Health Insurance

Preview

Preview

• Many of the features of the health insurance system you and your patients will see trace back to the economics underlying this tension.

  • Premiums and deductibles
  • Co-payments and coinsurance
  • Documentation / billing and its relationship to plan risk adjustment.
    
  • Prior authorization and utilization management tools

Preview

• Goal of this talk is to provide historical context and an economic framework for understanding these concepts.
• Future talks will discuss how these concepts are integrated (or not!) into health systems & programs within the US and abroad.
• We’ll also cover the role state and federal policy efforts (legislative and regulatory)

A Brief History of Health Insurance

• Great Depression led to reduction in paid care and an increase in the need for charity care.

A Brief History of Health Insurance

• In response, Baylor Hospital offered Dallas public school teachers up to 21 days of hospital care for $0.50/month.
  • The AMA was opposed to insurance plans, so the plan did not cover physician services.
  • The “hospital service plan” model soon spread, and expanded to include multiple community hospitals.
  • Basic design was a “service benefit,” i.e., the plan paid for the costs of care.

A Brief History of Health Insurance

• The hospital-based model was formalized under the Blue Cross Commission in 1946
• Plan requirements:
  • Nonprofit, and with no competition among health plans.
  • Designed to improve public welfare
  • Covered hospital charges only
  • Allow for free choice of physicians

A Brief History of Health Insurance

• Blue Shield plans grew in parallel, but from the physician side.
• Developed by lumber and mining employers in the Pacific Northwest.
• Indemnity plan: plans paid the patient a pre-determined dollar amount, and the patient paid the physician.

A Brief History of Health Insurance

• Prepaid group practice plans also started to crop up as arrangements between employers and clinics.
  • Ross-Loos Cinic and LA Department of Water and Power ($1.50/month for physician care)
  • Elk Grove, Oklahoma Farmer’s Union and Dr. Michael Shadid
  • Kaiser Foundation Health Plan in California
  • Forerunner to managed care and association health plans.

A Brief History of Health Insurance

• Group practice plans were shunned within the medical profession.
• Plan physicians were stripped of their licences, denied membership in local medical societies, and denied access to hospitals.
• In response, some of the plans built and staffed their own hospitals.
  • Hello, Kaiser Permanente!
• Antitrust action was brought against the AMA, and the Supreme Court ruled against them in 1943.

Rapid Growth in Health Insurance

Source: Morrisey Ch. 1

Why the Rapid Growth?

• WWII: Wage and price controls.
• Health insurance was not considered a wage.
• Firms could compete for workers by offering health insurance
• The IRS also did not consider employer-sponsored health insurance as taxable income.
• Tax incentive to direct additional compensation into “buying-up” health insurance.

Health Economics 101: Risk Pooling

Health Economics 101: Risk Pooling

Health Economics 102: Risk Selection

• Low risk individuals/groups have an incentive to leave the “community” (risk pool) to reduce premiums.
• An insurer could approach a healthier group (e.g., teachers vs. mine workers) and offer a premium that reflects their experience.
  • This is known as experience rating
• By the 1960s nearly all plans were using experience rating.

Health Economics 102: Risk Selection

• With rise of experience rating, many large companies found it better to self-insure.
• Large firms with lots of employees provided a natural risk pooling mechanism.
  • Firm’s employees are the risk pool
  • Aggregate medical expenditures (mostly) stable year-on-year.
  • Insurers simply act as third-party administrators (TPAs).

Health Economics 102: Risk Selection

• Within the firm, premiums are the same for all employees
• The need to compete for workers and IRS tax incentives meant plans could become (and remain) comprehensive.

Percent of Americans with a Self-Insured Plan

Health Economics 103: Adverse Selection

• Outside of large firms, individuals and small employers had to contend with experience rating, too.
• In the individually-purchased and small-group health insurance market, risk is borne by the insurer.
  • “Fully insured” vs. “Self insured”
• “Adverse selection” plays a much more prominent role in shaping these insurance markets.

Health Economics 103: Adverse Selection

Health Economics 103: Adverse Selection

Health Economics 103: Adverse Selection

Individual Market Plans Before the ACA …

Individual Market Plans After the ACA …

Individual Market Plans After the ACA …

Health Economics 104: Moral Hazard

• Let’s dip back into history again …

Health Economics 104: Moral Hazard

• By the 1950s the limitations of insurance plans limited to hospital/physician services were readily apparent.

• Medical technology was evolving, and what was once lethal/untreatable became chronic.

• So-called “major medical” plans came into being, offering coverage for hospital care, diagnostic testing, outpatient procedures, and doctor visits.

  • They generally did not cover preventive, primary or long-term care.

Health Economics 104: Moral Hazard

• To compete with Blue Cross / Blue Shield plans, premiums had to be set reasonably low.

• So major medical plans had a deductible, as well as other cost-sharing or “patient responsibilitiy” requirements.

Patient Responsibility for Medical Costs

• Decuctible: A dollar amount a patient must pay before their insurance policy kicks in (e.g., the first $1,500 of care)
• Co-payment: Once the policy kicks in, a dollar amount the patient must pay at the point of care.
• Co-insurance: Once the policy kicks in, a percentage of the bill the patient must pay.

Health Economics 104: Moral Hazard

• There was an important economic rationale for deductibles, co-payments and coinsurance, too.

• “Moral hazard” refers to additional health care utilization incurred when people are insured from the additional costs of that care.

• Insurers wanted to avoid so-called “sniffle claims” that drive up health care costs (and thus premiums)

Contemporary Insurance Designs

• Concerns over risk selection, adverse selection, and moral hazard continue to shape the structure and experience of health insurance in the US and abroad.

  • High deductible health plans
  • Health savings accounts and flexible spending accounts
  • Risk adjustment

Contemporary Insurance Designs

Supply-Side Approaches to Health Insurance

• Thus far we’ve mostly considered so-called “demand-side” approaches to managing medical/drug spending and utilization.

• We’ll now focus our attention on “supply side” approaches that focus on the role of physicians and hospitals to control medical spending and utilization.

Supply-Side Approaches to Health Insurance

• Recall from earlier the prepaid group practices that arose as arrangements between employers and clinics.

• These were the forerunner to managed care plans.

Managed Care: Basic Idea

• Structure health plans to contract with high-quality providers who can serve as a gatekeeper for specialty and inpatient care.

• Put providers on a budget to disincentivize unnecessary care.

• Capitated payments: Plan pays a fixed amount of money in advance to participating physicians/groups for the delivery of health care services.

• Care must remain in-network, unless its an emergency.

Supply-Side Approaches to Health Insurance

• Capitated amounts are set based on the range of services provided.

• Plans use risk-adjustment to combat against risk selection (i.e., enrolling only healthy patients)

  • But risk-adjustment creates additional incentives: find and report as many diagnoses as possible.

Supply-Side Approaches to Health Insurance

Supply-Side Approaches to Health Insurance

• Additional restrictions such as prior authorization, step therapy, and utilization and care management programs.

  • We’ll get to these in a bit.

A Typology of Health Plan Types

• Next set of slides walks through various health plan structures.

Other Supply-Side Approaches to Health Insurance

Other Supply-Side Approaches to Health Insurance

The Next Frontier: The Shift to Value

• Network optimization
• Centers of excellence
• Bundled payment approaches
• Reference pricing

Questions?