Introduction to Healthcare and Public Health in the US: Financing Healthcare
(Part1)
Audio Transcript
Slide 1
Welcome to Introduction to Healthcare and Public Health in the US: Financing
Healthcare (Part1). This is Lecture (d).
The component, Introduction to Healthcare and Public Health in the US, is a survey
of how healthcare and public health are organized and services delivered in the US.
Slide 2
The objectives for Financing Healthcare (Part 1) are:
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Understand the importance of the healthcare industry in the US economy and the
role of financial management in healthcare.
Describe the models of healthcare financing found in the US and in selected
other countries.
Describe the history and role of the health insurance industry in financing
healthcare in the US, and Federal laws that have influenced the development of
the industry.
Understand the differences among various types of private health insurance and
describe the organization and structure of network-based managed care health
insurance programs.
Understand the various roles played by government as policy maker, payer,
provider, and regulator of healthcare.
Describe the organization and function of Medicare and Medicaid.
Slide 3
This lecture discusses payers in the US healthcare system. It will describe how health
insurance works and how insurers pay healthcare providers for their services. It will
cover the two sources for healthcare financing, who is allowed to offer insurance, and
the different types of health insurance plans. It will also introduce the the concept of
managed care, the types of managed care plans, and how managed care affects and
controls insurance costs. Finally, this lecture will describe the role of state and federal
laws in regulating private health insurance companies.
Slide 4
Health insurance spreads the financial risk for healthcare expenditures for a group of
people by pooling money or premiums paid on their behalf into a large fund. A payer
uses the pool of money to pay or reimburse for healthcare services provided to the
individual members of the group.
Health IT Workforce CurriculumIntroduction to Healthcare and Public Health in the US
Version 3.0 / Spring 2012
Financing Healthcare (Part 1)
Lecture d
This material (Comp1_Unit4d) was developed by Oregon Health and Science University funded by the Department of Health and
Human Services, Office of the National Coordinator for Health Information Technology under Award Number IU24OC000015.
1
In a given year, approximately five percent of the people enrolled in a health insurance
plan consume about half of all the money available in the pool. Health plans stay
solvent in most cases because each year all of its members contribute more money
than they use.
The cost of health insurance is influenced most by prescription costs, technology, an
aging population, the prevalence of chronic conditions, government subsidies, and
health plan administrative costs.
Slide 5
Before beginning this discussion of health insurance, it is important to understand how
providers receive payment from payers or insurance companies. Whenever a patient
sees a doctor, gets tests run, or goes to the hospital, the provider prepares one or more
claims to receive insurance reimbursement. Information about the patient and the
services received is described in two kinds of codes – a diagnosis code and a
procedure code. A diagnosis code is called an ICD-9-CM code. ICD stands for
International Classification of Disease and CM stands for Clinical Modification, to
designate that this collection of codes was revised from an earlier version. A procedure
code is called a CPT code, which stands for Current Procedural Terminology in the
case of physicians, and a DRG, or diagnosis related group, in the case of hospitals
billing Medicare. The procedure code describes the services provided by the provider.
Most claims are sent electronically to the insurance company, where the medical claims
examiner or adjuster processes it according to the insurance plan’s guidelines. The
examiner subtracts from the bill any amount considered in excess of the plan’s so-called
usual and customary charge. The examiner also subtracts any patient co-payment, coinsurance, or deductible, as well as the provider’s pre-negotiated discount for services.
The balance is then remitted to the provider in an explanation of benefits or remittance
advice.
An explanation of benefits (EOB) or remittance advice (RA) is a document issued by the
payer stating the status of the claim; whether it is paid, suspended (pending), rejected,
or denied. The purpose is to provide detailed payment information relative to the claim
and, if applicable, to describe why the total original charges have not been paid in full.
Slide 6
If a claim isrejected the reason must be stated in the explanation of benefits or
remittance advice. Claims can be denied because of coding errors or insufficient
information, because a service is not covered under the policy, or because a procedure
is still considered experimental.
Many employer-provided insurance plans have a process for allowing patients to appeal
a rejected claim. Under the recent healthcare reform law, more companies are required
to establish this process as well as allow patients to have a rejected claim reviewed by
an independent third party.
Health IT Workforce CurriculumIntroduction to Healthcare and Public Health in the US
Version 3.0 / Spring 2012
Financing Healthcare (Part 1)
Lecture d
This material (Comp1_Unit4d) was developed by Oregon Health and Science University funded by the Department of Health and
Human Services, Office of the National Coordinator for Health Information Technology under Award Number IU24OC000015.
2
Slide 7
As mentioned previously, contributors to healthcare financing include private and public
or government sources. Private sources include employers who purchase insurance
policies or pay directly for healthcare expenditures through a self-insured plan.
Individuals and families contribute through the employee portion of health insurance
premiums and through out-of-pocket expenses.
Federal, state, and local governments collect payroll taxes from employer and
employees and general tax revenues that is used to fund government financed
insurance. Occasionally special tax methods are used such as a sales tax.
The money contributed from government and private sources is pooled into large funds
and distributed by payers. Payer was previously defined as a pool of funds, without
reference to any specific payer. The next slides will expand this definition to include
different organizations or plans that pay for the healthcare services either through a
private health insurance plan or through a government insurance program. Each
insurance pool or fund pays or reimburses on behalf of the individuals who meet the
eligibility requirements for the group represented by the plan or program. For example,
eligibility may be due to age as in Medicare and the Children’s Health Insurance
Program (CHIP), socioeconomic category as in Medicaid, or employment status for a
large corporation that self-insures.
Slide 8
The two basic types of health insurance are public and private with the difference being
who is responsible for the programs.
Public insurance is run by the federal government, state government, or both, meaning
the government provides the coverage and pays the providers. Medicare is for people
age 65 and older and for certain people with disabilities. Medicaid is for low-income
people. CHIP [chip] provides low-cost health insurance coverage to children in families
that earn too much qualify for Medicaid but cannot afford private health insurance.
Medicaid and CHIP [chip] receive federal funding, but are administered by the states.
Private health insurance is funded and run by individual organizations that are licensed
by a state. Consumers usually obtain private insurance through their employer. In some
cases, employers self-insure in which case they finance and pay for all the healthcare
expenditures of their employees. These plans usethe guidelines in the Employee
Retirement Income Security Act or ERISA legislation (discussed later in this lecture). In
these plans, the employer administers the plan and assumes all the risk for the
healthcare expenditures of its employees. An employer may contract the claims
paperwork to a third-party administrator, or TPA.
This remainder of this lecture will focus on private health insurance, followed by
government health insurance in the next lecture.
Health IT Workforce CurriculumIntroduction to Healthcare and Public Health in the US
Version 3.0 / Spring 2012
Financing Healthcare (Part 1)
Lecture d
This material (Comp1_Unit4d) was developed by Oregon Health and Science University funded by the Department of Health and
Human Services, Office of the National Coordinator for Health Information Technology under Award Number IU24OC000015.
3
Slide 9
The contract that an insurance company offers is either an indemnity plan or a managed
care plan. Generally, the contract for insurance is between the individual or family and
the insurance company or payer, and not between the insurance company and provider.
There are two types of private health insurance plans.
Indemnity plans are “traditional” plans based on a fee-for-service model. Under these
plans, providers are paid according to the services they perform. For example, if you
break your arm, the company pays a different fee for each service provided, such as a
fee for the x-ray and a fee for applying a cast. Today, relatively few indemnity plans
exist. Instead, most health plans are managed care plans.
Managed care is a term to describe the techniques designed to provide comprehensive
healthcare, manage outcomes and quality, and control costs through a managed care
organization. Managed care became popular in the 1970s with health maintenance
organizations, or HMOs. Managed care controls costs by providing financial incentives
to providers and patients.
A key difference between the two types of plans is indemnity plans simply finance
healthcare by paying reimbursements to providers. In contrast, managed care plans
integrate the financing and delivery of care into one system. The current delivery of
"managed care" services is considerably different than the HMO models of the 1970s,
80s, and 90s.
Slide 10
Before continuing with the discussion of managed care, Blue Cross/Blue Shield is a
special case that deserves separate mention here. It is a collection of private insurance
organizations, each of which is independent and licensed by a state. Blue Cross
reimburses hospitals and Blue Shield reimburses physicians, but the two organizations
function as a whole.
Historically, Blue Cross/Blue Shield consisted of not-for-profit associations organized to
circumvent state insurance licensing requirements. Today, some Blue Cross/Blue
Shield organizations operate as commercial for-profit insurance companies.
Slide 11
A managed care organization, or MCO, is a business model that integrates financing
and delivery of healthcare, using managed care techniques. Managed care can be
separated into two distinct functions - one is the methodology and techniques used for
provider reimbursement, and the other is the provision of comprehensive quality
medical care.
Managed care organizations share common features. All have controlled access to
comprehensive care and manage the care provided using various techniques designed
to reduce costs yet improve the quality of care.
Health IT Workforce CurriculumIntroduction to Healthcare and Public Health in the US
Version 3.0 / Spring 2012
Financing Healthcare (Part 1)
Lecture d
This material (Comp1_Unit4d) was developed by Oregon Health and Science University funded by the Department of Health and
Human Services, Office of the National Coordinator for Health Information Technology under Award Number IU24OC000015.
4
Patient concerns about rationing and the quality of care received through withholding of
services by early health maintenance organizations resulted in new managed care
models.
Slide 12
HMO plans were the prototype MCOs, and provided care to members during sickness,
and encouraged prevention and wellness. Original HMOs used an episode of care
reimbursement methodology called capitation, and limited member access only to
designated plan providers.
The newer models of MCOs listed on this slide developed as concerns grew that care
was being withheld at the expense of patients. The new models mixed-and-matched
reimbursement methodologies, permitting greater patient choice of providers, but
increasedthe cost of care from the original HMO model. These four MCO models will
be discussed in more detail later in this lecture.
Slide 13
Managed care “manages” the accessibility, cost, and quality of healthcare. Managed
care plans control what contracted providers are paid and use cost-containment
strategies, such as incentives for physicians and patients to choose less costly forms of
care, and utilization reviews to determine the medical necessity of services. For this
reason, many people consider managed care a gatekeeper.
Today, many versions of managed care plans exist, their heir differences based
primarily on cost and provider choice.
Slide 14
Managed care plans differ with regard to the number of choices its members have
which has a direct relationship to healthcare costs. Fewer choices, usually in the form
of restricting a patient’s selection of healthcare providers, translates to lower insurance
premiums and lower out-of-pocket costs. However, some people prefer the freedom to
choose their own doctors and this choice and the additional costs involved is an
important issue.
There are three types of managed care plans: health maintenance organizations, or
HMOs; preferred provider organizations, or PPOs; and point-of-service plans, or POS
[P-O-S]. A variation of the PPO is the exclusive provider organization or EPO. The
next slides will detail the varying degrees of choice and cost in each of these models.
Slide 15
HMOs represent the lowest cost managed care organization. There are various types
of HMOs, with the differences depending mainly on the working arrangement providers
have with the organization.
In a staff model HMO, the physicians are salaried employees. They see only patients
who are enrolled in that HMO, and they see patients in a clinic operated by the HMO.
Health IT Workforce CurriculumIntroduction to Healthcare and Public Health in the US
Version 3.0 / Spring 2012
Financing Healthcare (Part 1)
Lecture d
This material (Comp1_Unit4d) was developed by Oregon Health and Science University funded by the Department of Health and
Human Services, Office of the National Coordinator for Health Information Technology under Award Number IU24OC000015.
5
In a group model HMO, the physicians are employed by an independent, physicianowned group practice, and the HMO contracts with them for services. In this
arrangement, HMO patients are the bulk of a physician’s business, and again, patients
are seen in a clinic run by the HMO.
In an open-group HMO, the organization contracts with individual physicians, who are
free to contract with multiple plans. Patients are often seen in a clinic operated by the
HMO.
In an independent physician association, or IPA, the HMO contracts with physicians
who are organized into a group such as a corporation, partnership, or foundation. The
physicians retain their independence to see other patients, and they see patients in their
own offices, not a clinic operated by the HMO. The IPA model is now used in the
majority of HMO plans.
In a network model, the HMO contracts with multiple independent physicians, group
practices, and/or IPAs.
Reimbursement is only made to providers within the HMO. No reimbursement is
available for healthcare services by providers outside the HMO.
Slide 16
In a PPO, reimbursement is provided using a fee-for-service methodology where
patients receive discounts and savings for using network providers. This includes lower
deductibles, copayments, and coinsurance. In a PPO, a patient is free to seek care
from any provider they choose outside the network and receive some reimbursement.
A variation of the PPO is the exclusive provider organization, or EPO. It is similar to a
PPO, but care must be obtained through network providers only. Healthcare services
supplied by providers outside the network are not reimbursable through the EPO.
In both the PPO and EPO plans, a gatekeeper does not control access to medical
services and individuals may seek care from any provider.
Slide 17
The point of service plan, or POS, includes a primary care physician, or gatekeeper,
who controls access to plan only providers, similar to an HMO. The primary care
physician becomes the point of service for delivery of all healthcare services. In a POS
plan, referrals can be made out of network at the discretion of the primary care
physician.
Slide 18
This table summarizes and compares indemnity and managed care programs.
Indemnity programs have the most freedom of choice, but they cost the most. HMOs
have the least freedom of choice and cost the least.
As previously mentioned, all managed care plans limit member choice by designating a
network of providers. The providers accept reduced reimbursement from the managed
Health IT Workforce CurriculumIntroduction to Healthcare and Public Health in the US
Version 3.0 / Spring 2012
Financing Healthcare (Part 1)
Lecture d
This material (Comp1_Unit4d) was developed by Oregon Health and Science University funded by the Department of Health and
Human Services, Office of the National Coordinator for Health Information Technology under Award Number IU24OC000015.
6
care program in exchange for patients referred through the plan. PPOs offer a broader
network than HMOs do.
So-called in-network providers are reimbursed more by the insurance plan than out-ofnetwork providers. A patient might pay as much as forty percent more for out-of-network
services.
Choice of physicians is most limited with an HMO, which also requires the patient to
designate a primary care provider, or PCP. Patients must see this provider first in order
to get a referral to a specialist. PPOs and POS plans do not have this requirement.
HMOs require precertification, a process for checking the patient’s eligibility and
authorizing a medical procedure or hospitalization before it occurs. If precertification is
skipped, the HMO may not pay for the patient’s care. The exception is in case of an
emergency, but even then, the incident must be certified as necessary after the fact.
PPOs do not usually require certification.
Another difference between HMOs and PPOs is that HMOs generally pay more for
preventive care, which lowers costs for everyone.
Note that a POS plan is a hybrid. It has the flexibility of a PPO, with a cost comparable
to an HMO. A POS relies heavily on preventive care. Members have a primary care
physician who may refer members to providers outside the network if deemed
necessary.
Slide 19
Private insurance is regulated by both state and federal laws. States regulate
commercial health insurers. They control the legal structure of private insurers and
monitor their finances to make sure they can meet their obligations to the people they
insure. Companies must prove they have enough money to pay all anticipated claims
for the year, along with their administrative and operating costs, and they must maintain
a certain amount of excess funds or reserves, in case claims exceed projected
experience.
Slide 20
There are multiple Federal laws regulating both public and private health insurance.
Many of the laws have been mentioned previously in the history of the US health
insurance system.
One of the most important federal laws about regulation of private insurance is the
Employee Retirement Income Security Act of 1974 or ERISA [uh-riss-uh]. It sets certain
minimum standards for employer-provided health plans. It allows employers to selfinsure, effectively permitting an employer to create an insurance company bypassing
state requirements. For any ERISA organized health plan, states laws may not preempt Federal rules and regulations. It requires that employers provide an appeals
process so employees can get benefits, and it allows employees to sue for benefits.
Health IT Workforce CurriculumIntroduction to Healthcare and Public Health in the US
Version 3.0 / Spring 2012
Financing Healthcare (Part 1)
Lecture d
This material (Comp1_Unit4d) was developed by Oregon Health and Science University funded by the Department of Health and
Human Services, Office of the National Coordinator for Health Information Technology under Award Number IU24OC000015.
7
Slide 21
COBRA is an amendment to ERISA that allows employees to continue their healthcare
insurance in certain cases, such as voluntarily leaving a job, involuntary job loss, death
of a spouse, and divorce. Individuals usually have to pay at least some of the premium
themselves, and they may even pay slightly more than what the insurance formerly
cost. Companies with fewer than twenty employees are not generally required to offer
COBRA benefits.
Slide 22
Most people are familiar with HIPAA, the Health Insurance Portability and Accountability
Act, because of the notices required with visits to a healthcare provider. The most
publicized part of HIPAA, protects the privacy of patient information. Lesser-known
HIPAA provisions are just as important. HIPAA gives employees and their families
access to group insurance regardless of their health status, such as previous claims
experience or knowledge of genetic disease. For many employees who lose insurance
coverage, it provides opportunities to join other group plans or buy individual insurance.
Slide 23
Other amendments to ERISA regulate private insurance by requiring that certain types
of coverage be provided. For example, the Newborns and Mothers Health Protection
Act of 1996 provides for at least a forty-eight hour hospital stay following childbirth. The
Mental Health Parity Act of 1996 requires that lifetime and annual dollar limits on
coverage for mental illness be the same for mental illness and medical or surgical
benefits. The latest rider on this bill was in 2008 when the Troubled Asset Relief
Program (TARP) was signed into law by President George W. Bush. Finally, the
Women's Health and Cancer Rights Act of 1997 provides coverage of certain postmastectomy benefits for women who undergo mastectomy that includes reconstructive
surgery and treatment of complications.
Slide 24
The Patient Protection and Affordable Care Act, passed in 2010, is the official name for
what many refer to as the healthcare reform law. This law is scheduled to take effect
over time, through 2014. For now, the law improves access to health insurance for
children, young adults, and people who have been denied insurance due to a
preexisting condition. In addition, insurance companies are no longer allowed to
impose lifetime limits on most benefits, and the law is phasing out the annual limits that
companies can impose. Patients in some plans get free access to certain preventive
services, and seniors who are experiencing the Medicare D coverage gap receive a
fifty-percent discount on brand-name drugs.
Slide 25
This concludes Lecture (d) of Financing Healthcare Part 1. In summary, insurance
works by spreading financial risk. Insurers pay providers based upon the diagnosis
Health IT Workforce CurriculumIntroduction to Healthcare and Public Health in the US
Version 3.0 / Spring 2012
Financing Healthcare (Part 1)
Lecture d
This material (Comp1_Unit4d) was developed by Oregon Health and Science University funded by the Department of Health and
Human Services, Office of the National Coordinator for Health Information Technology under Award Number IU24OC000015.
8
code, procedure code or the service provided, and contractual agreements for fees.
Individual organizations run private insurance and operate under state and Federal
laws. Different types of insurance plans include indemnity plans, Blue Cross Blue Shield
plans, and managed care plans.
The term managed care is used to describe techniques designed to provide
comprehensive healthcare, manage outcomes and quality, and control costs. Managed
care balances choice with cost where fewer choices translate to lower insurance
premiums and lower out-of-pocket costs.
Both state and federal laws regulate private health insurance. The most important
federal laws regulating insurance are ERISA, COBRA, HIPAA, and the Affordable Care
Act.
Slide 26
References slide. No audio.
Slide 27
References slide. No audio.
Slide 28
References slide. No audio.
Health IT Workforce CurriculumIntroduction to Healthcare and Public Health in the US
Version 3.0 / Spring 2012
Financing Healthcare (Part 1)
Lecture d
This material (Comp1_Unit4d) was developed by Oregon Health and Science University funded by the Department of Health and
Human Services, Office of the National Coordinator for Health Information Technology under Award Number IU24OC000015.
9