Who Manages Your Health Dollars?
Prior to the mass shift to managed care beginning in the late 1980s, most insured Americans had what is called indemnity health insurance. You may remember what that was like: You went to the doctor and/or hospital, paid the bill, and then sought reimbursement from the insurance company or submitted the bill to the insurance company to pay. Customers paid a monthly fee, plus a deductible, and then a portion of the costs of their health care. Hospitals were paid for each day that you were admitted and doctors were paid a fee for the services they rendered.
The indemnity insurance system provided financial incentives for doctors to provide more care and for hospitals to keep patients longer. Critics believe this system created tremendous, sometimes dangerous, overuse of medical services and procedures, and wasteful, extended hospital stays. Another problem with indemnity insurance is that since doctors and hospitals were only paid to care for the sick, there was no reward for preventive care, for keeping patients well. Supporters saw managed care as a way both to cut waste and cost and to improve preventive care.
- For-Profit Managed Care Organization: In the 1980s, as employers began searching for ways to cut health care costs, a new breed of managed care organizations emerged. These were companies, many publicly traded on Wall Street, seeking to profit by providing cheaper health care coverage to employers. These companies did not provide integrated care, like the older HMOs, but built networks of financial contracts with doctors and hospitals to provide care to members (see HMOs and PPOs below). In 1985, only 29 percent of Americans in HMOs were in for-profit plans. In 1999, that number had more than doubled to 64 percent.ix
- Not-For-Profit Managed Care Organization: Prior to the 1980s, before "managed care" was even part of the popular lexicon, there were just two models of health care: 1. Indemnity insurance, and 2. One-stop-shop health maintenance organizations like Kaiser Permanente or the Harvard-Pilgrim Health Care, among others. These original HMOs began in earnest during the 1940s as a radical experiment to spread health care to workers, and they had a social mission of life-time care. They put physicians on salary and charged patients a set fee in advance, regardless of how much care they needed. The medical establishment viewed the HMOs with contempt and repeatedly attempted, unsuccessfully, to destroy them. HMOs proved far less costly than indemnity insurance and in 1973, as health care costs were rising dramatically, President Richard Nixon signed the Health Maintenance Organization Act, with the goal of channeling American workers into HMOs to cut costs. By 1979 HMOs had doubled in size, but still enrolled less than 8 million Americans.
Today, while the not-for-profit HMOs have grown along with the rest of managed care, their share of the overall market has slid dramatically. Only 35% of Americans are in not-for-profit HMOs, either descendents of the traditional indemnity insurers, like most Blue Cross and Blue Shield plans, or the surviving one-stop-shops.
HMO (Health Maintenance Organization):
HMOs come in two types:
- The traditional one-stop-shop HMO, like Kaiser Permanente, the Harvard-Pilgrim Health Care, or Group Health of Puget Sound, among others. These HMOs are sometimes called "group" or "staff" model HMOs because they work with an exclusive group of doctors (the group model), or employ doctors directly (the staff model). These HMOs are also referred to as "integrated" HMOs because all services - the health plan, medical care, and hospitalization - take place "under one roof," in a single company. At Kaiser Permanente, physicians are largely in control of the care they give, with no health plan pre-authorization requirements, which is common in the network HMO (see below). In addition to a monthly premium, patients pay a small fee each time they visit a doctor (called a co-pay) but nothing else. Generally the HMO will not pay for care by outside doctors or hospitals. For some specialized care not offered by the HMO patients can receive approval for outside treatment.
- The network HMO. This model was developed in the 1980s by companies new to managed care who were unable to afford to build their own hospitals or hire their own doctors. These HMOs, many of which are traditional insurers like Cigna and the Blues, contract with local physicians and hospitals to care for their members. Unlike the one-stop-shops, competing HMOs share doctors, so that contracted physicians may treat members of more than a dozen different health plans. In the old indemnity insurance, care would be retrospectively reviewed for approval. In the new network HMOs, doctors are now required to obtain prior authorization for many procedures. HMO members must sign up with a primary care provider who must approve visits to a specialist. Patients are restricted to a limited list of doctors and hospitals. In addition to a monthly premium, patients pay a small co-pay per visit.
In some HMOs doctors are "capitated," a controversial financial arrangement whereby physicians receive a lump sum per patient per month, regardless of how much care they give. The more care a doctor provides the less money he or she makes. Capitation has been attacked by critics for creating a large incentive to deny necessary care.
PPO (Preferred Provider Organization)
PPOs provide patients with a network of preferred physicians and hospitals to choose from. Patients are free to see any doctor on the preferred list, including specialists. Physicians are paid a discounted fee-for-service, while patients usually pay a fee for each visit, plus a portion of their health expenses, as well as a deductible, in addition to a monthly premium. PPOs are a kind of compromise between HMOs and indemnity insurance. PPOs are less restrictive but more expensive than HMOs and more restrictive but less expensive than indemnity insurance. Today PPOs are the most popular and fastest growing insurance option for Americans who get coverage through an employer. Of those:
- More than one third are in PPOs.
- About 25% are in HMOs and a hybrid option called PointofService (POS).
- Less than 10% are enrolled in indemnity plans.