4) Health care plans 1

Health Care
Plans: 1
The Economics of Health Care:
• Price rationing occurs because buyers base
purchasing decisions on the relative quality and
price of the good as well as on their willingness
and ability to pay.
• Adverse selection leads to individuals with lower
risks subsidizing those with greater risks.
• Moral hazard problem (when consumer’s
perception of cost is less it is actual price)
inflates the demand for medical services relative
to the demand for services when buyers pay the
full price for care. This can be mitigated by
transferring some of the cost to the policyowner.
• Providers have an incentive to recommend
and perform more health services
(supplier-induced demand)
• Barrier to entry contribute to monopoly
power among providers, which can increase
price and lower the quality of services
• Cultural beliefs about the nature of health
care ( right or privilege) are important
factors that shape the health care financing
system of a given country.
The rapid and continuing advances in medical
technology requiring continuous capital
The increased incidence of medical
malpractice claims has caused physician
malpractice insurance costs to rise, and these
costs are ultimately passed on to consumers.
The Health Care Environment:
Rising health care cost are a global
phenomena. This was due to several
• Increase in health care costs were at
rates two times that of inflation
• Individual live longer
• Increased demand for quality health care
and state-of-art treatment
• The shift to outpatient surgery has been
accompanied by dramatic increased
Development of Managed Care:
The escalate cost of health care has led to
emergence of Managed Care.
• There are different types of managed care
such as health maintenance organizations
(HMOs), preferred provider organizations
(PPOs), exclusive provider organizations, and
various forms of provider-sponsored
organizations (PSOs)
• Characteristics of managed care:
– Direct relationship and interdependence
between provision of and payment for
health care
– Provider network is formed in managed
– Providers are paid in preset amount, a
common method is capitation
– Use of financial incentives. Physicians
may be penalized financially if they order
a hospital stay, give a referral to a
specialist, or order expensive tests.
Health Insurance Providers:
There are five principle sources for health
1. Commercial insurers,
2. Blue Cross and Blue Shield
3. Managed care organizations, and
4. Self-insured plans.
5. Federal or state government (such as
Medicare, Medicaid, military personal)
Commercial Insurance Companies:
These are stock and mutual corporations and
designed as life, property and causality, or
health insurance companies to provide
medical expense and disability income
insurance on group and individual basis.
• Payment of benefits directly to the insured,
unless the insured assigned the payment to
the provider.
Blue Cross and Blue Shield Plans:
Operate mostly as nonprofit hospital and medical
services corporations. With lower premiums from
a favored tax status and have a close ties with
hospitals and organized medical societies in the
locality they serve.
Blue Cross: are non profit hospital expense plans.
Most plans were organized by the hospitals in the
area served by the plan
• The provide for hospital care on a service-type
• The subscribers are billed only for not covered
services. And no direct payment to subscribers
• Blue Cross enters into contracts separately with
member hospitals
Blue Shield: are nonprofit organizations
offering prepayment coverage for surgical
and medical services performed by
Major medical coverage is available on both
Blues plans, on both group and individual
Managed Care Organizations:
Health maintenance organizations (HMOs): it is
responsible for both financing and delivering
of comprehensive health care services to a
defined group of member for a prepaid, fixed
Five models of HMO are staff, group, network,
individual practice association, and direct
Preferred Provider Organizations (PPO):
Are group of health care providers that contract
with employers, insurance companies, union
trust funds, or others to provide medical
services at a reduced, negotiated fee.
It differ form HMO in the fact that:
– The provide benefits on a fee-for-service basis as
their services are used. Fees are usually subject
to a schedule that is the same for all participant
– Participants have a financial incentives to use
preferred provider network
– Access to specialist is not controlled by primary
Exclusive Provider Organizations (EPO):
Similar to PPO in their organization and
purpose but limit their participants to
participating providers.
Point-of-Service Plans (POS):
A participant's access to a provider network is
controlled by a primary care physician.
Participants retain the option to seek care
outside the network but at a reduced
coverage levels.
Physician-hospital organizations (PHO’s):
Organizations that are jointly owned and
operated by hospitals and physicians and
typically are developed to provide a vehicle
for hospital and physicians to contract
together with other managed care
organizations to provide both physician and
hospital services.
Self –Insured Plans:
Employees have increasingly adopted funding
methods that are alternatives to the
traditional group insurance contract.
• Both medical expense and disability income
insurance are made available through selfinsured or self-funded plans of employers.
• The plans may require enrolled member to
share in the funding
The End