Chapter 7 Summary
Healthcare Insurance: An Introduction

Chapter Authors
Vinod K Sahney - Blue Cross Blue Shield of Massachusetts
Ann Tousignant - Blue Cross Blue Shield of Massachusetts

Some Commentary

This is a brief overview into the complex world of healthcare insurance in America - as of the textbook's 2011 publication.

1. Introduction to Health Coverage in America

Despite the formation of medical insurance in 1929, medical debt remains the leading cause of bankruptcy in North America.

15% of Americans (45 million) are not covered by healthcare insurance, and 20 million Americans are underinsured.

"According to the Institute of Medicine of the National Academy of Science, the United States is the only developed country without health coverage for all of its citizens (Institute of Medicine 2004).

In another report, it is estimated that more than 100,000 Americans die each year due to a lack of health insurance."

Lack of coverage is not for lack of spending. America spends 17% GDP on national healthcare expenditures ($2.4 trillion 2008 dollars), a total of $7868 per capita. This rate has increased at 3x the consumer price index at time of the chapter's publication.

At the time of this chapter's publication, America was in the midst of discussions regarding healthcare financing. For this reason, some of the chapter's details are out of date.

2. Third Party Insurance

The majority of care in the United States is covered by third-party payers. These payers may be either private or public.

The breakdown of national healthcare expenditures is as follows:

Private Insurance 34%
Medicare 19%
Medicaid/SCHIP 15%
Other public 12%
Out of pocket 12%
Other/private: 7%

2A.  Public Third-Party insurance

Public third-party insurance is mediated primarily via Medicare and Medicaid.

Medicare is a federal program that covers citizens over age 65, and in some exceptions those under 65. There are multiple parts to the Program. Part A covers hospital, Part B outpatient and physician. Part D pharmacy and drugs. In 2007 44 million people were enrolled in part A, 40 million in Part B, and 17 million in Part D.

Medicaid is federal program with state partnerships that cover individuals below an income level cutoff (somewhere under $5,000 to $30,000). 48 million are covered under this.

Other public healthcare insurance programs include: State Children's Health Insurance Program (SCHIP) that covers children under the age of 18 - 7 million enrolled. The Military Health System covers active members and their dependents. Veteran's Health Administration (VHA) that covers those who have served in the military. The Indian Health Service covers Native Americans.

2b. Private Third-Party Insurance

Private insurance in the United States is primarily connected to one's employment. Employers often will contract one (or several) a third-party healthcare insurance company(ies) to administer a health insurance program for their employees.  Employees will have several plans they can choose from on an annual basis for themselves and their dependents. The underwriter of the plans may either be health insurance company themselves, or the employer (more on this later).

3. Origin of Employer-Sponsored Healthcare

In 1920s America, private companies started to cover care for injuries among their employees. Eventually these services were expanded to include more general sick care as well.

The first formal American managed and commercial health insurance plan was founded in 1929 when the employees of the Louisiana Department of Water and Power contracted two physicians to provide care for 2000 workers and their families. It include both office and hospital care. This model continued to expand, with more workers and their dependents being covered.

Kaiser Permanente Health Plans got their start in 1938 when the Henry J. Kaiser Company contracted prepaid medical services to cover its employees constructing the Grand Coulee Dam.

Blue Cross was founded in 1929. For coverage of $6 per person, school teachers could receive up to 21 days of hospital care.

Outside of America
World War II triggered healthcare reform in many other countries. In England, the air raids in the cities that drove people into the country, led to the building of new hospitals and government reimbursement of hospital and medical costs for war-related injuries. This program eventually became the NHS. In France, the payroll tax system after the war was used to administer health funds.

4. Types of Private Insurance Providers

Private healthcare can be funded by either State-Licensed Companies or by Self-Funded Employee Plans

4a. State-Licensed Insurance Companies/Organizations

a. Blue Cross Blue Shield Plans: Blue Cross (hospital) and Blue Shield (medical) have merged in many states, and converted from their original not-for-profit status to for-profit organizations. Mergers such as Wellpoint originate from these groups.

b. Commercial Health Insurers - publicly traded stock market comapnies provide national insruance, such as United Healthcare, Aetna, Cigna, and Humana.

c. Health Maintenance Organizations (HMOs) - provide both health insurance and care. In the case of Kaiser, 8.5 million members are served in their facilities.

Top 10 Healthcare Insurance Companies and Enrolment (in Million of people):

United Health Group 32.7
Wellpoint 30.6
Aetna 16.9
HCSC 12.2
Cigna 9.9
Kaiser 8.5
Humana 8.5
Health Net 6.2
Highmark 5.2
BCBSMI 5.0
Total 135.7

4b. Self-Funded Employee Health Benefit Plans

Employers assume the pooled risk of their employees, and contract a private healthcare company to administer the care.

4c. Regulation of Insurance

The standards for coverage and plans in regulated federally by the Employee Retirement Income Security Act (ERISA) of 1974, in addition to state laws.

Rate Bands are state regulated rates for the maximum acceptable difference between the lowest and highest premiums that can be charged for the same insurance coverage.

5. Healthcare Insurance Products

A variety of insurance plans are offered

Health Managment Organizations - HMOs, provide care based on a fixed per person per month payment.

Preferred Provider Organizations - insurance companies network with a group of physicians and hospitals to provide care. Members must attend their care from network providers.

Point of Service (POS): an HMO model, that allows members to go outside of the provider network, if the patient wishes to pay a higher copay or deductable.

High Deductable Health Plans (HDHPs), such as Health Savings Accounts (HSA)HSA / and Health reimbursement accounts (HRAs) - tax free savings accounts with a high deductible health insurance plan.

Breakdown of health insurance plans:
PPO 57%, HMO 21%, POS 13%, HDHP 5%, Traditional 3%

6. Healthcare Reimbursement System

Four primary reimbursement systems are used. It is a continual balance to cover the costs provided in the administration of care, while at he same time incentivizing providers to become more efficient.

Fee-for-service:  insurance companies are billed for episodic care, and they pay based on their maximum reimbursement rates. It was estimated that potentially 30% of all care is excess/unneeded and may be induced by the wrong incentives.

Diagnostic-Related Groups (DRGs): reimburse hospitals for payments using a 'payment bundle' rather than fee-for-service. When Medicare moved to DRG payments in 1985, the length of hospitalization dropped on average from 10 to less than 5 days.

Capitation: Health Management Organizations draw their origin from a capitation model where fixed payments are patient per year are paid to the organization to provide comprehensive care. This was popular in the 1980s-2000s as a way to incentive preventative treatment.

Pay for Performance (P4P): insurance companies work to incentive 'high quality care'  by providing bonuses for meeting quality goals, and to decentivize 'never-events' by refusing to  reimburse for instance operating on the wrong site (eg left vs right knee).

7. So whats the problem?

The big issue with insurance in America is that one's coverage is so closely tied to their employment. Loose your job? Loose your health coverage. Transfer jobs and you may have to reapply with new insurer, yet you may have a pre-existing condition (this was supposed to be fixed in party with removal of pre-existing conditions in the Accountable Care Act).

Although there are policies to allow out of pocket payments to bridge of coverage after leaving an employee, this still does not solve the problem that when one starts a new job, they may have to apply to a new insurance company with that company - and in such a case may be denied given preexisting health conditions.

In addition, changing employment, may also change the catchment areas of hospitals and physicians your insurance company covers - meaning your physician may have to change as well.

Further Commentary

Outsiders often criticize the American Health System with a primary focus on the trouble it causes patients.

It is important to realize that the system is also very problematic for employers.

Warren Buffet stated "The ballooning costs of healthcare act as a hungry tapeworm on the American economy". Part of the reason for the JP Morgan, Berkshire Hathaway, Amazon formation of a joint healthcare company is to help get control over and constrain the one line item on their budget that grows astronomically each year (without any increased return or value) - their coverage of employee health costs.

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