Premiums, deductibles, co-payments, coinsurance, flexible spending accounts, health savings accounts — all are terms used in conjunction with the health insurance plans that cover us. Not enough? How about these: PPO (preferred provider organization), HMO (health maintenance organization), in-network providers, out-of-network providers, usual and customary charge, covered service, non-covered service, supplemental insurance … and the list goes on. Is it any wonder that so many of us are confused when it comes to our health insurance coverage? How did this all come to be? Why do we need health insurance at all?
Health insurance, like all other insurance, is associated with the idea of decreasing our personal financial risk. But to understand the idea of financial risk in health care, we have to revisit the history of health care in our country.
Before the 1920s, there was little (by today’s standards) that could be done for a person who was seriously ill or injured. Because of this, most health care was provided in a person’s home. Even surgeries were done at home. During the last 90 years, there has been an ever-escalating progression of scientific understanding, new technology and better educated clinicians, all of which has radically increased the ability to treat an extraordinary array of diseases. The end result was that more people used medical care because better and better outcomes were provided. Costs began to skyrocket and the question quickly became: Who is going to pay for it all?
In the early 20th century, most hospitals were funded by the government or by charitable foundations. By the 1930s, the increase in health-care usage and costs was at a crisis stage. In fact, when social security was developed in 1935, there was much discussion about creating a national health insurance plan to address the problem. However, the first private insurance plans were developed (Blue Cross and Blue Shield), and it was concluded that it would be better for people to purchase private insurance than to have the government provide coverage.
By the 1940s, the government had created tax incentives for employers and employees that began to shield from payroll and income taxes the portion of income used to pay for health insurance. This contributed to a boom in the purchase of health insurance with the number of people with at least some coverage increasing from 20 million in 1940 to 140 million in 1950. By 1960, 75 percent of Americans were covered by private insurance.
In the 1960s, there was a growing realization that the employment-based health insurance model left gaps through which low income and elderly individuals would fall. This precipitated the approval of the Medicare and Medicaid programs in 1965. The end result was that most (but clearly not all) Americans had access to health insurance of some kind. The recent health-care reform legislation was aimed at ensuring that the remaining 10-15 percent of Americans without health insurance are covered in the future.
Here’s the summary of the history of health insurance in America: Medical care has become more technologically advanced and is increasingly able to cure disease and heal injuries. Because of this, more and more people have accessed health care; the combination of these two factors have made health care increasingly expensive and placed individuals at risk of a financial burden in the event that they need extensive medical care.
At this point you are likely thinking, “It’s nice to know some history, but how does this really affect me?” The best way to answer this is to provide an example.
Let’s say that 100 people get together and decide that they can’t individually afford to pay for a hospital stay on their own. They know that the risk of being hospitalized is low, but when it happens it is very expensive. These 100 people decide to share the risk of paying their health-care bills by having each of them pitch in $100 per month. During the course of the year, they would have pooled together $120,000. Let’s say that during the course of the year, five people end up in the hospital and each has a hospital bill of $20,000, all of which is paid from the pool of money they collectively built. The hospital is happy because it got paid for the services provided. The people who were in the hospital are happy because they could not have afforded to pay the bills themselves. The people who were not hospitalized are not as happy because they paid $1,200 during the year and didn’t get the financial benefit, but they are comforted by the fact that they could have been one of the people who got sick. It’s a simple but effective illustration of the power of sharing risk. Take that example and expand it by thinking of insurance companies that cover millions of people.
Let’s now assume that you are the insurance company. You want to be the person who brings everyone together, takes care of the pooled money and handles the administrative tasks of collecting money from the insured people and paying it to the people providing care. Clearly, you need to get a paycheck out of the deal, so you need a profit margin. Basically, you need to pay out to providers less than you take in from the people you insure. You also need a cushion of money to tide you over during those years when you have more bills paid out (because more people are sick) than you have money coming in. You also don’t want people to take advantage of your business model by having folks regularly get more in health care services than they pay you in fees. In addition, you don’t want the health care providers to charge you more than they should. Bottom-line: You want to charge a reasonable price for the insurance you provide and you want to pay a reasonable price to the person providing health care. To make sure this all works, you write contracts with the person you are insuring and also with the provider you are paying.
Your contract with the person you are insuring will have incentives to ensure they don’t overuse the service. You include co-payments and deductibles so they share some of the cost of the care they are getting. You negotiate rates with the health-care providers that are as low as you can get, to minimize the price you pay. For most people, insurance is provided by the employer, so you (the person who owns the insurance company) don’t sell your insurance to the person using it, you sell it to the employer of the person using it. This means your contract is with the employer, and the employer includes the insurance in the employment contract with the individual. So now there are four entities in the mix, all with contracts. Sound confusing? It is.
Let’s make it a bit more confusing. Now, you are a doctor. You take care of hundreds of patients in town who work for different companies. Each of those employers have contracts with different insurance companies, who in turn have a contract with you. When you negotiate your contracts with each company, you try to get the best payment rate that you can, realizing that few, if any, will pay your full fee. This means that each contract pays a little differently for exactly the same service provided by you. In addition, each patient’s out-of-pocket costs (co-payments, deductibles, premiums, etc.) are different, too.
Now imagine you are the patient. You visit your doctor and say, “How much will you charge me for my surgery?” The doctor says, “My charge for the surgery is $1,000.” You say, “Wow! That’s a lot of money, doc.” The doctor responds that he never actually gets paid what he charges and all of the insurance companies have negotiated different rates with him. Plus, he knows you have a deductible, but he doesn’t know if you’ve met any of that deductible by seeing other doctors, so he’s not sure how much you will have to pay out-of-pocket. You know you need the surgery, so you go ahead and schedule it and hope the bill isn’t too big in the end. Sound familiar?
Insurance is necessary to help us pay for health care bills that we couldn’t otherwise afford. The insurance system we have today is a mix of individual, employer and government-based plans. These plans all pay different rates for the services provided by health-care workers, but overall hospitals average about 50 cents of insurance reimbursement for each dollar charged, and the costs to deliver the service often exceed the allowable reimbursement rates. The whole system is incredibly complex. Because of this complexity, health care is widely known as the most highly regulated industry in the United States. It is difficult to predict what health care will cost on an out-of-pocket basis, especially considering that we are all slightly different physically and the treatment is tailored to each of us individually.
If there was a way to get an estimate up front for care you receive at the hospital, would you want to know? If you knew how much your out-of-pocket expense would be, would that change your decision regarding getting the care recommended by your doctor? I encourage you to send me your thoughts by visiting www.skiffmed.com and selecting "Contact us" in the upper right-hand corner.