Affordable Health Care Insurance – More Companies are Providing Ways to Save

It’s not easy to say affordable and health care insurance in the same sentence. They don’t seem to peacefully co-exist. The relative simplicity of purchasing health insurance has all but vanished. That doesn’t mean that the insurance buying public is out of options. Insurance plans are more complicated now. There are more deductibles. There are PPO’S and HMO’S. There are medically underwritten plans and some companies even have income based plans. There are more coinsurance combinations and varying amounts of co-pays for physician services. It sounds like the insurance companies have made things more difficult but in reality they have provided options to reduce costs.

The out of pocket expenses are increasing for the health insurance buyer. Self-insuring is what makes affordable health care insurance become a reality. There is no better way to reduce premium costs than by using higher deductibles. We used to purchase health insurance with a $100 deductible. The insurance company was on the hook immediately. The rising medical costs have made that prohibitive.

Once your deductible is fulfilled another out of pocket expense occurs. This is called coinsurance. The most common coinsurance clause is the 80/20. You pay 20% of the actual expense after the deductible. After your 20% reaches a certain threshold (usually $2000) the insurance company begins to pay 100% of the cost.

Deductible and coinsurance options vary greatly and have a great impact on the final premium. This is not rocket science but it is imperative that you understand these insurance concepts. The last piece of the puzzle are Health Savings Accounts. These are like medical IRA’s. They are tax deductible savings accounts specifically designed to cover medical expenses. HSA’S are an excellent way to pay for the out of pocket expenses.

Who’s Paying For Health Care?

America spent 17.3% of its gross domestic product on health care in 2009 (1). If you break that down on an individual level, we spend $7,129 per person each year on health care…more than any other country in the world (2). With 17 cents of every dollar Americans spent keeping our country healthy, it’s no wonder the government is determined to reform the system. Despite the overwhelming attention health care is getting in the media, we know very little about where that money comes from or how it makes its way into the system (and rightfully so…the way we pay for health care is insanely complex, to say the least). This convoluted system is the unfortunate result of a series of programs that attempt to control spending layered on top of one another. What follows is a systematic attempt to peel away those layers, helping you become an informed health care consumer and an incontrovertible debater when discussing “Health Care Reform.”

Who’s paying the bill?

The “bill payers” fall into three distinct buckets: individuals paying out-of-pocket, private insurance companies, and the government. We can look at these payors in two different ways: 1) How much do they pay and 2) How many people do they pay for?

The majority of individuals in America are insured by private insurance companies via their employers, followed second by the government. These two sources of payment combined account for close to 80% of the funding for health care. The “Out-of-Pocket” payers fall into the uninsured as they have chosen to carry the risk of medical expense independently. When we look at the amount of money each of these groups spends on health care annually, the pie shifts dramatically.

The government currently pays for 46% of national health care expenditures. How is that possible? This will make much more sense when we examine each of the payors individually.

Understanding the Payors

Out-of-Pocket

A select portion of the population chooses to carry the risk of medical expenses themselves rather than buying into an insurance plan. This group tends to be younger and healthier than insured patients and, as such, accesses medical care much less frequently. Because this group has to pay for all incurred costs, they also tend to be much more discriminating in how they access the system. The result is that patients (now more appropriately termed “consumers”) comparison shop for tests and elective procedures and wait longer before seeking medical attention. The payment method for this group is simple: the doctors and hospitals charge set fees for their services and the patient pays that amount directly to the doctor/hospital.

Private Insurance

This is where the whole system gets a lot more complicated. Private insurance is purchased either individually or is provided by employers (most people get it through their employer as we mentioned). When it comes to private insurance, there are two main types: Fee-for-Service insurers and Managed Care insurers. These two groups approach paying for care very differently.

Fee-for-Service:

This group makes it relatively simple (believe it or not). The employer or individual buys a health plan from a private insurance company with a defined set of benefits. This benefit package will also have what is called a deductible (an amount the patient/individual must pay for their health care services before their insurance pays anything). Once the deductible amount is met, the health plan pays the fees for services provided throughout the health care system. Often, they will pay a maximum fee for a service (say $100 for an x-ray). The plan will require the individual to pay a copayment (a sharing of the cost between the health plan and the individual). A typical industry standard is an 80/20 split of the payment, so in the case of the $100 x-ray, the health plan would pay $80 and the patient would pay $20…remember those annoying medical bills stating your insurance did not cover all the charges? This is where they come from. Another downside of this model is that health care providers are both financially incentivized and legally bound to perform more tests and procedures as they are paid additional fees for each of these or are held legally accountable for not ordering the tests when things go wrong (called “CYA or “Cover You’re A**” medicine). If ordering more tests provided you with more legal protection and more compensation, wouldn’t you order anything justifiable? Can we say misalignment of incentives?

Managed Care:

Now it gets crazy. Managed care insurers pay for care while also “managing” the care they pay for (very clever name, right). Managed care is defined as “a set of techniques used by or on behalf of purchasers of health care benefits to manage health care costs by influencing patient care decision making through case-by-case assessments of the appropriateness of care prior to its provision” (2). Yep, insurers make medical decisions on your behalf (sound as scary to you as it does to us?). The original idea was driven by a desire by employers, insurance companies, and the public to control soaring health care costs. Doesn’t seem to be working quite yet. Managed care groups either provide medical care directly or contract with a select group of health care providers. These insurers are further subdivided based on their own personal management styles. You may be familiar with many of these sub-types as you’ve had to choose between then when selecting your insurance.

  • Preferred Provider Organization (PPO) / Exclusive Provider Organization (EPO):This is the closet managed care gets to the Fee-for-Service model with many of the same characteristics as a Fee-for-Service plan like deductibles and copayments. PPO’s & EPO’s contract with a set list of providers (we’re all familiar with these lists) with whom they have negotiated set (read discounted) fees for care. Yes, individual doctors have to charge less for their services if they want to see patients with these insurance plans. An EPO has a smaller and more strictly regulated list of physicians than a PPO but are otherwise the same. PPO’s control costs by requiring preauthorization for many services and second opinions for major procedures. All of this aside, many consumers feel that they have the greatest amount of autonomy and flexibility with PPO’s.
  • Health Management Organization (HMO): HMO’s combine insurance with health care delivery. This model will not have deductibles but will have copayments. In an HMO, the organization hires doctors to provide care and either builds its own hospital or contracts for the services of a hospital within the community. In this model the doctor works for the insurance provider directly (aka a Staff Model HMO). Kaiser Permanente is an example of a very large HMO that we’ve heard mentioned frequently during the recent debates. Since the company paying the bill is also providing the care, HMO’s heavily emphasize preventive medicine and primary care (enter the Kaiser “Thrive” campaign). The healthier you are, the more money the HMO saves. The HMO’s emphasis on keeping patients healthy is commendable as this is the only model to do so, however, with complex, lifelong, or advanced diseases, they are incentivized to provide the minimum amount of care necessary to reduce costs. It is with these conditions that we hear the horror stories of insufficient care. This being said, physicians in HMO settings continue to practice medicine as they feel is needed to best care for their patients despite the incentives to reduce costs inherent in the system (recall that physicians are often salaried in HMO’s and have no incentive to order more or less tests).

The Government

The U.S. Government pays for health care in a variety of ways depending on whom they are paying for. The government, through a number of different programs, provides insurance to individuals over 65 years of age, people of any age with permanent kidney failure, certain disabled people under 65, the military, military veterans, federal employees, children of low-income families, and, most interestingly, prisoners. It also has the same characteristics as a Fee-for-Service plan, with deductibles and copayments. As you would imagine, the majority of these populations are very expensive to cover medically. While the government only insures 28% of the American population, they are paying for 46% of all care provided. The populations covered by the government are amongst the sickest and most medically needy in America resulting in this discrepancy between number of individuals insured and cost of care.

The largest and most well-known government programs are Medicare and Medicaid. Let’s take a look at these individually:

Medicare:

The Medicare program currently covers 42.5 million Americans. To qualify for Medicare you must meet one of the following criteria:

  • Over 65 years of age
  • Permanent kidney failure
  • Meet certain disability requirements

So you meet the criteria…what do you get? Medicare comes in 4 parts (Part A-D), some of which are free and some of which you have to pay for. You’ve probably heard of the various parts over the years thanks to CNN (remember the commotion about the Part D drug benefits during the Bush administration?) but we’ll give you a quick refresher just in case.

  • Part A (Hospital Insurance): This part of Medicare is free and covers any inpatient and outpatient hospital care the patient may need (only for a set number of days, however, with the added bonus of copayments and deductibles…apparently there really is no such thing as a free lunch).
  • Part B (Medical Insurance): This part, which you must purchase, covers physicians’ services, and selected other health care services and supplies that are not covered by Part A. What does it cost? The Part B premium for 2009 ranged from $96.40 to $308.30 per month depending on your household income.
  • Part C (Managed Care): This part, called Medicare Advantage, is a private insurance plan that provides all of the coverage provided in Parts A and B and must cover medically necessary services. Part C replaces Parts A & B. All private insurers that want to provide Part C coverage must meet certain criteria set forth by the government. Your care will also be managed much like the HMO plans previously discussed.
  • Part D (Prescription Drug Plans): Part D covers prescription drugs and costs $20 to $40 per month for those who chose to enroll.

Ok, now how does Medicare pay for everything? Hospitals are paid predetermined amounts of money per admission or per outpatient procedure for services provided to Medicare patients. These predetermined amounts are based upon over 470 diagnosis-related groups (DRGs) or Ambulatory Payment Classifications (APC’s) rather than the actual cost of the care rendered (interesting way to peg hospital reimbursement…especially when the Harvard economist who developed the DRG system openly disagrees with its use for this purpose). The cherry on top of the irrational reimbursement system is that the amount of money assigned to each DRG is not the same for each hospital. Totally logical (can you sense our sarcasm?). The figure is based on a formula that takes into account the type of service, the type of hospital, and the location of the hospital. This may sound logical but often times this system fails.

Medicaid:

Medicaid is a jointly funded (funded by both federal and state governments) health insurance program for low-income families. Eligibility rules vary from state to state and factors in age, pregnancy, disability, income and resources. Poverty alone does not qualify an individual for Medicaid (there is currently no government-provided insurance for the American poor…despite the fact that almost all first world countries have such a system…enter the current health care debate) but is a significant factor in Medicaid eligibility. Each state operates its own Medicaid program but must adhere to certain federal guidelines to receive matching federal funds (you may be familiar with California’s MediCal, Massachusetts’ MassHealth and Oregon’s Oregon Health Plan due to their recent media coverage). Medicaid payments currently assist nearly 60 percent of all nursing home residents and about 37 percent of all childbirths in the United States.

How are the bills paid?

We now understand who is paying the bill but we have yet to cover how those bills are paid. There are two broad divisions of arrangements for paying for and delivering health care: fee-for-service care and prepaid care.

Fee-for-Service

As we mentioned briefly while discussing PPO’s, in a fee-for-service structure, consumers select a provider, receive care (a.k.a. “service”) from the provider, and incur expenses (a.k.a. “a fee”) for the care. Deductibles and copayments are also required as previously discussed. Pretty simple. The physician is then reimbursed for their services in part by the insurer (i.e. a private insurance company or the government) and in part by the patient, who is responsible for the balance unpaid by the insurer (the return of the unanticipated medical bill despite your overpriced insurance). Again, the major downfall of the fee-for-service approach is that medical professionals are incentivized to provide services (and by this we mean any and all services they can legally request or must request to be protected legally), some of which may be nonessential, to increase their revenue and/or “C.Y.A.” (revenue that has steadily decreased as insurance companies continue to lower the amount they pay medical professionals for their services).

Fee Schedule

A fee schedule operates in the same way that Fee-for-Service does with one exception: instead of using the “usual, customary, and reasonable” amount to reimburse medical professionals, states set fees to be paid for specific procedures and services. The reimbursement is very low ($.10-.15 on the dollar) and barely covers the actual direct cost of providing the care. Physicians may chose to opt into the plan or not (starting to see why a doctor might not be so excited about this plan?). Would you sign up to be paid 10 cents for every dollar you charged for your work? Try the insurance reimbursement approach next time you go out to eat. We’ll come bail you out of the Big House if things go awry. What happens when the insurance system does this? You get the Wal-Mart approach to medicine (high volume, low quality). Not the kind of heath care we recommend.

Pre-Paid

Pre-paid health care? Like a phone card? Not exactly–but close. The pre-paid system evolved out of the insurance company’s desire to share its risk ( a.k.a “pooled risk”) with health care providers. Essentially, they wanted the doctors to have some skin in the game. In the pre-paid system, insurers make arrangements with health care providers to provide agreed-upon covered health care services to a given population of consumers for a (usually discounted) set price-the per-person premium fee-over a particular time period. What does that mean? It means that Dr. Bob gets paid, say, $30 per month to take care of Joe the Plumber including his blood work and x-rays. If Dr. Bob spends less than that caring for Joe, he makes money. If Joe is sick every month and needs lots of tests and follow-up visits, Dr. Bob could lose money caring for Joe. The set monthly fee paid to the doctor for taking care of a patient is set up on a per-member, per-month (PMPM) rate called a “capitated fee.” The provider receives the capitated fee per enrollee regardless of whether the enrollee uses health care services and regardless of the quality of services provided (not a good thing in our book). Theoretically, providers should become more prudent and subsequently provide services in a more cost effective manner because they are bearing some of the risk. Often times, however, less care is provided than is needed in hopes of saving money and increasing profits. In addition, physicians are incentivized to cherry pick the youngest and healthiest patients because these patients typically require less care (i.e. they are cheaper to keep healthy). We like that doctors are encouraged to keep patients healthy but we have to worry about the ways in which they are being encouraged to reduce costs (as little care as possible?). Again, the incentive system falls short and encourages providers to act unethically.

The Take Home Message:

Health Care in the United States today is complex and messy at best. The layers on top of layers of failed attempts to correct the system continue to encourage the wrong behavior in both patients (out of fear of medical bills) and providers (out of fear of bankruptcy). We have yet to provide every American citizen with medical care (something that goes without saying in most 1st World countries…even Cuba has it!). We spend more money on caring for our citizens than any country in the world yet we continue to lag behind in terms of national health outcomes. We think it’s safe to say that we’re not getting the best bang for our buck. The ultimate solution? We wish we knew. Only time will tell where the system goes from here. Our goal: to help you better understand the system as it stands today in hopes of developing a more effective, efficient, and comprehensive system for the future. Are you with us?

References

1. Levey N. Soaring cost of healthcare sets a record. Los Angeles Times. Feb 4 2010.

2. McKenzie J, Pinger R, Kotecki J. An Introduction to Community Health, 6th Ed. Jones and Bartlett Publishers. 2008.

3. Bodenheimer TS, Grumbach K. Understanding Health Policy. 5th Ed. Lange Medical Books/McGraw-Hill. 2002.

4. Kaiser Family Foundation. “EXPLAINING HEALTH CARE REFORM: How Do Health Care Costs Vary By Region?” Brief #8030. December 2009.