Managing The Cost Per Service Of Medical Expenses
in Health Insurance Coverage
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Premise of Risk control through
payment structure
The basic premise of risk transfer in an insurance system is:
• transfer the risk to the party who controls the risk
• but not to exceed the amount of risk they can hold.
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 2
Considerations in what controls on
medical payment to apply
• Match the method to the risk
• Make sure you can administer the control method
• Do not set up too many mechanisms to control the same
risk
• Different controls can achieve different payment levels
• Make sure the system can be monitored
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 3
Medical Expense Charge Levels
Vary by
• The service itself
• The provider
• The place of service
• Whether the patient has insurance coverage
• Whether the insurer has any tariff structure
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 4
Types of Risk
a. Morbidity Risk: Controlled by insurer
b. Incidence Risk: Impacted by insurer, providers, and
insured
• Propensity to use care
• Intensity of care
c. Payment Level
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 5
Who Controls the Payment Level?
• Insurance companies control the level of benefits and
allowable fee levels
• Physicians control their charge levels and which
hospitals used
• Hospitals control charges and type of room
• Insureds control what care is provided
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 6
Controls of provider expenses provider payment methods
Some of the common payment level controls are
1. None
2. UCR’s
3. Fee schedules :
• Physician fee schedule
• Hospital fee schedule
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 7
Provider Payment Controls: None
Prevalence: Primary model currently in place in India.
Philosophy: insureds are given a benefit that they can use
at any properly credentialed provider.
Strengths:
• Easy to set up
• Customers used to that
• For a time, payment levels may not become unruly
• Unlimited access to providers
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 8
Provider Payment Controls: None
(cont)
Weaknesses:
• Over time, providers will charge more and more
• No structure
• Only benefits and selection can control costs
• The cost of insurance will be far greater than the actual
risk cost
Impact on provision of care:
• Pays professionals on a piece-work basis
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 9
Provider Payment Controls : UCR
What it is: Usual, Customary, and Reasonable limits on the
fees paid for a service. Such limits generally agreed and
based on typical payment levels.
Prevalence: Not really used in India.
Philosophy: The free market should control charges but
there should be limits.
Strengths:
• relatively loose
• understood and accepted
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 10
• adjusts to the charge levels in a controlled fashion
Provider Payment Controls : UCR
(cont)
Weaknesses:
• This only controls the rogue providers
• Will allow for continued inflation
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 11
Provider Payment Controls : Fee
Schedules
What it is: Agreed payment levels between the insurance
company and the provider
Prevalence: Moderately used in India at some hospitals for
a small subset of services and are regularly
circumvented
Philosophy: The provider is a vendor for the insurance
company and this is the payment for services that has
been agreed
Strengths:
• logical way to do business
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 12
• allows for changes over time
Provider Payment Controls: Fee
Schedules (cont)
Weaknesses:
• Contracts must cover a tremendous number of facilities
and physicians in all markets the products are sold in.
• The tariffs must cover a long list of medical services.
• Updating schedules is an intensive and ongoing.
• Claims processing must track each contract .
• For services and providers not covered, some other
method of payment level must still be applied.
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 13
Control of Provider Payments
Through Selection and Benefit
Design
This is designed to impact the pricing behavior of providers
by giving the insured a share of the costs.
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 14
Control of Provider Payments
Through Selection and Benefit
Design
Insureds can keep the costs down through:
• Which provider
• Whether to get treatment, what services to get
• The charge level
• The accuracy of the provider’s bill
• Any fraudulent excess billing
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 15
Control of Provider Payments
Through Selection and Benefit
Design
Some controls include :
• Selection of insureds
• Fixed benefit coverage
• Copays
• Benefit limits
• Controls on place of treatment
By Robert Prochnow, FSA
Assisted by Shruthi
Srinivasan, Student Actuary
Slide 16