Health Insurance and Managed Care
Real World Scenario
Archie Griffin, CEO of Cardiology Associates, has been approached by A. J. Hawk, a Vice President
of Alpha Health Plans, to accept a capitation arrangement for all professional services associated
with enrollees in Alpha’s local market area. Currently, Cardiology Associates is being paid on an
resource based relative value scale (RBRVS) fee schedule that gives them 110% of current
Medicare rates. Mr. Hawk wants Archie to accept a capitation payment of $10.50 per month for
every enrollee in Cardiology Associates’ market area. Mr. Hawk has been explaining the many
benefits of this payment methodology to Archie, but he is not certain whether all of Mr. Hawk’s
claims are true.
Archie has discussed this proposal with the principal partners in the practice and most of them are
unclear whether this is a wise business move. Currently, Cardiology Associates captures about 40%
of Alpha Health Plans’ local enrollees and this figure would certainly increase to close to 100% of
their enrollees. The firm believes that they have capacity to service this contract because last year
they hired six new physicians who are not 100% productive at the present time.
The basic arrangement of the capitation plan is to have Cardiology Associates provide all
professional services to the plan’s enrollees for the fixed sum of $10.50 per member per month.
Archie has explained to the physicians that this method of payment will essentially shift utilization
risk to the physicians and offers them the possibility of greater returns if usage rates are controlled.
Archie has asked for historical data from Alpha Health Plans, showing him historical utilization
patterns by procedure code. Archie is especially concerned about the future demographics of Alpha
Health Plans’ enrollees. Alpha is growing rapidly in its marketplace and has established a qualified
managed-care program for Medicare beneficiaries. Mr. Hawk’s current proposal does not provide for
different levels of payment for enrollees in its Medicare and non-Medicare plans. Cardiology services
increase rapidly with age, and a shift in the demographics of Alpha’s enrollee population to an older
mix could accelerate usage patterns, quickly creating a financial disaster for Cardiology Associates
Managed-care, health maintenance organizations (HMOs), preferred provider organizations
(PPOs), physician organizations (POs), physician hospital organizations (PHOs), capitation,
medical service organizations (MSOs), consumer-directed health plans (CDHP), Accountable
Care Organizations (ACOs), and integrated delivery systems (IDSs) are all terms and acronyms
that are used freely in today’s healthcare arena. These terms often represent different things to
different people and often change in meaning over time. One common thread runs through all of
these terms: the issue of change and market reform that is sweeping the healthcare industry. Our
focus in this chapter will be primarily on the development of managed-care plans and the
development of required premium payments for healthcare coverage.
Learning Objective 1
Define a health maintenance organization (HMO).
▶HMO and Managed-Care Development
Before describing the development of HMOs in the healthcare market, it is important to
define what we mean by an HMO. HMOs are organizations that receive premium dollars
from subscribers in exchange for a promise to provide all health care required by that
subscriber for a defined period. They assume the risk of delivering both physician and
hospital services to their enrolled populations for a fixed sum of money provided on a
prepaid basis. HMOs are a type of health plan or health insurance company. In this
regard, they are no different than any other type of health insurer.
FIGURE 7-1 presents a view of the money flows from subscribers, to health plans, to
providers of healthcare services.
Health plans receive premium dollars from buyers who may be employers, groups, or
individuals on a prepaid basis in return for a promise to provide payment for covered
healthcare services when needed. Payments for those services can be paid to the
subscriber or to the healthcare provider. Indemnity plans make payments to the
subscriber or indemnify the subscriber for covered healthcare services, but in most
cases, payments are made directly to the provider.
Health plans must make a profit to remain in business, and it is easy to understand the
principles of profitability in the health insurance marketplace. To earn positive profits,
health plans must receive payments from subscribers greater than payments to
healthcare providers. They must also cover their own internal administrative costs.
Health plans also generate some additional revenue from the investment of prepaid
health premiums. The amount of investment income earned by health insurers is
relatively small compared to that of life insurance companies where the premium dollars
are received far in advance of payment.
What functions do health plans perform to justify their position in the healthcare
marketplace? There are four primary activities, and they are described next.
Learning Objective 2
Describe the four main activities of health plans.
Health plans accept risk much in the same way that any insurance company accepts risk. They
agree to provide payment for services that at the time of contract are not certain. Greater-thanexpected utilization can easily destroy profits and cause payments to exceed receipts.
Underwriting of risk is an important business function. Few of us would be willing to live in
homes without homeowner’s insurance because the occurrence of a fire could destroy us
financially. Even though we may pay the insurance company much more in premiums over our
lifetimes than we receive in payments, we are not willing to assume the risk of a fire. Health
insurance is the same situation. Payment for open heart procedures, kidney transplants, and other
sophisticated medical procedures are very expensive, and we all hope that we never need them;
but, if we do, it is comforting to know that we have a source of payment for these procedures.
The United States is different from most other industrial countries regarding the percentage of
private versus public financing. The United States relies on private financing of medical care to a
much greater extent than do most other countries. This places a much greater emphasis on health
insurance in our country and less on public financing programs such as Medicare and Medicaid.
Increasingly, health plans have sought to control escalating costs through a variety of utilization
review techniques. Health plans employ doctors and nurses to review and approve the delivery of
nonemergent medical care for necessity and appropriateness. Medical personnel at health plans
also work with health providers to plan discharges from hospitals to less intense, subacute
settings as soon as possible. Case management of chronic conditions such as mental illness
also is used by health plans to control costs. Much of the “managed” in managed care deals with
health plan review and approval of treatment protocols.
Payments to healthcare providers for the provision of services to subscribers are a necessary
administrative process. The health plan must verify that coverage for the services exists and that
the services were in fact performed. In most cases, the health plan also must determine the
amount of payment for the services, which is often different than the charges listed on a patient’s
bill or claim form. Verification of primary coverage also must be determined in cases when the
individual has more than one insurer. The process of assigning payment responsibility when
multiple insurers exist is called coordination of benefits.
HMOs are a subset of health plans and share all of the functions identified previously, but they
are different in several areas, most notably regarding the pattern of relationships with their
healthcare providers. First, most HMOs do not permit HMO subscribers to select providers who
are out of network. For example, an HMO subscriber who wishes to use an orthopedic surgeon
not in the HMO’s network may not be covered for charges incurred by that surgeon. A hybrid
form of an HMO package called point of service (POS) has a provision that permits
subscribers to go out of network for services, but subscribers must pay a greater percentage of
the cost. We review POS options later. Second, most HMOs rely on a primary care
gatekeeper concept. The HMO uses the primary care physician as a central triage point for the
referral and approval of services. Before a subscriber can see a specialist, the primary care
physician must first approve the referral. The use of the primary care physician as a gatekeeper is
a central concept underlying HMO success and has been adopted by other health plans that might
not be characterized as HMOs.
Insurance companies in general and health insurers in particular must communicate the
availability of their products to prospective buyers and convince buyers of the value of their
product. Various media are used to accomplish this task, from individual salespersons to
television and other media advertising. There are substantial costs associated with these efforts.
Learning Objective 3
List the five types of health plans and their characteristics.
Types of Health Plans
HMOs are often categorized by the pattern of provider relationships they maintain, especially
physician–provider relationships. Health plans are usually categorized into five types. TABLE 7-
1 provides some data on the five types of health plans and the distribution of healthcare coverage
for employees in companies where healthcare benefits are provided. The most dramatic change
between 1988 and 2015 is the reduction in conventional coverage—mostly indemnity-type
plans. TABLE 7-2 summarizes the key characteristics of alternative health plans.each!