Author:Justin P. Swearingen, MHA, DrPH

1. Author:Justin P. Swearingen, MHA, DrPH Health Insurance, Health Financing, and Managed Care

2. How does health insurance work? http://www.staysmartstayhealthy.com/watch?v=8

3. What is Insurance? • Insurance, in its simplest form, works by pooling risks • Many people pay a small “premium” up front • Those who face an unfortunate event (getting sick, being in a car accident having their home burn down) get paid from the group’s money

4. Basic Principles Health Insurance • protects against risk Risk • the possibility of substantial financial loss from becoming sick, where • probability of occurrence is small Four Principles of Insurance: 1) Individual risk is unpredictable 2) Population risk is predicable 3) Insurance transfers risk from individual to group through pooling of resources 4) Losses are shared by all members Insurance does not make sense for small, predictable events. Ex: Why pay a $100 processing fee for a guaranteed $200 annual family dental checkup?

5. Insurance Terms • Premium: The monthly amount paid to cover member claims and administration of the insurance program • Deductibles: A deductible is the amount of money that you pay before the plan pays anything. • Co-Pay: A small amount paid every time you receive services • Coinsurance: In addition to the deductible, the insurance and patient split a percent of the bill (Ex: 80%/ 20%) • Stop Loss/ Maximum Out-of-Pocket: Despite having deductibles, copayments, and coinsurance, this is the most you will have to pay per year (Ex:$5,000). Past this, insurance pays for everything. • Covered Expenses: The services in which your insurance will pay. If not covered, the cost of the procedure will not apply toward your deductible, coinsurance or maximum out-of-pocket expense • Lifetime Limits: Health plan used to stop paying after a certain amount. ACA has outlawed such practice.

6. Determining Premiums Two risk assessment methods to determine premiums: 1) Experience Rating • Determines pricing of premiums for different groups or individuals based on the group or individual's history of claimsand status (Ex: Young vs. Old, low cost to cover vs. high cost to cover) • Vary from group to group due to different risks 2) Community Rating • Requires health insurance providers to offer health insurance policies at the same price to all persons, regardless of their health status • Only two states (New York and Vermont) have pure community rating • Illegal to have different charges for age/sex • Makes insurance much more expensive for the young and healthy, more affordable for the old and sick

7. Medical Loss Ratio (MLR) • The percentage of premium dollars an insurance company spends on medical care, as opposed to administrative costs or profits • For example, if an insurance company pays out $60 in claims for every $100 in collected premiums, then its loss ratio is 60%. • The ACA mandates minimum MLRs of 80% in the group market and 85% in the individual market • 80-85 cents out of every dollar collected must pay for healthcare • 15-20 cents can be used for marketing, executive salaries, and profit

8. Why is Health Insurance Important? • Health insurance coverage is fundamentally important to better health • Primary mechanism to obtain health care (Access) • Regarded as a key component of health care financing • Currently 50 million uninsured • 80% from working families with at least 1 adult worker (“working poor”) • Strong association between health insurance and access to: • Primary and preventive care • Treatment of acute conditions • Management of chronic illness • Strong association between health insurance and outcomes: • 50% of uninsured with chronic conditions report no usual source of care • 50% of uninsured do not get preventive care (colon, breast screenings) • More likely to have unmet medical, dental, prescription needs • More likely be sicker and die earlier

9. Cancer Screenings

10. Annual Excess Deaths 25% greater risk of death

11. 1. Employer- Sponsored Insurance (Private) • (Blue Cross, United, Aetna) • 2. Private Market (Private) • (Blue Cross, United, Aetna) • 3. Government programs (public) • Federal/ State Employees • Medicare (elderly/disabled) • Medicaid/SCHIP (poor that meet the eligibility criteria), children • TriCare (Military) • 4. Uninsured Health Coverage in the US

12. Sometime in 2011-2012Gov’t spending>Private Spending FEBRUARY 4, 2010 “Public Health Tab to Hit Milestone” Wall Street Journal http://online.wsj.com/article/SB10001424052748703575004575043490639289022.html

13. How did healthcare come about in the United States? • http://www.staysmartstayhealthy.com/healthcare_history Basics of video: • Health insurance started in WWII as a way to recruit workers during a wage freeze • Tax-free employer sponsored healthcare became popular • Medicare and Medicaid helped the elderly and poor • Rising costs lead to “managed care” models • Managed Care is losing popularity and more “consumer-driven” plans are becoming prevalent

14. Employer-Sponsored Health Insurance • Although the government now spends more on health care, employer-sponsored it still largest source of health insurance (55% of people) • Modern group health insurance was introduced in 1929 • Employer-based insurance  did not become common until WWII • National wage freeze prompted employers to use other benefits (like health insurance) as a way to recruit workers.  • War Labor Board subsequently declared health insurance a tax-free benefit(exempt from all Federal and State taxes) • The response was immense: Between 1940 and 1950, the number of people enrolled in health insurance plans grew 700 times, resulting in 75% of Americans having health insurance by 1959.

15. Problems with Employer Insurance • Tax benefit only to the employed (not unemployed) and to those who’s jobs offer insurance (a decreasing number) • Disproportionately benefits high incomes (pre-tax money is worth more to those who in higher tax brackets) • Stimulates demand for small claims normally not insured • Ex: Why pay a $100 processing fee for a guaranteed $200 annual family dental checkup? • Spending $200 already means I have to earn $350 in before-tax income (at 40% tax rate) • However! Now that the gov’t lets me use pre-tax money, I have enough for the unnecessary processing fee and $50 pre-tax left over for even more healthcare. • Bring on the expensive services! • Estimated value of tax subsidy in 2004 was $209 billion = subsidy for those who can afford it the most. Money that could be used to subsidize those that cannot afford it.

16. Adverse Selection and the Death Spiral • Adverse Selection • High-risk individuals who need more care are more likely to enroll in insurance plans than healthy people • So, health insurance companies try to “screen” individuals by requiring medical examinations and will refuse policies to people who have preexisting conditions. • Can cause a “death spiral” • When people in the group health plan get sick, prices for the plan go up, and the healthy (who do not need the coverage) leave the plan. • Due to their preexisting condition, the sick cannot leave the plan. Prices rise more, healthy leave more, until no one can afford the policy. This leaves the sick without insurance when they need it most. • In studies of health insurance, an individual mandate requiring people to either purchase plans or face a penalty is cited as a way out of the adverse selection problem by broadening the risk pool.

17. Cherry Picking • Risk Selection or “cherry picking” • Insurers going to extra lengths to select below-average risk populations to make a profit • Difficult for high-risk people to get coverage • Will discuss later, but the US government started paying private HMO’s to “manage” the care of Medicare patients and paid them the average rate per month across all patients. • However, they started “cherry picking” only the healthy Medicare recipients to reduce costs below average and make profit (leaving the gov’t with the sickest recipients).

18. Types of Private Health Insurance Plans • First dollar plans : No deductibles/ copayments. Insurance pays the “first dollar” (almost nonexistent) • Traditional Plans (Fee for Service): pays anydoctor for everyservice (not common now either) • Managed care plans: HMO, PPO, POS plans with less choice, lower cost. (Very common) • Consumer-Driven Health Plans: Place more of the expense and responsibility on the patient

19. Traditional Insurance • Traditional Insurance • Free access to any provider • Itemized billing of charges by the provider to the insurer • Few, if any, controls over the amount of payment • Sickness coverage; no coverage for wellness and prevention • Insurers functioned simply as passive payers of claims Flaws: • Uncontrolled utilization • Moral Hazard • Overutilization of specialty care • Provider-induced demand • Uncontrolled prices and payment • Charges set at artificially high levels • Insurers were passive payers of claims • Inefficiencies absorbed by raising premiums • Focus on illness rather than wellness • Lucrative for physicians to hospitalize patients

20. Managed Care Organizations (MCO) Basic premise: lower medical costs in exchange for more limited choice and tighter control of utilization • Most Americans who have health insurance through their employer (and many who are self-insured) are enrolled in some type of a managed care plan • Managed Care plans contract with doctors, hospitals, clinics, and other health care providers to form a “network” • pharmacies, labs, x-ray centers, etc • Choice restriction (In network, out-of-network) • Gatekeeping (Primary Care Physician referrals) • Case management (Coordination of care for complex and costly cases. Ex: HIV) • Disease management (Population based education and follow-up on treatment) • Utilization review (determines “appropriateness” of care) • Practice profiling (compares physician practices for outliers)

21. Types of MCO’s • Video: http://www.staysmartstayhealthy.com/watch?v=6 • Health Maintenance Organization (HMO) • Insurance plan has pre-negotiated discounted rates within a select “network” of providers which you must use (strictest plan) • Must have a Primary Care Physician (PCP) who acts as a “gatekeeper” who must refer you to specialty services • Less costly premiums • Preferred Provider Organization (PPO) • Contracts with a (usually larger) network of "preferred" providers from which you can choose. • Can also go out-of-network, but at higher cost • Do not need a PCP gatekeeper referral for specialty services • More costly premiums • Also: Point Of Service (POS)- less common • Hybrid (Must gave PCP gatekeeper, but can go out-of-network for higher cost)

22. MCO Pros and Cons • Pros • Widely credited as slowing costs during the 1990’s • Cons • Consumer and provider backlash • Less choice • Savings did not reach the employer/employee • Physicians reacted negatively to utilization management and lower reimbursement • Lengthy appeals for denied services Overall, Managed care’s full potential was not realized because controls were ultimately relaxed

23. Distribution of Insurance

24. Trends in Private Insurance

25. RAND Health Insurance Experiment • As previously discussed, empirical research demonstrates that insured people use more care (Moral Hazard) • RAND Health Insurance Experiment (HIE)- “the most important health insurance study ever conducted” • In the 1970s, the HIE randomly assigned several thousand families to insurance with varying levels of patient co-insurance, and then followed them over a five-year period to evaluate the effect on their medical utilization and health. • Showed that modest “cost sharing” reduces moral hazard related use of services with minimal to no effects on health status for the “average person” • Large negative impacts on health from introducing co-insurance to low-income and less-healthy individuals .

26. Consumer-Driven Health Care (CDHC) • Aims to increase personal responsibility and control (reduce moral hazard) by placing more cost into the patient • Usually have lower monthly premiums, but larger upfront costs for care • High Deductible Health Plan • Patient pays for first amount (Ex: $5,000) • Offers “catastrophic coverage” to pay for everything above deducible • Usually no copays and preventive services are often free • Health Savings Account (HSA) • Can put tax-free money aside every month to pay for deductibles • Your own bank account that does not expire • Flexible Spending Account (FSA) • Similar, but set up through your employer, can be used for any health expense (not just deductibles), and expires at end of year • Health Reimbursement Account (HRA) • Employee pays upfront, but reimbursed later

27. CDHC Issues • The Kaiser Family Foundation in September 2008 found that 8% of covered workers were enrolled in a consumer-driven health plans • Proponents of Consumer Driven Health Care believe that they are an important reform that will help reduce the growth of health care costs and increase the efficiency of the health care system. • Encourage saving for future health care expenses • Allow the patient to receive needed care without a “gatekeeper” to determine what benefits are allowed • Makes consumers more responsible for their own health care choices through the required High-Deductible Health Plan.[1] • Opponents say they worsen the U.S. health system's problems • People who are healthy will leave insurance plans • People who have health problems will avoid Consumer Driven plans

28. The Payment Function • Complexity of financing: Answer is very often “it depends” • Many payers (mix of private plans and government programs) • Many payment methods • Various management decisions are influenced by reimbursement (Ex: How long should the patient stay in the hospital?) • Most payments come through Third-Party Payers • Insurance companies, managed care organizations, BlueCross BlueShield, government

29. Reimbursement (Payment) Methods • Fee For Service (FFS) • Charges are set by the provider on “usual and customary” bases or “cost-plus” basis. • Each service is billed separately. • Makes a profit by doing as much as possible (causes provider-induced demand) • Bundled Pricing: Fees are inclusive of all bundled services. Ex: A hospital receives $400,000 for an entire kidney transplant procedure. Makes a profit by keeping expenses low. • Per Diem: A Skilled Nursing Facility (SNF) receives $200 per day for a patient’s care. Makes a profit by keeping expenses low. • Capitation: A doctor’s practice receives $50 per member per month to treat 1,000 people. Makes a profit by having healthy patients.

30. Cost Shifting Charging more and “passing the buck” to those who have less financial control • From Medicare to private payers (MCO insurance companies) • From MCO’s to individuals (higher copayments and deductibles in “consumer-driven healthcare” • Also passing the cost of the uninsured onto the federal government and/or private insurers • Added cost is then passed onto taxpayers (from federal gov’t), lower wages (from employers), and higher price of goods (from employers). • Overall high cost of care increasingly passed onto patient and employer, and consumer. • Ex: Starbucks spends more on healthcare than coffee . . GM adds $1500 - 2,000 to every car to pay for healthcare

31. Questions?