Provider Reimbursement Approaches

Fee-for-Service

Under this payment method, health care providers charge separately each time services for care are rendered. This is a common reimbursement method under traditional indemnity plans. Providers commonly set their own charge and are paid accordingly. Sometimes, insurers negotiate a fee schedule that establishes the maximum amount the plan will pay for any given medical procedure or service. Fee-for-service has been the most common provider reimbursement approach for the traditional prepayment, indemnity, and comprehensive plan designs.

Capitation

Under capitation, providers are paid a set amount (generally monthly for primary care providers (PCPs)) for each plan participant, regardless of the number of visits or services provided.

Capitation payment methods are used extensively by HMOs. This form of payment shifts some risk to the medical provider, who accepts the capitation amount, assuming the increased enrollment will level out the risks. Some plans reimburse PCPs and certain specialists using capitation, and have a fee schedule for other medical specialists.

Other Provider Reimbursement Approaches

Health Care Purchasing Cooperatives/ Coalitions

Some employers have banded together into purchasing cooperatives to have greater health care buying power in the marketplace. Such an arrangement is used to gain favorable pricing from medical providers because of the large volume of business that can be supplied. This means of purchasing health care can be particularly attractive to a small employer who would not be able to procure the same discount on services that a large employer could. In some ways, the insurance company or managed care provider plays this role for smaller groups. However, the emergence of health care purchasing cooperatives provides another alternative for employers to negotiate pricing with medical providers.

Experience Rating | Health Plan Designs

An organization that is willing to proactively manage its health care costs through benefit plan redesign and innovative delivery of care will seek to capture the cost savings generated by these actions. An experience-rated plan uses recent claims and utilization data of a particular organization to establish the appropriate insurance rates for a future time period. If an organization has had a history of favorable claims experience, the experience-rated insurance product may offer substantial cost advantages over an underwriting approach that uses aggregate community claims experience to establish insurance rates.

Cost-Plus and Self-Insured Approaches

An organization of sufficient size may finance its health care benefits using a cost-plus or self-insured approach. Under such a scenario, the organization will pay for the actual claims of its group, along with an administrative charge to an insurer or third-party administrator who handles claims processing. Such an agreement is often called an administrative services only (ASO) agreement. Under this type of arrangement, it is important to understand provider reimbursement methods. For instance, are hospital daily room costs based on actual charges or a discounted amount below charges? Will the hospital be paid for each day a patient is hospitalized, or will the hospital be paid for a fixed number of days commensurate with the expected length of stay usually associated with the medical condition and its course of treatment? This latter approach would give the hospital an incentive to ensure that patient lengths of stay are in line with practice norms.

Stop-Loss Insurance

If an organization utilizes a cost-plus or self-insured method of financing, it may choose to limit its potential aggregate medical claims exposure by purchasing insurance that would make payment if claims exceeded a certain predetermined amount for the entire group. This insurance coverage for capping the total claims experience of the group is known as aggregate stop loss. A firm also might limit its liability using specific stop loss. Specific stop loss sets a limit on the amount that a plan sponsor will pay for an individual case. If a catastrophic medical case occurs, the employer will only be responsible for paying covered medical costs on that individual case up to the stop-loss amount.

Because the insurer is assuming risk for excess claims, the contractual document will clearly define when the insurer assumes the risk. It is extremely important when contracting for stop-loss protection to carefully analyze terms and conditions to ensure that the intentions for protecting against loss are matched by the insurer's policy. For instance, the period for claims coverage could be specified either on the basis of when a claim is incurred or when a claim is paid. It is also important to ensure that definitions for coverable expenses in the employer's health plan match coverages in the stop-loss agreement. Medical plans and stop-loss coverage typically exclude medical care that is deemed experimental in nature. Do both documents have the same definition of experimental medical care? Other issues to examine would be whether specific subscribers undergoing treatment are excluded from the stop-loss coverage and how the run-out of claims payments going beyond the stop-loss coverage period are handled.

Underwriting And Funding Approaches

Health care cost-control has become of paramount importance as the cost of medical care has increased. Medical costs are a significant expense and a risk exposure that can have a substantial impact on an organization's overall compensation costs and operating results. In light of this, it is not surprising that many organizations have looked to innovative financial arrangements at the same time they restructure benefit design and health care delivery.

Community Rating

The early prepayment plans offered by the Blue Cross and Blue Shield organizations were offered as community-rated products. Under this financing approach, all insureds in a given geographic area paid a uniform rate. Because the Blue Cross and Blue Shield organizations were chartered with the intention of providing insurance to all those seeking coverage and because they negotiated contractual reimbursement arrangements with providers, this method of underwriting was possible in the early years when costs were lower and the Blue Cross/Blue Shield plans were the principal underwriter of medical care. HMOs at their inception also used community rating and, in order to be qualified under the Health Maintenance Organization Act of 1973, were required to adhere to specific rules regarding it. These requirements were relaxed with the 1988 amendments to the Health Maintenance Organization Act. Community rating is still used for individual subscribers and for smaller group contracts. However, community rating is much less popular in the group insurance market where larger organizations prefer to be experience rated rather than be rated with other organizations, which potentially have less-favorable risks.

Adjusted Community Rating

At times, an insurer will offer a plan sponsor insurance rates that have been calculated using adjusted community rates. The baseline claims data used to establish these rates are the claims and utilization patterns in the community at large. However, based on certain favorable characteristics of the plan sponsor's own past claims data, the insurer is willing to offer more favorable rates, which have been approved by the state's insurance department and the insurer's underwriting department, for a client that exhibits favorable claims characteristics.

Variations In Plan Design

The preceding descriptions of benefit provisions are intended to acquaint the reader with standard types of medical plans. The reader should be aware that there is wide latitude in design alternatives within the frameworks described. For instance, with the traditional prepayment and indemnity products, which benefits are included in the medical/surgical component and which benefits are covered by supplemental major medical can dramatically alter the nature of a plan. Through the use of its fee schedule, an insurer might exert greater control over provider price escalation, including procedures in the medical/surgical component. An alternate design could include more items from the medical/surgical component in the supplemental major medical portion, subjecting these to deductibles and coinsurance, or the plan could characterize hospitalization benefits as the only form of basic benefits. Some supplemental major medical plans, called wraparounds, only supplement basic hospitalization benefits.

With a comprehensive plan, variation as to which benefits are subject to deductibles and coinsurance can lead to very different plan designs. Some comprehensive plans, the so-called "full-pay hospital" plans, waive deductibles and coinsurance on hospitalizations, making the comprehensive plan resemble a first-dollar plan. Even payments to providers can combine different reimbursement systems, with payment on a fee schedule up to a certain level and then above that on a reasonable and customary basis, with subscribers paying a deductible and coinsurance at the reasonable and customary level. Some flexible benefit programs offer plan participants various alternative comprehensive plans with different levels of deductibles and coinsurance.

Accordingly, a plan sponsor can use this flexibility in designing plans that best suit the organization's objectives. The sponsor should consider designs that balance human resource and organization goals with administrative, communication, and funding realities.

Special Provisions | Managed Care Plan Designs

Mental Health/Substance Abuse Benefits

Special provisions and limitat ions historically have applied to mental illness and substance abuse (drug/alcohol treatment) benefits. These limitations were a very common plan design feature. In 1993 for example, 97 percent of participants in medium and large private establishment health plans were eligible for some level of outpatient mental health services, while only three percent had the same benefits as those for other illnesses. Similarly, while 98 percent of full-time participants in medium and large private establishment medical plans in 1993 were covered for inpatient detoxification for alcohol and drug abuse treatment, 28 percent and 29 percent, respectively, had the same level of coverage for these illnesses as they had for other illnesses. However, on September 26, 1996, the Mental Health Parity Act (MHPA) was signed into law. The MHPA required that annual or lifetime limits on mental health benefits be no lower than the dollar limits for medical and surgical benefits offered by the group health plan. The MHPA applied to group health plans for plan years beginning on or after January 1, 1998 and contained a "sunset" provision providing that the parity requirements did not apply to benefits received on or after September 30, 2001. These parity requirements were subsequently extended. The MHPA does not apply to benefits for substance abuse or chemical dependency.

In the past, substance abuse benefits were not separately delineated in many plans but covered under mental and nervous benefits. However, because new treatment approaches have been developed and because the federal government and some states have enacted legislation mandating minimum levels of treatment for mental and nervous benefits, more plans separate these benefits today into distinct categories. Most plans in the past had limitations on both mental/nervous and drug/alcohol benefits that resulted in greater cost sharing by the participant. There were two common forms of limitations on these benefits. The first was to set the coinsurance at a higher level, say 50 percent in a 20 percent reimbursement plan, and establish an annual maximum for this benefit, such as $1,500. Additionally, a different lifetime maximum applied to this benefit, say $10,000. A second form of limitation was to set a maximum number of outpatient visits per year, such as 20 visits, with a maximum covered charge, such as $50. Similarly with inpatient coverage on the basic hospitalization portion of the plan, it was common to have a lifetime cap on this specific type of care and a maximum number of days allowable per plan year or calendar year. Since the MHPA prohibited specific dollar limitations for mental and nervous benefits different from other medical and surgical benefits offered by the plan, many plans eliminated such provisions but kept limitations in terms of days of treatment and outpatient visits. Some plans have used this same approach for substance abuse benefits although dollar limitations are still permissible.

"Carve Out" and Separate Management of Costly Expense Items

Many organizations have "carved out" prescription drug benefits from their plans and are managing those benefits on a separate basis. This is because prescription drugs have been among the fastest growing cost components in many medical plans. The emergence of drug management firms provides opportunities for cost savings through pharmacy networks, mail-order discount programs, inclusion of generic drug substitutes, drug formulary management, prescription utilization review, and disease management programs. Mental health and substance abuse benefits also have been carved out and are separately managed by many medical plans.

Consumer-Driven Health Plans (CDHPs)

Close to the turn of the millennium, a new type of health plan design was created—the consumer-driven (directed) health plan (CDHP). Though these plans can involve a variety of different features, there are certain common attributes that characterize them. CDHPs, as first conceived, involved linking a high-deductible supplemental major medical plan with a savings account that would be used to pay either discretionary medical costs or certain charges before the deductible was reached. Decisions involving the spending of funds in the savings account are made by the plan participant. There would often be a deductible gap before the high-deductible supplemental major medical plan would cover expenses. The rationale for the CDHP model is that the plan provides a financial incentive to the plan participant to selectively choose medical care in a cost-efficient manner; thus, to be a good health care consumer. If the consumer-driven health plan is designed well, patient behavior is changed. This is of particular consequence to the plan's economics if patients requiring chronic and acute care, those who are responsible for high-volume discretionary expenditures, change their behavior.

Under a typical CDHP, as first introduced, a plan participant would receive some employer contribution, say $1,000 to $2,000, deposited into a health reimbursement account (HRA). When the funds in the HRA were exhausted, the participant would need to pay certain medical costs out-of-pocket before receiving insured health coverage under the high-deductible supplemental major medical plan.

The early CDHPs utilized HRAs as consumer-managed, side savings health care accounts. Promoters of consumer-driven health plans sought tax guidance from the Internal Revenue Service (IRS), and the IRS responded that these accounts would be considered employer-provided health benefits exempt from income and employment tax and deductible as an employer business expense. It is noteworthy that HRAs were created by regulatory guidance rather than by statute. In order to qualify as an HRA, these accounts needed to be funded solely by employer contribution, be used to reimburse employees for medical care as defined by Section 213(d) of the Internal Revenue Code (IRC), and medical expenses needed to be incurred by the employee, the employee's spouse or dependents as defined in Section 152 of the IRC. The HRAs provided reimbursements up to a maximum amount, but the IRS ruled that any unused portion of the maximum dollar amount remaining at the end of a coverage period could be rolled over and increase the maximum reimbursement amount in subsequent coverage periods.

"The true viability of the consumer-directed health care model was ensured on June 26, 2002. That was the day the Internal Revenue Service issued guidelines approving the right of HRA owners to carry over unused amounts from year to year. This ruling may have been the most important change in health care in 25 years."

The significance of this ruling was that it introduced a savings element into health plans allowing capital accumulation and investment possibilities so participants could advance fund future medical care.

Not long after the introduction of the HRA, another type of consumer-managed health care account was created. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 allowed for the use of health savings accounts (HSAs) beginning in 2004. HSAs were similar to HRAs in that they allowed unused account balances to be carried forward into future years. Only individuals covered by a high deductible insurance plan were permitted to establish an HSA. An innovative feature of the HSA was the wide latitude in funding source. An HSA can be funded by employer contribution, or using employee pretax money, or by an individual making a tax-deductible contribution. Another innovative feature is the account ownership characteristic. The accounts are the property of the individual, are nonforfeitable, and may be rolled over from one employer to another and from one account to another. The alternate funding sources for an HSA allow for a variety of plan design approaches involving employer contribution, employee contribution, or both. Also, the fact that an individual or an employer can establish an HSA, allows its creation apart from the employer as long as the individual is a participant in a high-deductible health plan.

Beyond the basics of a consumer-managed health care account linked to a supplemental major medical plan, what do CDHPs offer? Some designing these plans see a much wider array of consumer choice embedded in these plans. In keeping with the spirit of consumerism, many see the inclusion of consumer education as integral to the success of the plan and the receptiveness of employees to these plans.

"Most consumer-driven plans are designed in several ways to encourage employees to be better health consumers. First, these plans offer the participant much more information about health choices, including providers, treatments and facilities. These plans may offer far more choice in services. Some allow the participant to 'build' his or her own plan, literally choosing the deductible, copay, health providers and benefits covered. Consumer-driven plans frequently offer quality measures and evaluations of various health providers. They may offer health coaches for general health issues or designated specialist coaches for chronic conditions and disease management."

Some practitioners are forecasting several stages in the development of consumer driven health plans. Under this evolutionary schema, second generation CDHPs would involve employers funding the consumer-managed health account in creative ways with rewards, discounts or other incentives when employees make behavioral changes. Looking further into the future, CDHP theorists envision optimizing the relationship between health care costs and employee performance.

"An important component of this strategy is the health risk appraisal. Profiling employees in areas such as stress can lead to an understanding of what health or workplace modifications are needed to lower costs and improve performance."

"Future-generation CDHPs will emphasize personalization. Under this scenario, decision support systems will link each person with a personalized health care electronic support system providing real-time feedback on health status, lifestyle and health concerns."

Although the future alone will determine the realization of these prognostications, it is clear that the plethora of innovative features comprising CDHPs is likely to expand into many new and exciting areas.

Preferred Provider Organizations (PPOs)

A preferred provider organization is formed when a group of medical providers such as hospitals and doctors contract with employers, insurance companies, or other plan sponsors to provide various medical services. The medical providers usually offer discounted pricing because of the volume of business received from the contracting organizations. The medical providers are reimbursed on a fee-for-service basis, but the fees are lower than in a traditional plan because of the negotiated discounts.

Preferred Provider Organization Benefits

Benefits provided through a preferred provider organization vary depending on the capabilities of the providers in the organization and the overall size of the PPO. A PPO could be the only source of medical care for an employee group, or the PPO may be one choice among several medical plans the employer offers. Alternatively, a PPO may provide the in-network benefit for a point of service plan, described below.

Point of Service (POS) Programs

Another type of managed care program is the point of service program. This managed care product is somewhat of a cross between an HMO and the comprehensive major medical plan. Essentially, the plan sponsor either contracts with a number of health care providers or a managed care company to provide cost-effective medical care through a preferred provider organization of health care providers. Plan participants are free to use the network of preferred providers when they need health care. Alternatively, the plan participants can decide to utilize other medical providers who are not included in the network. However, if the participant uses out-of-network providers, he or she incurs additional expense in the form of greater deductibles and copayments. It is at the point of service that the plan participant is making the decision whether to remain in-network and receive a higher level of coverage or, alternatively, to select a medical provider who is out-of-network and be personally responsible for a larger share of the cost for this care. The POS program can be an attractive delivery system for participants who do not want to be restricted to receiving medical care only from network providers yet still would like to receive the same coverage and wellness benefits provided through a managed care system. This system of health care delivery suits some medical providers who are willing to join the PPO and provide medical services for discounted fees but are unwilling to assume the financial risks of HMO participation where a monthly fee is often paid to the doctor for each member regardless of the frequency of visits and the care provided. However, the particular financial arrangement and whether service providers bear any financial risk can be determined in various ways. 

Point of Service Plan Benefit

The POS plan is a hybrid of sorts, offering managed care case-management features and health maintenance approaches to medical care within the network but allowing plan participants the added flexibility of going outside the network if they are willing to bear a larger share of the cost for such flexibility. The extent to which subscribers are either penalized for going outside the network, or rewarded for staying within the network, can be determined by the deductible and coinsurance levels that are set. An organization could have varying reasons for setting the deductible and coinsurance levels either low or high. Also, these coinsurance levels can vary by various types of medical services. For instance, if the network of medical providers is not particularly well-developed in certain specialty areas, such as pediatrics, a company would find it difficult to penalize employees for not utilizing an in-network benefit. Another example could be that on certain types of medical services, for instance, psychiatric benefits, a company may perceive it as intrusive to require use of an in-network benefit. This may be particularly true if the POS plan is newly installed and would result in disruption of ongoing treatment. Some organizations have used POS plans as a means to transition from an indemnity plan to an HMO. In this situation, deductibles and coinsurance might initially be set slightly lower than in the traditional indemnity plan for employee relations reasons and later be increased as utilization grows in the managed care environment and employees become more comfortable with using in-network providers.

Integrated Health Systems

As the managed care delivery structures continue to grow, what started out as HMOs or PPOs are evolving into larger health systems that may include a managed care company, various physician and multispecialty practices, as well as entire hospitals and ancillary service providers. The preceding discussion of health care delivery structures is not meant to provide strict classifications into which each health plan must be distinctly assigned. Rather, it is hoped this characterization will be helpful in understanding basic differences between existing health care delivery systems and a starting point for understanding the relative merits of alternative designs. An employer's health plan should be configured matching the plan sponsor's objectives and assisting in meeting total compensation and human resource objectives.