Kaiser Health Insurance Quiz

Learning Objectives

1. Understand the foundations of health insurance markets and product design
2. Explore key challenges for designing, obtaining and reforming health insurance
3. Discuss sources of private health insurance in the US and related public policy issues

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

• Deductible: 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?