Sources of Health Care Financing • Health care in the U.S. is financed directly by the recipients of services, by government, and by private insurance • 1. Federal and state government 47% • 2. Private insurance 35% • 3. Private out-of-pocket 19%
Coverage by Social Insurance Programs • 1. Workers compensation pays medical expenses for work-related injuries. • 2. Federal Government is a major source of health care financing under two programs: • Medicare for persons over age 65. • Medicaid, a needs-based program for the poor.
Private Medical Expense Insurers • 1. Commercial insurance companies • 2. Blue Cross and Blue Shield • 3. Capitating health care providers • 4. Self insurers • corporate employers • Multiple Employer Trusts • MEWAs • 5. Federal CHAMPUS program
Distribution of Health-Insured Population • Percent of Population • Commercial Insurers 29.14% • Blue Cross/Blue Shield 24.94% • HMOs 22.45% • Self-Insured Plans 23.20% • Total Private Sector 68.96% • Medicare 14.16% • CHAMPUS 1.38% • Total Government 15.54% • Total Insured 84.50% • Uninsured 15.50% • Medicaid 13.94%
Extent of Medical Expense Coverage • 1. Most individuals under 65 (slightly less than two-thirds) are covered as employees or dependents under employer-sponsored medical expense plans. • 2. Where employer-sponsored coverage is not available, individual coverage may be purchased. • 3. Approximately 85% of Americans under age 65 were covered by private medical expense insurance in 1998.
Traditional Medical Expense Insurance Plans • GROUP MEDICAL EXPENSE INSURANCE • 1. Less than 10 million persons (under 5% of population) are insured under individually purchased medical expense insurance. • 2. Overwhelming dominance of group approach is due to • lower cost of group insurance • favorable tax treatment of employer-provided health insurance
Traditional Medical Expense Insurance Fee-For-Service Plans • Historically, commercial insurers and Blue Cross/Blue Shield organizations have provided fee-for-service benefits. • 1. insured sought services from a provider. • 2. insurance would pay some or all of the providers charge, directly or by reimbursing the insured. • 3. provider and insured agreed on the level of care and the insurer paid the bill.
Managed Care Plans • 1. Many experts argued that the fee-for-service approach provided an incentive to overutilize health care. • 2. Trend in recent years is away from traditional indemnity fee-for-service plans toward programs with a more direct relationship between the provider and the insurer. • 3. Newer approach includes HMOs, PPOs, and point-of-service plans. • 4. These programs are often referred to as managed care plans.
Traditional Fee-For-ServiceMedical Expense Insurance Plans • 1. Hospital expense coverage • 2. Surgical expense • 3. Physician’s expense coverage • 4. Major medical coverage
Hospitalization Insurance • 1. Hospital service benefit contracts • 2. Hospital reimbursement contracts • 3. Indemnity (cash payment) contracts
Surgical and Physician’s Expense Contracts • 1. Surgical service plans • 2. Surgical expense reimbursement contracts • 3. Physician’s expense reimbursement insurance
Major Medical Insurance • 1. High maximum (or unlimited) • 2. Deductible • 3. Coinsurance or share-loss provision
Major Medical With Base Plan $1,000,000 maximum Insurer pays 100% of costs up to maximum $10,000 Coinsured Layer of Coverage Insured pays 20% of Costs Insurer pays 80% of costs in excess of basic policies 80% of costs in excess of deductible on expenses not covered by basic $100 Corridor Deductible Basic hospitalization and surgical expense coverage (same or different insurer)
Comprehensive Major Medical $1,000,000 maximum Insurer pays 100% of costs up to maximum $10,000 Coinsured Layer of Coverage Insured pays 20% of Costs Insurer pays 80% of costs $250 per person/$500 family Deductible
Illustrated Payment Under Major Medical • Amount of loss $20,000 • Less deductible 250 • ______ • 19,750 • Insured pays 20% of expenseover deductible up to $10,000 $2,000 • Insurer pays balance $17,750
The Health Insurance Market Today • Although about 1,200 insurers that offer health insurance for medical expenses, traditional insurance plans no longer dominate the insurance market. • Many employers now offer health care coverage under alternative mechanisms. • 1. Health Maintenance Organizations • 2. Preferred Provider Organizations • 3. Point-of-Service Plans
GENERAL NATURE OF HMOs • Provide a wide range of comprehensive health care services to members in return for a fixed periodic payment. • Sponsored by a group of physicians, hospital, employer, labor union, consumer group, insurance company, or Blue Cross/Blue Shield plans. • HMO provides for the financing of health care and also delivers that care.
TYPES OF HMOs • Staff model • Group model • Individual practice association • Network model
Provider Sponsored Organizations • 1. Also sometimes called • Physician-Hospital Organizations (PHOs) • Integrated Delivery Systems (IDS’s) • 2. Similar to HMOs • PHO’s are paid a capitated fee • fee is divided among providers on a prenegotiated basis
Preferred Provider Organizations (PPO’s) • 1. Doctors or hospitals with whom employer or insurer contracts to provide medical services. • 2. Provider discounts services and sets up utilization control programs to control costs. • 3. Employees not required to use PPO, but if they go elsewhere they must pay more.
Point of Service Plans (POS) • 1. POS plans are the newest development in health insurance field. • 2. In one respect, POS plans operate like a PPO, since the employee retains right to use any provider but will pay a higher part of the cost for a provider outside network. • 3. At same time, POS is like an HMO, since care received through network is managed by primary care physician or “gatekeeper.” • 4. POS plans were created when HMOs allowed subscribers to use nonnetwork providers.
Cost Containment Provisions • In addition to managed care arrangements such as HMOs, PPOs, and POS plans, most traditional indemnity plans have adopted cost control provisions. • 1. Increased employee cost sharing • 2. Coordination of benefits • 3. Covering alternative sites of care • 4. Addressing utilization
Limited Health Insurance Contracts • Dread disease policies • Travel accident
Dental Expense Insurance • Written with a dollar reimbursement limit or on a service basis. • Coinsurance may require different cost-sharing in earlier years (e.g., 50% first year, 60% second year, 70% third year, 80% fourth year and 90% thereafter). • Coinsurance may also be structured to encourage or discourage utilization (100% for preventive care, 50% for orthodontics)
Prescription Drugs • Usually written on a group basis, as an adjunct to other coverage. • Reimbursement Basis Coverage • Generally a coinsurance or deductible. • Deductible per prescription or annual. • Service basis Coverage • Operates similar to the Blue Cross model. • Insurer payments directly to pharmacists. • Payment limited to the amount payable to a participating pharmacy.
Medical Savings Accounts • Medical savings accounts (MSAs) have been discussed for years and HIPAA-96 established an experimental MSA program: • 750,000 MSAs will be available to small business employees (50 or fewer employees) and self-employed individuals. • The MSA pilot program will end in the year 2000 or, if earlier, when the limit on the number of MSAs has been exceeded.
Medical Savings Accounts • Basic idea of the MSA is to allow individuals to make tax-sheltered contributions into a fund to be used to cover medical expenses. • Fund is used with a high deductible insurance policy and covers expenses within deductible. 1998 deductibles for the high-deductible policy • Individual coverage only $1,500 to $2,250 • Family coverage $3,000 to $4,500 • Amounts will be adjusted for inflation after 1998.
MSA Contributions • Generally, MSA contributions may be made by either the individual or his or her employer. • If made by an employer, MSA contributions are excluded from the employee's income. • If made by individual, contributions are deductible from income, subject to limits. • maximum limitation of 65% of the annual deductible for individual coverage and • 75% of the annual deductible for family coverage.
MSA Distributions • Distributions from an MSA that are used to pay for qualified medical expenses are not taxed to the MSA holder. • Distributions not used to medical expenses are taxable and subject to a 15% penalty. • Tax, but not penalty, for distributions received after MSA-holder becomes disabled, dies, or reaches Medicare eligibility.
Medicaid • Title XIX of the Social Security Act, known as Medicaid, is a federal-state program of medical assistance for needy persons that was enacted simultaneously with the Medicare program. • provides medical assistance to low income persons and certain needy persons who are not at the poverty level. • the federal government sets regulations and minimum standards. • federal share of cost is based on a formula tied to state per capita income and varied from 50% to 80% in 1998.
Medicaid Benefits • Medicaid benefits are quite comprehensive. • Benefits includes services traditionally included in a commercial group-health-insurance plan and some services, such as long-term care, that are not. • Mandatory benefits in all states include inpatient and outpatient hospital services, physician services, and home health care. • Optional services include outpatient prescription drugs, prosthetic devices and hearing aids, and dental services.
Child Health Assistance Program • BBA-97 introduced Child Health Assistance Program (Title XXI of the Social Security Act), from fiscal years 1998 through 2007. • New federal spending of $24 billion over 5 years for children’s health, with $48 billion for the initiative over the next 10 years. • Funding will allow states to provide health insurance coverage to poor uninsured children who do not qualify for Medicaid. • States can provide coverage by expanding Medicaid or under a State Children’s Health Insurance Program (or by a combination).
Buying Health Insurance • 1. When a noncontributory plan is provided by employer, no decision required by consumer, except perhaps a choice between traditional health insurance and a HMO. • 2. When and individual must choose, the primary emphasis should be on protecting against catastrophe losses.
Taxes and Health Care Costs • 1. Cost of employer-provided group plans is deductible by employer and nontaxable to the employee. • 2. For the individual, • health insurance premiums receive no special tax treatment. • premiums are combined with other health care costs and deductible to extent total exceeds 7.5% of AGI.
Health Insurance for Self-Employed • TRA-86 authorized self-employed persons to deduct 25% of cost of health insurance. The 25% later increased to 30% and then 40%. • TRA-97 phases in 100% deductibility. • Fiscal Year% Deductible • 1998-99 45% • 2000-01 50% • 2002 60% • 2003-2005 80% • 2006 90% • 2007 100%
The Health Insurance Problem • Access to health care • High cost of health care
The Access Problem • 40 million Americans have no health insurance coverage • Another 70 million are underinsured • Over 85% of the population with private insurance obtain coverage through employment
High Cost of Health Care • 1. Medical care costs growing faster than the average cost of living • 2. Consuming an increasing share of GNP • 1950 4.4% of GNP • 1998 13.+% of GNP
Some Causes of High Cost of Health Care and Health Insurance • Aging population • Improved (high-cost) medical technology • Excessive capacity • Defensive medicine • Insurance-encouraged utilization • Cost-shifting from government funded plans • Mandated benefits
Previous Attacks on the Problem • 1. State / federal legislation have addressed availability and to a lesser extent cost • COBRA • subsidized state health insurance pools • small-group reform • Oregon Medicaid experiment
COBRA • 1. Requires continuance of employer-sponsored group health insurance under specified circumstances. • 18 months for terminated employees. • 36 months for spouses of deceased, divorced or separated workers or dependent children whose eligibility for coverage ceases. • Generally, COBRA participant pays a premium based on the existing group rate.
Health Insurance Portability and Accountability Act of 1996 (HIPAA) • Health Insurance Portability and Accountability Act of 1996 (HIPAA) also known as Kassebaum-Kennedy, become effective on July 1, 1997. • Primary purpose of HIPAA-96 was to ensure the security of health insurance coverage for those that already have insurance. • HIPAA-96 was significant because, for the first time, minimum federal standards were applied nationally and to all plans, including self-insured plans.
HIPAA Reforms • HIPAA-96 imposed reforms on the • large group market (over 50 employees), • small group market (2 to 50 employees), and • individual market. • Reforms in the group market (both large and small) include • guaranteed renewability, • limitations on preexisting conditions, and • portability.
Small Group and Individual Market Reforms • In the small group market an insurer must provide all products on a guaranteed issue basis. • In the individual market, policies must be guaranteed renewable, as in the group market. • Individual market must provide access to health insurance to “eligible individuals.” An eligible individual is a person • who has at least 18 months prior health insurance coverage • most recent coverage being employer-provided and • no break in coverage lasting greater than 63 days.
Access for “Eligible Individuals” • HIPAA permits states to use one of two approaches to meeting the access requirement in the individual health insurance market. • Federal fallback approach applies if the states does nothing else. • Under federal fallback option, all insurers who operate in the individual market must offer eligible individuals at least two health plans. • Alternatively, a state may adopt an acceptable alternative mechanism, such as a high-risk pool or other mechanism to guarantee access.
Absence of Rating Reforms • Federal fallback standards contained no rating reforms. • Critics pointed out that access at an unlimited premium is not really access. • In response, Senator Edward Kennedy proposed legislation that would cap premiums to eligible individuals at 150% of the standard premium. • State small group reform programs and high risk pools that predated HIPAA include limits on rating and subsidized coverage.
HIPAA and Federal Regulation • A major development in HIPAA is the possibility of federal regulation of a state’s health insurance market. • If a state does not enact legislation to enforce federal standards, the Department of HHS performs the enforcement function. • Five states (California, Massachusetts, Michigan, Missouri, and Rhode Island) failed to comply and HHS now actively regulates insurance plans in those states.
State Efforts to Increase Access • Prior to the enactment of HIPAA, many states had addressed the problem of access to health insurance by: • establishing subsidized state health insurance pools for the uninsurable. • enacting small group reforms. • Unlike HIPAA, these state initiatives addressed the issue of cost.
Subsidized State Health Insurance Pools • 1. Individuals not eligible for Medicare or Medicaid and who cannot obtain insurance in conventional market may obtain coverage from state pools, usually at a subsidized rate. • 2. Pools provide comprehensive coverage including in-hospital services, skilled nursing facility care, and prescription drugs. • 3. The pools are subsidized, but even with the subsidy, premiums range from 125 to 200 percent of the state’s average premiums. • 4. By 1998, 30 states had created such pools. • 5. Costs in excess of premiums are covered by a subsidy, in most states from health insurers.
Small Group Reform • Prior to HIPAA, many states had passed small-group reform to improve availability of health coverage to small businesses and employees. • Typically, laws require insurers to offer plans to small groups on a guaranteed issue basis. • Insurer may not exclude individual employees and may exclude preexisting conditions only for a limited period. • If preexisting conditions requirement in one plan is met, coverage must be portable without a new preexisting conditions requirement. • Rules limit rates and annual rate increases.