History

Insurance companies have existed for centuries. Notably, Lloyds of London insured cargoes on merchant ships, which were frequently subject to loss from piracy, inclement weather, and other catastrophes. The beginnings of insurance in health care date only to the mid-nineteenth century, when companies insured railroad and paddleboat employees in the event of catastrophic injury or death. A lump sum was paid to an employee or employee’s family after such an event.

Assumption of Risk

Health care providers render services for which they expect to be fairly compensated. Patients need these services, but their high cost is largely unaffordable. Insurance companies are willing to assume the risk of having to pay for expensive services, but they cannot spend more than they earn in premiums. To avoid this, insurance companies try to balance their risk by insuring a large number of patients, many of whom will likely not need health care services at all. This assumption of risk is the foundation of the concept of insurance.

Insurance companies negotiate contracts with both the patient (usually via the employer) and the provider. Each party would like to minimize its financial loss. The provider wants to minimize the chances of receiving less payment for services than it costs to provide those services. The insurance company wants to minimize the potential loss of paying out more for health care than it receives in premiums. The patient wants to minimize the cost of health care. Each party negotiates contracts and attempts to minimize its risks by taking all potential treatment costs and circumstances into consideration.

Insurance companies serve the public by assuming the risk of financial loss. Automobile owners probably have auto insurance. They pay periodic premiums to the auto insurance company, which in turn covers all or part of the costs incurred in an accident. The auto insurance company, although assuming the risk of financial loss in the event of an accident, is gambling that its customers will not have one. In fact, it goes to great lengths to predict the likelihood of accidents in certain populations, geographical areas, and types of vehicles. If one pays $1000 per year in auto insurance premiums for 40 years and never has an accident, then the insurance company keeps the $40,000 (plus interest) accumulated over the life of the policy. If the auto insurance company insures a very large number of drivers, in theory and under normal circumstances, only a small percentage of them will ever have a costly accident. In some states, auto insurance companies are permitted to choose which drivers they wish to insure. Obviously, they would prefer to choose drivers with good driving records and no history of accidents. In other states, insurers may not pick and choose and must offer insurance to anyone who applies for it. This requirement raises the risk that the insurer will be required to pay for the costs of accidents and resultant settlements, in turn raising the cost of auto insurance for all, unless the premiums of the high-risk drivers are increased significantly to compensate.

When the employer pays the cost (premium) of the health care insurance, it is the employer who negotiates what will be covered. Although there are some federal mandates regarding what must be covered and under what circumstances, in general it is the employer’s decision—generally based on what the employer can afford to pay in premiums for the group. Group plans, such as those negotiated through employers, consist of pools of potential patients (in this case, employees) whose risk can be averaged by the third party payer.

Indemnity

A typical insurance arrangement requires the patient to pay the physician or other health care provider and then submit the bills to the insurance company for reimbursement. Under the terms of the insurance contract is a list of services for which the insurance company agrees to pay, called the covered services. If the patient receives a covered service, then the insurance company reimburses the patient. Some insurance companies pay 100% of the cost of certain covered services and a lower percentage of the cost of other covered services. This type of insurance, called indemnity insurance, was the predominant type of health insurance for many years, and patients generally paid the premiums. Indemnity insurance plans still exist, but managed care plans have become more prevalent.

An important feature of indemnity insurance is the deductible. A deductible is the amount for which the patient is personally responsible before any insurance benefits are paid. If a patient incurs medical expenses of $5000, and her policy includes a deductible of $300, she pays the first $300 out-of-pocket (from her personal funds). The insurer then pays the portion of the remaining $4700 covered by the policy. After that, the patient is responsible for any amount not covered by her policy.

Depending on the insurance company plan, a deductible could apply for every encounter, every visit, or every hospitalization, or it could be applied on an annual basis. If the insurance plan covers a whole family, the deductible could be per person or per family. One effect of the deductible is that routine health care costs often do not exceed the deductible amount. In these instances, the insurance company ultimately covers and pays for only unusual or extraordinary expenses. Conversely, indemnity contracts often specify limits for certain covered services. If the benefit limit is $3000 for physician office visits and the patient’s care (after the deductible) is $4000, then the patient is responsible for the additional $1000.

Indemnity insurance plans led to an increase in the amount of money spent on health care. In a simple physician-patient relationship, the patient bears the cost of the care and therefore has some influence on the fees. Individuals may choose not to go to the physician in the first place because they feel the fee is too high and they cannot afford it, or they might be able to afford only some services. But because indemnity insurance plans, even with the deductible, reduce the out-of-pocket expense to the patient, they increase the likelihood that the services of the provider will be used regardless of the fees. Consequently, the number of people using health care services has increased. In addition, if the insurance company reimburses for services without reviewing the need for those services, then physicians have no incentive to be conservative in their diagnostic and treatment plans. The costs have risen still further with advances in diagnostic and therapeutic technologies, many of which are extremely costly in their initial phases. As these technologies become more widely used, the cost of providing health care increases.

In addition to the technology-driven expenses, health care costs have risen because a small portion of the health care community provided an excessive number of services to their patients. Two radiographs may have been taken when one would have sufficed, or computed tomography or magnetic resonance imaging was used when a simple radiograph would have been sufficient to achieve the same diagnostic goal. Often it is not entirely the provider’s fault when these excesses occur. Some patients may feel entitled to the newest technologies even if they are not necessary, and so they pressure their physicians into ordering them. The physician may not want to lose the patient’s business or to be subjected to a lawsuit for failure to use all available diagnostic means.

To meet the rising costs of health care, insurance companies raised health care premiums. Eventually, some employers could no longer afford to offer health insurance as a benefit. Many employers began shifting the cost of insurance to the employees. Other employers solved the escalating premium problem by hiring more part-time employees, who were not eligible for benefits. Still other employers hired outside contractors to perform noncritical functions.

With costs rising, health insurance companies had to find ways to control their expenses. Certain steps, such as imposing higher deductibles and strictly limiting the number and types of covered services, could help lower their costs. However, insurance becomes less attractive under these circumstances, and insurance companies want to remain in business. The insurance industry responded to these circumstances and factors, opening the door to the concept of managed care plans.

Managed Care

The term managed care, in general, refers to the control that an insurance company or other payer exerts over the reimbursement process and over the patient’s choices in selecting a health care provider.

In the pure physician-patient relationship, the patient uses the physician of his or her choice. The patient arrives at the office with a medical concern, and the physician determines a diagnosis and develops a treatment plan. The patient agrees (or declines) to undergo the treatment plan, the physician bills the patient, and the patient pays the physician.

Under managed care, the insurer (payer) and the health care provider have a contractual arrangement with each other. The providers participate in a particular managed care plan, which means that they are under contract with the managed care plan insurer to provide services to the insurer’s patients. Managed care patients are referred to, depending on the insurer, as members, enrollees, or covered lives. The primary insured member is the subscriber, with those covered under the subscriber’s policy referred to as dependents or additional insured. The insurer’s patients must choose their providers from those participating in the managed care plan. The scope of services paid for is determined by the insurer’s contract with the subscriber (or the subscriber’s employer or group manager). Decisions about the medical necessity of specific services are made by the managed care organization. For example, a physician may write an order for a blood test to determine whether the patient has a vitamin D deficiency. The managed care organization may have determined that it will pay for vitamin D blood tests only if the patient is known or suspected to have a bone loss condition, such as osteopenia or osteoporosis.

In a managed care scenario, the patient goes to the primary care physician (PCP), whom the patient has chosen from a list of participating physicians. The physician diagnoses and treats the patient according to the guidelines from the managed care plan. The patient may pay the physician a small copay. The physician bills the managed care insurer directly for the visit. The managed care insurer may refuse to pay the physician if the physician does not obtain preapproval or authorization for some treatments, such as hospitalization. If the patient sees a physician outside the plan, the patient may not be covered at all and may have to pay the physician himself or herself. In many instances, the patient cannot go to a specialist directly but must visit the PCP first. After examination and discussion with the patient, the PCP must justify the necessity for the involvement of a specialist and must refer the patient to a specialist participating in the plan.

Managed care organizations seek to reduce costs by controlling as much of the health care delivery system as possible. The underlying rationale for managed care is to reduce overall costs by eliminating unnecessary tests, procedures, visits, and hospitalizations through financial incentives if the plan is followed and financial penalties or sanctions if the plan is not followed. A major controversy in this strategy lies in the definition of what constitutes unnecessary health care and who makes this determination. Traditionally, physicians have determined the care that they provide to patients, whereas managed care has shifted that determination somewhat to the insurer. To emphasize: The managed care organization does not dictate what care will be rendered; it dictates what care it will pay for. It is the prohibitive cost of care that drives a patient to elect only that care for which third party payment is available.

It should be noted that managed care plans employ physicians who assist in making determinations. For example, many managed care insurers did not consider preventive care to be necessary and would not pay for it. It was only through years of study, investigation, and trial and error that they discovered that preventive care was one of the best ways to reduce health care costs. This fact is particularly salient with regard to obstetrical care. The costs of treating a pregnant woman through prenatal testing, education, and regular examinations, with the goal of delivering a healthy newborn, are significantly less than those of treating a newborn or new mother with complications that could have been prevented or treated earlier at less cost. The same holds true for dental care. Theoretically, if teeth are examined and cleaned routinely, expensive fillings and root canal treatments will not be needed because the dentist will help detect and treat those problems early.

Individuals who change jobs are often forced to find new health care providers if their previous physicians are not included in the new insurer’s plan. The same may be true if the employer changes insurers. Patients who live at the outskirts of a plan’s primary service area may be required to travel unacceptably long distances to receive covered health care services.

Physicians may feel a loss of control in the treatment process. They are sometimes frustrated by the emphasis on medical practice standards, what some call “cookbook medicine,” and resistance to what they may see as individualized, alternative approaches of care. Managed care organizations focus heavily on statistical analysis of treatment outcomes and scrutinize physicians whose practices appear to vary significantly from the norm. Managed care has forced physicians to become more aware of and active in managing their own resources by employing reimbursement methods other than fee for service that shift some financial risk to the physician.

Despite controversy and criticism, managed care has become an important presence in the health care arena. Managed care takes a number of different forms, and there are many variations in the relationship among managed care organizations and physicians and other health care providers who deliver their services. At the heart of managed care is the idea that the insurer can gain better control over cost of health care by delivering the services directly. The U.S. Congress supported this concept with the Health Maintenance Organization Act of 1973, which encouraged the development of health maintenance organizations (HMOs) and mandated certain employers to offer employees an HMO option for health care delivery.

Preferred Provider Organizations

A preferred provider organization (PPO) is another managed care approach in which the organization contracts with a network of health care providers who agree to certain reimbursement rates. It is from this network that patients are encouraged to choose their primary care physician and any specialists. If a patient chooses a provider who is not in the network, the PPO reimburses in the same manner as an indemnity insurer: for specified services, with specific dollar amounts or percentage limits, and after any deductible is paid by the insured.

A PPO is a hybrid plan that gives patients the option of choosing physicians outside the plan without totally forfeiting benefits. In addition, PPOs may offer patients a certain degree of freedom to self-refer to specialists. For example, some plans allow patients to visit gynecologists and vision specialists directly, without referral from the PCP.

Self-Insurance

Although not specifically a type of insurance, self-insurance (or self-funded insurance) is an alternative to purchasing an insurance policy. The term self-insurance should not be confused with patients who “self-pay” or those who have no insurance or coverage plan at all. Self-insurance is really a savings plan in which an individual or employer puts aside funds to cover health care costs. In this way, the individual or company assumes the financial risk associated with health care. Because the assumption of risk rests with the company or the individual, this is not so much a type of insurance as it is an alternative to shifting the risk to an insurer.

An employer may choose to self-insure for all health care benefits, or it may self-insure to provide specific benefits that its primary insurance plan does not cover. For example, an insurance plan may cover preventive care, hospital and physician services, and diagnostic tests. However, it may not cover vision or dental care. The employer may designate to each employee a certain dollar amount with which the employee may then be reimbursed for these other services. Ordinarily, if the annual dollar amount is not spent, it is lost to the employee. Because the issue of confidentiality is so important, employers may choose to contract with an insurer to process health care claims, even if the employer self-insures.

Case Management

The responsibility for patient care rests with the provider, but often multiple providers, and possibly multiple facilities, are involved in a patient’s care. From the payer’s perspective, case management is necessary to coordinate the approval of and adherence to the care plan. From the provider’s perspective, case managers are necessary to facilitate the continuity of care. Thus a patient may have multiple case managers working from different perspectives, all helping to ensure that the patient is cared for appropriately and efficiently.

Utilization Review

Understanding clinical pathways and payer issues enables a facility to evaluate patient care, control the use of facility resources, and measure the performance of individual clinical staff. In a hospital, the utilization review (UR) department works closely with all health care disciplines involved in caring for a patient who has been admitted. UR staff members (also known as case management personnel) are responsible, with physician oversight, for performing an admission review that covers the appropriateness of the admission itself, certifying the level of care for an admission (e.g., acute, skilled nursing), monitoring the intensity of services provided, and ensuring that a patient’s length of stay is appropriate for that level of care. UR staff members may have daily contact with a patient’s insurance company during the patient’s admission to verify that the correct level of care payment will be received for the anticipated length of stay. UR staff may also make provisions for aftercare once the patient is discharged; this is called discharge planning.

Federal Coverage for Specific Populations

The U.S. government has historically allocated funds for the benefits of specific populations. In the case of health care, target populations of chronically ill or indigent patients have received low-cost or free health care. Until the 1960s, funding was not entirely predictable and health care providers were often required to provide a certain amount of charity care. In addition, large groups of individuals with limited incomes were not eligible for federal assistance. The federal government took the plunge in the mid-1960s with the enactment of legislation that made it the largest single payer in the health care industry: Title XVIII and Title XIX of the Social Security Act, which established the Medicare and Medicaid programs.

The Indian Health Services (IHS) provides care for American Indians and Alaska Natives. The IHS provides a comprehensive health service delivery system for approximately 1.9 million American Indians and Alaska Natives who belong to 564 federally recognized tribes in 35 states (Indian Health Services, 2012).

Medicare

Title XVIII of the Social Security Act established the Medicare program in 1965. Originally enacted to provide funding for health care for older adults, Medicare has grown to include individuals with certain disabilities or with end-stage renal disease requiring dialysis or kidney transplantation. Medicare represents more than 50% of the income of some health care providers. Medicare is an extremely important driving force in the insurance industry because many insurance companies follow Medicare’s lead in adopting reimbursement strategies. For example, if Medicare decides that a particular surgical procedure will be reimbursed only if is it performed in the inpatient setting (as opposed to ambulatory surgery), other insurance companies may choose to enforce the same rule.

The Medicare program, although funded by the federal government and administered by the Centers for Medicare and Medicaid Services (CMS), does not process its own claims reimbursements. Reimbursements are processed by Medicare administrative contractors (MACs) located in different regions throughout the country.

Medicare coverage applies in four categories: Parts A, B, C, and D. Part A covers inpatient hospital services and some other services, such as hospice. Part B covers physician claims and outpatient services. Part C is a voluntary managed care option. Part D, implemented in 2006, is a prescription drug program.

Because there are limits to Medicare coverage, many beneficiaries choose to purchase additional insurance; such plans, called wraparound policies (supplemental policies), are aimed at absorbing costs not reimbursed by Medicare. Many end-of-life hospital stays generate costs in the hundreds of thousands of dollars. Therefore wraparound policies can help preserve estates and save surviving spouses from financial ruin. Medicare may also be the secondary payer for enrollees who are still employed and covered primarily by the employer’s insurance plan.

Medicare beneficiaries also may enroll in a Medicare HMO program, called Medicare+Choice. Different HMOs have contracted with the federal government under the Medicare+Choice program to provide health services to these beneficiaries.

Medicaid

In 1965, Congress enacted Title XIX of the Social Security Act, which created a formal system of providing funding for health care for low-income populations. Also administered by CMS, Medicaid, which is sometimes also called “Medical Assistance,” is a shared federal and state program designed to shift resources from higher-income to lower-income individuals. Funds are allocated according to the average income of the residents of the state. Unlike Medicare, which reimburses through fiscal intermediaries, Medicaid reimbursement is handled directly by each individual state. The reimbursement guidelines vary from state to state. Some states have contracted with insurers to offer HMO plans to Medicaid beneficiaries.

Tax Equity and Fiscal Responsibility Act of 1982

With the federal government’s entry into the reimbursement arena, more citizens had access to health care services than ever before. The use of health care services rose accordingly, in turn driving health care costs upward at an alarming rate. Improved access for older adults meant better care and therefore longer life expectancy, which further increased costs. Thus cost containment became a critical issue. In the early 1970s, Professional Standards Review Organizations (PSROs) were established. PSROs conducted local peer reviews of Medicare and Medicaid cases for the purpose of ensuring that only medically necessary services were being rendered and appropriately reimbursed. Under the Peer Review Improvement Act of 1982, PSROs were replaced by Peer Review Organizations (PROs) through a federal law called the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). TEFRA included a broad array of provisions, many of which had nothing to do with health care. For example, TEFRA raised taxes by eliminating previous tax cuts. In 2002, PROs were replaced by (or, more accurately, renamed) Quality Improvement Organizations (QIOs). Many HIM professionals are employed in QIOs because certain specialized skills, such as data analysis and coding expertise, are necessary to support various federal initiatives delegated to QIOs. TEFRA’s impact on health care included a modification of Medicare reimbursement for inpatient care to include a case mix adjustment based on diagnosis related groups (DRGs). In 1983, Medicare adopted the Prospective Payment System (PPS), which uses the DRG classification system as the basis of its reimbursement methodology. Prospective payment systems (PPS) are discussed at length later in the chapter, but in the broadest terms, they operate on the assumption that patients with the same diagnoses will require roughly the same level of care, therefore consuming roughly the same resources and incurring roughly the same costs. Of course, the focus of treatment, patient length of stay, and the individuals involved in the care plan differ from setting to setting. Because prospective reimbursement systems are based on just these types of factors, different systems were developed for each health care setting.