Health Maintenance Organizations (HMOs) | Health Plan Designs

The introduction of the health maintenance organization was seen by many as the first real attempt at managed health care. An HMO differs from traditional approaches to health care in that it stresses wellness and preventive care. The HMO's intent is to maintain the participant's health, and therefore its orientation is toward health maintenance rather than toward treatment of illness only. Accordingly, HMOs provide richer preventive benefits, such as wellness programs, health screenings, and immunizations. Also, the financial incentives and cost controls are structured differently. Whereas comprehensive and major medical programs have up-front cost sharing to discourage "excess" medical utilization, HMOs usually have no up-front costs or charge only modest copayments for routine physician visits. Theoretically, HMOs control plan costs by maintaining health, managing care more cost-effectively, and controlling specialist referral. Most HMOs assign a primary care physician (PCP) to the plan participant. This PCP is charged with providing routine medical care to the subscriber and serves as a "gatekeeper," steering the subscriber to appropriate and cost-effective care should referral to specialists be required.

HMOs can take a variety of forms. The individual practice association model (IPA) is one in which an HMO contracts with individual physicians or associations of individual physicians to provide services to the health plan's subscribers. A group model is one where the HMO purchases services from an independent multispecialty group of physicians. A network model HMO is similar to the group model, but more than one multispecialty group practice provides services to members. Yet another variation in organizational design and service delivery is the staff model HMO. Here, rather than the HMO contracting with independent physicians or multispecialty groups, the physicians are full-time, bona fide employees of the HMO that pays their salaries. As many HMOs have grown, the clear distinction between individual practice model, group model, network model, and staff model has been somewhat blurred. The dramatic and ongoing growth of various health systems has meant the aggregation and merging of these disparate models.

Health Maintenance Organization Benefits

As mentioned earlier, most managed care providers offer broader health care coverage especially in the areas of wellness and preventive care. Often a fundamental difference is the manner in which one accesses the delivery of care. At the time of initial enrollment in the plan, the subscriber and his or her dependents select a PCP who is responsible as the primary caregiver for most routine medical care. This PCP is the person to make referrals and provide authorization for specialty care when needed. Different managed care organizations have different approaches to the process by which specialty care referrals can occur. For instance, some managed care companies publish a listing of specialists in the network and leave a referral to the discretion of the PCP. Other companies have this function centralized and require the assignment of specialty authorizations to a centralized unit that ensures steer-age to the most cost-effective specialty providers. This centralized approach to specialty care can be beneficial in ensuring that serious illnesses are directed to a "center of excellence," a provider known to have unique procedures or competence in treating certain types of injury or illnesses.

Wellness and preventive care benefits are key coverages that HMOs (and other managed care plans) provide that traditional plans have not provided. Expenses for these services historically have not been covered in the traditional fee-for-service type of plan. They include:

§  Routine physical exams.

§  Preventive screenings and diagnostic tests for early detection of certain diseases.

§  Prenatal and well-baby care.

§  Immunizations for prevention of diseases (particularly for children).

§  Vision and dental checkups.

§  Allowances for health club memberships.

Because of the growing understanding of the benefits of preventive care, some states have enacted legislation requiring all health plans to offer certain benefits such as childhood immunizations and screenings for diseases that clearly would benefit from early detection. Hence, some of the distinctions between plan models in terms of benefits offered have been blurred as preventive measures have been added to the traditional insurance plans.

Hospital/Medical Plan Designs—Then And Now

Prepayment Service and Indemnity Plans

Because the primary distinction between original prepayment and insured indemnity products was whether the benefit coverages were stipulated as a set level of benefits or an indemnified dollar amount to cover a certain amount of benefit, these two types of plans are described together.

Hospitalization Coverage: Background

Insurance that covered hospital stays was traditionally obtainable as a stand-alone product separate from insurance for medical services. Although medical benefit insurance has evolved into a more comprehensive product that covers hospital stays, physician services, and other medical expenses, it is still useful to examine the separate components.

The Blue Cross/Blue Shield organizations played a dominant role in the emergence of these early plans, setting up separate entities to handle hospital insurance and medical care insurance. Their hospital insurance products were configured as prepayment plans in which benefits were set in terms of allowable days of hospitalization. These plans emerged in the early 1930s. They contracted with hospitals and reimbursed them directly for patient lengths of stay. The Blue Cross organizations provided insurance to all policy seekers under their own charter. Insurance companies entered the marketplace soon thereafter but provided a hospital-day benefit that was based on a fixed dollar figure, which was the amount for which the insurance company indemnified the subscriber. This dollar figure was calculated based on the expected cost of the hospitalization. While the Blue Cross organizations were nonprofit entities, the insurance companies were for-profit organizations, were not community rated, and were not open to all those seeking coverage.

The early hospitalization plans were configured as first-dollar plans, in which benefits were paid from the first dollar of expense incurred, and the subscriber did not incur any expense with the hospitalization. This first-dollar coverage was in keeping with the model of a prepayment plan and was doable because the cost and utilization patterns for medical care were quite different from what they are today. Many of these plans, particularly the Blue Cross plans, were underwritten by community rating, an insurance approach whereby a uniform rate is used for all subscribers or insureds within a given geographical area.

Hospitalization Benefits Today

The hospitalization portion of today's plans generally covers all services, supplies, and procedures provided and billed through a hospital. These include the following:

§  Inpatient room and board. This benefit usually covers hospital charges for a semiprivate room and board and other necessary services and supplies. If confinement in an intensive care unit is necessary, it is usually paid at two or three times the semiprivate room rate or at a set charge.

§  Emergency care for services obtained at a hospital emergency room.

§  Intensive and specialty care.

§  Maternity and required associated newborn care for a set number of days or a stipulated dollar amount.

§  X-ray, diagnostic testing, and laboratory expenses when the insured is hospital confined or when these services are performed by a hospital on either an inpatient or outpatient basis.

§  Skilled nursing facility care. A plan will pay for confinement in a skilled nursing facility if it meets prescribed requirements. Usually there is a daily limitation either on a yearly basis or per confinement. Historically, a hospital stay of at least three consecutive days immediately prior to confinement was required to trigger allowance for skilled nursing facility care. Many plans have eliminated this prior hospitalization requirement.

§  Radiation and chemotherapy. This benefit typically covers materials and their preparation as well as use of hospital facilities.

§  Inpatient mental and nervous care.

§  Inpatient drug and alcohol substance abuse care.

§  Physical, inhalation, and cardiac therapy.

§  Home health care. This benefit is provided for a specific number of visits per year by physicians, nurses, and home health aides. Care usually must be under a treatment plan supervised by a home health agency.

§  Hospice care. This benefit is provided when the subscriber's attending physician certifies that the subscriber has a terminal illness with a limited medical prognosis, in many plans six months or less. This type of care allows the subscriber to receive care primarily at home, to help relieve pain and provide comfort rather than curing the patient. Hospice care will typically allow for admission into a hospice facility, and benefits will usually be provided until the earlier of either a patient's death or discharge from a hospice.

§  Respite care. Coupled with hospice care, this benefit allows the terminal patient short-term inpatient care in a skilled nursing facility or member hospice when it is necessary to relieve primary caregivers in the patient's home. An example of this benefit might be an allowance of seven days every six months.

Under a major medical plan (described below) when allowances for hospitalization services are exceeded by a plan participant, the excess charges typically flow to the major medical component of the plan where the plan reimburses the participant after he or she pays the applicable deductible and coinsurance amounts.

Medical/Service Coverage: Background

Just as Blue Cross provided hospital insurance coverage, Blue Shield provided for insured medical care, including physician and other health care provider expenses. Similar to Blue Cross, the Blue Shield plans were service type plans, which provided a limit on the services covered rather than a strict dollar indemnification. Blue Shield plans followed the creation of the Blue Cross hospitalization plans. The insurance companies that followed Blue Shield into the marketplace provided indemnification to the subscriber up to certain dollar amounts for covered medical services.

Medical/Service Benefits Today

Today's medical/service benefits parallel the benefits provided under the earlier medical/service plans. The medical/surgical portion of today's plans covers most services of health care practitioners. Their fees are reimbursed either on a scheduled fee basis or on a "reasonable and customary (R&C) basis." A scheduled fee basis provides a maximum allowance for itemized procedures in terms of either a flat dollar amount or a unit value per procedure, which is then multiplied by a conversion dollar amount. The reasonable and customary basis is reimbursement based on the individual practitioner's customary charge for the procedure and the charges made by peer physicians in the given geographic area. Typically, "reasonable and customary" covers the equivalent of the full charge of 75 percent to 90 percent of all physicians within a geographic region. The plan then reimburses the lesser of the individual practitioner's charge or the reasonable and customary fee. The advantage to a medical/surgical plan that pays on an R&C basis is that, unlike a scheduled fee plan, it is not necessary to amend the medical plan to account for medical inflation. However, in times of dramatic medical inflation, an insurer might not update the reasonable and customary database as frequently to exercise some restraint on price escalation.

The following services are typically covered in the medical/surgical insurance component:

§  Surgeons.

§  Anesthesiologists.

§  Nurses and other surgical assistants.

§  Service fees associated with inpatient medical care.

§  Second surgical opinions.

§  X-ray, diagnostic, and laboratory expense benefits made in a doctor's office or by an independent laboratory.

§  Skilled nursing care.

§  Obstetricians and pediatricians associated with prenatal, delivery, and postnatal care.

§  Inpatient intensive care and concurrent care in a hospital.

§  Allergy testing.

§  Transplant services.

§  The administration of radiation and chemotherapy.

§  Inpatient physical therapy.

§  Immunizations for children.

Today, an insurer may contract with physicians and other health care practitioners to establish fees for services. This agreement with physicians was common practice in the past with Blue Shield plans. With these plans, in agreeing to be a "participating doctor," the physician would agree to accept as payment in full, Blue Shield's usual, customary, and reasonable (UCR) fee. Thus the doctor agreed that he or she would not balance bill the plan participant an additional amount if the doctor's fee was higher than the fee assigned by Blue Shield. The benefit that the doctor received for being a participating provider with Blue Shield was that she or he would be paid directly and would not have to seek collection from the individual patient. Most physicians were participating providers with Blue Shield.

If, on the other hand, the plan participant were to receive medical services from a "nonparticipating" doctor, the basic component of the plan might reimburse the participant a dollar amount that was less than the doctor's charge. In this case, the participant could often submit the excess billed amount to the supplemental major medical portion of the plan and receive a second level of reimbursement after paying the required deductible and coinsurance amounts required on the major medical insurance component of the plan.

As managed care organizations have become more prominent, they have been able to exert greater influence over physician fee arrangements.

Major Medical Coverage: Background

The third component that was joined with hospitalization and medical service to comprise traditional plans was supplemental major medical insurance. Major medical insurance is characterized by high limits of coverage; it is not typically written as first-dollar coverage but involves reasonable up-front deductibles and coinsurance. Two of the earliest attempts at health care cost containment, deductibles and coinsurance amounts, are two distinct methods of cost sharing with plan participants. The deductible is an amount of eligible covered medical expense that the insured subscriber must incur before the plan pays benefits. The rationale for a deductible is to lower plan costs. Coinsurance is another means by which plan participants share in the cost of their medical care. After an insured participant exceeds his or her deductible, the plan reimburses at less than 100 percent. This cost-sharing device ensures that the insured participant has a financial stake in the cost of medical care. The major medical insurance policy is written as "all-except" coverage rather than as "named peril" coverage, which specifically identifies the services that are covered. Major medical coverage includes a widely defined array of medical expenses, and names those services or medical items that are either limited in or precluded from coverage. A major medical policy also can be issued as a stand-alone policy, which was prevalent when this type of coverage was first introduced.

Major Medical Benefits Today

The supplemental portion of today's plans covers eligible expenses that may not be covered in full or that are specifically excluded from either the basic hospitalization or the basic medical/surgical portions of the plan. Typically, these charges include the following:

§  Excess hospitalization charges if the limit for services or a dollar amount on the hospitalization portion of the hospitalization component of the plan is exceeded.

§  Excess medical/surgical expenses experienced in receiving medical services from a "nonparticipating" doctor (if the plan is a Blue Cross/Blue Shield Plan).

§  Diagnostic home and office visits.

§  Ambulance service.

§  Durable medical and surgical equipment.

§  Blood transfusions.

§  Oxygen and its administration.

§  Prescription drugs not used in a hospital or outpatient facility.

§  Prosthetics and orthotics.

§  Skilled nursing facility care in excess of the basic benefit allowance.

§  Outpatient mental and nervous care.

§  Outpatient drug and alcohol/substance-abuse care.

These expenses are generally reimbursed after the participant pays an annual deductible in a major medical plan. He or she is then responsible for the relevant coinsurance amount. A plan may require a deductible of $500 worth of eligible major medical type expenses per person before the plan begins to reimburse. A typical level of coinsurance required by the participant is 20 percent. Therefore, under this type of arrangement, the plan would begin to reimburse at 80 percent after the deductible is satisfied. Typically, the plan reimburses at 100 percent after an individual incurs a certain amount of coinsurance. For instance, the plan may reimburse at 80 percent for the first $10,000 of expenses and then pick up at 100 percent above the $10,000 threshold after the individual has paid $2,000 worth of co-payments out of pocket. The rationale for eliminating the coinsurance after a certain level and establishing an out-of-pocket maximum payment by the subscriber is the recognition that even requiring a coinsurance amount of 20 percent can cause extreme financial hardship in the event of a catastrophic illness.

Major medical plans have some lifetime maximum cap on eligible benefit charges after which the plan ceases reimbursing the participant. For instance, an individual might be subject to a $1 million lifetime plan maximum, meaning that the plan will no longer cover expenses if the individual incurs eligible major medical expenses in excess of this limit.

Comprehensive Plans: Background

It is not hard to imagine the change in design of medical plans that occurred as the economics of medical care, utilization patterns, and technological enhancements increased the cost of the prepayment and traditional indemnity plans. Comprehensive medical plans were an adaptation of the major medical approach. Essentially, the structural approach of up-front deductibles and coinsurance was applied not only to supplemental medical services but to hospitalization and basic medical services. What was a supplemental insurance approach to items not covered in the base medical plan, became the mode of providing all medical insurance. The cost of medical insurance was decreased for two primary reasons. First, plan participants were cost sharing each time medical expenses were incurred through the up-front deductible and coinsurance. Second, because plan participants were required to pay a portion of medical costs when incurring services, they were given a financial incentive to be better health care consumers, unlike with first-dollar coverage where there was no incentive to curb unnecessary utilization or choose less costly care. Comprehensive plans tended to be easier to communicate to plan participants because there was no need to explain different component parts of a plan, which benefits were in each component, and which benefits were subject to deductibles and coinsurance.

Cost-Control Features of Comprehensive Plans

Because many comprehensive plans were designed with cost savings as a primary objective, they had other cost-controlling features. Some of these features were applied later to other plan designs when organizations wanted to restrain the cost escalation in these programs. Some of the cost-controlling features included requiring second surgical opinions, full coverage for certain diagnostic tests, pre-admission certification requirements for hospitalizations, utilization reviews by the insurer or a third-party administrator, and enhanced reimbursements if procedures were performed at an outpatient facility.

These plan features were intended to control costs and reduce unnecessary care. A plan sometimes exempted certain items such as second surgical opinions and diagnostic testing from the deductible and coinsurance provisions, and either required or encouraged their use. The belief was that second surgical opinions could decrease unnecessary surgical procedures, and diagnostic tests could result in early detection of certain medical conditions that were more cost effectively treatable if identified early. Pre-admission certification required either plan participants or the admitting hospital to check with a specialist at the insurer or the plan before admitting an individual for treatment. The intent was to allow insurers to review provider decisions as to the cost-effectiveness and necessity of the treatment before hospitalization and to intervene if necessary. Utilization review involved an examination of medical patterns to determine whether plan participants or certain health care providers seemed to be outside average utilization patterns or expected practice patterns. Utilization review was concurrent, prospective, or retrospective. Enhanced reimbursements or waiving of deductibles and co-payments would occur if certain procedures were performed on an outpatient basis. The belief here was that a financial incentive would encourage plan participants to opt for a less costly outpatient treatment rather than a more costly treatment involving hospital inpatient care.

Comprehensive Plan Benefits Today

The cost-control features just described have carried over into today's comprehensive plans, which subject virtually all expenses to a deductible and then reimburse an amount that excludes the coinsurance the participant must pay. However, certain benefits might be paid at 100 percent if they are viewed as contributing to a more economical means of accessing care, primarily as an alternative to inpatient hospital care. Also, as with major medical programs, most comprehensive plans have a maximum out-of-pocket payment, after which the plan would reimburse 100 percent of the UCR fee. Special daily limitations and annual maximum and lifetime caps also apply. A typical plan with a 20 percent coinsurance amount might have benefits configured in the following way:

Benefits Paid at 80 Percent of the Insurer's Established UCR Fee (Subject to Deductible)

§  Inpatient days room and board (pre-admission certification required for admission).

§  Maternity and newborn care.

§  Administration of radiation and chemotherapy.

§  Inpatient surgical services.

§  Physician office visits.

§  Chiropractic care.

§  Anesthesia.

§  Outpatient hospitalization services.

§  Emergency accident and medical emergency expenses.

§  Prescription drugs.

§  Private duty nursing.

§  Preadmission hospital testing.

§  Skilled nursing facility care.

§  Hospice care.

§  Respite care.

§  Physical and respiratory therapy.

Benefits Paid at 100 Percent of the Insurer's Established UCR Fee (Not Subject to Deductible)

§  Outpatient diagnostic tests, X-rays, and lab examinations.

§  Outpatient surgery or procedures performed at an ambulatory care facility, doctor's office, or surgi-center.

§  Home health care.

§  Second surgical opinions for specific medical procedures.

In obtaining medical services from a Blue Cross/Blue Shield Comprehensive Plan, it could still be beneficial to seek services from the "participating" doctors because a "nonparticipating" provider could charge an amount in excess of the insurer's UCR fee schedule. This could result in a plan participant having to pay more than 20 percent coinsurance because the plan will reimburse based upon the UCR fee.