Health insurance is a type of insurance whereby the insurer pays the medical costs of the insured if the insured becomes sick due to covered causes, or due to accidents. The insurer may be a private organization or a government agency. Market-based health care systems such as that in the United States rely primarily on private health insurance.
History and evolution
The concept of health insurance was proposed in 1694 by Hugh the Elder Chamberlen from the Peter Chamberlen family. In the late 19th century, early health insurance was actually disability insurance, in the sense that it covered only the cost of emergency care for injuries that could lead to a disability. This payment model continued until the start of the 20th century in some jurisdictions (like California), where all laws regulating health insurance actually referred to disability insurance. Patients were expected to pay all other health care costs out of their own pockets, under what is known as the fee-for-service business model. During the middle to late 20th century, traditional disability insurance evolved into modern health insurance programs. Today, most comprehensive private health insurance programs cover the cost of routine, preventive and emergency health care procedures, and also most prescription drugs, but this was not always the case.
Private health insurance
A health insurance policy is a legal, binding contract between the insurance company and the customer. The largest difference between private sector health insurance and life insurance is that for life insurance, a person may purchase guaranteed renewable insurance for the whole of the insured’s life at a constant premium rate, while health insurance is generally purchased year by year with generally no assurance of renewability and if renewable no guarantee that premium rates will not increase.
Inherent problems with private insurance
Any private insurance system will face two inherent challenges: adverse selection and Ex-post moral hazard.
Insurance companies use the term “adverse selection” to describe the tendency for only those who will benefit from insurance to buy it. Specifically when talking about health insurance, unhealthy people are more likely to purchase health insurance because they anticipate large medical bills. On the flip side, people who consider themselves to be reasonably healthy may decide that medical insurance is an unnecessary expense; if they see the doctor once a year and it costs $250, that’s much better than making monthly insurance payments of $400 (example figures).
The fundamental concept of insurance is that it balances costs across a large, random sample of individuals. For instance, an insurance company has a pool of 1000 randomly selected subscribers, each paying $100/month. One of them gets really sick while the others stay healthy, which means that the insurance company can use the money paid by the healthy people to treat the sick person. Adverse selection upsets this balance between healthy and sick subscribers. It will leave an insurance company with primarily sick subscribers and no way to balance out the cost of their medical expenses with a large number of healthy subscribers.
Because of adverse selection, insurance companies use a patient’s medical history to screen out persons with pre-existing medical conditions. Before buying health insurance, a person typically fills out a comprehensive medical history form that asks whether the person smokes, how much the person weighs, whether or not the person has been treated for any of a long list of diseases and so on. In general, those who look like they will be large financial burdens are denied coverage or charged high premiums to compensate. On the other side, applicants can actually get discounts if they do not smoke and are healthy.
Moral hazard describes the state of mind and change in behavior that results from one’s knowledge that if something bad were to happen, the out-of-pocket cost would be mitigated by an insurance policy–in this case, one which provides reduced prices for medical care. In the same way that people treat water with little care when it is very inexpensive, people will also tend to overuse medical care when the out-of-pocket costs are small.
Other factors affecting insurance price
Because of advances in medicine and medical technology, medical treatment is more expensive, and people in developed countries are living longer. The population of those countries is aging, and a larger group of senior citizens requires more medical care than a young healthier population. (A similar rise in costs is evident in Social Security in the United States.) These factors cause an increase in the price of health insurance.
Some other factors that cause an increase in health insurance prices are health related:
insufficient exercise unhealthy food choices; a shortage of doctors in impoverished or rural areas; excessive alcohol use, smoking, street drugs, obesity, among some parts of the population; and the modern sedentary lifestyle of the middle classes.
In theory, people could lower health insurance prices by doing the opposite of the above; that is, by exercising, eating healthy food, avoiding addictive substances, etc. Healthier lifestyles protect the body from some, although not all, diseases, and with fewer diseases, the expenses borne by insurance companies would likely drop. A program for addressing increasing premiums, dubbed “consumer driven health care,” encourages Americans to buy high-deductible, lower-premium insurance plans in exchange for tax benefits.
Common complaints of private insurance
Some common complaints about private health insurance include:
1. Insurance companies do not announce their health insurance premiums more than a year in advance. This means that, if one becomes ill, he or she may find that their premiums have greatly increased.
2. If insurance companies try to charge different people different amounts based on their own personal health, people will feel they are unfairly treated.
3. When a claim is made, particularly for a sizable amount, it may be deemed in the best interest of the insurance company to use paperwork and bureaucracy to attempt to avoid payment of the claim or, at a minimum, greatly delay it.
4. Health insurance is often only widely available at a reasonable cost through an employer- sponsored group plan.
5. Employers can write some or all of their employee health insurance premiums off of their taxable income whereas traditionally individuals have had to pay taxes on income used to fund health insurance.
6. Experimental treatments are generally not covered. This practice is especially criticized by those who have already tried, and not benefited from, all “standard” medical treatments for their condition.
7. The Health Maintenance Organization (HMO) type of health insurance plan has been criticized for excessive cost-cutting policies.
8. As the health care recipient is not directly involved in payment of health care services and products, they are less likely to scrutinize or negotiate the costs of the health care received. The health care company has few popular and many unpopular ways of controlling this market force.
9. Some health care providers end up with different sets of rates for the same procedure; one for people with insurance and another for those without.
Publicly funded health insurance
With publicly funded health insurance the good and the bad risks all receive coverage without regard to their health status, which eliminates the problem of adverse selection.
National Health Service
The National Health Service (NHS) is the “public face” of the four publicly funded health care systems of the United Kingdom. The organizations provide the majority of healthcare in the UK, from general practitioners to Accident and Emergency Departments, long-term healthcare and dentistry. They were founded in 1948 and have become an integral part of British society, culture and everyday life: the NHS was once described by Nigel Lawson, former Chancellor of the Exchequer, as ‘the national religion’. Private health care has continued parallel to the NHS, paid for largely by private insurance, but it is used only by a small percentage of the population, and generally as a top-up to NHS services.
Health insurance in the United States
According to the latest United States Census Bureau figures, approximately 85% of Americans have health insurance. Approximately 60% obtain health insurance through their place of employment or as individuals, and various government agencies provide health insurance to over 29% of Americans. In 2005, 46.6 million (15.9%) Americans were without health insurance. People living in the western and southern United States are more likely to be uninsured.
In the United States, government-funded Medicare programs help to insure the elderly and end stage renal disease patients. Some health care economists (Ewe Reinhardt of Princeton and Stuart Butler among others) assert that (the third party payment feature) these programs have had the unintended consequence of distorting the price of medical procedures. As a result, the Health Care Financing Administration has set up a list of procedures and corresponding prices under the Resource-Based Relative Value Scale. Starting in 2006, Medicare Part D provides a program for the elderly to buy insurance for the purchase of prescription drugs.
Medicare Advantage expands the health care options for Medicare beneficiaries. Medicare Advantage was born from the Balanced Budget Act of 1997 in order to better control the rapid growth in Medicare spending, as well as to provide Medicare beneficiaries more choices.
While Medicaid was instituted for the very poor, beginning in 1972, the number of individuals in the United States who lacked any form of health insurance for any period during the year increased each year, every year with the exceptions of the years 1999 and 2000. It has been reported that the number of physicians accepting Medicaid has decreased in recent years due to relatively high administrative costs and low reimbursements. The shift to managed care in the U.S. Through the 1990s, managed care grew from about 25% of U.S. employees to the vast majority.
According the Centers for Medicare and Medicaid Services, nearly 100% of large firms offer health insurance to their employees. Although much more likely to offer retiree health benefits than small firms, the percentage of large firms offering these benefits fell from 66% in 1988 to 34% in 2002.
What is COBRA?
Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, is a law passed by the U.S. Congress, that mandates an insurance program giving some employees the ability to continue health insurance coverage after leaving employment. COBRA includes amendments to the Employee Retirement Income Security Act of 1974 (ERISA).
Although this statute became law on April 7, 1986, its official name is the Consolidated Omnibus Budget Reconciliation Act of 1985 (Pub.L. 99-272, 100 Stat. 82). Because of the discrepancy between the official name of the Act and the year in which it was enacted, some government publications refer to the Act as the Consolidated Omnibus Budget Reconciliation Act of 1986. The Act is often referred to simply as “COBRA”.
The Act allows both workers and their immediate family members who had been covered by a health care plan to maintain their coverage if a “qualifying event” causes them to lose coverage. Among the “qualifying events” listed in the statute are loss of benefits coverage due to (1) the death of the covered employee, (2) a reduction in hours (which can be the result of resignation, discharge, layoff, strike or lockout, medical leave or simply a slowdown in business operations) that causes the worker to lose eligibility for coverage, (3) divorce, which normally terminates the ex-spouse’s eligibility for benefits, or (4) a dependent child reaching the age at which he or she is no longer covered. COBRA imposes different notice requirements on participants and beneficiaries, depending on the particular qualifying event that triggers COBRA rights. COBRA also allows for longer periods of extended coverage in some cases, such as disability or divorce, than others, such as termination of employment or a reduction in hours. COBRA does not apply, on the other hand, if employees lose their benefits coverage because the employer has terminated the plan altogether.
COBRA does not, unlike other federal statutes such as the Family and Medical Leave Act (FMLA), require the employer to pay for the cost of providing continuation coverage; instead it allows employees and their dependents to maintain coverage at their own expense by paying the full cost of the premium the employer previously paid, plus a 2% administrative charge (150% for the disability extension). Employees and dependents can also opt for a lesser form of coverage, e.g., to choose continuation coverage under a plan that only covers the employee, but not his or her dependents, or that only provides medical and hospitalization coverage and does not pay for dental work, if those options are available to covered employees. Employees and dependents lose coverage if they fail to make timely payments of these premiums.
What is a Health Maintenance Organization (HMO) ?
A health maintenance organization (HMO) is a type of Managed Care Organization (MCO) that provides a form of health insurance coverage in the United States and Switzerland that is fulfilled through hospitals, doctors, and other providers with which the HMO has a contract. Unlike traditional indemnity insurance, care provided in an HMO generally follows a set of care guidelines provided through the HMO’s network of providers. Under this model, providers contract with an HMO to receive more patients and in return usually agree to provide services at a discount. This arrangement allows the HMO to charge a lower monthly premium, which is an advantage over indemnity insurance, provided that its members are willing to abide by the additional restrictions. In addition to using their contracts with providers for services at a lower price, HMOs hope to gain an advantage over every day insurance plans by managing their patients’ health care and reducing unnecessary services. To achieve this, most HMOs require members to select a primary care physician, a doctor who acts as a “gatekeeper” to medical services. PCPs are usually internists, pediatricians, family doctors, or general practitioners. In a typical HMO, most medical needs must first go through the PCP, who authorizes referrals to specialists or other doctors if deemed necessary. Emergency medical care does not require prior authorization from a PCP, and many plans also allow women to select, in addition to a PCP, an OB/GYN whom they may see without referral.
HMOs also manage care through utilization review. The amount of utilization is usually expressed as a number of visits or services or a dollar amount per member per month. Utilization review is intended to identify providers providing an unusually high amount of services, in which case some services may not be medically necessary, or an unusually low amount of services, in which case patients may not be receiving appropriate care and are in danger of worsening a condition. HMOs often provide preventive care for a lower co-payment or for free, in order to keep members from developing a preventable condition that would require a great deal of medical services. When HMOs were coming into existence, indemnity plans often did not cover preventive services, such as immunizations, well-baby checkups, mammograms, or physicals. It is this inclusion of services intended to maintain a member’s health that gave the HMO its name. Some services, such as outpatient mental health care, are often provided on a limited basis, and more costly forms of care, diagnosis, or treatment may not be covered.
Experimental treatments and elective services that are not medically necessary (such as elective plastic surgery) are almost never covered. Other methods for managing care are case management, in which patients with catastrophic cases are identified, or disease management, in which patients with certain chronic diseases like diabetes, asthma, or some forms of cancer are identified. In either case, the HMO takes a greater level of involvement in the patient’s care, assigning a case manager to the patient or a group of patients to ensure that no two providers provide overlapping care, and to ensure that the patient is receiving appropriate treatment, so that the condition does not get worse beyond what can be helped.
HMOs often shift some financial risk to providers through a system called capitation, where certain providers (usually PCPs) receive a fixed payment per member per month and in return provide certain services for free. Under this arrangement, the provider does not have the incentive to provide unnecessary care, as he will not receive any additional payment for the care. Some plans offer a bonus to providers whose care meets a predetermined level of quality. Some critics regard HMOs as monopolies that distort the market for health care. They argue that HMOs were supposed to be a stopgap solution, and perhaps even set up for ultimate failure so the public would demand that the federal government would take over with a national health care system.
What is a PPO?
In health insurance, a preferred provider organization (or “PPO”) is a managed care organization of medical doctors, hospitals, and other health care providers who have covenanted with an insurer or a third-party administrator to provide health care at reduced rates to the insurer’s or administrator’s clients.
The idea of a preferred provider organization is that the providers will provide the insured members of the group a substantial discount below their regularly-charged rates. This will be mutually beneficial in theory, as the insurer will be billed at a reduced rate when its insured utilize the services of the “preferred” provider and the provider will see an increase in its business as almost all insureds in the organization will use only providers who are members. Even the insured should benefit, as lower costs to the insurer should result in lower rates of increase in premiums. Preferred provider organizations themselves earn money by charging an access fee to the insurance company for the use of their network. They negotiate with providers to set fee schedules, and handle disputes between insurers and providers. PPOs can also contract with one another to strengthen their position in certain geographic areas without forming new relationships directly with providers.
PPOs differ from health maintenance organizations (HMOs), in which insureds who do not use participating health care providers receive little or no benefit from their health plan. PPO members will be reimbursed for utilization of non-preferred providers, albeit at a reduced rate which may include higher deductibles, co-payments, lower reimbursement percentages, or a combination of the above. Exclusive Provider Organizations (EPOs) are similar to PPOs, except that they do not provide any benefit if the insured chooses a non-preferred provider, with some exceptions in cases of emergencies. Some state regulations limit how much and under what circumstances an insurance plan can lower the insured’s benefit for using a non-preferred provider.
Other features of a preferred provider organization generally include utilization review, where representatives of the insurer or administrator review the records of treatments provided to verify that they are appropriate for the condition being treated rather than largely or solely being performed to increase the amount of reimbursement due, a procedure that many providers resent as second-guessing. Another near-universal feature is a pre-certification requirement, in which scheduled (non-emergency) hospital admissions and, in some instances outpatient surgery as well, must have prior approval of the insurer and often undergo “utilization review” in advance. The rise of PPOs was credited by some with a reduction in the rate of medical inflation in the U.S. in the 1990s. However, as most providers have become members of most of the major preferred provider organizations sponsored by major insurers and administrators, the competitive advantages outlined above have largely been reduced or almost entirely eliminated, and medical inflation in the U.S. is again advancing at several times the rate of general inflation. Furthermore, passive PPOs are now a part of the marketplace. These PPOs obtain discounts for insurance companies on indemnity and out-of-network claims, and often take as their fee a portion of the discount obtained. The aspects of utilization review and pre-certification are now widely used even in traditional “indemnity” plans, and are widely regarded as being essentially permanent features of the American health care system.
PPOs can also create inefficiencies and ironies in the health care industry. Though PPOs often require insurers to pay a claim within a certain timeframe in order to take the PPO discount, calculating the PPO discount and having the insurer pay the PPO’s access fee is still one more step– and one more opportunity for mistakes and delays–in the already-complex process of paying for health care in the United States. Since PPOs have more power in their relationship with providers, they can still provide a benefit to insured patients. Uninsured patients may, however, be unable to obtain these discounts- even if they pay cash.
Managed care is a concept in U.S. health care which rose to dominance during the presidency of Ronald Reagan, ostensibly as a means to control Medicare payouts. Ronald Reagan had supported legislation in California during his term as Governor there as a way to stem rapidly rising costs to California’s Medicaid (named Medi-Cal) Program adopted earlier in his administration. The program was allowed as a Medicaid “waiver.” At the time it was called the “Pre-paid Health Plan Program. A series of contracting scandals with a number of prepaid health plans caused reforms in CA and prompted passage of the HMO Act by Congress. Reagan later promoted HMO’s nationwide after he became President, and they spread relatively quickly through the health insurance industry. Managed care usually refers to a PPO, HMO, MCO, or POS plan. The spread of managed care reflected its role as a primary mechanism through which corporations have tried to transform U.S. health care from a not-for-profit human service into a for-profit business.
The rise of managed care was touted by the U.S. health insurance industry as a way to lower the rate of medical inflation in the 1990s. But managed care has not been successful in lowering the rate of medical inflation. In fact, U.S. medical inflation is now two or three times the rate of overall inflation, as it was during much of the 1980s.
Managed care has been a successful for-profit business model. Corporations and many individual investors have reaped billions in profits. However, critics have argued managed care has been an unsuccessful health policy as it has increased health care costs, increased the number of uninsured citizens, driven away health care providers (e.g., nurses) and applied downward pressure on quality.
Forms of managed care
There are several forms of managed care. Ranging from more restrictive to less restrictive, they include HMO’s and PPO’s as previously mentioned. Proposed in the 1960s by Dr. Paul Elwood in the “Health Maintenance Strategy”, the HMO concept was promoted by the Nixon Administration as a fix to rising health care costs and set in law as PL 93-222. As defined in the act, a federally qualified HMO would in exchange for a subscriber fee (premium) allow members access to a panel of employed physicians or a network of doctors and facilities including hospitals. In return the HMO received mandated market access and could receive federal development funds.
In practice, an HMO is an insurance plan under which an insurance company controls all aspects of the health care of the insured. In the design of the plan, each member is assigned a “gatekeeper”, a primary care physician (PCP) who is responsible for the overall care of members assigned to him/her. Specialty services require a specific referral from the PCP to the specialist. Non-emergency hospital admissions also required specific pre-authorization by the PCP. Typically, services are not covered if performed by a provider not an employee of or specifically approved by the HMO, unless it is an emergency situation as defined by the HMO. Financial sanctions for use of emergency facilities in non-emergent situations were once an issue; however, prudent layperson language now applies to all emergency-service utilization and penalties are rare. An example would be the Kaiser Permanente Plan. Since the 1980s, HMOs have been protected by Federal law from malpractice litigation on the grounds that the decisions regarding patient care are administrative rather than medical in nature.
PPOs are insurance plans in which the policy-holder is free to choose his/her own physician, although they will generally receive greater benefits returns (possibly including lower deductibles, lower copayments, and higher reimbursement percentages) if a pre-approved “network” of caregivers and facilities is utilized in non-emergency situations, and a PCP is identified and consulted. These “network” caregivers and facilities are independent of insurance company ownership, and may hold contracts for reimbursement with multiple insurers. “Pre-certification” (prior approval) may be required before nonemergency hospital admissions, testing, consultations or outpatient surgery under many plans. Providers remain liable for malpractice.
While not employees of the insurer, PPO healthcare providers do hold contracts with each insurance company, or a Third Party Adjusting company, for which they are designated as “preferred”, under which they agree to accept the reimbursement that was negotiated at rates agreed upon between themselves and the insurer or the Third Party Adjusting company, at the time of execution of the contract. In the beginning, the insurance companies used actuarial tables to determine a “reasonable and customary fee” for each service and the provider, if he/she generally charged more, was obligated to write off the difference. The insurer would then pay a percentage of the balance to the provider, and the rest would become the responsibility of the insured. But during the 1990s, many providers engaged the services of medical office management services to handle these contracting arrangements on their behalf, with the result that full fees, write-offs, and percentages due from insurer and insured are jointly agreed-to amounts between the insurer and the provider on a plan-by-plan, provider-by-provider basis, which amounts are protected as corporate secrets and are not available to consumers who wish to compare benefits offered against premiums charged on a dollar basis. Furthermore, in the event the insurer defaults on payment by claiming a service provided was “not necessary” under the plan, the provider is free to charge any amount they deem desirable to the patient, instead of any generalized, capitated “reasonable and customary fee” determined by the insurer.
Point Of Service (POS)
A POS plan utilizes some of the features of each of the above plans. Members of a POS plan do not make a choice about which system to use until the point at which the service is being used.
Managed care in indemnity insurance plans
Many “traditional” or “indemnity” health insurance plans now incorporate some managed care features such as pre-certification for non-emergency hospital admissions and utilization reviews.
Healthcare reform is a general rubric used for discussing major policy changes–for the most part, governmental policy changes–to any existing healthcare system in a given place. Health care reform typically attempts to:
- Broaden the population covered by private or public health insurance
- Expand the array of health care providers consumers may choose from
- Improve the access to health care specialists
- Improve the quality of health care
- Decrease the cost of health care
- Decrease the cost of health insurance
In the United Kingdom, a massive program of attempted reform of the British National Health Service has begun. In the United States, health care reform was a major concern of the Clinton administration headed up by First Lady Hillary Clinton; however, her complex proposal was not enacted into law. More recently, President George W. Bush signed into law the Medicare Prescription Drug, Improvement, and Modernization Act which included a prescription drug plan for elderly and disabled Americans. U.S. efforts to achieve universal coverage began with Theodore Roosevelt and continue to today.
As evidenced by the large variety of different health care systems seen across the world, there are several different pathways that a country could take when thinking about reform. Germany for instance, makes use of sickness funds, which citizens are obliged to join but are able to opt out of. The Netherlands uses a similar system but the financial threshold for opting out is lower. The Swiss, on the other hand, use more of a privately-based health insurance system where citizens are risk-rated by age and sex, among other factors. The United States employs a system in which the government does not provide health insurance to all of its citizens.
When the health care expenditures per capita and GDP per capita for developed countries are graphed, a nearly linear relationship is revealed, with the United States the clear outlier.