HEALTH INSURANCE OPTIONS



Health insurance, like other forms of insurance, serves to spread the consequences of a loss that would normally fall upon a single individual over members of a large group. It also ensures that health care providers will be paid for services that an uninsured individual may otherwise not be able to afford. The two primary types of U.S. health plans addressed in this article are: (1) fee-for-service plans, which include traditional indemnity insurance; and (2) prepaid plans, which include popular managed care options such as health maintenance organizations (HMOs).

In addition to the two principal types of plans, government-backed health care plans, such as Medicare and Medicaid, serve as safety nets to furnish medical coverage to select groups of society and to those least able to afford other types of health insurance. Furthermore, a significant segment of the American population elects to provide or pay for their own health care for personal or religious reasons.

BACKGROUND

Although the broad concept of insurance dates back over 2,000 years, the first form of health insurance in the United States can be traced back to the 1800s. At that time, merchant seamen could pay a modest premium and then obtain health care as they traveled from port to port. Health insurance as it is known today, however, is a relatively new concept with roots in the Great Depression. In fact, the first major managed care, or prepaid, plan was started in the 1930s by Henry J. Kaiser and Sidney Garfield to provide medical care for San Francisco shipyard workers. That same plan was offered to the public at large in the 1940s.

The popularization of private health insurance in the United States is a phenomenon of the post-World War II economic expansion. After the war, federal government initiatives caused fee-for-service health insurance to become a popular benefit for employees. Health insurance premiums became tax deductible to the employer and were not taxable to the employee. Therefore, health insurance became a cost-effective form of compensation, and health care benefits became a popular bargaining tool for labor unions seeking to improve their total pay package. Furthermore, as living standards increased, people in industrialized nations began to view health insurance as a necessity, and even an entitlement or individual right.

During the 1960s the health insurance industry in the United States grew massively in proportion to other types of insurance. A primary impetus for that growth was the advent of modified agreements, which shifted a greater amount of health care risk to the employers that offered employee insurance plans. Under these agreements, insurers, employees, and health care providers had little reason to control health care costs, because the employers, as policyholders, were paying the insurance bill. In fact, one result of these agreements was that insurance company profits increased in proportion to the rise in the cost of medical care. These circumstances resulted in unprecedented growth in group health insurance, which averaged 15 percent per year in the 1970s and early 1980s.

Although traditional fee-for-service plans remained the dominant health care option into the 1980s and early 1990s, managed care plans similar to the Kaiser plan were formed during the 1950s and 1960s, and they became widely available to the general public in the 1970s. It was during that time that society began to address the dilemma of spiraling health care costs. The federal Health Maintenance Organization Act of 1973 stimulated the growth of the industry by providing grants and loans that expanded existing plans and spawned new HMOs. Although a few companies, such as Kaiser and Group Health of Puget Sound, offered managed care plans in the early 1970s, fewer than 3 percent of Americans were enrolled in them.

By the late 1970s, changes in the American economy began to dictate a transformation of health insurance. As economic stagnation exerted downward pressure on company profits and a new corporate cost-consciousness developed, employers began to shift more of the insurance burden to their employees. Likewise, insurance companies were battling new economic and regulatory forces; skyrocketing inflation , deregulation of financial institutions in the early 1980s, and public pressure to cap rising insurance rates all contributed to a decline in insurance company profitability. All of these forces combined to encourage the use of more cost-effective insurance instruments, particularly managed care.

Health care costs continued to spiral upward much faster than inflation throughout the 1980s and early 1990s. By 1998, moreover, aggregate U.S. health care expenditures rose to $1 trillion. The Employee Benefit Research Institute estimated that in 1998 only 3.3 percent of employers fully paid for their employees' health insurance, compared to 44 percent in 1987. Also as a result of increasing costs, many small businesses were forced to eliminate health insurance from benefit packages. These trends resulted in fewer people having health insurance, and in a greater reliance on government-backed health care options. These trends also helped to open the door to previously ignored health insurance alternatives, such as HMOs—by 1996, 60 million people in the United States (20 percent of the U.S. population) received health care from HMOs. That number was expected to reach 100 million by 2000. All managed care plans combined already served more then 70 percent of the U.S. population.

TYPES OF PLANS

Health insurance plans can be classified as prepaid or fee-for-service. Under traditional fee-for-service plans, the insurer pays the insured directly for any hospital or physician costs for which the insured is covered. Under a prepaid plan, insurance companies arrange to pay health care providers for any service for which an enrollee has coverage. The insurer effectively agrees to provide the insured with health care services, rather than reimbursement dollars. Service plans offer the advantages of lower costs, which results from reduced administrative expenses and a greater emphasis on cost control.

FEE-FOR-SERVICE.

Fee-for-service health insurance plans remained the most popular form of health insurance in the United States during the early 1990s, though their popularity was waning. Two principal categories of fee-for-service health insurance plans are individual and group. Individual insurance covers people who are not part of an insured group, such as self-employed individuals. Group health insurance, on the other hand, insures a pool of enrollees and therefore offers benefits derived from economies of scale. Group insurance benefits generally include lower premiums and deductibles, more comprehensive coverage, and fewer restrictions.

Most fee-for-service plans cover basic costs related to: hospitalization, including room and board, drugs, and emergency room care; professional care, such as physician visits; and surgery, including any procedures performed by surgeons, radiologists, or other specialists. More inclusive health insurance plans are referred to as major medical insurance. Two types of major medical plans are: (1) supplemental, which provides higher dollar limits for coverage or covers miscellaneous services not encompassed in some basic plans, such as medical appliances and psychiatric care; and (2) comprehensive, which usually covers all costs covered by basic and supplemental plans, and may also eliminate deductible and coinsurance requirements. Basic, supplemental, and comprehensive plans usually do not insure dental, vision, or hearing care.

Most health care options related to fee-for-service plans relate to different degrees of coverage. For instance, insureds may select a high deductible as a way of lowering the cost of the plan—the deductible is the amount of initial costs covered by the insured before reimbursement begins. Likewise, different levels of coinsurance are usually available. For example, the plan participant may agree to pay for 20 percent of all costs incurred after the deductible amount, up to a total of, say, $50,000 (for a total disbursement by the insured of $10,000). A more expensive plan may reduce the participant's share of those costs to 5 or 10 percent. The total limit on insurer payments can also be adjusted; an individual lifetime maximum of $1 million is not uncommon.

PREPAID PLANS.

The second major category of health insurance is prepaid, or managed care, plans. Managed care plans typically arrange to provide medical services for members in exchange for subscription fees paid to the plan sponsor. Members receive services from physicians or hospitals that also have a contract with the sponsor. Thus, managed care plan administrators act as middlemen by contracting both with health care providers and enrollees to deliver medical services. Subscribers benefit from reduced health care costs, and the health care providers profit from a guaranteed client base.

Although they serve the same basic function as traditional health insurance, managed care plans differ because the plan sponsors play a greater role in administering and managing the services that the health care providers furnish. For this reason, advocates of managed care believe that it provides a less expensive alternative to traditional insurance plans. For instance, plan sponsors can work with health care providers to increase outpatient care, reduce administrative costs, eliminate complicated claims forms and procedures, and minimize unnecessary tests.

Managed care sponsors accomplish these tasks by reviewing each patient's needs before treatment, sometimes requiring a second opinion before allowing doctors to administer care; by providing authorization before hospitalization; and by administering prior approval of services performed by specialists. Critics of managed care claim that some techniques the sponsors use, such as giving bonuses to doctors for reducing hospitalization time, lead to undertreatment. Some plans also offer controversial bonuses to doctors for avoiding expensive tests and costly services performed by specialists.

Managed care plan sponsors also have more of an incentive to emphasize preventive maintenance procedures that avoid serious future health problems and expenses. For instance, they typically provide physicals and checkups at little or no charge to their members; these procedures help doctors detect and prevent many long-term complications. Many plans offer cancer screenings, stress-reduction classes, programs to help members stop smoking, and other services that save the sponsor money in the long run. Some plans also offer financial compensation to members who lose weight or achieve fitness goals. For example, one plan offers $175 to overweight members who lose 10 pounds and gives $100 to members who participate in a fitness program.

Another difference between traditional insurance and managed care is that members typically have less freedom to choose their health care providers and have less control over the quality and delivery of care in a managed system. Members of managed care plans usually must select a "primary care physician" from a list of doctors provided by the plan sponsor.

Managed care plans can take many forms. The most popular plans are health maintenance organizations (HMOs) and preferred provider organizations (PPOs). Other services that mimic these two plans include point-of-service plans and competitive medical organizations. In addition to these established plans, many employers and organizations offer hybrid plans that combine various elements of fee-for-service and managed care options.

The most popular plan, the basic HMO, is the purest form of the managed care concept described above. A PPO is a variation of the basic HMO. It combines features of both indemnity insurance and HMO plans. A PPO is typically organized by a large insurer or a group of doctors or hospitals. Under this arrangement, networks of health care providers contract with large organizations to offer their services at reduced rates. The major difference from the HMO is that PPO enrollees retain the option of seeking care outside of the network with a doctor or hospital of their choice. They are usually charged a penalty for doing so, however. Doctors and hospitals are drawn to PPOs because they provide prompt payment for services as well as access to a large client base.

HMOs are differentiated by four organizational models that define the relationship between plan sponsors, physicians, and subscribers. Under the first model, called individual practice associations (IPA), HMO sponsors contract with independent physicians who agree to deliver services to enrollees for a fee. Under this plan, the sponsor pays the provider on a per capita, or fee-for-service, basis each time it treats a plan member. Under the second model, the group plan, HMOs contract with groups of physicians to deliver client services. The sponsor then compensates the medical group on a negotiated per capita rate. The physicians determine how they will compensate each member of their group.

A third model, the network model, is similar to the group model but the HMO contracts with various groups of physicians based on the specialty that a particular group of doctors practices. Enrollees then obtain their service from a network of providers based on their specialized needs. Under the fourth model, the staff arrangement, doctors are actually employed by the managed care plan sponsor. The HMO owns the facility and pays salaries to the doctors on its staff. This type of arrangement allows the greatest control over costs but also entails the highest start-up costs.

[ Dave Mote ,

updated by Wendy H. Mason ]

FURTHER READING:

Abromovitz, Les. Family Insurance Handbook. Blue Ridge Summit, PA: Tab Press, 1990.

Enteen, Robert. Health Insurance: How to Get It, Keep It, or Improve What You've Got. New York: Demos Vermande, 1996.

Gottlieb, Martin. The Confused Consumer's Guide to Choosing a Health Care Plan: Everything You Need to Know. New York: Hyperion, 1998.

Greene, Jay. "Too Big a Blanket?" HR Magazine 43, no. 3 (March 1998): 90.

Jaffe, Alfred 1. "Misinformation Leaves Public in the Dark about True Causes of Healthcare Cost Hikes." National Underwriter Property and Casually Risk and Benefits Management. 2 November 1998, 29.

Weiner, Edith. "The Changing Face of Health Care." Best's Review Life/Health Insurance Edition 93, no. 9 (January 1993): 35.

Williams, Stephen J., and Sandra J. Guerra. Health Care Services in the 1990s. New York: Praeger Publishers, 1991. Wolford, G. Rodney, Montague Brown, and Barbara P. McCool. "Getting to Go in Managed Care." Health Care Management Review 18, no. I (winter 1993): 7.



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