Surgical Expense Benefits

Surgical expense coverage provides benefits for physicians' charges associated with surgical procedures. While one tends to think of a surgical procedure as involving cutting, insurance contracts typically define the term broadly to include such procedures as suturing, electrocauterization, removal of a stone or foreign body by endoscopic means, and the treatment of fractures or dislocations.

Even though surgical expense coverage is frequently sold in connection with hospital expense coverage, surgical expense coverage normally provides benefits for surgery performed not only for patients in the hospital (either as inpatients or outpatients) but also for outpatients in a free-standing (that is, separate from a hospital) ambulatory surgical center and in a physician's office. To discourage unnecessary hospitalization, some surgical expense benefit contracts actually provide larger benefits if a procedure is performed as outpatient surgery.

Outpatient surgery also results in charges for medical supplies, nurses and the use of facilities. As mentioned, these charges are often covered if surgery is performed on an outpatient basis in a hospital or outpatient surgical facility.

Benefits
Surgical expense coverage traditionally provided benefits only for the fee of the primary surgeon. However, newer contracts often provide separate benefits for assistant surgeons and anesthesiologists as well. Because both hospital expense coverage and surgical expense coverage often cover anesthesia, it is important that an overall medical expense plan be properly designed to make sure this benefit is neither omitted nor overlapping. The major difficulty in this regard occurs when different providers are used for the hospital and surgical benefits.

In providing basic surgical expense benefits, some insurance companies and some Blue Shield plans use a surgical fee schedule in which charges are paid up to the maximum amounts specified in the schedule of surgical procedures in the master contract. However, the majority of surgical expense plans follow the approach used in major medical contracts and provide benefits to the extent that surgical charges are reasonable and customary. Unfortunately, the precise meaning of these terms in insurance contracts is vague, and each company determines what it considers reasonable and customary. In general, reasonable-and-customary charges (sometimes referred to as usual, customary, and reasonable charges or prevailing charges) are considered to be those that fall within the range of fees normally charged for a given procedure by physicians of similar training and experience within a geographic region.

The usual practice of insurance companies is to pay charges in full as long as they do not exceed some percentile (usually ranging from the 85th to the 95th) of the range of charges for a specific surgical procedure within a certain geographic region. For example, if an insurance company uses the 90th percentile and if for a certain procedure 90 percent of the charges are $300 or less, this is the maximum amount that is paid. The covered person is required to absorb any additional charges if he or she uses a more expensive physician. Through the use of computers, insurance companies now have statistics that categorize expenses by geographic regions that are as small as the ZIP codes of medical-care providers. Thus, while $300 may be the maximum reasonable-and-customary amount in one part of a metropolitan area, $350 may be considered reasonable and customary in another part of the same metropolitan area.

Blue Shield plans often use a somewhat modified approach in determining the maximum amount that is paid. Each year, physicians file their charges for the coming year with the Blue Shield plan, and during that year the plan pays charges in full up to some percentile of these filed charges. Under some plans, the physicians agree not to charge Blue Shield patients amounts in excess of their filed fees. Participating physicians in other Blue Shield plans agree to accept any Blue Shield payment as payment in full, particularly for employees with an income level below a certain amount, such as $10,000 for an individual and $15,000 for a family.

Second Surgical Opinions
In an attempt to control medical costs by eliminating unnecessary surgery, many medical expense plans, both traditional and managed care, provide benefits for second surgical opinions. While such opinions undoubtedly cause some patients to decide against surgery, it is still unclear whether the cost savings of second surgical opinions are illusory. For example, surgery may still be required at a later date, or long-term costs for alternative treatment may be incurred.

A voluntary approach for obtaining second surgical opinions is often used. If a physician or surgeon recommends surgery, a covered person can seek a second opinion and the cost is borne by the medical expense plan. In some instances the benefit is limited to a specific maximum, but in most cases the costs of the second opinion, including X-rays and diagnostic tests, are paid in full. Some plans also pay for a third opinion if the first two opinions disagree. When there are divergent opinions, the final choice is up to the patient, and the plan's regular benefits are usually paid for any resulting surgery. As an incentive to encourage second opinions, some plans actually provide larger benefits for a covered person who has obtained a second opinion, even if it does not agree with the first opinion.

In the last few years, it has become increasingly common for medical expense plans to require mandatory second opinions, which may apply to any elective and nonemergency surgery but frequently apply only to a specified list of procedures. In most cases, a surgeon selected by the insurance company or other provider of benefits must give the second opinion. If conflicting opinions arise, a third opinion may be obtained. The costs of the second and third opinions are paid in full. In contrast to voluntary provisions, mandatory provisions generally specify that benefits are paid at a reduced level if surgery is performed either without a second opinion or contrary to the final opinion.

The trend toward mandatory second opinions has had an interesting result. Because many employers felt money was being saved under their voluntary programs, wouldn't it be logical to save more money by making the program mandatory? Unfortunately, the opposite situation has often been the case: people who voluntarily seek a second opinion are frequently looking for an alternative to surgery, while those who obtain a second opinion only because it is required are more likely to accept surgery as the best alternative. Employers have also found that a second opinion by a surgeon is still likely to call for surgery. As a result, there seems to be a growing feeling that the cost of mandatory second opinions may exceed any decrease in surgical benefits paid. Consequently, some employers have returned to voluntary programs or stopped providing coverage for second opinions altogether.

Exclusions
As with hospital expense coverage and virtually all other types of medical expense coverage, exclusions exist under basic surgical expense contracts for occupational injuries or disease, certain services provided by government agencies, and cosmetic surgery. All surgical expense contracts have an exclusion for certain types of dental surgery. However, the extent of the exclusion varies and care must be taken to properly integrate any dental coverage with other basic coverages. At one extreme, some contracts exclude virtually any procedures associated with the teeth or disease of the surrounding tissue or bone structure. At the other extreme, a more common exclusion eliminates coverage for most dental procedures but does provide surgical benefits if a covered person is hospitalized for the removal of impacted teeth or for surgery of the gums or bone structure surrounding the teeth. It is interesting to note that although benefits for oral surgery may not be paid even if a covered person is hospitalized, the hospital expenses are often covered under hospital expense contracts.

Hospital Expense Benefits

Hospital expense coverage provides benefits for charges incurred in a hospital by a covered person (that is, the employee or his or her dependents) who is an inpatient or, in some circumstances, an outpatient. Every medical expense contract discussed defines what is meant by a hospital. While the actual wording may vary among insurance companies and in some states, the following definition is typical:

The term hospital means (1) an institution that is accredited as a hospital under the hospital accreditation program of the Joint Commission on Accreditation of Healthcare Organizations or (2) any other institution that is legally operated under the supervision of a staff of physicians and with 24-hour-a-day nursing service. In no event should the term hospital include a convalescent nursing home or include any institution or part thereof that (1) is used principally as a convalescent facility, rest facility, nursing facility, or facility for the aged; or (2) furnishes primarily domiciliary or custodial care, including training in the routines of daily living; or (3) is operated primarily as a school.

Inpatient Benefits
Hospital inpatient benefits fall into two categories: coverage for room-and-board charges and coverage for "other charges."

Room and Board. Coverage for room-and-board charges includes the cost of the hospital room, meals, and the services normally provided to all inpatients, including routine nursing care. Separate charges for such items as telephones and televisions are usually not covered. Benefits are normally provided for a specific number of days for each separate hospital confinement, a time period that may vary from 31 days to 365 days. Some contracts provide coverage for an unlimited number of days. For purposes of this time period, as well as for other benefits, most contracts stipulate that successive periods of hospital confinement are treated as a single hospital confinement unless they (1) arise from entirely unrelated causes or (2) are separated by the employee's return to continuous full-time active employment for some specified period of time, such as two weeks. For dependents, this latter requirement is replaced by one specifying that they must completely recover or remain out of the hospital for a certain period of time, such as 3 months.

The amount of the daily room-and-board benefit may be expressed in one of two ways: either a flat-dollar maximum or the cost of semiprivate accommodations. Under the first approach, benefits are provided for actual room-and-board charges up to a maximum daily amount, such as $500.

The majority of hospital expense contracts cover actual room-and-board charges up to the cost of semiprivate accommodations (that is, two-person rooms). The cost of a private room may be covered in full if it is medically necessary, and a few insurance plans provide additional coverage, usually a fixed daily dollar amount, for elective private room occupancy. Many hospital expense contracts include additional room-and-board benefits for confinement in an intensive care unit.

Other Charges. Coverage for "other charges" (often referred to as miscellaneous charges, ancillary charges, or hospital extras) provides benefits for certain services and supplies ordered by a physician during a covered person's hospital confinement, such as drugs, operating room charges, laboratory services, and X-rays. With a few exceptions, only the hospital portion of these charges is covered; any associated charges for such professional services as physicians' fees are not covered. The exceptions often include charges for ambulance services and anesthesia if anethesia is not covered as part of surgical expense benefits.

The amount of the benefit for other charges is usually expressed in one of the following three ways:

1. Full coverage up to a dollar maximum. This approach is most commonly found in contracts when the daily room-and-board benefit is also subject to a dollar limit. In most cases, this maximum is some multiple (often 20) of the daily room-and-board benefit. For example, a contract with a daily room-and-board benefit of $750 might have a $15,000 maximum for other charges.

2. Full coverage up to a dollar maximum (again, often expressed as a multiple of the room-and-board benefit) and partial coverage for a limited amount of additional expenses.

3. Full payment subject only to the duration for which room-and-board benefits are payable.

When coverage for ambulance services is provided, it is common to limit the benefit to a dollar maximum, such as $50 per hospital confinement. A few plans have a mileage limit in lieu of a dollar limit.

Preadmission Certification. As a method of controlling costs, most medical expense plans have adopted utilization review programs. One aspect of these programs, is preadmission certification. Such a program requires that a covered person or his or her physician obtain prior authorization for any nonemergency hospitalization. Authorization usually must also be obtained within 24 to 48 hours of admissions for emergencies.

The initial reviewer, typically a registered nurse, determines whether hospitalization or some type of alternative care is most appropriate and what the appropriate length of stay for the medical condition should be. If the preapproved length of stay is insufficient, the patient's physician must obtain prior approval for any extension.

Most plans reduce benefits if the preadmission certification procedure is not followed. Probably the most common reduction is to pay only 50 percent of the benefit that would otherwise be paid. If a patient enters the hospital after a preadmission certification has been denied, many plans do not pay for any hospital expenses, whereas other plans provide a reduced level of benefits.

Outpatient Benefits
Although hospital expense contracts did not originally cover outpatient expenses, today it is common to find coverage for such expenses arising from the following:

Surgery. The purpose of this benefit is to provide comparable coverage and thus lower hospital utilization when surgical procedures can be performed on an outpatient basis. It should be noted that this benefit covers only hospital charges or charges of outpatient surgical centers (such as the use of operating room facilities), not the surgeon's fee.

Preadmission testing. The first day or two of hospital confinement, particularly for surgical procedures, were historically devoted to necessary diagnostic tests and X-rays. This benefit requires the performance of these procedures on an outpatient basis prior to hospitalization and covers the costs as if the person were an inpatient. For benefits to be paid, these procedures must generally be (1) performed after a hospital confinement for surgery has been scheduled, (2) ordered by the same physician who ordered the hospital confinement, (3) performed in the hospital where the confinement will take place, and (4) accepted by the hospital in lieu of the same tests that would normally be performed during confinement. Benefits are paid even if the preadmission testing leads to a cancellation of the scheduled confinement.

Emergency room treatment. Hospital expense contracts commonly provide coverage for emergency room treatment of accidental injuries within some specified time period (varying from 24 to 72 hours) after an accident. In a few cases, similar benefits are also provided for sudden and serious illnesses. It should be noted that any emergency room charges incurred immediately prior to hospitalization are considered inpatient expenses.

Exclusions
While variations exist among the providers of hospital coverage (some of which result from state legislation), most hospital expense contracts do not usually cover expenses resulting from the following:

- Occupational injury or disease to the extent that benefits are provided by workers' compensation laws or similar legislation.

- Cosmetic surgery, unless such surgery is to correct a condition resulting from an accidental injury incurred while the covered person is insured under the contract or coverage of such surgery is mandated by the Women's Health and Cancer Rights Act.

- Most physical examinations (including diagnostic tests and X-rays), unless such examinations are necessary for the treatment of an injury or illness.

- Convalescent, custodial or rest care.

- Private-duty nursing.

- Services furnished by or on behalf of government agencies, unless there is a requirement for either the patient or the patient's medical expense plan to pay for the services. Under federal law, medical expense plans must generally pay benefits to the government for care in Department of Veterans Affairs (VA) or military hospitals on the same basis as they pay for care received elsewhere. However, if a plan does not pay charges in full because of deductibles, coinsurance, or plan limitations, the patient is not responsible for the balance. The exceptions to the law—meaning that the plan is not responsible for payment—include treatment in VA hospitals for service-connected disabilities and treatment of active-duty members of the armed services in military hospitals.

Mental Illness, Alcoholism, and Drug Addiction. In the absence of state mandates to the contrary, some hospital expense contracts either exclude (or provide limited benefits for) expenses arising from mental illness, alcoholism, and/or drug addiction. Benefit plans that cover more than 50 employees and that have benefit limitations pertaining to mental illness must be in compliance with the Mental Health Parity Act, on major medical coverage.

Maternity. Until the passage of the Pregnancy Discrimination Act, it was not unusual to exclude maternity-related expenses from hospital expense contracts. However, the act requires that benefit plans of employers with 15 or more employees treat pregnancy, childbirth, and related conditions the same as any other illness.

In the absence of state laws to the contrary, pregnancy may be and is sometimes excluded under group insurance contracts written for employers with fewer than 15 employees. If these employers wish to provide such coverage, it can usually be added as an optional benefit. In some cases, pregnancy is treated like any other illness covered under the contract. In other cases, benefits are determined in accordance with a schedule that most commonly provides an all-inclusive benefit for hospital, surgical, and certain other expenses associated with delivery. Regular physician visits and diagnostic tests may or may not be covered. Table below is an example of a maternity schedule.



A variation of this schedule that is often used by Blue Cross—Blue Shield plans provides a surgical benefit (possibly including visits prior to delivery) but covers hospital expenses on a semiprivate room basis.

An expense associated with maternity is the nursery charge for a newborn infant, which in most cases is equal to at least 50 percent of a hospital's normal room-and-board charge. This expense is not part of a maternity benefit, and a few hospital expense contracts do not cover the expense if the infant is healthy (since the contract covers only expenses associated with accidents and illnesses). However, many contracts do cover nursery charges, and a number of states require that they be covered.

Since 1998, group health plans have been subject to the provisions of the Newborns' and Mothers' Health Protection Act. This federal act is very broad and, with one exception, applies to all employers regardless of size and to self-funded plans as well as those written by health insurers and managed care plans. The exception is for plans subject to similar state legislation, which exist in more than half the states. The impetus for such legislation at both the state and federal levels arose over consumer backlash from the practice of an increasing number of HMOs and insurance companies limiting maternity benefits to 24 hours after a normal vaginal birth and 48 hours after a cesarean section. The act affects maternity benefits if they are provided. It does not mandate that such benefits be included in benefit plans. Of course, many employers are subject to other state and federal laws that do mandate maternity benefits.

The act prohibits a group health plan or insurer from restricting hospital benefits to less than 48 hours for both the mother and the newborn following a normal vaginal delivery and 96 hours following a cesarean section. In addition, a plan cannot require that a provider obtain authorization from the plan or insurer for a stay that is within these minimums. While a new mother, in consultation with her physician, might agree to a shorter stay, a plan or insurer cannot offer a monetary or nonmonetary incentive to the mother for this purpose. For example, follow-up visits from a home health nurse cannot be provided to mothers and children who are discharged early unless these visits are also provided to mothers and children who stayed in the hospital for the full period specified in the act. In addition, the plan or insurer cannot limit provider reimbursement because care was provided within the minimum limits or make incentives available to providers to render care inconsistent with the minimum requirements.

If a plan has deductibles or other benefit restrictions, these cannot be greater during the 48- or 96-hour period than those imposed on any preceding portion of the hospital stay prior to the birth.

Effect of Women's Health and Cancer Rights Act. The Women's Health and Cancer Rights Act amended ERISA and applies to group health plans as well as to individual medical expense insurance. Under the provisions of the federal act, any benefit plan or policy that provides medical and surgical benefits for mastectomy must also provide coverage for the following:

- Reconstruction of the breast on which the mastectomy has been performed

- Surgery and reconstruction of the other breast to produce a symmetrical appearance

- Prostheses and physical complications of all stages of mastectomy, including lymphedema

Prior to the act's taking effect, such coverage often was not available because of exclusions, particularly exclusions that applied to cosmetic surgery. Such coverage can be subject to deductibles and coinsurance provisions as long as it is consistent with those provided for other procedures under the plan or policy. Plan participants must be notified of the existence of these benefits on an annual basis.

Deductibles and Coinsurance
It is common for deductibles and coinsurance to apply to major medical expense coverage. In contrast, hospital expenses under basic hospital expense coverage (and benefits under other basic medical expense coverages as well) usually are not subject to deductibles or coinsurance. Rather, any limitations that exist are most likely to be in the form of maximum amounts that will be paid. It should be noted, however, that deductibles and coinsurance are more likely to be used for basic coverages than was once the case.

BASIC MEDICAL EXPENSE COVERAGES

Historically, medical expense coverage consisted of separate benefits for hospital expenses, surgical expenses, and physicians' visits. Coverage was limited, and many types of medical expenses were not covered. In this environment, two developments took place: (1) basic coverages for other types of medical expenses were developed (2) and a vast majority of employers began to provide more extensive benefits to employees than had previously been available through the commonly written basic coverages. While this broader coverage is often provided through a single comprehensive contract, many employees who have medical expense benefits under traditional plans are still covered under medical expense plans that consist of selected basic coverages supplemented by a major medical contract. This is particularly true for large employers, while small employers are much more likely to use a single major medical contract. Basic plans consist of three traditional coverages:

- Hospital expense benefits

- Surgical expense benefits

- Physicians' visits expense benefits

In addition, other types of medical expense coverage can be written as a basic benefit. While many of these basic coverages can be written separately, it is common for them to be incorporated into a single contract.

Comparison of the Blues and Insurance Companies

Perhaps the best way to describe the characteristics of Blue Cross—Blue Shield plans and insurance company plans is to compare their characteristics. Traditionally, the similarities between the Blues and insurance companies were overshadowed by their differences. Over time, however, intense competition has often caused one type of provider to adopt the more popular but differing practices of the other. As a result, insurance companies and the Blues are becoming increasingly similar, in spite of their many distinctly different characteristics.

The following comparison of the Blues and insurance companies focuses on their operation with respect to traditional medical expense insurance coverage. It is followed by a brief treatment of how both types of organizations have expanded into managed care.

Regulation and Taxation
In a few states, Blue Cross—Blue Shield plans are regulated under the same laws that apply to insurance companies. However, in most states the Blues are nonprofit organizations and are regulated under special legislation. Typically, this regulation is carried out by the same body that regulates insurance companies. However, in some respects the Blues receive preferential treatment over insurance companies, probably the most significant example being their exemption from premium taxation and income taxation by many states. Because premium taxes (usually about 2 percent of premiums) are passed on to consumers, this gives the Blues a cost advantage. In many other respects, however, the Blues are subject to more stringent regulation than insurance companies. For example, in most states their rates are subject to regulatory approval. With recent trends toward consumerism, this approval has become more burdensome and expensive.

In addition, the Blues are also accorded favorable tax treatment under the federal income tax laws. Prior to the Tax Reform Act of 1986, the Blues (except for the few plans that were incorporated as insurance companies) were exempt from federal income taxation. The tax act eliminated this complete exemption. Because of various deductions that can be taken, however, the average effective tax rate for the Blues is significantly below the average tax rate for insurance companies.

Form of Benefits
Traditionally, the Blues offered benefits in the form of services, while insurance companies offered benefits on an indemnity (or reimbursement) basis. Under the service-benefit concept, benefits are expressed in terms of the services that are provided by the hospitals or physicians participating in the plan rather than in terms of dollar maximums. For example, a Blue Cross plan might provide up to 90 days of hospitalization per year in semiprivate accommodations. In contrast, an insurance company might provide reimbursement for hospital charges subject to both dollar and duration limits, such as $400 per day for 90 days. In both cases, however, any charges in excess of the benefits must be borne by the covered person.

Blue Cross—Blue Shield plans involve two separate types of contractual relationships: a plan promises to provide specified services to a subscriber for whom a premium has been paid, and it has contracts with providers of services whereby the providers are reimbursed for the cost of services rendered to subscribers. In general, subscribers are not billed for the cost of covered services or required to file claim forms. Rather, this cost is negotiated between the plan and the providers. This type of arrangement generally requires that subscribers receive their services from providers participating in the plan; however, most hospitals and physicians are participants. If nonparticipating providers can be used (such as for emergencies), benefits are usually paid on an indemnity basis, as is done by insurance companies.

In contrast, an insurance company that writes traditional medical expense coverage agrees only to reimburse a covered person for medical expenses up to the limits specified in the insurance contract. There is no contractual relationship between the providers of medical services and the insurance company. Thus, covered persons must file the appropriate claim forms. While covered persons have a legal obligation to pay their medical bills, the insurance company's obligation (unless benefits are assigned) is only to reimburse the covered person, not to actually pay the providers. However, most hospitals and many other providers require that any potential insurance benefits be assigned to them by a patient before they will render services. In effect, such an assignment requires the insurance company to pay benefits directly to the provider on behalf of the covered person.

In the past, insurance companies incorporated maximum daily room and board limits into their contracts that did not cover medical expenses in full. However, to compete with the Blues, many insurance companies now frequently write contracts that provide full reimbursement for certain medical expenses. Even though a covered person may see little difference in the benefits received from either type of provider, the traditional distinction still exists: The Blues are providing services, whereas insurance companies are providing reimbursement for the cost of services.

Types of Benefits
Over the years the Blues specialized in providing basic medical benefits, with Blue Cross providing coverage for hospital expenses and Blue Shield providing coverage for surgical expenses and physicians' visits. Major medical benefits were rarely available. However, competition from insurance companies and increased cooperation between Blue Cross and Blue Shield have resulted in the Blues now offering virtually the same coverages as insurance companies. It is interesting to note that as the Blues have expanded the scope of benefits offered, they have frequently included deductible and coinsurance provisions similar to those used by insurance companies. When there is a deductible, a covered person is required to pay expenses up to some limit (such as $100 per year or per illness) out of his or her own pocket before benefits are paid. When coinsurance is used, a covered person is required to pay a percentage (such as 20 percent) of some or all expenses, the remaining portion being covered under the medical expense plan.

The advantage many insurance companies have had over the Blues has been their ability to offer a wide variety of group benefits, including life insurance coverage and disability income coverage. Until a few years ago, most states had laws and regulations that prevented the Blues from offering any coverage other than medical expense benefits, but because of recent changes in these laws and regulations, the Blues can now offer a wider range of group benefits to their subscribers. While competition between the Blues and insurance companies over writing these other benefits is increasing, the Blues currently write relatively little coverage other than medical expense benefits.

Reimbursement of Providers
The method by which the Blues reimburse the providers often results in their having a competitive advantage over insurance companies. Most Blue Cross plans pay participating hospitals on a per diem basis for each day a subscriber is hospitalized. Periodic negotiations with Blue Cross determine the amount of this payment (which includes room-and-board charges as well as other covered charges) for each hospital. For example, if the per diem amount is $600, the hospital will receive $600 for each day a subscriber is hospitalized, regardless of what the actual charges might be. While this per diem amount is adequate on the average, the hospital will "lose money" on some patients but "make money" on others.

In addition to the administrative simplicity of this method of reimbursement, the per diem amount is often less than the average daily hospital charges. Frequently, it is determined by excluding such hospital costs as bad debts, charity care, and nursing school costs. These costs are used in determining charges for patients who are not Blue Cross subscribers or members of managed care plans that have entered into similar arrangements. Therefore, Blue Cross subscribers, in effect, receive a discount on the charges made to some other patients, including those whose benefits are provided by insurance companies under many traditional medical expense plans. However, insurance companies often also reimburse hospitals on a per diem basis under their managed care plans.

Under some Blue Shield plans, physicians may also be reimbursed at less than their actual charges.

National Coverage
While Blue Cross—Blue Shield plans operate in precise geographic regions, many insurance companies have historically operated on a national basis. In the era of traditional medical expense plans, the Blues had a more difficult time competing with insurance companies for the group insurance business of employers whose employees were located in areas served by several different Blue Cross—Blue Shield plans. Today, the situation has changed. It is more difficult for insurance companies to operate on a national basis because of differences in the state regulation of medical expense insurance. In addition, in this era of managed care, a national presence requires the ability to set up provider networks everywhere. As a result, many insurance companies have withdrawn from the medical expense market or do not sell products in all states. The Blues, on the other hand, have developed procedures on a cooperative basis among themselves for providing coverage to "national accounts." For example, an employer can arrange a medical expense plan that allows any employee to have coverage through the HMO or PPO of the Blue Cross—Blue Shield organization that operates in the area where the employee resides.

Flexibility
There seems to be a feeling among benefit consultants that insurance companies have a greater degree of flexibility than Blue Cross—Blue Shield in modifying their group contracts to meet employers' needs and desires. Blue Cross—Blue Shield contracts have traditionally been quite standardized, with few, if any, variations allowed. One major reason for this rigidity is that changes in the benefits promised to subscribers also have an effect on the contracts between the Blues and the providers. However, with employers increasingly wanting new approaches to medical expense benefits, often for cost-containment reasons, many Blue Cross—Blue Shield plans have taken a more flexible approach. Many variations exist among plans, and some have been very innovative in meeting the demands of the marketplace, even going as far as to administer benefit plans that are self-funded by employers.

Rating
In their early years, the Blues used only a "community-rating" approach in determining what premium rates to charge. Under this approach, each plan used the same rate structure for all subscribers, regardless of their past or potential loss experience and regardless of whether coverage was written on an individual or a group basis. Usually, the only variations in the rate structure resulted from variations in coverage: whether it was for an individual, a couple without children, or a family. The philosophy behind the community-rating approach was that coverage should be available to the widest range of persons possible at an affordable cost. Charging lower premium rates to segments of the community with better-than-average loss experience was thought to result in higher and possibly unaffordable premium rates for other segments of the community.

Community rating placed Blue Cross and Blue Shield plans at a competitive disadvantage when insurance companies began to aggressively market group medical expense insurance and use experience rating, which allowed them to charge certain employer groups much lower premiums than those charged by the Blues. As a result, by the mid-1950s insurance companies surpassed the Blues in the number of persons covered. Faced with the growing dilemma that rate increases necessary to compensate for the loss of better-than-average business tended to drive even more business to the insurance companies, the Blues initiated the use of experience rating for groups. Today, there is little difference in this regard between these two major providers with respect to group business. However, the Blues still use community rating in pricing products for smaller employers and for the individual marketplace.

Marketing
The Blues tend to have lower acquisition expenses than insurance companies, and most coverage is marketed by salaried employees. However, more than half of the plans also market coverage through agents and/or brokers in addition to their own sales forces. In general, the commissions paid to agents or brokers are below the commissions paid by insurance companies.

The Blues and Insurance Companies in Today's Environment
Today, the Blues and insurance companies have moved far beyond writing only traditional medical expense plans and are major players in the managed care marketplace. Together they write the majority of PPO coverage and a significant portion of HMO coverage.

Most of the Blues now have their own HMOs, PPOs, and point-of-service plans. In fact, national statistics show that slightly more than one-third of Blue Cross—Blue Shield subscribers are covered under PPOs, and this is the fastest-growing market segment. About one-third of their subscribers are covered under traditional plans, and a little less than one-third are covered under HMOs. As the Blues have expanded into broader markets, many of them have changed their names and do not use Blue Cross or Blue Shield in the new names.

Similarly, insurance companies have expanded their offerings. Most insurers that write traditional medical expense coverage also offer PPO products. Some insurers have actually gotten out of the market for traditional products and only offer PPOs. A relatively small number of insurers have gotten into the HMO market—sometimes through mergers with existing HMOs—but these insurers account for about 20 percent of HMO coverage written. Insurance companies also offer a wide array of products and services for use with self-funded plans.

Providers of Traditional Coverage : Blue Cross—Blue Shield Plans

PROVIDERS OF TRADITIONAL COVERAGE
Providers of traditional coverage include Blue Cross—Blue Shield plans, insurance companies, and employers using self-funded arrangements. While the plans described in this post are characteristic of those offered by the Blues and insurance companies, self-funded plans must be properly designed to be effective. Such plans have "borrowed" liberally from insured plans and contain similar—if not identical—provisions.

Blue Cross—Blue Shield Plans
Prior to the Great Depression, "health" insurance contracts provided by insurance companies were primarily designed to give income benefits to persons who were disabled by accidents and, to a limited degree, illnesses. It was generally accepted that individuals should pay their own medical expenses from their savings. During the depression, however, the savings of many individuals disappeared, unemployment was severe, and most insurance companies ceased writing disability income contracts. Faced with financial difficulties arising from the inability of many patients to pay their bills, many hospitals established plans for the prepayment of hospital expenses. By paying a monthly fee to the hospital, a subscriber (the term used to describe persons covered by such plans) was entitled to a limited number of days of hospitalization per year. The early plans were limited to a single hospital, but by the mid-1930s many plans had become communitywide or statewide operations, offering subscribers the choice of using any participating hospital. Much of this expansion resulted from actions by the American Hospital Association to promote and control this type of plan. In the late 1930s, the American Hospital Association adopted the Blue Cross name and emblem and permitted them to be used only by plans that met standards established by the association. As a general rule, only one plan within a geographic area was allowed to use the Blue Cross name. Eventually, the Blue Cross activities of the American Hospital Association were transferred to a separate national organization, the Blue Cross Association.

The success of the early Blue Cross plans and the inability of physicians to collect bills for their services during the depression resulted in the development of Blue Shield plans, established by local medical associations to prepay physicians' charges. The evolution of Blue Shield plans paralleled that of Blue Cross plans, with the American Medical Association acting similarly to the American Hospital Association. Eventually, the role of the American Medical Association was transferred to the National Association of Blue Shield Plans, which then became the national coordinating body.

To a large extent, the persons covered by Blue Shield plans were the same ones whose hospital charges were covered by Blue Cross plans, and in many geographic regions this overlapping led to a close working relationship between the two. For many years in some areas of the country one plan administered the other. However, this administration was typically on a fee-for-administration basis, with the two plans being separate legal entities. In recent years, there has been a consolidation of most Blue Cross and Blue Shield plans. Usually, this consolidation has taken the form of a complete merger; in a few cases the consolidation has been only partial. These partial consolidations have resulted in Blue Cross—Blue Shield plans that operate under a single staff but with separate governing boards.

There has been consolidation at the national level also. In 1978, the staffs of the two national organizations were merged, and a new organization—the Blue Cross and Blue Shield Associations—was formed to act on matters of mutual interest to both Blue Cross plans and Blue Shield plans. It was governed by members of the boards from both the Blue Cross Association and the National Association of Blue Shield Plans. In 1982, a complete merger took place, with the resulting organization called the Blue Cross and Blue Shield Association.

As of late 2000, there were 50 plans in existence. Most jointly wrote Blue Cross and Blue Shield coverage, but there were a few separate Blue Cross plans and Blue Shield plans. Although most states are served by a single Blue Cross—Blue Shield plan, in a few states there is more than one plan, each operating within a specific geographic region. In a few instances, plans may cover more than one state. Only in a few cases is there any overlapping of the geographic areas served by individual plans.

Each local Blue Cross, Blue Shield, or Blue Cross—Blue Shield plan is a legally separate entity operated by a governing board, which establishes specific practices for the plan in accordance with the broad standards of the national Blue Cross and Blue Shield Association. Consequently, individual plans may differ substantially from one another. The boards of these plans used to be dominated by the providers of coverage, but now the boards of most plans are dominated by "nonproviders," including representatives of consumer organizations, foundations, labor unions, businesses, and the general public.

Traditionally, Blue Cross and Blue Shield plans have been nonprofit corporations and acted as insurers of last resort in most states. This meant that they wrote coverage on almost anyone at competitive rates. For this, the Blues tended to receive favorable tax treatment. However, as insurance companies and HMOs expanded their market share, they tended to take the better business and leave the Blues with coverage of an increasing number of unhealthy lives. As a result, the Blues have become more restrictive in their underwriting practices. In addition, a few of the Blues have changed to for-profit status in order to raise the capital necessary to compete more effectively with other types of providers of medical expense coverage. Many of the Blues also own subsidiaries that are run to make a profit.

Insurance Companies
For many years, Blue Cross and Blue Shield plans were the predominant providers of medical expense coverage; insurance companies were much slower to enter the market and took a different approach. Rather than emphasizing basic first-dollar coverage for hospital or physicians' charges, most insurers chose to write major medical coverage with deductibles and coinsurance. By the mid-1950s, insurance companies surpassed the Blues in premium volume for medical expense coverage.

Like other types of insurance, medical expense coverage is written by both stock and mutual insurance companies. While some coverage is written by insurers that specialize in the medical expense market, much of the premium volume for group coverage is written by large life insurance companies. It is interesting to note that medical expense coverage is also a line of insurance sometimes written by property-casualty insurance companies.

NATIONAL HEALTH INSURANCE : Possible Approaches

Possible Approaches
One difficulty is the extent to which current proposals should be covered in detail. In a debate like the one occurring over health insurance, new proposals are continually replacing old ones, and those that are around for any length of time undergo revision. For this reason, the discussion is general and describes the following generic approaches that are being discussed:

- Managed competition plans

- Single-payer plans

- Medical savings accounts

- Reform on a state-by-state basis

- Modest reform of the current system

It is important to remember that the use of any one of these approaches does not dictate a specific national health insurance plan. Within each approach, there is wide latitude to address many of the issues discussed in the previous pages.

Managed Competition Plans
The term managed competition received considerable attention because it was the approach taken by the Clinton administration in designing its initial national health insurance proposal. However, the term and the concept have been discussed since the 1970s. The basic philosophy behind the idea of managed competition is that competition for medical expense insurance should be based on price rather than on the risk characteristics of those needing coverage. A managed competition plan would create a new type of organization—often referred to as an HIPC or a health insurance purchasing cooperative. An HIPC would act as a purchasing agent and negotiate with insurance companies, HMOs, and other providers of medical expense coverage to offer a menu of different insurance plans to employers and individuals who subscribe to the HIPC. In addition to price, subscribers would be given information on each plan's quality of care.

Under most managed care proposals, HIPCs would be established under state regulation, would operate in a specified geographic region, and would not compete with each other. Some proposals require all employers to be subscribers to the HIPC in their area, which would be the only source for providing coverage to employees. To varying degrees, however, most managed competition proposals allow larger employers to establish their own HIPCs for self-funding benefits.

Most managed care proposals also establish standards for what are often called approved or accountable health plans (AHPs). These AHPs are the only medical providers that can deal with an HIPC, which would require each AHP to offer a standard set of benefit packages. HMOs are in a position to do this, but other providers would need to form alliances, such as an insurance company forming an AHP with a network of hospitals and physicians.

All employers (and also unemployed and self-employed persons) would be eligible for coverage from the HIPC, and there would be no preexisting-conditions provisions for employees. Some proposals use community rating, which would establish a set price per covered person for the plan selected. Other proposals would adjust rates by such factors as age or sex.

While individual proposals for national health insurance may vary, there is nothing in the basic idea of managed competition that dictates any specific benefit package, level of employer contribution to the cost of the coverage for employees, or government price controls.

The critics of managed competition are many. It involves a fundamental change in the delivery of health care and has been opposed by many physicians who fear that their ability to treat patients will come under government control. Insurance agents have been particularly vocal because their role would be virtually eliminated. However, there would still be a modest role for benefit consultants to advise employers on the selection of alternative plans under the HIPC. HIPCs are also unappealing to persons who are not already in managed care plans and wish to retain control over their choice of medical practitioners. Employers that operate in many regions would also be required to deal with several HIPCs.

Managed competition has also been criticized for creating another level of health care bureaucracy by the formation of HIPCs and the additional regulation that would be needed. It has been suggested that this might also negate the effect of any cost-saving features of the approach.

Single-Payer Plans
Several proposals for national health insurance can be categorized as single-payer plans, which is the approach taken in Canada and many European countries. Under a single-payer plan, everyone is automatically covered by a single program run by the government, and the same benefit package is provided to everyone. Some proposals have a totally federal program; other proposals call for each state to administer the program for its residents, but under specific federal guidelines.

Single-payer plans eliminate the employer's role in providing medical expense benefits to employees. The agent's role is also eliminated unless the plan benefits are at a level where there is a market for supplemental insurance. However, most proposals call for very comprehensive coverage with few if any copayments.

Most proposals for a single-payer plan call for the financing of the program through taxes rather than premiums. While the taxes could take a variety of forms, a Social Security type of payroll tax on both employers and employees is most commonly mentioned.

In some respects, a single-payer plan can be viewed as a Medicare-type program that covers everyone. The single-payer approach, however, goes farther and calls for more government control of medical care. A national health care budget would be established, and reimbursement schedules to providers would be determined at the state or federal level within the constraints of this budget. In addition, the budget would result in the government's exercising controls over the types of treatment available for specific conditions and the extent to which monies would be spent on new technology and medical facilities. In effect, a single-payer plan rejects market forces as the allocator of medical resources and implies that there would be some rationing of medical care under government guidelines.

Although the broad nature of a single-payer plan would result in additional costs because of increased demand for health care, these costs would be offset by efficiencies associated with the approach. For example, the claim process would be dramatically streamlined, and marketing costs would be virtually eliminated. Furthermore, the widespread availability of medical care would probably lead to more preventive care, which would minimize the need for more expensive treatments in the future.

Much of the support for a single-payer approach to the health care problem arises from the perception that Americans have of the Canadian health care system. There is no doubt that Canadians overwhelmingly believe they have a good system, but just as in the United States, the system is becoming a subject of national debate. Costs are lower than in the United States, but they are increasing at a rapid rate. Moreover, there is rationing of care, which can lead to lengthy waits to schedule surgeries. As a result, some Canadians come to the United States for treatment that privately insured Americans can receive on demand. These facts, coupled with the American public's concern over bigger government and its bureaucracy, make the adoption of a single-payer approach unlikely.

Medical Savings Accounts
Unlike the two previous approaches to national health insurance, the use of medical savings accounts (MSAs) is seldom proposed as the sole method of providing medical expense coverage. Instead, their use is an option that would be available to employers. Depending on the proposal, employers might use this approach for all employees or let employees choose an MSA in lieu of another form of medical expense coverage.

An MSA is an alternative to a medical expense plan and has few copayments. Instead, an employee gets a comprehensive medical plan with virtually total coverage for medical expenses to the extent that they exceed a high deductible, such as $2,000. The employer then contributes part of the savings in premium to an MSA, which is often an interest-bearing account. An employee can draw from the account to pay medical expenses not covered by the medical expense plan, such as charges for routine office visits or the cost of eyeglasses. At the end of the year, any monies in the MSA might either be left in the MSA to pay future unreimbursed medical expenses or be paid to the employee.

The rationale for an MSA is that significant cost savings can occur for two primary reasons. First, the expensive cost of administering small claims is largely eliminated, as demonstrated by the fact that a major medical policy with a $2,500 deductible can often be purchased for about one-half the cost of a policy with a $250 deductible. Second, employees now have a direct financial incentive to avoid unnecessary care and to seek out the most cost-effective form of treatment.

A few employers have used MSAs for some time with positive results. Costs have in fact been lowered or risen less rapidly than would otherwise be expected. Reactions of employees have generally been favorable, but there has been one major drawback—contributions to an MSA have constituted taxable income to employees. However, this issue has been addressed by recent legislation.

As with almost any approach to cost containment, MSAs have their critics. It is argued that MSAs may make sense when used with traditional indemnity plans, but long-term health care reform should focus on managed care. Proponents counter that the concept could also work with HMOs or PPOs. Another argument against MSAs is that employees will minimize treatment for minor medical expenses and preventive care that would have been covered under a plan without an MSA. This avoidance of medical care, contend the critics, may lead to major expenses that could have been avoided or minimized with earlier treatment. A final criticism of MSAs is that they do not focus on the problem of the uninsured. In rebuttal, proponents argue that any technique that lowers costs for employers will encourage some additional small employers to provide coverage that would have previously been unaffordable.

State Reform
There is increasing support in Congress for the idea that national health insurance should take the form of a series of state programs rather than a single federal program. This support comes from many new members of Congress who are more amenable to having the states rather than the federal government solve some of the nation's problems. Support also comes from some state governors. Some other members of Congress, who might otherwise prefer a federal solution, feel that reform at the state level is preferable to partisan debate at the national level with little chance of any real reform.

To give the states flexibility in health care reform, it will be necessary for the states to be free of such constraints as ERISA. Without an ERISA preemption, states will be unable to apply reform to employees who are in self-funded plans. Employers who self-fund benefits, particularly those who have been successful with cost containment, will be reluctant to support such a change in federal law because it may ultimately result in increased costs, particularly if a state adopts some type of community rating. Self-funded employers that operate in many states would also be burdened by having to comply with each state's mandates.

An interesting paradox has developed in Congress. While Republican control has increased interest in letting the states solve problems, there is also increased sympathy for the wishes of business. As a result, support for an ERISA preemption seems less likely than in the past.

Reform of the Current System
The 1994 elections, which resulted in a more conservative Congress, effectively ended any hopes of the Clinton administration for a major comprehensive restructuring of the nation's health care system. Despite very divergent views in Washington, however, 1996 saw the most far-reaching federal legislation to affect medical expense insurance in many years. It was clear to all sides that the public strongly supported certain changes, and these changes were enacted with bipartisan support. In addition, each side seemed willing to give the other side a little bit of what it wanted. While the overall result is not a basic restructuring of the health care system, it clearly represents significant reform and change.

HIPAA was not the only 1996 legislation to affect group medical expense coverage. The Mental Health Parity Act requires that many employers provide increased benefits for mental illnesses. In addition, the Newborns' and Mothers' Health Protection Act may increase the length of inpatient benefits for childbirth in many cases.

For the foreseeable future, it appears that changes to the health care system will continue on a piecemeal approach to address specific issues and problems. For example, there is proposed legislation to make medical expense benefits available to more children. It is interesting to note that many recent state health care reforms (such as the establishment of HIPCs and small-group legislation) and many provisions of HIPAA and other federal legislation incorporate aspects of the original Clinton proposal for national health insurance.

Increased Availability of Medical Expense Coverage
HIPAA contains several provisions designed to help both employees and employers obtain coverage more easily. The discussion focuses on the plans covered by the act and portions of the act that address nondiscrimination rules, special enrollment periods, renewability and small groups.

Covered Plans
The act applies to group health plans that cover two or more employees, whether insured or self-funded. However, there is a long list of excepted benefits to which the act does not apply. The following are excepted benefits in all circumstances:

- Coverage for accidents, including accidental death and dismemberment

- Disability income insurance

- Liability insurance

- Coverage issued as a supplement to liability insurance

- Workers' compensation or similar insurance

- Automobile medical payments insurance

- Credit-only insurance, such as mortgage insurance

- Coverage for on-site medical clinics

In addition, certain other benefits are excepted benefits under specified circumstances:

Limited vision or dental benefits, long-term care insurance, nursing home insurance, home health care insurance, and insurance for community-based care if these benefits are offered separately rather than as an integral part of a medical expense plan

Coverage for a specific disease or illness or for hospital or other fixed indemnity insurance if the benefits (1) are provided under a corporate policy and certificate or contract of insurance and (2) are not coordinated with other coverage under a medical expense plan

Medicare supplement insurance or other similar supplemental coverage if the policy is offered as a separate insurance policy rather than as a continuation of coverage under a plan that also covers active employees

Flexible spending accounts (FSAs) under cafeteria plans, as long as (1) the employee has other coverage available under a group health plan of the employer and (2) the maximum payment under the FSA for the year does not exceed the greater of two times the employee's salary reduction or the amount of the employee's salary reduction plus $500

With one exception, all employers—including the federal government—must comply with the act's provisions. State and local government plans can elect to be excluded from most of HIPAA's provisions.

Nondiscrimination Rules
The act prohibits the use of any of the following health-related factors as a reason to exclude an employee or dependent from coverage under a group health plan or to charge the individual or dependent a higher premium:

- Health status

- Medical condition, including both physical and mental condition

- Claims experience

- Receipt of health care

- Medical history

- Genetic information

- Evidence of insurability, including conditions caused by domestic violence

- Disability

It is important to note that these factors relate to coverage for specific individuals under a plan. The overall plan itself (except for plans in the small-group market, as explained later) can still be subject to traditional underwriting standards. In addition, group health plans are not required to offer any specific benefits and can limit benefit levels as long as they do not discriminate on the basis of these health-related factors. The act does not restrict the amount an insurance company or other provider of health care coverage can charge an employer for coverage. The act does allow an employer or provider of medical expense coverage to establish premium discounts or to modify co-payments or deductibles for persons who participate in programs of health promotion or disease prevention.

Special Enrollment Periods
For various reasons, employees and their dependents may elect not to enroll in an employer's plan when they are initially eligible for coverage. For example, a new employee may have coverage under a spouse's plan. The act requires that employers allow these employees and dependents to enroll in the employer's plan under any one of several specified circumstances as long as the employee had previously stated in writing that the original declination was because there was other coverage. However, the requirement of a written declination does not apply unless the employer requires it and notifies the employee that it is a requirement for future coverage. The following are the circumstances for special enrollment:

The other coverage was lost because of loss of eligibility under the other plan. This loss of eligibility can result from such circumstances as divorce, the spouse's termination of employment, or the spouse's death.

The other coverage was lost because employer contributions for the coverage terminated.

The other coverage was COBRA coverage that is exhausted.

The employee has 30 days following the loss of coverage to request enrollment in the employer's plan.

In addition, new dependents (including children placed for adoption) are also eligible for coverage under special enrollment rules. The employee must enroll the dependent within 30 days of his or her gaining dependent status. Coverage for a new spouse must become effective no later than the first month beginning after the employee's request. Coverage for children must go into effect as of the date of birth, adoption, or placement for adoption.

Guaranteed Renewability
All group health insurers must renew existing health insurance coverage unless one of the following circumstances exists:

- The plan sponsor failed to pay premiums or the issuer of health insurance coverage failed to receive timely premiums.

- The plan sponsor performed an act of fraud or made an intentional misrepresentation of material fact under the terms of the coverage.

- The plan sponsor failed to comply with a material plan provision relating to employer contribution or group participation rules, as long as these rules are permitted under applicable state or federal law. For example, an employer might fail to maintain a minimum required percentage of participation under a plan.

- There is no covered employee who lives or works in the service area of a network plan, such as an HMO.

- The employer is no longer a member of the association that sponsors a plan.

- The issuer of coverage ceases to offer coverage in a particular market. The issuer must notify each plan sponsor, participant, and beneficiary at least 90 days prior to the discontinuation of coverage, and the issuer must offer each plan sponsor the option to purchase other health insurance coverage currently being offered by the issuer to a group health plan in the market. If the issuer exits the market entirely, the period of notice is 180 days, and the issuer cannot reenter the market and sell health insurance coverage for at least five years.

Similar rules require that multi-employer plans and multiple-employer welfare arrangements renew coverage for employers. It also establishes guaranteed-issue rules for the individual marketplace.

Guaranteed Issue for Small-Group Plans
With some exceptions, the act requires that insurers, HMOs, and other providers of health care coverage that operate in the small-group market to accept all small employers—defined as employers with 2 to 50 employees—that apply for coverage. In addition, all employees of small employers and their dependents must be accepted for coverage as long as they enroll during the period in which they are first eligible. This rule is in line with the small-group legislation of many states. Some states have similar rules for groups as small as one employee, and some stipulate an upper limit of 25 above which the small-group legislation does not apply.

Exceptions to this guaranteed-issue requirement are allowed if a provider of coverage in the small-group market has inadequate network or financial capacity or if applicants are not in a plan's service area.

Minimum participation or employer contribution requirements are acceptable as long as they are permitted under applicable state law.

Interrelationship of State and Federal Legislation
For the most part, the new federal legislation does not preempt state laws pertaining to group health insurance (which might be more stringent than HIPAA), except in those situations where any state standard or requirement would prevent the application of the federal law. To prevent any preemption, many states have had to make some modifications to their laws and regulations.

The act permits a state to enforce the act's provisions with respect to insurance companies and other medical expense providers. However, the federal government can take over enforcement if a state does not perform its duties. In that case, enforcement is by the secretary of health and human services. The secretary of labor has enforcement power for the act's provisions as they apply to group health plans themselves, including the act's portability provisions. When there is federal enforcement, the penalty for noncompliance can be up to $100 per day for each individual with respect to whom a plan or issuer is in noncompliance.

NATIONAL HEALTH INSURANCE : Basic Question and FAQ

NATIONAL HEALTH INSURANCE
Few issues in recent years have gotten as much attention as the debate over national health insurance. With health care expenditures taking nearly one out of every six dollars spent in this country and about 14 percent of the population without adequate coverage for medical expenses, the magnitude of the problem cannot be overemphasized. There are no easy solutions to the problems of increasing costs and the lack of coverage for everyone. Health care is an emotional issue, and any reform will be complex and affect almost all Americans to varying degrees.

The following discussion of national health insurance does not give any precise answers or solutions. Rather it addresses many aspects of the issue, describes some approaches suggested for solving current problems, and attempts to predict what seems most feasible in the short term. The major goal of this discussion is to provide readers with a better framework for following—and perhaps participating in—the debate that will undoubtedly continue for some time.

Some Basic Questions
The issue of national health insurance is best addressed by having an understanding of its many dimensions. This discussion is organized around several questions, not all of which have precise or easy answers.

Don't We Already Have National Health Insurance?
The answer is "yes," for many Americans. Unlike most other industrialized countries, however, the United States does not have a system of national health insurance that covers everyone. Although national health insurance does exist in the form of Medicare, Medicaid, certain veterans' benefits, and coverage of military personnel and their families, each of these programs attempts to address the issue of health insurance for a specific group and each takes a different approach.

Some people would say that most other Americans are also covered under a national health insurance program. While the role of the federal government is probably not extensive enough for most persons to agree with this observation, the federal government does in fact have an influence on the design of employer-provided medical expense plans of almost all but the smallest employers. This influence comes from numerous pieces of federal legislation, such as ERISA, COBRA, the Family and Medical Leave Act, the Age Discrimination in Employment Act, the Americans with Disabilities Act, and HIPAA.

Many Americans have a tendency to feel that the federal government should have no role in health care reform. But approximately 50 percent of all medical care expenditures are for persons who are either employees of the federal government or covered under the national health insurance programs previously mentioned. Therefore, the government and the taxpayers who fund its activities have a direct stake in controlling the cost of medical care. (However, it is easy for many observers to become a bit cynical when they compare their own medical expense plan with the generous plan available to members of Congress.)

What Is the Objective of National Health Insurance?
It is difficult to determine exactly what a national health insurance program should accomplish. Alternative proposals either have different objectives or place varying degrees of emphasis on a combination of objectives. There are two primary concerns with the current health care system—rapidly increasing costs and the lack of coverage for a large segment of the population. Some programs are essentially a proposed solution to only one of these concerns; other proposals address both concerns in varying degrees. It would be much easier to find a solution if there was consensus on the scope of the actual problem.

Unfortunately, the two problems are not independent, and solving one problem may actually exacerbate the other. For example, making broad coverage available to everyone might so increase the demand for medical treatment that costs would go up because of a shortage of medical providers. This situation occurred after the passage of Medicare. In addition, efforts to control costs could lead to rationing of medical care so that some types of care would be available only to the more affluent segment of the population who could afford some type of supplemental insurance protection.

Do Americans Want Reform?
This is a difficult question to answer. During the health care debate over the last few years, numerous polls were taken. There seemed to be overwhelming agreement among the American people that the health care system is broken and needs fixing. Some proponents of national health insurance inferred from this opinion that there was support for radical reform.

As the debate continued and more polls about the underlying mood of the public were conducted, a different picture began to emerge. Most Americans were happy with their own medical expense coverage. They were also aware of rapidly rising costs, but those in managed care plans had been less significantly affected by them. In fact, as many employees elected managed care options, they actually saw their out-of-pocket medical expenses decrease. Although the public was not in favor of changes that would affect their relationships with providers of medical care, a surprisingly large percentage of the public was aware that reform carried a financial cost, and within limits many Americans were willing to foot the bill.

These further surveys also indicated that the major concern of Americans was the lack of security surrounding their own medical expense coverage, particularly if they became unemployed or changed jobs. There was fear that the loss of employment would put them in the category of uninsured. Even if coverage could be continued under COBRA, its high cost would make it unaffordable. Considerable concern was also expressed over the lack of coverage when changing jobs because of preexisting-conditions provisions in the new employer's coverage. While Congress is often considered out of touch with the electorate, these, in fact, were significant issues addressed by recent major health insurance legislation.

One final observation about these surveys: They showed that the majority of Americans do not want another program as bureaucratic as they view Medicare to be.

Is the Goal Universal Coverage or Universal Access?
Some national health insurance programs call for universal coverage, which means that all Americans would be covered. Unfortunately the cost of universal coverage would be very expensive, and it is questionable whether such a program could be accomplished voluntarily. As long as some people are in a position of voluntarily electing coverage, there are those who would be unwilling to pay the price, even if it was subsidized. Therefore, universal coverage probably requires a program similar to Medicare and accompanying tax revenue to support the program. With the majority of the public wanting a nongovernment program of health insurance, many other national health insurance proposals focus on universal access and realize that a goal of slightly less than universal coverage is all that is realistically attainable. But even this goal will require subsidies for some segments of the population.

Who Should Pay the Cost?
A majority of the uninsured have inadequate resources to pay the cost of voluntary coverage, even if it were suddenly available. As a result, there will be some need to subsidize the cost of coverage if the number of uninsured is going to be reduced substantially. Who pays? The alternatives are many, but they can largely be summed up in one word—taxes. There have been numerous suggestions about the form of these taxes, but in all cases they will fall on some or all taxpayers. These alternatives include general tax revenue, additional Social Security taxes, and taxes on cigarettes because smoking is the source of many medical problems.

Sometimes overlooked is the fact that many of the uninsured do receive medical treatment. Even though uninsured persons may be unable to pay, treatment by hospitals and physicians is usually not denied for serious illnesses or injuries. However, when the hospital or physician writes off a large portion of these bills as uncollectible, the cost is in effect being passed on to those who do pay their bills (usually through insurance) in the form of higher charges than would otherwise be made. In theory, the cost to many individuals or employers will decrease if a larger portion of the population has the resources to pay their own expenses. This is used as the rationale for taxing employers or individuals to pay the cost of providing protection for the uninsured.

What Benefits Should Be Available?
One of the major debates in designing a national health insurance program involves the scope of the benefits that will be included. At one extreme in the debate are those who feel the government should guarantee only a minimum level of health care. Private medical expense insurance or personal resources would be necessary to obtain broader benefits. At the other extreme are those who feel that a comprehensive level of health care should be available to all Americans. This group views complete health care protection as a basic right that belongs to everyone regardless of income.

The current system of health insurance falls somewhere between these two extremes, and this is probably where any ultimate solution will be found. Most Americans do not have coverage for long-term care, and many have limitations on such benefits as mental health and substance abuse. Some medical expense plans limit coverage for prescription drugs. Such limitations exist not because employers see no value in these benefits but because realistic cost constraints dictate the benefits that are provided. Employers cannot afford a medical expense plan that will do everything for everyone, and it is questionable whether Americans are willing to pay the cost of a national health insurance program that has such a lofty goal.

Another issue is whether a uniform package of benefits should be available nationwide. Under some proposals, benefits would be determined on a state-by-state basis, while under other proposals, a national benefit standard would be established. These proposals typically call for the abolishment of state benefit mandates.

Does Cost Containment Harm Quality?
While there are undoubtedly inefficiencies in the health care system, many of these inefficiencies have been addressed in recent years. For example, hospitals, faced with limits on Medicare and Medicaid reimbursements, have been forced to operate in a more cost-effective manner. However, future efforts to control costs will probably need to be more severe and may come with a high price. Americans arguably have the best and most innovative health care system in the world. Can this quality be continued if prices are controlled? Or will it continue only for those who have additional resources to pay? Control of costs, if taken beyond a certain point, will lead to the situation that exists in most countries with national health insurance programs—rationing of medical care. Questions like the following will then need to be answered: Should organ transplants be limited to persons under age 50? Should very expensive health care continue to be provided to premature babies who have a less than 25 percent chance of survival? To what extent should medical treatment be provided to persons with AIDS and other terminal illnesses? Will controls on the cost of prescription drugs eliminate the resources needed to develop the next generation of medicines?

Are Employer Mandates the Proper Approach?
National health care proposals differ with respect to the employer's role in making coverage available to its employees. Some proposals would require virtually all employers to make coverage available to employees (including part-time employees) and their dependents and to pay a portion of the cost. Under all such proposals, there are additional programs for the unemployed and subsidies to some employers for whom the cost exceeds a certain limit. However, small employers would be hit hard by most of these proposals and have lobbied against employer mandates. There is considerable support for the argument that the cost of employer mandates would force some small employers out of business.

One major argument for employer mandates is that the alternative is a government-run program with its accompanying bureaucracy.

What Is the Role of Medicare and Medicaid?
Many differences exist over the role of Medicare and Medicaid in health care reform. Although some argue for a single system to cover all Americans, opponents argue that the Medicare and Medicaid programs serve specific groups and are working reasonably well. Why alter the part of the system that is already closest to the concept of universal coverage?

It is interesting to note that national health insurance proposals are much more likely to fold Medicaid recipients into a new program than they are to include Medicare recipients. This fact reflects the reality that tinkering with Medicare can have grave consequences because of the high voter turnout of the elderly.

What Are the Political Realities?
The possibility of any national health insurance program depends on whether Congress can design a program that receives broad-based support. Although Republicans are unlikely to offer solutions that are as far-reaching as the initial Clinton administration's proposal and that will offend as many segments of society, public clamor for change will undoubtedly lead to continued reform of the current health care system, modest though it may be. Clearly any change will be designed to appeal to a different class of constituents. While the initial Clinton administration's proposal appealed to such groups as organized labor, the Republicans are much more likely to be influenced by the concerns of small businesses. However, no program will be successful and politically palatable unless it receives support from many diverse groups, including employers, insurers, hospitals, physicians, drug companies, and the general public.

State Reforms

Often overlooked in the debate over national health insurance is the role of the states in health care reform. Since 1989, almost all states have passed some type of legislation to make medical expense coverage more available and less costly to certain segments of the population. Some of this legislation was passed before the initial national health insurance proposal of the Clinton administration, and it is interesting to note that some of the administration's ideas reflected practices already instituted in some states. Other states continued to pass their own reforms as the debate over national health insurance continued at the national level during most of the first Clinton administration. The potential importance of state actions should not be overlooked. There has been and continues to be considerable support in Congress for having the states, rather than the federal government, take the initiative in health care reform.

State reforms fall into two categories. One category is laws and regulations aimed at uninsured individuals other than employees. The other category is those laws and regulations that constitute what is commonly referred to as small-group reform. It is in these groups of fewer than 25 or 50 employees that the majority of employees without employer-sponsored coverage is found. Most states have passed National Association of Insurance Commissioners (NAIC) model legislation, and a few states have gone even farther with other types of legislation. Unfortunately, the results seem to be somewhat mixed. Some states report modest results, but the national percentage of employees with medical coverage under small-employer plans has remained static. In addition, several insurers no longer choose to write business for small groups because of the limitations imposed by the legislation. While coverage is still more readily available, the legislation does not make it more affordable. Some small employers cannot afford to pay a significant share of the cost for their employees, and the employee share under contributory plans is often in excess of what employees can or are willing to pay.

NAIC Model
The most common approach to state reform has been the adoption of one of the versions of the NAIC Small Employer Health Insurance Availability Model Act. The stated purpose and intent of the model act are "to promote the availability of health insurance to small employers regardless of their health status or claims experience, to prevent abusive rating practices, to require disclosure of rating practices to purchasers, to establish rules regarding renewability of coverage, to establish limitations on the use of preexisting-conditions exclusions, to provide for development of basic and standard health benefit plans to be offered to all small employers, to provide for establishment of a reinsurance program, and to improve the overall fairness and efficiency of the small-group health insurance market." While some provisions of the model act may result in lower costs for certain employers, the main emphasis of the model act is on the availability of coverage, not on the employer's or employees' ability to afford the coverage.

Although the following discussion focuses on the provisions of the NAIC model act, it is important to remember that states often adopt model acts with variations. Some of the more significant variations are described.

Plans Subject to the Act
The model act defines a small employer as one who had 25 or fewer employees working on at least 50 percent of the days during the previous calendar quarter. Several states extend their legislation to employers with as many as 50 employees and/or exclude groups of one or two employees.

The model act applies to most medical expense products provided by insurance companies, HMOs, and prepaid service plans. Certain types of coverage are specifically excluded from the act's provisions: dental insurance, vision insurance, Medicare supplements, long-term care insurance, and disability income insurance. In addition, payroll deduction plans of individual medical expense insurance under which the employer pays no portion of the cost may or may not be subject to a specific state's legislation.

The small-group legislation does not force the providers of medical expense coverage to operate in the small-employer market. However, if a provider of coverage does sell medical expense coverage to small employers, the provisions of the legislation must be followed.

Benefit Provisions
The model act establishes a committee representing providers of medical expense coverage, employers, employees, health care practitioners, and agents to recommend the form and level of coverage to be made available to small employers. The committee must recommend a basic plan and a more comprehensive standard plan and make decisions regarding benefit levels, cost-sharing levels, exclusions, and limitations. In designing the basic plan, the committee can ignore any state mandates for benefits unless the small-group legislation specifically requires them.

Preexisting-conditions provisions are allowed, but with limitations. A medical condition can be treated as preexisting if it was treated (or if a prudent person would have sought treatment) within a specified prior period, which cannot exceed 6 months. Coverage for preexisting conditions cannot be excluded for more than 12 months following the effective date of coverage. Preexisting conditions must be covered as any other medical conditions if a person had benefits for the medical condition under a prior medical expense plan for at least 90 continuous days prior to the effective date of the new coverage.

One unfortunate and probably unintended side effect of the small-group legislation is that the policies that must be made available in many states are very precisely prescribed, making it impossible for insurance companies to use the same policies in multiple states. The expense of designing and refiling policies for many states, coupled with rate controls and the inability to underwrite for medical conditions, has resulted in several insurers leaving the small-group market.

Underwriting
With few exceptions, coverage must be written for all small employers. An insurance company or other provider of medical expense coverage is permitted to have requirements for minimum participation and minimum employer contributions as long as these requirements are the same for all similarly sized groups. These requirements cannot be increased after an employer has been accepted for coverage.

Coverage must be made available to all employees and their dependents. However, persons who did not enroll when initially eligible can be denied coverage for up to 18 months or have coverage excluded for preexisting conditions for up to 18 months.

Rates and Renewability
The model act prescribes a procedure for determining an "index rate" to be charged by each provider of medical expense coverage. Under certain circumstances, such as the use of more than one type of marketing system, the provider can use different rates for different classes of business to reflect substantial differences in expected claims experience or administrative costs. However, the index rate for any class of business cannot be more than 20 percent higher than the index rate for any other class of business.

Although the act allows rate differences among groups because of variations in age, sex, industry, geographic area, family composition, and group size, far fewer refinements are allowed than would be the case without this legislation. Some states have adopted more restrictive legislation and require community rating.

At annual renewals, rates can be changed because of changes in the index rate, changes in the mix of employees, and possibly group experience. In the latter case, the size of the adjustment is limited to a modest amount. The provider of medical expense coverage must renew all policies subject to certain exceptions, such as nonpayment of premium or the failure to meet any minimum participation requirement. The provider may also elect not to renew all policies for small employers in a state. However, proper notification (usually 180 days) must be given to the insurance commissioner and all employers.

Relation to New Federal Legislation
The Health Insurance Portability and Accountability Act (HIPAA) contains provisions that are similar to many provisions of the NAIC model act. State law continues to apply to insured medical expense plans unless it interferes with the new federal legislation. Provisions of the state law supersede the federal legislation if they are more generous toward insured individuals. For example, the maximum allowable length of preexisting-conditions periods may be shorter in some states than under the federal legislation.

Other State Reforms
Other reforms passed by the states include the following:

Tort reform. Several states have passed legislation to control medical malpractice suits. This legislation ranges from limiting recovery for noneconomic loss to mandatory arbitration.

Claim administration reform. A few states now require the use of standardized claim forms, including a uniform system of coding diagnoses and procedures.

The establishment of health insurance purchasing cooperatives (HIPCs). Several states have laws that establish HIPCs, entities that act as brokers between the purchasers and providers of medical expense coverage. They negotiate alternative plans of coverage on the basis of price and quality. Those eligible to use the HIPC, which may vary from all purchasers to small employers only, may elect one of the available plans directly from the HIPC. With some HIPCs, an employer deals directly with the cooperative without using agents or brokers. In one state, however, an employer can purchase coverage through an agent or broker or deal directly with the cooperative and receive a discount equal to the commission that would be paid to an agent or broker. An unexpected result of this arrangement is that almost 70 percent of the employers have elected to use an agent or broker. Clearly, these employers feel that the services agents and brokers provided are worth the extra cost.

Managed Care

Managed Care
The current buzzword with respect to cost containment is managed care. In a general sense, the term can be defined to include any medical expense plan that attempts to contain costs by controlling the behavior of participants. However, in practice the term is used by many persons to mean different things. At one extreme are traditional indemnity plans that require second opinions and/or hospital precertification. At the other extreme are HMOs and PPOs that limit a participant's choice of medical providers, negotiate provider fees, and use case management.

Managed care plans have evolved over the last few years. Today, it is generally felt that a true managed care plan should have five basic characteristics:

Controlled access to providers. It is difficult to control costs if participants have unrestricted access to physicians and hospitals. Managed care plans attempt to encourage or force participants to use predetermined providers. Because a major portion of medical expenses results from referrals to specialists, managed care plans tend to use primary care physicians as gatekeepers to determine the necessity and appropriateness of specialty care. By limiting the number of providers, managed care plans are better able to control costs by negotiating provider fees.

Comprehensive case management. Successful managed care plans perform utilization review at all levels. This involves reviewing a case to determine the type of treatment necessary, monitoring ongoing care, and reviewing the appropriateness and success of treatment after it has been given.

Preventive care. Managed care plans encourage preventive care and the attainment of healthier lifestyles.

Risk sharing. Managed care plans are most successful if providers share in the financial consequences of medical decisions. Newer managed care plans have contractual guarantees to encourage cost-effective care. For example, a physician who minimizes diagnostic tests may receive a bonus. Ideally, such an arrangement will eliminate unnecessary tests, not discourage tests that should be performed.

High-quality care. A managed care plan is not well received and selected by participants if there is a perception of inferior or inconvenient medical care. In the past, too little attention was paid to this aspect of cost containment. Newer managed care plans not only select providers more carefully but also monitor the quality of care on a continuing basis.

There seems to be a reasonable consensus among employers and benefit specialists that there is a negative correlation between benefit costs and the degree of managed care—that is, the greater the degree of managed care, the lower the cost. For example, studies generally rank benefit plans in the following order (from highest to lowest) with respect to annual benefit costs:

- Traditional insurance company and Blue Cross and Blue Shield plans without case management

- Traditional insurance company and Blue Cross and Blue Shield plans with case management

- PPOs

- Point-of-service plans

- Independent practice association HMOs

- Closed-panel HMOs

It is interesting to note that the degree of managed care increases as one goes down the list. There also seems to be a high correlation between annual benefit costs and the rate of cost increases. For example, the cost of traditional benefit plans has been increasing recently at an annual rate in excess of the annual increase in cost for closed-panel HMOs.