Health Insurance
DEFINITION
Insurance is a contract between two or more parties
whereby, in exchange for a payment (premium), the
insurer protects (indemnifies) the insured against a defined
peril or loss by agreeing to pay a specified amount of
money if that loss should occur.
History and Status of Health
Insurance
I. History
A. European Guilds
B. U.S.
1.Labor Unions
2.Commercial Health Insurance (Montgomery
Ward, 1912)
3.Blue Cross
Community rating
Open enrollment
Provider contracts
4.National Association of Insurance Commissioners
“ This wide divergence from ordinary
insurance methods is based on the
theory that a group is acceptable as a
whole, the company can take the risk of
any members of the group not up to the
rigid medical standard required in
individual cases.”
The New York Times, April 14, 1912
“Between the individually insurable and the
individually noninsurable, between the young,
the middle-aged and the old, the employer
draws no distinction and any scheme that
would completely cover employees must take
them all, the young with the old, the weak with
the strong, depending upon the underlying
averages that make insurance possible and
supply its reasons for existence.”
W.A. Day, President of The Equitable Life Assurance
Society, 1912
“The
organization of medicine is not a thing apart
which can be subjected to study in isolation. It is
an aspect of a culture whose arrangements are
inseparable from the general organization of
society.”
Walton H. Hamilton, Professor of Law, Yale University Law School
in:
"Medical Care for the American People: The Final Report of the
Committee on the Cost of Medical Care," Adopted October 31,
1932, Chicago: University of Chicago Press 1932
What else was happening?
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Ida Tarbel publishes a series of articles in McClure’s magazine
(subsequently complied as “The History of the Standard Oil
Company”) to expose the corruption and greed of the
Standard Oil Monopoly (1902-1904).
Upton Sinclair publishes The Jungle (1906), exposing
problems in the meat-packing industry. The resultant social
uproar was responsible for passage of the Pure Food and
Drugs Act (1906) and the Meat Inspection Act (1906). It also
ushered in the era of what President Theodore Roosevelt
called “muckraking” journalism.
President Taft uses the Sherman Antitrust Act to break up the
Standard Oil trust and American Tobacco Company (1911)
International Ladies Garment Workers Union (ILGWU)
provides the first union-based medical services (1913)
Enactment of the Clayton Antitrust Act to supplement the
Sherman Act (1914)
Establishment of the Federal Trade Commission (1914)
History and Status (2)
5. World War II
6. Medicare and Medicaid - 1965
7. HMO Act- 1973
8. Self-Insured Plans
a. Most large companies insured this way
b. ERISA 1974
c. Advantages:
a. No state insurance premium tax (2 - 3%)
b. Exemption from state mandated benefits
c. Exemption from financing reserve requirements
d. Exemption from contributions to state risk pools
e. Full access to claims data (which commercial insurers frequently do
not and cannot often provide their clients)
f. Ability to pay claims after they are received (enables the employer
to "play the float" on reserves)
g .No broker commissions
h. Standardize benefits across states for multi-state companies
History and Status (3)
9. Consolidated Omnibus Reconciliation Act
(COBRA) 1985
10. Health Insurance Portability and
Accountability Act (HIPAA), 1996Portablility;Data Standardization; MSAs
11. Medicare Prescription Drug,
Improvement and Modernization Act of
2003 (MMA)- Establishment of HSAs
Insurance Coverage of U.S. Population*
(in thousands)
Total Population
Uninsured for study year
Insured for some portion of year
291,155 (100%)
45,820 (15.7%)
245,335 (84.3%)
Privately insured
Employment-based insurance
198,262
174,174
Government insurance (total)**
Medicare
Medicaid
Military
79,086
39,745
37,514
10,680
*Source: Annual Demographic Survey, 2004. U.S.Bureau of labor Statistics
Statistics and Census Bureau.
http://pubdb3.census.gov/macro/032005/health/toc.htm
**Note: Except for uninsured and insured, others numbers do not add to subtotals because of dual enrollments . For example, there
there
are about 6 million persons eligible for both Medicare and Medicaid.
Medicaid.
Purposes of Insurance:
For the insured: Can budget for healthcare
expenses by protecting against catastrophic
events.
For the insurer: Make money from premiums
and investments. In the past, health insurance
made money for the insurer as a loss leader by
allowing the company to sell more profitable
policies, e.g., life insurance, with it.
“Boys, that’s the business you ought
to get into. It’s a great business.
Why think of it - people paying
money before they even know what
they were going to get!”
Goldie Balaban To Her Sons - Early 20th Century
Conditions for an event to be insurable:
1. It must be neither too frequent nor too rare (issue of
frequency).
Q: What would be the premiums at these two extremes?
2. It must be accidental and sporadic, i.e., a random,
unpredictable event (issue of unpredictability).
Q: What would happen if the event were predictable?
Issue of “Moral Hazard”
3. It must be statistically measurable and computable, or at least
estimable (subject to actuarial study).
4. From the insurer’s viewpoint, large numbers of subscribers are
needed who must make sufficient and regular payments.
***INSURANCE IS A NUMBERS GAME***
Tradeoffs in health insurance:
Other than quality services, holding
benefits constant, people in the U.S. want
three features from their health insurance:
A. First dollar coverage
B. Low premiums
C. Freedom of choice of providers
Some important terms:
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Subscriber and Member; Subscription Certificate
Capitation vs. Fee-for-Service; Service vs. Indemnity
Defined Benefit vs. Defined Contribution
Copay, Coinsurance, Deductible (Some examples)
Reinsurance
Health Savings Account (HSA)
Underwrite- Indemnify a specific peril for a specified
value for a defined time.
Community vs. Risk Rating (Individual underwriting)
Administrative Service Only (ASO)/Third Party
Administrator (TPA)
Medical Loss Ratio
Coordination of Benefits (COB) and Subrogation
Incurred but not reported expenses (IBNR)
Workers’ Compensation
Example of the application of out of pocket expenses to payment
of healthcare charges*
Your health plan covers “medically necessary” services and pharmaceuticals. The services are subject to an
annual (calendar year) deductible of $200, 80/20 coinsurance (your insurance pays 80% and you pay 20%),
$25 physician office copayment (which does not count toward deductible, coinsurance or out of pocket annual
maximum payment), and a maximum out of pocket payment (after the deductible is met) of $1000 per
calendar year. (Pharmaceutical benefits are handled separately, see Box 4.2.) Hospital charges are covered
in full.
You see a physician at the beginning of the year and are charged $150. It is an acceptable amount,
according to a fee schedule upon which she and your insurance company have agreed. How much do you
pay? First, you have a $25 office copayment. Then, you determine if you satisfied your annual deductible.
Since it is the beginning of a new year and your deductible is $200, you are responsible for the entire bill.
Unfortunately, your physician found a problem that requires a revisit four weeks later. After that visit you
have an allowable charge of $100. How much do you owe for that visit? Again, start with the $25 copayment.
Since you satisfied $150 of your $200 deductible during your last visit, you owe an additional $50. Now that
you reached your deductible limit, your coinsurance starts to apply. Of the remaining $50 of your bill, you pay
20%, or $10, and the insurance company pays $40.
Your doctor now tells you that you need surgery to correct the problem she found during the first two visits.
You have the surgery and review the physicians’ charges (the only part of the bill for which you are
responsible). Since the surgery was performed in the hospital, there is no office copayment. The deductibles
and coinsurance do, however, apply. The total of all physicians’ charges (surgeon, anesthesiologist,
pathologist and radiologist) is $5500. Since, as mentioned above, you already satisfied your deductible, you
would be responsible for 20% of the $5500 ($1100). But you are only at risk for the first $1000 of out of pocket
expenses after your deductible is met. You already paid $10 for coinsurance at the last office visit. So you
would pay $990. In the future, you only pay office copayments since your annual out of pocket expenses are
met.
*This example is to illustrate how out of pocket provisions may operate. Plans have diverse provisions. For
example, the charges that apply to annual limits may be different, copayments are frequently not the same for
all specialties, and special daily copayments may exist for hospital stays.
Example of the application of out of pocket expenses to
payment for pharmaceuticals*
Your insurance plan covers pharmaceuticals that you can take by yourself (self administered
medications, like pills, and simple injections, like insulin). In order to hold down costs, the
insurance company has contracted with an independent company (pharmaceutical benefit
management company, or PBM) to administer these benefits. The PBM classifies the
medications into 3 categories (or tiers) and assigns different copayments to their purchase,
depending on how much they cost relative to others in the same category. The first tier is all
generic drugs, which carry a $10 copayment for a 30 day supply.** The second tier is
comprised of brand name drugs, for example, those for which the PBM has negotiated special
considerations from the manufacturers in the form of lower prices or rebates. Tier 2 medications
have a $25 copayment for a 30 day supply. Tier 3 consists of all other branded medications.
The Tier 3 copayment is $40 for a 30 day supply. The listing of all these medications and their
assigned tier is called a formulary.***
* Many different variations exist with respect to pharmaceutical coverage. For example, some
plans have more than 3 tiers, depending on the extent of favorable manufacturer contracts, and
others have eliminated copayments and use coinsurance instead. Additionally, some plans may
apply annual maximum out of pocket cost limits for drugs.
**Virtually all plans also provide patients with the opportunity to order 90 day medication
supplies by mail at less than the cost of 3 copayments.
*** In addition to U.S. companies, countries that provide pharmaceuticals to their citizens also
use formularies and differential cost structures. The difference between the two is that in the
U.S., the tiers are based on medication cost; other countries (Italy, for example) assign tiers by
effectiveness.
The latest strategy has been to
attack the consumer side of the
demand for healthcare services
with insurance products called:
Consumer-Driven Health Plans
RAND Health Insurance Experiment (HIE)
Source: Newhouse, JP: Consumer-Directed Health Plans And The RAND Health Insurance Experiment.
Health Affairs 23: 107-113, 2004.
Medical Savings Accounts and Prescription Drugs:
Evidence from South Africa
Source: Shaun Matisonn, Executive VP, Discovery Health. National
Center for Policy Analysis Policy Report No. 254 August, 2002
Medical Savings Accounts (MSAs) were started in South Africa in 1994 and by 2002 captured
half the seven million person health insurance market. For the MSA product in South Africa
non-discretionary services do not incur out of pocket expenses. For example, hospitalizations
and medications for chronic conditions are not counted against the individual’s annual
deductible. (In the U.S., Health Savings Accounts can have out of pocket exclusions on
preventive services and medications for certain chronic conditions without running afoul of tax
laws that enable these plans.) Based on this experience, Discovery Health (an MSA) found that:
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“On average, discretionary spending (primarily outpatient spending) is 47 percent lower for
those enrolled in Medical Savings Account plans.
“…no evidence suggests that members of MSA plans are shifting costs to a hospital setting
where the insurer would foot the entire bill.”
“Patients using their MSAs also were much more likely to purchase a generic equivalent…use of
the brand-name drug [Prozac in this case] jumped 45 percent when patients were spending
insurance company money.”
Patients do not skimp on necessary chronic medications when paying for drugs from an MSA.
(This conclusion was reached comparing use of osteoporosis treatment medications before
enrollment in a chronic disease program-when the medication costs came out of the MSA- with
costs after enrollment-when the medication was free. There was no statistical difference in
prescription filling between the two groups.)
Example: Health Savings Accounts (HSAs)- all
amounts are for individuals in 2006
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Employer purchases a high deductible heath plan (minimum
$1050; no maximum but subject to annual maximum out of
pocket of $5250).
Employee and/or employer can contribute up to 100% of the
deductible, provided it is not more than a maximum amount
($2700).
Any unused amount can be carried forward indefinitely.
The account belongs to the employee and is portable with job
changes.
Eligible donations to these accounts are tax exempt for the
employee and tax deductible for the employer
Accumulated amounts in these accounts can be invested; the
resulting income is tax exempt to the employee if withdrawals
are used for the legitimate purposes of these plans.
Personal Healthcare Spending Accounts
Type of Plan
Flexible Spending Account
(FSA) IRC § 125
Medical Savings Account (MSA)
IRC § 220(b) and (c)
Health Reimbursement
Arrangement (HRA)
IRC § 105(h), 419,
Health Savings Account
(HSA) IRC § 223 (c)
Who is eligible?
Anyone who works for an
employer having such a plan
SelfSelf-employed and those
working for employers with <50
employees
Any selfself-employed person
or employer group,
regardless of size
Any selfself-employed person or
employer group, regardless
of size; cannot be a
dependent on another’
another’s tax
return, e.g., children or
spouses
Who funds the account?
Usually employee
Employer or employee (but not
both in a given year)
Employer
Employer and/or employee
What are the annual
financial requirements for
contribution or nature of
the underlying insurance?
No legal minimum but
maximum subject to federal
regulation, currently $5000.
Employee must have a "high
deductible”
deductible” plan; minimum and
maximum limits and out of
pocket limits subject to federal
regulation, e.g., in 2006, for
individuals the deductible limits
are $1800/$2700 and
maximum out of pocket is
$3650.
None.
Employee must have a "high
deductible”
deductible” plan; minimum
and maximum limits and out
of pocket limits subject to
federal regulation, e.g., in
2006, for individuals the
deductible limits are
$1050/None and maximum
out of pocket is $5250.
Are contributions federally
tax exempt if used for
“qualified”
qualified” expenses?
Yes
Yes
Yes
Yes
Can I carry unused
contributions into the next
year?
No
Yes
Yes
Yes
Can I take unused
contributions with me to
my next job?
No
Yes
No
Yes
Characteristics
So…is this the solution?
What do we know (so far):
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The RAND HIE used $1000 as its maximum out of pocket amount. Today
that would be at least $6000.
The health effects were “minimal” but the study did not last long enough to
assess adequate endpoints for chronic illness, e.g., hypertension.
The South African MSA carves out non-discretionary care from the out of
pocket responsibility; our HSAs include all but potentially preventive care.
While these plans depend on well-informed “consumers,” the most
consistent complaint from them is they do not get enough information from
insurers or employers to make intelligent choices.
Once out of pocket limits are reached, consumers do not behave differently
from full those with full coverage.
Satisfaction levels with consumer-driven plans are significantly lower than
with full coverage plans.
Compared to those with full coverage plans, individuals with consumerdriven plans are significantly more likely to avoid, skip or delay care
(particularly if they have health problems or earn less than $50,000 per
year) and to spend a larger share of their income on out-of-pocket expenses
(despite similar rates of healthcare use).
Consumer-driven health plans do not address provider and supplier induced
demand problems.
Personal Healthcare Spending Accounts
Type of Plan
Flexible Spending Account
(FSA) IRC § 125
Medical Savings Account
(MSA) IRC § 220(b) and (c)
Health Reimbursement
Arrangement (HRA)
IRC § 105(h), 419,
Health Savings Account
(HSA) IRC § 223 (c)
Who is eligible?
Anyone who works for an
employer having such a plan
Self-employed and those
working for employers with <50
employees
Any self-employed person
or employer group,
regardless of size
Any self-employed person or
employer group, regardless
of size; cannot be a
dependent on another’s tax
return, e.g., children or
spouses
Who funds the account?
Usually employee
Employer or employee (but not
both in a given year)
Employer
Employer and/or employee
What are the annual
financial requirements for
contribution or nature of
the underlying insurance?
No legal minimum but
maximum subject to federal
regulation, currently $5000.
Employee must have a "high
deductible” plan; minimum and
maximum limits and out of
pocket limits subject to federal
regulation, e.g., in 2006, for
individuals the deductible limits
are $1800/$2700 and maximum
out of pocket is $3650.
None.
Employee must have a "high
deductible” plan; minimum
and maximum limits and out
of pocket limits subject to
federal regulation, e.g., in
2006, for individuals the
deductible limits are
$1050/None and maximum
out of pocket is $5250.
Are contributions federally
tax exempt if used for
“qualified” expenses?
Yes
Yes
Yes
Yes
Can I carry unused
contributions into the next
year?
No
Yes
Yes
Yes
Can I take unused
contributions with me to
my next job?
No
Yes
No
Yes
Characteristics