Private Health Care Coverage
LHCO 215
Oct. 13, 2011
Robert Kaplan
Goals for this class are to understand:
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Private Health Care Coverage and their effects
on the delivery of health care
Different Models of Private Health Coverage
Regulations of PHCC
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State and Federal
Pre-1940s
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Financing of Health Care
Fee For Service
 Private Pay and Charity Care
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Organization of Health Care Delivery
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Solo practice
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Public, religious and private non-profit Hospitals
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A few alternative systems:
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Multi-specialty Group Practices
Community Health Centers
Transformation of out-of-pocket into
third-party payment
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Growth of private insurance
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Blue Cross/Blue Shield during Great Depression
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Non-profit organizations, closely tied to state hospital
associations (BX) and state medical societies (BS)
Employer-sponsored insurance in WW II and beyond
Medicare and Medicaid enacted in 1965
Out-of-pocket Payments as a Share of Health Expenditures, 1960-2005
70%
60%
50%
40%
30%
20%
10%
All health services
Physicians
Hospitals
05
20
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
19
73
19
71
19
69
19
67
19
65
19
63
19
19
61
0%
Why do so many people highly value
health insurance?
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Protect against financial risk
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Need for health care is unpredictable (20/80 rule)
As a result of risk aversion, most people would rather spend $4,000
every year rather than face a 1 in 10 chance of a $40,000 loss
Protect against health risk
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Some care may be so expensive that it would be unobtainable in the
absence of insurance
Status Quo Ante, 1980
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Insurers paid any licensed doctor or hospital for all
the care the patient received
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No selective contracting
BX/BS were creatures of hospital/physician associations
Paid for any services that were ‘medically
necessary’
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Exclusions for ‘experimental’ therapy, but virtually no utilization
review
Insurers had little influence on the practice of medicine
Status Quo Ante, 1980 (cont.)
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Physicians were paid at ‘Usual, Customary,
and Reasonable’ rates (UCR) by Blue Shield
Hospitals were paid at cost by Blue Cross
Medicare payment methods, 1965-1982
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When enacted in 1965, Medicare was designed to
mimic prevailing BX/BS plans, both in benefit design
and payment methods
Contracted with intermediaries and carriers (mostly
BX/BS associations) to make payments to MDs and
hospitals
UCR method for physicians; cost-based payments for
hospitals
Results of Well-Insured FFS
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Hospitals competed for doctors in a medical arms race
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New technology is attractive to physicians, and resulted in
higher revenues
Little financial reward to physicians for fee restraint
Physicians were not rewarded for using fewer rather than
more resources to get patients better
Specialists performing newly developed procedures were
able to make much more money than primary care
physicians because they had substantial flexibility in
establishing UCR amounts
Results of Well-Insured FFS (cont.)
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Emphasis on episodic care for acute problems; limited
ability to provide coordinated care for chronic
conditions
Large variations across geographic areas in how care
was delivered, with no organization having authority,
responsibility, or accountability to figure out which
rate is right
Few financial rewards for improvements in quality or
patient safety
Concerns about Open-ended
FFS Payment
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Expenditures increasing at an unsustainable
rate
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Payment for quantity, not for value
Quality
Little accountability for quality
 Underinvestment in management of chronic disease
 Underinvestment in primary and preventive care
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Types of insurance products
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Conventional FFS
Preferred Provider Organizations (PPO)
Point-of-Service (POS)
Health Maintenance Organization (HMO)
Types of Insurance Products
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Conventional FFS
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Any MD or hospital in town; no UR
Deductibles and co-payments
Preferred Provider Organization (PPO)
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Contracted list of MDs and hospitals
Lower deductibles and co-payments when using ‘in-network’
providers
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e.g., $500 deductible and 80/20 in-network; $1,000 deductible and 60/40 out-ofnetwork (plus balance billing)
Minimal utilization review, although pre-admission approval for
inpatient care and high cost procedures/imaging typically required
Types of Insurance Products (cont.)
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Health Maintenance Organization (HMO)
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Care paid for only if provided by doctors or hospitals under contract
Differences for patients from FFS/PPO coverage:
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Minimal co-payments and out-of-pocket liability
Restricted to a panel of MDs and hospitals
Referrals must be authorized by PCP
Point-of-Service (POS)
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Combination of HMO and PPO -- HMO-style benefits and
restrictions, plus the option of using other physicians with relatively
high co-payments and deductibles
Quick History Lesson
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Multi-Speciality Group Practice (1900)
 Mayo Clinic, Meninger, Palo Alto Foundation
Prepaid Group Practice & HMOs (1929-30)
 Ross-Loos – D of Water & Power
 Kaiser – Dr. Sidney Garfield – Grand Coulee Dam
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Richmond, CA – Kaiser Industries/ PMPM
UMW, Group Health Cooperative of PS
Quick History Lesson Conitnued
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First generation – HMOs Vertical Integrated
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KFHP,
KF Hospital,
Permanente Medical Group
Second Generation HMOs/ IPA – Virtually Integrated
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San Joaquin Foundation for Medical Care (1954)
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Alternative to Kaiser
Rapid growth conversion to for- profit
Paul Ellwood HMO Act Pres. Nixon(1973)
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Federal Qualification an HMO must be offered + FFS
Types of HMOs
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Kaiser – vertically integrated health plan
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Hospitals and medical group providing service only to Kaiser
members
Clinical autonomy within a system of constrained resources
‘Managed’ fee-for-service
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Insurance company contracts with providers on a FFS basis
1-800-RN-MAY-I utilization review
Managing prices more than care
Types of HMOs (cont.)
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CA HMOs – Virtually Integrated-the Delegated Model
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Capitated payments to medical groups and hospitals; financial risk
and utilization management delegated to medical groups
 In theory, provided physician groups with flexibility to use
resources more efficiently
Distribution of Health Plan Enrollment for Covered Workers, by Plan
Type, 1988-2009
Basis of competition among private
insurers in the employer market
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Almost entirely self-insured and experience rated – employer
determines product design
Administrative costs and customer service (including, to a limited
extent, provider satisfaction)
Success at negotiating lower unit prices (primarily a result of
leverage, although in this decade, providers have more leverage
than insurers in most markets)
To a limited extent, ability to lower claims costs through
selective contracting with high quality/low cost providers,
innovative disease management programs, and utilization
review/hassle factor
Regulation of Private Health Care
Coverage -Federal
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ERISA (1974)
Preempts state laws especially on benefit plan
No mandate on benefit or coverage level
 Fiduciary Manager
 Summary plan description, claim and appeal info
 Annual reporting requirements IRS/DOL
 Remedies and enforcement but no “pain”
 Continuation Coverage-COBRA (1985)
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Federal - Continued
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HIPAA (1996)
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Privacy rule for personal health information
Pre-exisitng conditions
12 mos/63 days
Access to coverage employers 2-50
State High Risk Pool’s
 Renewability guarantee but no control of price
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Federal - Continued
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Women’s health and coverage Act
Newborns and Mothers HPA
Mental Health Parity
Pregnancy Discrimination Act
ADA
Regulation of Private Health
Coverage – State
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McCarran – Ferguson Act (1945)
CA- Dept Managed Health Care – HMOs
DOI – Insurance Prodcuts
Financial standards
Market conduct, Access Stds & benefits,
Forms
Premium Increase- Input - Approval
State - Continued
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Network Adequacy
UR Practices
Credentialing
Quality Assessment and Improvement
Appeal and Grievance
Sue Only under Malpractice
Summary
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Physicians and hospitals receive most of their
revenue from public and private insurers
Most revenue is from fee-for-service payment
FFS payment systems pay more for more
service, regardless of the value produced by that
service
Summary - Continued
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Flailing about for some method of
controlling expenditure growth:
Medicare limits price increases, but has few tools for
limiting volume increases
 Private insurers attempt to limit price increases, with
some success from 1993-99, but little success from
2000 and beyond
 Private insures hassle physicians and hospitals, and
these hassles somewhat restrain volume growth
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Discussion
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Divide by Healthcare Coverage types
Present Pro’s and Con’s of each type
 Does a “gatekeeper” Model work? Hold costs down?
 Lessons Learned by being a consumer of healthcare
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