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Overview of Health Insurance & Managed Care Principles

& HistoryJonathan P. Weiner, Dr. P.H.

Professor or Health Policy & Management

Session 1

3

Goals of Session

• To introduce some basic principles of health insurance and managed care.

• To provide a brief history and overview of health insurance and managed care in the US.

• To identify some key trends

4

0200400600800

100012001400160018002000

1962 1966 1970 1974 1978 1982 1986 1990 1995 1998 2000 2007

Year

Dol

lars

(bill

ions

)

Source: HCFA, CMS

Growth in US Health Care Spending: 1962-2007

5

Paying for Health Care: Alternative Approaches

• Government employed providers• Government “social insurance”

– Mandatory buy-in– Entitlement for special populations

• As “benefit” of employment– Insurance– Direct care or access to contract providers

• Union/worker collectives• Private “indemnity” health insurance • Out of pocket• Charity care

6

Definition of Insurance

• A social device where a group of persons transfers risk to an insuring entity in order to combine loss experience.

• This theoretically permits the ability to actuarially predict these “losses” and to calculate the premium payments that will need to be contributed by all members of the risk pool.

7

Some characteristics of an “ideal” private insurance market

• Large risk pool

• Predictable, but “random” event

• Potential high cost of insurable event

• Event not controllable by parties– “moral hazard”

• Market economically feasible

8

Approaches for Sharing and Bearing Insurance “Risk”

• Consumers– Premiums,cost sharing (deductibles,co-pays,co-insurance,

coverage threshold)

• “Intermediary” (Insurance/managed care entity) – Inclusions/exclusions, thresholds, re-insurance

• Providers- Capitation, risk-sharing arrangements,employment

• Employers– Premiums, self-insurance, re-insurance

9

Patient Cost, Use, and Insurance Coverage

Adapted from Chollet DJ. Mapping Insurance Markets. State Coverage Initiatives, AcademyHealth, 1997.

Patient Cost of Care

Use of Care

Total Cost for Uninsured Patient

Out-of-pocket cost for insured patient, net of insurance premium

Co-insurance applies

Deductible Out-of-Pocket Limit

External Plan Maximum

10

Why Employer’s Got Involved In Health Care

• Healthy employees are productive employees

• European immigrant / Union expectations

• Vacuum existed in the 1930-50’s, now “stuck” in this role.

• Tax advantage

• Attracts good employees

• “Self Insurance” (ERISA) is now big factor

11

US Health Insurance: Some Historical Footnotes

• 1930’s -- Blue-Cross/ Blue Shield and Hospital Association.

• 1930’s – Prepaid-Group Practices (PGPs) and Union/Employers

• 1950’s – Commercial insurers get into the act

• 1960’s -- Federal “great society” – Medicare and Medicaid

• 1970’s - The “Health Maintenance Organization” (HMO) Act (the unholy alliance of AMA sponsored IPAs and PGPs)

12

Proportion of Americans with Health Insurance: 1940-2005

0102030405060708090

100

1940

1945

1950

1955196

0196

5197

019

7519

8019

9019952000200

5

Year

% In

sure

d

13

Health Care Financing and Coverage (Approx) in the US

Population PaymentPrivate Ins. 67% 44%

Medicare 10 16Medicaid 9 14Uninsured 14 -Out-of -Pocket - 16Other - 10

14

Who Pays for Health Care 1965-2001

25%

42% 41% 46% 45%6%

5% 6%6% 5%

25%

23%30%

33% 35%

44%29%

22%15% 14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1965 1975 1985 1995 2001

Public Total Private OtherPrivate Insurance Private Out-of-Pocket

CMS Office of the Actuary, National Health Statistics Group. Figures may not add due to rounding.

15

The “Actuarial Cycle” -- Cost / premium see-saw

Image from CMS Health Care Industry Market Update. March 24, 2003.

16

Insurance premiums vs. earnings and inflation

12.0%

18.0%

14.0%

8.5%

0.8%

5.3%

8.2%

10.9%

12.9%13.9%

11.2%

9.2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1988 1989 1990 1993 1996 1999 2000 2001 2002 2003 2004 2005

Health Insurance Premiums Overall Inflation Workers' Earnings

Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 1999-2005; KPMG Survey of Employer-Sponsored Health Benefits: 1993, 1996; The Health Insurance Association of America (HIAA), 1988, 1989, 1990; Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April), 1988-2005; Bureau of Labor Statistics, Seasonally Adjusted Data from the Current Employment Statistics Survey (April to April), 1988-2005.

17

The Late 1980’s: medical inflation is out of control

• The bankrollers of the system said enough was enough, and the era of “managed care” was born. HMOs and their techniques served as the model.

18

Managed Care’s Approximate Share of the Health Insurance Market in 1988 & 2007

25%

85%

75%

15%

0%

20%

40%

60%

80%

100%

120%

1988 2007

MCO FFS

19

The Key “Ingredients” of Managed Care

• Care “management”– aka, utilization/disease management

• Vertical integration / coordination

• Financial risk sharing with providers

• Attempts at instilling a market

20

Definition of Managed Care

An integrated system that manages health services for an enrolled population rather than simply providing or paying for them.

Services are usually delivered by providers who are under contract to, or employed by the plan.

21

The Health Insurance Models

• Traditional (Fee-for-Service) Indemnity

• “Managed” Indemnity Plan

• Preferred Provider Organization (PPO)

• Health Maintenance Organization (HMO)

22

Shift in Employment-Based Plan Type 1988 - 2002

16% 21%31% 27% 28% 29%

23% 26%

7%

14% 24% 25% 22%22% 18%

11%

26%

28%

35%38% 41% 48% 52%

73%

46%

27%14% 9% 8% 7% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1988 1993 1996 1998 1999 2000 2001 2002

HMO POS PPO Indemnity

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2002

23

Managed Care Is Mainstream

Managed Care = US Health Care

24

INGREDIENTS SIMMERING IN TODAY’S PRESSURE COOKER

• Health care cost spiral is inevitable.

• “We”consumers and providers want it “all.”

• Uninsured likely to grow, government not able (willing?) to tackle head-on.

• Other than MCOs, no party is willing (able?) to come to grips with resource limitations.