the capability to expand provider networks to meet the needs of consumers.

Three Key Areas of All Health Insurance Plans

Ensure access to care.
Provide payment for care.
Ensure the value of care provided.

Functional Areas Organized Around Three Plan Roles.

Product management: Ensures access to care needed.
Membership management: The complex end-to-end process that ensures payment for services are provided.
Clinical management: Partnering with providers and members, which is foundational to ensuring value for care provided.

Product Management

Health insurance is a product to be purchased, and as discussed in other sections, health insurance can be purchased for different prices, offer different levels of coverage, and allow different levels of access to providers.

Membership Management

Ensuring payment for services is a complicated and technology-driven process for the health plan.
The end-to-end requirement to properly ensure payment first begins with the enrollment of new members and the ongoing enrollment management of existing members.

Clinical Management

Clinical management functions fall into four main categories. These areas are care and utilization management, including health and wellness promotion activities; provider management; population health and analytics; and quality, accreditation, and health equity.

Health Plan Support Functions

These areas include finance, legal services, compliance and regulatory affairs, quality improvement and audit, human resources, and facilities and IT.

How the U.S. Healthcare System Provides Coverage: Public and Private Options

Americans generally fall into four categories regarding health insurance.
- Covered by private, employer-sponsored coverage.
- Covered by state or federal public options sponsored by the federal or state government.
- Uninsured.
- Individuals who pay for health insurance out of pocket directly from a health plan and do not receive any government subsidy to pay for their coverage.

Private Options: Employer Sponsored

The Traditional Indemnity Product

The traditional product, often referred to in the health insurance industry as a fully insured product or "trad," was the precursor to more modern products seen today.

HMOS

This period ushered in the era of managed care.
Members were assigned a primary care physician (PCP) who was responsible for managing all aspects of a patient's health care.
Clinical services also required authorization from the health insurance plan to ensure that they were medically necessary.

Managed Care Products

Several different managed care products emerged that offered greater freedom for provider choice and less restrictive referral and authorization processes.
- Preferred provider organization (PPO): A managed care product in which coverage is provided through a network of contracted healthcare providers. Enrollees can go outside the network for care but will incur higher deductibles, higher coinsurance rates, or higher charges from OON providers.
- Point of service (POS): A POS product is a mix between an HMO and PPO. It is sometimes labeled as an open network HMO. POS products resemble HMOs for in-network services. Enrollees can access OON providers, but as in a PPO, they may incur higher deductibles, coinsurance, or provider charges.
- Exclusive provider organization (EPO): A more restrictive type of PPO much more like the HMO in-network design in which enrollees must use providers from the specified network of physicians and hospitals to receive coverage. There is no coverage for care received from an OON provider except in an emergency.

Public Options: Federal and State Sponsored

Medicare: Federally Sponsored Coverage

Medicare is health insurance offered by the federal government that offers coverage for Americans over 65 years of age, disabled Americans under 65 years, and those Americans suffering from the devastating effects of chronic end-stage renal disease.
Medicare Part A covers hospitalization costs, and Medicare Part B covers physician and other non-hospital-based care.
Medicare Part C, also known as Medicare Advantager (MA), as previously discussed was passed in 1982.

Medicare Supplemental Insurance

This product is an outgrowth of the traditional Medicare product.
It was developed to offer traditional Medicare enrollees supplemental coverage to healthcare services not offered under traditional Medicare.

Medicaid: State-Sponsored Coverage

The state programs for Medicaid offer coverage to eligible low-income adults, children, pregnant women, elderly adults, and people with disabilities.
This healthcare program is administered by state governments and is jointly funded through both federal and state governments.

ACA/Obamacare

As discussed previously in the chapter, the most sweeping healthcare reform legislation signed into law in recent history is the Affordable Care Act, which was signed by President Obama in 2010.
Given President Obama's key role in the congressional approval of the ACA, the legislation is often referred to as Obamacare.

ACA Legislative Mandates and Key Components

Health exchange marketplaces: This mandate introduced the option for individuals to purchase health insurance online directly through the federal government, their state government, or a private insurance company's website.
Guarantee issue: Insurers must provide health insurance to any person regardless of medical history or current health status.
Individual mandate: The individual mandate required everyone have health insurance coverage or else pay a tax penalty. This mandate was eliminated under the Trump administration.
Community rating: The ACA required health insurers to use a modified form of community rating that allows premiums to vary only on enrollee age.
Essential health benefits: ACA plans defined 10 categories of benefits that must be covered in all plans.
1. Preventive and wellness services and chronic disease management
2. Mental health and substance use disorder services, including behavioral services
3. Rehabilitative and habilitative services and devices
4. Pediatric services, including oral and vision care
5. Maternity and newborn care/family planning:
6. Ambulatory patient services
7. Emergency services
8. Laboratory services
9. Prescription drugs
10. Hospitalization
Out-of-pocket limits: Health insurers could no longer set yearly or lifetime dollar limits on essential benefits.
Premium and cost-sharing subsidies: Individuals who enroll through the health exchange marketplace may be eligible for a premium tax credit that assists with payment of the premium for health insurance.
Medicaid expansion: Beginning in 2014, the ACA gave individual states the option to expand Medicaid eligibility.
Prevention and wellness programs: The ACA required plans to cover certain preventive and wellness services including vaccines, disease screenings, and contraception, with zero cost sharing.
Small business tax credits: Tax credits were provided to small businesses with 25 or fewer full-time workers earning less than $50,000 in average annual wages to financially help small businesses provide health insurance to their employees.
Employer mandate: Beginning in 2015, employers with 50 or more full-time-equivalent employees were required to provide coverage for their employees or pay a penalty.
Tiered benefit plans: The ACA introduced four plan types based on metal name distinctions.
- Bronze
- Silver
- Gold
- Platinum
Cost-sharing subsidies: The government was mandated to provide financial payments to participating health insurance companies. These subsidies were eliminated by the Trump administration.
Cadillac tax: A $40\%$ tax would be placed on the most generous employer-provided health insurance plans-those costing more the $11,200$ per year for an individual policy or $30,150$ for family coverage. This tax was never enacted and was repealed under the Trump administration.

Leading in Complexity: The Macro Model, Leadership Competencies, and the Health Insurance Industry

Successful healthcare leaders are constantly developing new and refining existing health leader competencies.
Increased understanding of the health plan, its historical evolution, and the current role of the health plan in the healthcare system supports the competency of understanding insurance, risk, and reimbursement.
Given the role health plans play in the intensified policy focus on public health, population health, and health equity, developing the competencies to work both in and with health plans is important.

Summary

This chapter provided an overview of the health insurance industry.
The chapter focused on demonstrating how the health insurance industry integrates with all aspects of the health care ecosystem and is a domain that healthcare leaders should understand to better execute their leadership roles.
Healthcare leaders will benefit from awareness of how the forces of managed care impact their roles and how they can positively impact the broader internal or external system with greater reimbursement, risk, and insurance knowledge.