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Health Insurance

Further Readings

Health insurance originated in the Blue Cross system that was developed between hospitals and schoolteachers in Dallas in 1929. Blue Cross covered a pre-set amount of hospitalization costs for a flat monthly premium and set its rates according to a "community rating" system: Single people paid one flat rate, families another flat rate, and the economic risk of high hospitalization bills was spread throughout the whole employee group. The only requirement for participation by an employer was that all employees, whether sick or healthy, had to join, again spreading the risk over the whole group. Blue Shield was developed following the same plan to cover ambulatory (i.e., non-hospital) medical care.

The Blue Cross/Blue Shield plans were developed to complement the traditional method of paying for HEALTH CARE, often called fee-for-service. Under this method, a physician charges a patient directly for services rendered, and the patient is legally responsible for payment. The Blue Cross/Blue Shield plans are called indemnity plans, meaning they reimburse the patient for medical expenses incurred. Indemnity insurers are not responsible directly to physicians for payment, although physicians typically submit claims information to the insurers as a convenience for their patients. For insured patients in the fee-for-service system, two contracts are created: one between the doctor and the patient, and one between the patient and the insurance company.

Traditional property and casualty insurance companies did not offer health insurance because with traditional rate structures, the risks were great and the returns uncertain. After the Blue Cross/Blue Shield plans were developed, however, the traditional insurers noted the community rating practices and realized that they could enter the market and attract the healthier community members with lower rates than the community rates. By introducing health screening to identify the healthier individuals, and offering lower rates to younger individuals, these companies were able to lure lower-risk populations to their health plans. This left the Blue Cross/Blue Shield plans with the highest-risk and costliest population to insure. Eventually, the Blue Cross/Blue Shield plans also began using risk-segregation policies and charged higher-risk groups higher premiums.

During the 1960s, Congress enacted the MEDICARE program to cover health care costs of older patients and MEDICAID to cover health care costs of indigent patients (Pub. L. No. 81-97). The federal government administers the Medicare Program and its components: Part A, which covers hospitalization, and Part B, which covers physician and outpatient services. The federal government helps the states fund the Medicaid Program, and the states administer it. Medicare, Part A, initially covered 100 percent of hospitalization costs, and Medicare, Part B, covered 80 percent of the usual, customary, and reasonable costs of physician and outpatient care.

Under both the fee-for-service system of health care delivery, where private indemnity insurers charge premiums and pay the bills, and the Medicare-Medicaid system, where taxes

fund the programs and the government pays the bills, the relationship between the patient and the doctor remains distinct. Neither the doctor nor the patient is concerned about the cost of various medical procedures involved, and fees for services are paid without significant oversight by the payers. In fact, if more services are performed by a physician under a fee-for-service system, the result is greater total fees.

From 1960 to 1990, per capita medical costs in the United States rose 1,000 percent, which was four times the rate of inflation. As a consequence, a different way of paying for health care rose to prominence. "Managed care," which had been in existence as long as indemnity health insurance plans, became the health plan of choice among U.S. employers who sought to reduce the premiums paid for their employees' health insurance.

MANAGED CARE essentially creates a triangular relationship among the physician, patient (or member), and payer. Managed care refers primarily to a prepaid health-services plan where physicians (or physician groups or other entities) are paid a flat per-member, per-month (PMPM) fee for basic health care services, regardless of whether the patient seeks those services. The risk that a patient is going to require significant treatment shifts from the insurance company to the physicians under this model.

Managed care is a highly regulated industry. It is regulated at the federal level by the Health Maintenance Organization Act of 1973 (Pub. L. No. 93-222) and by the states in which it operates. The health maintenance organization (HMO) is the primary provider of managed care, and it functions according to four basic models:

  1. The staff-model HMO employs physicians and providers directly, and they provide services in facilities owned or controlled by the HMO. Physicians under this model are paid a salary (not fees for service) and share equipment and facilities with other physician-employees.
  2. The group-model HMO contracts with an organized group of physicians who are not direct employees of the HMO, but who agree to provide basic health care services to the HMO's members in exchange for capitation (i.e., PMPM) payments. The capitation payments must be spread among the physicians under a pre-determined arrangement, and medical records and equipment must be shared.
  3. The individual-practice-association (IPA) model HMO is based around an association of individual practitioners who organize to contract with an HMO, and as a result treat the HMO's patients on a discounted fee-for-service basis. Although there is no periodic limit on the amount of payments from the HMO, the physicians in an IPA must have an explicit agreement that determines the distribution of HMO receipts and sets forth the services to be performed.
  4. The direct-service contract/network HMO model is the most basic model. Under this variation, an HMO contracts directly with individual providers to provide service to the HMO's patients, on either a capitated or discounted fee-for-service basis.

All four of these models share one very important feature of HMOs: The health care providers may not bill patients directly for services rendered, and they must seek any and all reimbursement from the HMO.

Another form of managed care is the preferred provider organization (PPO). A PPO does not take the place of the traditional fee-for-service provider (as does a staff–model HMO), and does not rely on capitated payments to providers. Instead, a PPO contracts with individual providers and groups to create a network of providers. Members of a PPO may choose any physician they wish for medical care, but if they choose a provider in the PPO network, their copayments—predetermined, fixed amounts paid per visit, regardless of treatment received—are significantly reduced, thus providing the incentive to stay in the network. No federal statutes govern PPOs, but many states regulate their operations. There are three basic PPO models:

  1. In a gatekeeper plan, a patient must choose a primary-care provider from the PPO network. This provider tends to most of the patient's health care needs and must authorize any referrals to specialists or other providers. If the patient "self-refers" without authorization, the cost savings of the PPO will not apply.
  2. The open-panel plan, on the other hand, allows a patient to see different primary-care physicians and to self-refer within the PPO network. The financial penalties for seeking medical care out of the PPO network are much greater in this less-structured model than in the gatekeeper model.
  3. The exclusive-provider plan shifts onto the patient all of the costs of seeking medical care from a non-network provider, and in this respect it is very similar to an HMO plan.

Other forms of health care delivery that encompass features of managed care include point-of-service (POS) plans and physician-hospital organizations (PHOs). A POS plan is a combination of an HMO and an indemnity insurance plan, allowing full coverage within the network of providers and partial coverage outside of it. A patient must choose one primary-care physician and might pay a higher monthly rate to the POS if the physician is not in the HMO network. Another version of the POS plan creates "tiers" of providers, which are rated by cost-effectiveness and quality of patient outcomes. A patient may choose a provider from any tier and then will owe a monthly premium payment set to the level of that tier.

A PHO is very similar to an IPA in that it is an organization among various physicians (or physician groups) and a hospital, set up to contract as a unit with an HMO. Physician-hospital networks, within HMOs or through PHO contracts, further the managed-care mission of "vertical integration," which is the coordination of health care (and payment for that care) from primary care through specialists to acute care and hospitalization.

Managed care has affected Medicare as well as private health care. In 1983, Congress changed the payment system for Medicare, Part A, from a fee-for-service-paid-retroactively system to a prospective payment system, which fixes the amount that the federal government will pay based on a patient's initial diagnosis, not on the costs actually expended (Pub. L. No. 98-369). Medical diagnoses are grouped according to the medical resources that are usually consumed to treat them, and from that grouping is determined a fixed amount that Medicare will pay for each diagnosis. Although this system is applicable only to the acute-care hospital setting, it is clearly an example of shifting the risk of the cost of health care from the payer (in this case, Medicare) to the provider, which is an important element of managed care. In addition, many HMOs now offer Medicare managed-care plans, and many older citizens opt for these plans because of their paperless claims and preset co-payments for physician visits and pharmaceuticals.

The most recent development in the area of health insurance is the medical savings account (MSA), a pilot program that was created by the Health Insurance Portability and Accountability Act of 1996 (Pub. L. No. 104-191). The premise behind the MSA is to take the bulk of the financial risk, and premium payments, away from the managed-care and indemnity insurers; and to allow individuals to save money, tax free, in a savings account for use for medical expenses. Individuals or their employers purchase major-medical policies, medical insurance policies with no coverage for medical expenses until the amount paid by the patient exceeds a predetermined maximum amount, such as $2,500 per year. These policies have extremely high deductibles and correspondingly low monthly premiums. The participants take the money that they would have spent on higher premiums and deposit it in an MSA. This money accrues through monthly deposits and also earns interest, and it can be spent only to pay for medical care. The major-medical policy applies if a certain amount equal to the high deductible is expended or if the account is depleted. MSAs do not incorporate any of the cost-controlling aspects of managed-care organizations, and instead depend on competition among providers for patients (who are generally more cost-conscious about spending their own money) to encourage efficient health-care delivery and to discourage unnecessary expense.

Litigation has resulted from insurance companies seeking to place limits for certain conditions. The decision by the U.S. Court of Appeals for the Seventh Circuit in Doe and Smith v. Mutual of Omaha Insurance Co., 179 F.3d 557 (7th Cir. 1999), cert. denied, 120 S. Ct. 845 (2000), concerns AIDS caps insurance policies. At issue in the case was whether the Americans with Disabilities Act (ADA) covers the content of insurance policies. The plaintiffs, who sued under the pseudonyms JOHN DOE and Richard Smith, argued that Mutual of Omaha Company had discriminated against them by selling them insurance policies with lifetime caps on AIDS-related expenditures. John Doe's policy had a lifetime AIDS cap of $100,000, and Richard Smith's policy had a cap of $25,000. Other health insurance policies sold by the company had lifetime caps for other diseases of $1 million. The Seventh Circuit found that AIDS caps do not violate the ADA. The court found that Doe and Smith were not discriminated against, because the company did offer them an insurance policy. The ADA, the court determined, would only prohibit Mutual of Omaha from singling out disabled people and refusing to sell them insurance. The court ruled that the ADA did not prohibit the company from offering disabled parties insurance policies with different terms and conditions from other people. The court held the plaintiffs were not denied a policy because they had AIDS but rather were denied coverage for certain AIDS treatments.

In August 2000, a federal appeals court upheld the dismissal of a class-action RICO suit against Aetna-U.S. Healthcare Inc. after finding that the plaintiffs had failed to allege a valid RICO injury and that they therefore lacked standing to sue. In Maio v. Aetna Inc., 221 F.3d 472, 493 (3d Cir. 2000) the court found that the plaintiffs were unable to demonstrate that Aetna's policies gave less of a health care product than what Aetna had promised to deliver in terms of the level and quality of health care coverage under its HMO plan. The court found that without proof that systemic practices actually negatively affected the health care that Aetna provided to its HMO members through its participating providers, the case could not stand. The consumers who alleged that Aetna had lured them in with false promises of high-quality care, while secretly pressuring doctors to cut costs and to provide only minimal care, did not prevail in the suit.

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