HEALTH INSURANCE
Health insurance originated in the Blue Cross
system that was developed between hospitals
and schoolteachers in Dallas in 1929. Blue Cross
covered a pre-set amount of hospitalization
costs for a flat monthly premium and set its
rates according to a “community rating” system:
Single people paid one flat rate, families
another flat rate, and the economic risk of high
hospitalization bills was spread throughout the
whole employee group. The only requirement
for participation by an employer was that all
employees, whether sick or healthy, had to join,
again spreading the risk over the whole group.
Blue Shield was developed following the same
plan to cover ambulatory (i.e., non-hospital)
medical care.
The Blue Cross/Blue Shield plans were
developed to complement the traditional
method of paying for HEALTH CARE, often called
fee-for-service. Under this method, a physician
charges a patient directly for services rendered,
and the patient is legally responsible for pay-
ment. The Blue Cross/Blue Shield plans are
called indemnity plans,meaning they reimburse
the patient for medical expenses incurred.
Indemnity insurers are not responsible directly
to physicians for payment, although physicians
typically submit claims information to the
insurers as a convenience for their patients. For
insured patients in the fee-for-service system,
two contracts are created: one between the doc-
tor and the patient, and one between the patient
and the insurance company.
Traditional property and casualty insurance
companies did not offer health insurance
because with traditional rate structures, the risks
were great and the returns uncertain. After the
Blue Cross/Blue Shield plans were developed,
however, the traditional insurers noted the com-
munity rating practices and realized that they
could enter the market and attract the healthier
community members with lower rates than the
community rates. By introducing health screen-
ing to identify the healthier individuals, and
offering lower rates to younger individuals,
these companies were able to lure lower-risk
populations to their health plans. This left the
Blue Cross/Blue Shield plans with the highest-
risk and costliest population to insure. Eventu-
ally, the Blue Cross/Blue Shield plans also began
using risk-segregation policies and charged
higher-risk groups higher premiums.
During the 1960s, Congress enacted the
MEDICARE program to cover health care costs of
older patients and MEDICAID to cover health
care costs of indigent patients (Pub. L. No. 81-
97). The federal government administers the
Medicare Program and its components: Part A,
which covers hospitalization, and Part B, which
covers physician and outpatient services. The
federal government helps the states fund the
Medicaid Program, and the states administer it.
Medicare, Part A, initially covered 100 percent of
hospitalization costs, and Medicare, Part B, cov-
ered 80 percent of the usual, customary, and rea-
sonable costs of physician and outpatient care.
Under both the fee-for-service system of
health care delivery, where private indemnity
insurers charge premiums and pay the bills, and
the Medicare-Medicaid system, where taxes
fund the programs and the government pays the
bills, the relationship between the patient and
the doctor remains distinct. Neither the doctor
nor the patient is concerned about the cost of
various medical procedures involved, and fees
for services are paid without significant over-
sight by the payers. In fact, if more services are
performed by a physician under a fee-for-service
system, the result is greater total fees.
From 1960 to 1990, per capita medical costs
in the United States rose 1,000 percent,which was
four times the rate of inflation. As a consequence,
a different way of paying for health care rose to
prominence. “Managed care,” which had been in
existence as long as indemnity health insurance
plans, became the health plan of choice among
U.S. employers who sought to reduce the premi-
ums paid for their employees’ health insurance.
MANAGED CARE essentially creates a triangu-
lar relationship among the physician, patient (or
member), and payer.Managed care refers prima-
rily to a prepaid health-services plan where
physicians (or physician groups or other entities)
are paid a flat per-member, per-month (PMPM)
fee for basic health care services, regardless of
whether the patient seeks those services. The risk
that a patient is going to require significant treat-
ment shifts from the insurance company to the
physicians under this model.
Managed care is a highly regulated industry. It
is regulated at the federal level by the Health
Maintenance Organization Act of 1973 (Pub. L.
No. 93-222) and by the states in which it operates.
The health maintenance organization (HMO) is
the primary provider of managed care, and it
functions according to four basic models:
1. The staff-model HMO employs physicians
and providers directly, and they provide serv-
ices in facilities owned or controlled by the
HMO. Physicians under this model are paid a
salary (not fees for service) and share equip-
ment and facilities with other physician-
employees.
2. The group-model HMO contracts with an
organized group of physicians who are not
direct employees of the HMO, but who
agree to provide basic health care services to
the HMO’s members in exchange for capita-
tion (i.e., PMPM) payments. The capitation
payments must be spread among the physi-
cians under a pre-determined arrangement,
and medical records and equipment must
be shared.
3. The individual-practice-association (IPA)
model HMO is based around an association
of individual practitioners who organize to
contract with an HMO, and as a result treat
the HMO’s patients on a discounted fee-for-
service basis. Although there is no periodic
limit on the amount of payments from the
HMO, the physicians in an IPA must have an
explicit agreement that determines the dis-
tribution of HMO receipts and sets forth the
services to be performed.
4. The direct-service contract/network HMO
model is the most basic model. Under this
variation, an HMO contracts directly with
individual providers to provide service to
the HMO’s patients, on either a capitated or
discounted fee-for-service basis.
All four of these models share one very
important feature of HMOs: The health care
providers may not bill patients directly for serv-
ices rendered, and they must seek any and all
reimbursement from the HMO.
Another form of managed care is the pre-
ferred provider organization (PPO).A PPO does
not take the place of the traditional fee-for-
service provider (as does a staff–model HMO),
and does not rely on capitated payments to
providers. Instead, a PPO contracts with indi-
vidual providers and groups to create a network
of providers.Members of a PPO may choose any
physician they wish for medical care, but if they
choose a provider in the PPO network, their co-
payments—predetermined, fixed amounts paid
per visit, regardless of treatment received—are
significantly reduced, thus providing the incen-
tive to stay in the network. No federal statutes
govern PPOs, but many states regulate their
operations. There are three basic PPO models:
1. In a gatekeeper plan, a patient must choose a
primary-care provider from the PPO net-
work. This provider tends to most of the
patient’s health care needs and must author-
ize any referrals to specialists or other
providers. If the patient “self-refers” without
authorization, the cost savings of the PPO
will not apply.
2. The open-panel plan, on the other hand,
allows a patient to see different primary-care
physicians and to self-refer within the PPO
network. The financial penalties for seeking
medical care out of the PPO network are
much greater in this less-structured model
than in the gatekeeper model.
3. The exclusive-provider plan shifts onto the
patient all of the costs of seeking medical
care from a non-network provider, and in
this respect it is very similar to an HMO
plan.
Other forms of health care delivery that
encompass features of managed care include
point-of-service (POS) plans and physician-
hospital organizations (PHOs). A POS plan is a
combination of an HMO and an indemnity
insurance plan, allowing full coverage within the
network of providers and partial coverage out-
side of it. A patient must choose one primary-
care physician and might pay a higher monthly
rate to the POS if the physician is not in the
HMO network.Another version of the POS plan
creates “tiers” of providers, which are rated by
cost-effectiveness and quality of patient out-
comes. A patient may choose a provider from
any tier and then will owe a monthly premium
payment set to the level of that tier.
A PHO is very similar to an IPA in that it is
an organization among various physicians (or
physician groups) and a hospital, set up to con-
tract as a unit with an HMO. Physician-hospital
networks, within HMOs or through PHO con-
tracts, further the managed-care mission of
“vertical integration,” which is the coordination
of health care (and payment for that care) from
primary care through specialists to acute care
and hospitalization.
Managed care has affected Medicare as well
as private health care. In 1983, Congress
changed the payment system for Medicare, Part
A, from a fee-for-service-paid-retroactively sys-
tem to a prospective payment system, which
fixes the amount that the federal government
will pay based on a patient’s initial diagnosis, not
on the costs actually expended (Pub. L. No. 98-
369). Medical diagnoses are grouped according
to the medical resources that are usually con-
sumed to treat them, and from that grouping is
determined a fixed amount that Medicare will
pay for each diagnosis. Although this system is
applicable only to the acute-care hospital set-
ting, it is clearly an example of shifting the risk
of the cost of health care from the payer (in this
case, Medicare) to the provider, which is an
important element of managed care. In addi-
tion,many HMOs now offer Medicare managed-
care plans, and many older citizens opt for these
plans because of their paperless claims and pre-
set co-payments for physician visits and phar-
maceuticals.
The most recent development in the area of
health insurance is the medical savings account
(MSA), a pilot program that was created by the
Health Insurance Portability and Accountability
Act of 1996 (Pub. L. No. 104-191). The premise
behind the MSA is to take the bulk of the finan-
cial risk, and premium payments, away from the
managed-care and indemnity insurers; and to
allow individuals to save money, tax free, in a sav-
ings account for use for medical expenses. Indi-
viduals or their employers purchase major-
medical policies, medical insurance policies
with no coverage for medical expenses until
the amount paid by the patient exceeds a pre-
determined maximum amount, such as $2,500
per year. These policies have extremely high
deductibles and correspondingly low monthly
premiums. The participants take the money that
they would have spent on higher premiums and
deposit it in an MSA. This money accrues
through monthly deposits and also earns inter-
est, and it can be spent only to pay for medical
care. The major-medical policy applies if a cer-
tain amount equal to the high deductible is
expended or if the account is depleted.MSAs do
not incorporate any of the cost-controlling
aspects of managed-care organizations, and
instead depend on competition among providers
for patients (who are generally more cost-
conscious about spending their own money) to
encourage efficient health-care delivery and to
discourage unnecessary expense.
Litigation has resulted from insurance com-
panies seeking to place limits for certain condi-
tions. The decision by the U.S. Court of Appeals
for the Seventh Circuit in Doe and Smith v.
Mutual of Omaha Insurance Co., 179 F.3d 557
(7th Cir. 1999), cert. denied, 120 S. Ct. 845
(2000), concerns AIDS caps insurance policies.
At issue in the case was whether the Americans
with Disabilities Act (ADA) covers the content
of insurance policies. The plaintiffs, who sued
under the pseudonyms JOHN DOE and Richard
Smith, argued that Mutual of Omaha Company
had discriminated against them by selling them
insurance policies with lifetime caps on AIDS-
related expenditures. John Doe’s policy had a
lifetime AIDS cap of $100,000, and Richard
Smith’s policy had a cap of $25,000. Other
health insurance policies sold by the company
had lifetime caps for other diseases of $1 mil-
lion. The Seventh Circuit found that AIDS caps
do not violate the ADA. The court found that
