Component 1: Introduction to Health Care and Public Health in the U.S. Unit 4: Financing Health Care...

Component 1:Introduction to Health Care

and Public Health in the U.S.

Unit 4: Financing Health Care

Lecture 3

This material was developed by Oregon Health & Science University, funded by the Department of Health and Human Services, Office of the National Coordinator for Health Information Technology under Award Number IU24OC000015.

Topics in This Lecture

• How health insurance works• Sources of health insurance• Types of health insurance• What managed care is• How insurers pay health care providers for their

services• Regulation of private health insurance

Component 1/Unit 4-3Health IT Workforce Curriculum

Version 2.0/Spring 20112

How Health Insurance Works

• Spreads the financial risk over a large pool of people

• Balances risk with cost– 5% of the population accounts for approximately

half of all health care spending– People over age 65 consume more health care

than other age groups do



Public vs. Private Insurance

• Public insurance is government-run– Medicare– Medicaid– Children’s Health Insurance Program (CHIP)– Department of Veterans Affairs– Military Health System

• Private insurance is run primarily by state-licensed companies – Some employers have their own plan (may

contract to third-party administrator)



Blue Cross/Blue Shield

• Independent, state-licensed organizations• Historically set up as not-for-profits under

special state laws• Blue Cross reimburses hospitals• Blue Shield reimburses physicians• Today, some Blue Cross/Blue Shield

organizations operate as commercial insurers



2 General Typesof Health Insurance

• Indemnity plans are “traditional” plans that were prevalent a generation or two ago– Fee for service– Simply provide reimbursement to providers

• Managed care plans prevail today– Offer financial incentives to providers– Integrate the financing and delivery of care within a

single system



What Is “Managed” in Managed Care?

• Ideally, managed care keeps costs in check while delivering high-quality health care

• Many people consider managed care’s primary function to be a “gatekeeper”

• There are many versions of managed care plans, with differences based primarily on cost and provider choice



Cost vs. Provider Choice

• The various managed care plans are defined by choices in what providers the patient can use

• Fewer choices translate to lower health care premiums and lower out-of-pocket costs

• 3 main types of managed care plans have varying degrees of choices and costs– Health maintenance organization (HMO)– Preferred provider organization (PPO)– Point-of-service plan (POS)



Comparison of Indemnity vs. Managed Care Programs



INDEMNITY MANAGED CARE

Feature Fee for service HMO PPO POS

Providernetwork

None Strict or exclusive

Broad network Hybrid of HMO/PPO

Physician choice Unlimited PCP required PCP not required

PCPrecommended

Referrals Not needed Must come from PCP

Not needed Required if out of network

Precertification Not needed Required Not usually required

Not usuallyrequired

Preventive care Usually not covered

Covered Some covered Varies

Relative cost to patient

High Low Medium–high Medium

HMO Models• Staff model: Doctors are salaried employees• Group model: Doctors are employed by a group

practice; the plan contracts with the practice for their services; most patients that a doctor sees are patients in that plan

• Open-group model: As above, but doctors are freer to accept patients from outside the plan

• Independent physician association (IPA): Doctors are organized into a legal entity; have autonomy but also contract with the plan

• Network model: The plan contracts with multiple independent physicians, group practices, and/or IPAs

• Mixed model: Mixes and matches any of the above



Major Influences onthe Cost of Health Insurance

• Cost of prescriptions and medical technology• Aging population• Increase in chronic disease → more health care

consumption• Costs to administer health plan



How Insurers Pay Providers

• The provider submits a claim– Claim must include at least one diagnosis code, and

one procedure code for each service rendered• Diagnosis code = ICD-10-CM• Procedure code = CPT code

• A medical claims examiner or adjuster processes the claim – Determines “usual and customary” charge– Deducts any portion the patient is responsible for– Deducts any contractual provider discount– Reimburses the remainder



How InsurersPay Providers (cont’d)

• The patient receives an explanation of benefits (EOB), also called remittance advice– Regardless of whether claim is accepted or denied– Regardless of whether the patient receives a check

• A claim can be denied for many reasons:– Coding errors or insufficient information– Procedure considered experimental or otherwise not

covered by the policy• Rejected claims can be appealed



Regulation of PrivateHealth Insurance

• States control the legal structure of private insurers and monitor their finances– Purpose: To ensure the company can meet its

obligations to the people it insures

• Private insurance companies are also regulated by federal laws

• Federal law may take precedence over state law



Regulation of PrivateHealth Insurance (cont’d)

The most important federal laws:• ERISA (Employee Retirement Income Security Act)

– Regulates pension plans and health plans in private industry – Does not require employers to establish a plan, but requires

those who have plans to meet certain minimum standards – Requires a grievance and appeals process for participants to

get benefits from their plans– Gives participants the right to sue for benefits– Requires individuals who manage plans to meet certain

standards of conduct– Passed in 1974




• COBRA (Consolidated Omnibus Budget Reconciliation Act) – Allows employees to choose continuation of group

health benefits in certain cases– Voluntary or involuntary job loss, reduction in hours worked,

transition between jobs, death of a spouse, divorce, certain other life events

– Individuals may have to pay premium up to 102% of cost– Generally required for group health plans of companies

with 20+ employees– An amendment to ERISA, passed in 1986




• HIPAA (Health Insurance Portability and Accountability Act) – Defines “protected health information” and helps

ensure its privacy– Protects participants in group health plans

– Prohibits discrimination based on health status– Provides additional opportunities to enroll in group health

plan, after loss of coverage or certain life events– For some people, guarantees access to individual insurance

• An amendment to ERISA, passed in 1996




• ERISA also mandates certain types of coverage– Newborns' and Mothers' Health Protection Act

– Plans that offer maternity coverage must pay for at least a 48-hour hospital stay following childbirth

– Mental Health Parity Act– Lifetime and annual dollar limits on coverage must be the same

for mental illness and medical/surgical benefits– Women's Health and Cancer Rights Act

– Plans that cover medical/surgical benefits with respect to mastectomies must also cover certain post-mastectomy benefits, including reconstructive surgery and treatment of complications




• Affordable Health Care Act (Health Reform Law)– No limit or denial of coverage for children under 19 with

preexisting conditions– Insurance for adults denied due to preexisting condition– Ends lifetime limits and most annual limits on care– Allows young adults under 26 to stay on their parent’s health

insurance plan– Some plans will provide free access to preventive services– 50% discounts on brand-name drugs for seniors in the Medicare

“donut hole”– More benefits will be phased in through 2014 – Passed in 2010

Component 1/Unit 4-3 Health IT Workforce CurriculumVersion 2.0/Spring 2011

19

Summary• Insurance works by spreading financial risk• The government runs public insurance; individual

organizations run private insurance• Managed care balances choice with cost• Insurers pay providers based on diagnosis and

procedure codes• Private health insurers are regulated by both state and

federal laws• Important federal laws regulating private health

insurance are ERISA, COBRA, HIPAA, and the Affordable Health Care Act



Component 1: Introduction to Health Care and Public Health in the U.S. Unit 4: Financing Health Care...

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