01-04D - Introduction to Healthcare and Public Health in the US - Unit 04 - Financing Healthcare Part 1 - Lecture D

Introduction to Healthcare and Public Health in the US

Financing Healthcare (Part 1)

Lecture dThis material (Comp1_Unit4d) was developed by Oregon Health and Science University, funded by the Department of Health

and Human Services, Office of the National Coordinator for Health Information Technology under Award Number [IU24OC000015)].

Financing Healthcare (Part 1)Learning Objectives

• Understand the importance of the healthcare industry in the US economy and the role of financial management in healthcare. (Lecture b)

• Describe models of health care financing in the US and in selected other countries. (Lecture c)

• Describe the history and role of the health insurance industry in financing healthcare in the United States, and Federal laws that have influenced the development of the industry. (Lecture a)

• Understand the differences among various types of private health insurance and describe the organization and structure of network-based managed care health insurance programs. (Lecture d)

• Understand the various roles played by government as policy maker, payer, provider, and regulator of healthcare. (Lecture d)

• Describe the organization and function of Medicare and Medicaid. (Lecture e)

Health IT Workforce Curriculum Version 3.0/Spring 2012

2Introduction to Healthcare and Public Health in the US Financing Healthcare (Part 1)

Lecture d

Payers in the US Healthcare System

• US Multipayer System– Role of insurance– How payers reimburse providers for healthcare

services• The Private Healthcare Payer System

– How health insurance works– Sources of health insurance– Types of health insurance– Managed care

• Regulation of private health insurance Health IT Workforce Curriculum Version 3.0/Spring 2012


Lecture d

Health Insurance• Spreads the financial risk over a large pool of people• Balances risk with cost

– 5% of the risk pool accounts for approximately 50% of the pool spending

– People over age 65 consume more health care than other age groups do

• Insurance cost is influenced by prescription costs, technology, an aging population, many with chronic conditions, government subsidies and plan administrative costs.



Lecture d

How Insurers Pay Providers• The provider submits a claim

– Claim must include at least one diagnosis code, and one procedure code for each service rendered• Diagnosis code = ICD-9-CM• Procedure code = CPT code or DRG code

• A medical claims examiner or adjuster processes the claim – Determines “usual and customary” charge– Deducts any portion the patient is responsible for– Deducts any contractual provider discount– Reimburses the remainder



Lecture d

How InsurersPay Providers (continued)

• The patient and provider receive an explanation of benefits (EOB), also called remittance advice– Regardless of whether claim is accepted or denied– Regardless of whether the patient receives a check

• A claim can be denied for many reasons:– Coding errors or insufficient information– Procedure considered experimental or otherwise not

covered by the policy• Rejected claims can be appealed



Lecture d

The Multipayer US Healthcare System

• Contributors– Private sources

• Employers and employees– Contributions to private health insurance– Out of pocket

• Other– Public or government sources

• Federal & State and local– Payroll and general tax revenues– Special tax, e.g. sales tax

7Health IT Workforce Curriculum Version 3.0/Spring 2012


Lecture d

Public vs. Private Insurance

• Private insurance – Primarily state-licensed companies – Self-insured employer plan

• ERISA regulates• Third-party administrator

• Public insurance is government or administered– Medicare– Medicaid– Children’s Health Insurance Program (CHIP)



Lecture d

Types of Private Health Insurance

• Indemnity plans - “traditional” plans– Fee for service– Simply provide reimbursement to providers– Less prevalent today

• Managed care plans prevail today– Offer financial incentives to providers and patients– Integrate the financing and delivery of care within a

single system



Lecture d

Blue Cross/Blue Shield

• Independent, state-licensed organizations• Historically set up as not-for-profits under

special state laws• Blue Cross reimburses hospitals• Blue Shield reimburses physicians• Today, some Blue Cross/Blue Shield

organizations operate as commercial insurers



Lecture d

Managed Care• Managed care: term for techniques designed to

control costs and improve quality• Managed care organization (MCO) – a business

model which integrates financing and delivery of health care using managed care techniques

• Features– Comprehensive care– Controlled access to care– Manage outcomes and improve quality care– Reduce costs

• Rationing and quality of care concerns



Lecture d

Managed Care Organizations• HMO = Prototype using capitation• New models

– Mix and match reimbursement methodologies– Greater patient choice– Increased costs

• MCO Models– Health Maintenance Organization (HMO)– Preferred Provider Organization (PPO)– Exclusive Provider Organization (EPO)– Point of Service Plan (POS)



Lecture d

The “Managed” in Managed Care• Managed care

– Delivers high-quality health care – Controls costs

• Patient and provider incentives

– Utilization review• Determine medical necessity of care• Role as gatekeeper

– Different types of managed care plans• Plan differences based upon cost and provider choice



Lecture d

Cost vs. Provider Choice• The various managed care plans are defined by

choices in what providers the patient can use • Fewer choices translate to lower health care

premiums and lower out-of-pocket costs• Types of managed care plans have varying

degrees of choices and costs– Health maintenance organization (HMO)– Preferred provider organization (PPO)– Point-of-service plan (POS)



Lecture d

HMO Models• Staff model: Doctors are salaried employees• Group model: Doctors are employed by a group

practice; the plan contracts with the practice for their services; most patients that a doctor sees are patients in that plan

• Open-group model: As above, but doctors are freer to accept patients from outside the plan

• Independent physician association (IPA): Doctors are organized into a legal entity; have autonomy but also contract with the plan

• Network model: The plan contracts with multiple independent physicians, group practices, and/or IPAs

• Mixed model: Mixes and matches any of the above



Lecture d

Preferred Provider Organization (PPO)

• PPO - patients free to choose any provider– In-network providers

• Lower deductibles, copayments, and coinsurance

– Out-of-network providers• Higher deductibles and coinsurance for the patient

• EPO – patients must use network providers– No reimbursement for out of network provider

services • No gatekeeper for either a PPO or EPO



Lecture d

Point of Service Plan• Point of Service Plan

– Gatekeeper• All services through the gatekeeper – the point of

service - controls access to all medical services• Referrals generally to in-network providers only• May refer out-of-network

– No reimbursement for services to out-of-network providers unless previously authorized by gatekeeper



Lecture d

Indemnity vs. Managed Care Programs INDEMNITY MANAGED CARE

Feature Fee for service HMO PPO POS EPO

Providernetwork

None Strict or exclusive Broad network

Hybrid of HMO/PPO

Hybrid of HMO/PPO

Physician choice Unlimited PCP required PCP not required PCP required PCP not required

Referrals Not needed Must come from PCP

Not needed Required if out of network

None out-of-network

Precertification Not needed Required Not usually required

Not usuallyrequired

Required

Preventive care Usually not covered

Covered Some covered Covered Varies

Relative cost to patient

High Low Medium–high Low-medium Medium

4.9 Table: (2011, CC BY-NC-SA 3.0).



Lecture d

Regulation of PrivateHealth Insurance

• States control the legal structure of private insurers and monitor their finances– Purpose: To ensure the company can meet its

obligations to the people it insures• Private insurance companies are also regulated

by federal laws• Federal law may take precedence over state law



Lecture d

Federal Regulation of PrivateHealth Insurance

• Employee Retirement Income Security Act (ERISA) 1974– Permits and regulates self-insured health

plans – Does not require employer plan– Requires plans to meet minimum standards – Requires a grievance and appeals process– Gives participants the right to sue for benefits– Requires plan administrators to meet certain

standards of conduct



Lecture d

Regulation of PrivateHealth Insurance (continued)

• Consolidated Omnibus Budget Reconciliation Act (COBRA) 1985– An amendment to ERISA, implemented in 1986– Allows employees to choose continuation of group

health benefits in certain cases– Voluntary or involuntary job loss– Reduction in hours worked, – Transition between jobs, – Death of a spouse, divorce, and certain other life events

– Individuals may have to pay premium up to 102% of cost– Generally required for group health plans of companies

with 20+ employees



Lecture d


• Health Insurance Portability and Accountability Act (HIPAA) 1996– Amendment to ERISA– Defines “protected health information” and helps ensure its

privacy– Protects participants in group health plans

• Prohibits discrimination based on health status• Provides additional opportunities to enroll in group health plan, after

loss of coverage or certain life events• For some people, guarantees access to individual insurance

- American Recovery and Reinvestment Act (ARRA) of 2009 strengthened law and provided penalties



Lecture d


• ERISA mandated coverage– Newborns' and Mothers' Health Protection Act

1996• Plans that offer maternity coverage must pay for at

least a 48-hour hospital stay following childbirth– Mental Health Parity Act 1996

• Requires equality for coverage of mental illness–Women's Health and Cancer Rights Act 1997– Provides for post-mastectomy benefits including reconstructive

surgery and treatment of complications



Lecture d


• The Patient Protection and Affordable Care Act (PPACA) 2010 (Healthcare Reform Law)– No limit or denial of coverage for children under 19 with

preexisting conditions– Adults no longer denied insurance due to preexisting condition– Ends lifetime limits and most annual limits on care– Allows children under 26 to stay on parent’s plan– Some plans will provide free access to preventive services– Provides 50% discount on brand-name drugs for seniors in the

Medicare “donut hole”– More benefits will be phased in through 2014



Lecture d

Financing Healthcare (Part 1) Summary – Lecture d

• Insurance works by spreading financial risk• Insurers pay providers based upon

– Diagnosis and procedure codes, contracted rates

• States license and regulate private insurance• Types of plans include indemnity, Blue Cross and Blue Shield

and managed care plans• Managed care uses techniques that result in lower healthcare

costs and improved quality

• Some Federal laws regulate private health insurance– ERISA, COBRA, HIPAA, and the Affordable Health Care Act



Lecture d

Financing Healthcare (Part 1)References – Lecture d

References• American Association of Preferred Provider Organizations. PPO resources.

http://www.aappo.org/index.cfm?pageid=10. Accessed April 10, 2011.• American Association of Preferred Provider Organizations. PPO Toolkit.

http://www.aappo.org/AAPPO_Toolkit_FINAL.htm. Accessed April 2, 2011.• Bihari M. Understanding the Medicare Part D donut hole: learn about the Medicare Part D coverage gap.

http://healthinsurance.about.com/od/medicare/a/understanding_part_d.htm. Accessed April 7, 2011.• Centers for Medicare and Medicaid Services. Children’s Health Insurance Program (CHIP).

http://www.cms.gov/home/chip.asp. Accessed April 7, 2011.• Centers for Medicare and Medicaid Services. http://www.cms.gov. Accessed April 7, 2011.• Congressional Budget Office. Statement of Douglas W. Elmendorf, Director. CBO’s analysis of the major health

care legislation enacted in March 2010 before the Subcommittee on Health, Committee on Energy and Commerce, U.S. House of Representatives. March 30, 2011. www.cbo.gov/ftpdocs/121xx/doc12119/03-30-HealthCareLegislation.pdf. Accessed April 3, 2011

• Cornell University Law School. Workers’ Compensation: an overview. http://topics.law.cornell.edu/wex/Workers_compensation. Accessed April 7, 2011.

• Kaiser Family Foundation. Health care costs: a primer. August 2007. www.kff.org/insurance/upload/7670.pdf. Accessed April 2, 2011.

• Kaiser Family Foundation. How private health care coverage works: a primer—2008 Update. April 2008. www.kff.org/insurance/upload/7766.pdf. Accessed April 2, 2011.



Lecture d

http://www.aappo.org/index.cfm?pageid=10

http://www.aappo.org/AAPPO_Toolkit_FINAL.htm

http://healthinsurance.about.com/od/medicare/a/understanding_part_d.htm

http://www.cms.gov/home/chip.asp

http://www.cms.gov/

http://www.cbo.gov/ftpdocs/121xx/doc12119/03-30-HealthCareLegislation.pdf

http://topics.law.cornell.edu/wex/Workers_compensation

http://www.kff.org/insurance/upload/7670.pdf

http://www.kff.org/insurance/upload/7766.pdf


References• Levey NM. Questions and answers about new rules on appealing rejections of health insurance claims. Los

Angeles Times. July 23, 2010. http://articles.latimes.com/2010/jul/22/nation/la-na-health-rules-qa-20100723. Accessed April 12, 2011.

• Marcinko DE. Understanding the Medicare Prospective Payment System. September 17, 2009. http://medicalexecutivepost.com/2009/09/17/understanding-the-medicare-prospective-payment-system. Accessed April 7, 2011.

• MCOL. Managed care fact sheets. http://www.mcareol.com/factshts/factnati.htm. 2011. Accessed April 9, 2011• Medicare.gov. Medicare Advantage (Part C). http://www.medicare.gov/navigation/medicare-basics/medicare-

benefits/part-c.aspx. Accessed April 7, 2011.• National Association of Workers’ Compensation Judiciary. http://www.nawcj.org. Accessed April 7, 2011.• National Bureau of Economic Research. Prospective Payment System (PPS) data.

http://www.nber.org/data/pps.html. Accessed April 7, 2011.• Obringer LA, Jeffries M. How health insurance works.

http://health.howstuffworks.com/medicine/healthcare/insurance/health-insurance.htm. Accessed April 2, 2011.• Partners Human Research Committee. Overview of the HIPAA final privacy regulations.

http://healthcare.partners.org/phsirb/hipaaov.htm. Accessed April 10, 2011.• Purcell P, Staman J. Summary of the Employee Retirement Income Security Act (ERISA). Congressional

Research Service report RL34443. May 19, 2009. http://aging.senate.gov/crs/pension7.pdf. Accessed April 3, 2011.



Lecture d

http://articles.latimes.com/2010/jul/22/nation/la-na-health-rules-qa-20100723

http://medicalexecutivepost.com/2009/09/17/understanding-the-medicare-prospective-payment-system

http://www.mcareol.com/factshts/factnati.htm


References• Tufts Managed Care Institute. Managed care models and products. 1998.

www.thci.org/downloads/ModelsProducts.pdf. Accessed April 10, 2011.• U.S. Department of Health and Human Services and U.S. Department of Justice. Stop Medicare fraud: learn more

about fighting fraud. http://www.stopmedicarefraud.gov. Accessed April 7, 2011.• U.S. Department of Labor. Health plans and benefits. http://www.dol.gov/dol/topic/health-plans. Accessed April

11, 2011.• U.S. Department of Labor. Workers’ Compensation. http://www.dol.gov/dol/topic/workcomp/index.htm. Accessed

April 7, 2011.• WorkersCompensation.com. http://www.workerscompensation.com. Accessed April 7, 2011.

Chart, Tables, Figures• 4.9 Table: Indemnity vs. Managed Care Programs (2011, CC BY-NC-SA 3.0).




Lecture d

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01-04D - Introduction to Healthcare and Public Health in the US - Unit 04 - Financing Healthcare Part 1 - Lecture D