Excerpts from Ourselves Growing Older

HEALTH INSURANCE SYSTEMS TODAY

HOW HEALTH INSURANCE WORKS

Insurance is the word used to mean any system that provides benefits, that is, protection against or coverage of costs, in full or in part, for specific named events. Protection is purchased by subscribers or employers in exchange for annual fees or premiums. Health insurance offers benefits that cover part or all of the costs of some health- and medical-care procedures and some services, regardless of whether you, your employer, the federal government, or your state actually pays the premiums designed to cover these services.

Individuals and employers are purchasers of insurance premiums. Insurers and governments are "third-party payers" (neither patient nor medical-care provider). Whether or not some insuring agencies are defined as nonprofit, all insurance systems work on the profit motive, that is, they are designed to make money above the cost of paying the medical bills.

The majority of health-insurance coverage available today is based on the indemnity principle, which means protection is not comprehensive and covers only certain portions of fees for specified procedures or services. These are fee-for-service plans. Many plans will exclude you altogether for "preexisting conditions"-- illnesses or injuries you had before joining a plan-- that will cost above average to treat. Usually hospitalization or hospital-based services and procedures are included up to a certain limit, but little or no office-based care is included. Premiums paid for benefits received can go up anytime, and benefits may change. Usually, deductibles of a certain amount must be paid by you before payments by the insurance company begin. Co-insurance means that even then the insurer will only pay part of the cost, for example, 80 percent.⁴¹ You must pay the rest. Very few insurance plans pay 100 percent.

THE HEALTH INSURANCE INDUSTRY

There are about fifteen hundred large and small private insurance companies in the United States. About twelve hundred of them sell health insurance, all with different programs and benefit packages, operating primarily under each state's insurance laws. The majority of these plans work on the fee-for-service indemnity principle (described above). Plans pay for part of hospitalization costs and sometimes office visits. Often, policies are hard to read and failure to understand their terms can mean very painful surprises if the policyholder must pay for substantial portions of hospital bills, tests, drugs, or follow-up visits.⁴²

Fee for Service

The health-insurance industry has become extremely profitable partly because until recently is has supported the traditional fee-for-service system also favored by the medical profession, the hospital associations, the drug industry, and related industries. As the third-party payer, the insurance company continues to sign what are, in principle, virtual "blank checks." The checks are written by providers in the form of bills and invoices for higher and higher charges and fees for each single procedure, visit, or day of stay. In response to these rising charges, the insurance company raises its premiums to subscribers. Providers do more of the most expensive tasks and keep raising the fee. 

The effect has been to increase costs with no limits. Companies trying to provide health benefits for their employees and government programs trying to keep costs down have each faced massive, rising drains on their profits or resources. Group indemnity plans make insurance somewhat more affordable for the consumer but do not solve the fee-for-service cost-escalation problem. Most analysts now agree that if costs are to be controlled the indemnity principle and the fee-for-service system must go.

New Approaches

Increasingly, all insurance companies, including nonprofit Blue Cross/Blue Shield and profit making insurance companies, are moving more rapidly into the business of setting up their own prepaid managed-care health-insurance plans to better control costs and guarantee profits. Built on HMO principles, they may contract or hire their own health professionals and establish their own management system, setting prepaid annual premiums for subscribers who will receive somewhat more comprehensive benefits than under traditional plans. That way, revenues for the insurance companies will be better guaranteed now and in the future, whichever type of insurance plan employers and consumers may choose, and regardless of how the reform proposals finally come out.⁴³ The companies will also be in a better position to offer a whole series of packages, just as they do now, that would cost progressively more as extras beyond basic care are covered.

Utilization Review

Large insurance companies today are also more involved in monitoring medical care, its costs, and its effectiveness. They have set up utilization-review divisions to monitor diagnostic and treatment decisions refusing to pay for what they deem unnecessary. Physicians and surgeons are becoming resentful that their own judgements and their ability to act are being "second-guessed" by evaluators (some of them nurses) hired by the management companies. That intrusiveness promises to increase further as more insurance companies move into plans with fixed annual fees. In some cases the insurance companies may be calling into question a doctors' poor or inadequately informed judgement. Medical managers look at outcome studies and other kinds of information that seem to show that certain procedures will not necessarily be in the patient's interest. Given that the profit motive must remain the insurance companies' primary incentive, however, it is impossible to be sure what each decision means. They are not accountable to either the patient or the provider for their decisions. If subscribers are unhappy enough they might switch to another company offering another plan and hope for more satisfaction in the future. Providers have even fewer options, since often they must negotiate decisions with many different insurers.

HEALTH MAINTENANCE ORGANIZATIONS AND OTHER PREPAID PLANS

For a flat annual fee these plans offer health-insurance coverage that includes both hospitalization and outpatient care (usually for a small fee each visit). Depending on the premium, HMOs may or may not cover drugs, and some services may not be covered at all. Usually HMOs are set up by an independent, sometimes nonprofit corporation that hires the doctors and other personnel.

Differences in the quality of care between these plans and regular insurance programs may be disappearing. Some say that prepaid plans are better; they have received government support and recognition for their cost savings. Although a different kind of insurance, these programs are nevertheless based on a profit principle, even if some of them are "nonprofit." They too raise their premiums regularly. Physicians are on salary but they have considerable power in negotiating salaries and bonuses. Much of the cost savings in HMOs is achieved through the routine use of nurse-practitioners and other "midlevel practitioners." Most of the rest comes from keeping people out of the hospital and away from expensive procedures.

Preferred provider organizations (PPOs) operate on a similar prepaid principle but generally don't hire their physicians outright and may give subscribers a somewhat wider choice of providers. They are also more likely to be profit-making.

While the standard type of insurance puts you at risk of overtreatment, prepaid plans may be more likely to undertreat you in order to save money. It may be easy to file a complaint in an HMO, but your ability to sue an HMO for malpractice or get your complaints addressed successfully are likely to be much more limited.⁴⁴

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