This the second of four articles about health insurance by Joanna Lahey, an associate professor of economics at the George H.W. Bush School of Government and Public Service at Texas A&M University and the National Bureau of Economic Research (NBER). You can read the first one here. The subsequent articles will be published on the next two Saturdays.
In part two of our exploration of health economics, we will explore the more common structures of health insurance, why none of them work perfectly, and what you should consider when choosing among plans. Also: baby animal pictures.
Health insurance structures have been evolving to try to cut costs of health care and, in some cases, to increase patient health while doing so.
How do providers get paid?
There are two primary ways that insurance companies can reimburse providers for their services.
The traditional method is termed “retrospective reimbursement.” With retrospective reimbursement, the provider decides what tests to run and what treatment to give and bills the insurance company for the work after the work has been done. Unfortunately, this type of insurance leads to increased costs through moral hazard. Even if a doctor only has the patient's interests at heart, he or she will order too many tests. If you add a profit motive for the doctor, you won't be surprised to see unnecessary tests being run. Worse, with retrospective reimbursement, doctors are paid for the procedures they do, so there's no direct incentive to get patients to be more healthy. In fact, sicker patients require more procedures thus providing more profit for the provider.
The newer method, “prospective reimbursement,” tries to get around the moral hazard problem by reimbursing a flat rate for what the insurance company thinks a person should cost. There are several ways that this type of pricing works out in practice, from a flat rate for all patients to reimbursing a flat rate for each specific diagnosis. Of course, these methods are also inherently problematic. For example, flat-rate reimbursement leads to insurance companies competing for the healthiest patients who will cost the least. On the other hand, reimbursing based on diagnoses leads to “diagnosis creep,” which means that if there are two possible problems a patient could have, the patient is coded with the most expensive of the two. Moral hazard strikes again!
Types of insurance plans
FFS
“Fee for Service” or FFS. This type of insurance is a traditional type in which the doctor orders tests, and the insurance company pays for them.
PPO
In the 1980s, Preferred Provider Organizations, or PPOs, became popular. A PPO acts as a middleman between providers and patients. Basically they bargain with providers, saying, “If you want access to our patients, you need to accept these prices,” and patients have to pay extra to use providers outside of their network. This type of care doesn't necessarily decrease the number of procedures done; it is still “fee for service” and uses “retrospective reimbursement” but the insurance company negotiates down the fees for each procedure. That's why if you belong to a PPO you may see that the hospital billed the insurance company twice (or more) what the insurance company approved payment for. Most of my life I've been insured under various Blue Cross/Blue Shield PPOs.
HMO
One of the most controversial types of health insurance plans is the Health Maintenance Organization, or HMO. An HMO integrates the insurance and the health care provision.
HMOs fall between two types of provision. In the staff model, the HMO hires their own physicians and may have their own hospitals. Providers are paid a regular salary rather than fees based on the services they provide. We were on one of these in our last year in Boston — I was glad we were moving to Texas and a PPO so I didn't have to deliver my son in Boston, as the doctors, any one of whom could deliver the baby depending on who was on call, varied tremendously in their beliefs. In the Independent Practice Association, or IPA, model, the HMO contracts with independent providers but pays them through prospective reimbursement. In practice, most HMOs combine different aspects of these two systems. Like a PPO, an HMO restricts which doctors patients can see, but these plans tend to be even more restrictive. In general, you trade price for flexibility. On sabbatical in Los Angeles, I chose a flexible IPA over less flexible Kaiser Permanente and paid hundreds more for that flexibility — in retrospect a mistake.
HMOs cost less than other types of insurance for what they provide. Some of this is selection — HMOs generally select healthier patients to begin with — but even controlling for the selection, researchers find that they spend less money.
A big worry is that HMOs encourage doctors to provide too little care, thus hurting health outcomes. There is an enormous literature looking at whether or not HMOs do under-provide, and there's no general consensus. Our best evidence is the Rand Health Insurance Experiment (Rand HIE). They did a field experiment in which they tested different kinds of health insurance and found virtually no difference in health outcomes using an HMO model versus other types of health insurance. However, that experiment was completed in the 1980s and may only be valid for the types of HMOs it included in the experiment.
Patients tend to dislike HMOs, mainly because HMOs limit choice. You have a limited number of providers to choose from and you have to see a general practitioner or similar gate-keeper before you're allowed to see a specialist. To be honest, even though the Scott and White HMO that my school offered both got high ratings and was lower cost than Blue Cross/Blue Shield when my son was born almost six years ago, I picked BC/BS. Why? Because I wanted to keep my same doctor and I wanted to be able to deliver in the hospital whose nurses were more in tune with the kind of birth we envisioned. We couldn't have done that with the HMO.
ACO
There's a new kind of health insurance structure that is being promoted called an Accountable Care Organization, or ACO. The idea is a great one — why don't we reimburse based on patient health and the quality of care, keeping costs down like an HMO does but with incentives that encourage rather than discourage appropriate care. An example would be, if someone has a heart attack, then the provider is reimbursed based not only on the heart attack but several days after the heart attack (when the majority of expensive re-hospitalizations occur). This type of coverage would encourage providers to make sure that their instructions are clear and being followed and would discourage expensive re-hospitalizations. There's a role for patient advocates who integrate care across doctors for people with co-morbidities requiring many specialists — they take more care to make sure the medication prescribed by the cardiopulmonary specialist doesn't conflict with that prescribed by the endocrinologist, for example. A win for patients. Unfortunately, although the idea is good in theory, we're not really sure how these are going to look in practice. How does insurance know how much to reimburse or how long a time period to surround an episode with, and how do they deal with secondary episodes from multiple causes? These are not easy questions to answer, but the Affordable Care Act is encouraging experimentation.
HDHP with HSA
High-Deductible Health Plans (HDHP) with Health Savings Accounts (HSA) are becoming more popular. HSAs have some pretty complicated rules and really deserve their own post. These work to reduce moral hazard by putting most of the spending risk (up to a certain point) on patients, thus encouraging them to shop around and discouraging unnecessary treatment, while still insuring against catastrophic events (hence their other name, “catastrophic coverage”). In general, these work like PPOs that have a high deductible (at least $1,000 for individuals and $2,000 for families). In theory these plans could lead to either under-provision or over-provision of care. If folks don't have enough money to pay the deductible, they may avoid necessary treatment (although many plans provide free preventive care to mitigate this problem somewhat). After folks reach their out-of-pocket maximum, they no longer have any reason to keep their costs down. The big advantage to the HDHP with HSA is that the HSA works like an IRA for medical expenses. It's another way you can get tax-advantaged savings for the future.
Choosing your plan
Here are things to keep in mind if you have a choice between plans:
- What is the monthly premium for each plan? This is the cost you're going to see whether you use your health insurance or not. How much are you willing to pay for different trade-offs?
- How much do you care about getting to choose your provider or your hospital? If you care a lot and are willing to pay for it, then the PPO may be your best option. If you don't care, and you don't see yourself using the doctor except in unexpected emergencies, then a plan with lower premiums may be your best choice.
- How long will it take to see a specialist if you plan on seeing one? If it takes a month to see your primary care physician and three months to see a specialist, and you know you're going to be seeing a specialist, then an HMO may be less attractive than a plan without a gatekeeper.
- If your choices are limited, are there good choices available? If your HMO option has physicians that you like, then it may be a better value than the PPO because you don't care about your choices being limited.
- What is covered? Do they cover the type of care you think you may need? In several states, HMOs are regulated to a greater extent than other types of insurance and are required to cover more things. There are even laws in some states that require that HMOs provide infertility coverage even if no other type of health insurance has to.
- What is the reputation for customer service and do you mind spending time on the phone refuting refused claims? Unfortunately it may be difficult to find information on this other than by word of mouth, but some states compile ratings that you can access online.
- What is the deductible, and do you have enough money to cover it and co-pays and coinsurance in the event of an emergency? What is the out-of-pocket maximum, and would you be able to pay that back in a reasonable amount of time if something horrible happened? (And could you declare bankruptcy if you couldn't?) A high-deductible plan carries more risk unless you have enough money to cover it. Similarly plans with high out-of-pocket maximums.
- Are you looking for more tax-advantaged savings options? If you have money you want to save, a HDHP with an HSA is a great vehicle for savings above and beyond your retirement saving.
Finally, given your expected medical costs, look at the payment structure for each competing plan. If you plan on going to the doctor, compare the numbers for premium + deductible + co-pay + coinsurance, as well as the out-of-pocket maximum, for your particular situation. Not everybody has expected medical expenses, but for those who do, this calculation is important. (Are you pregnant? Do you have a chronic condition?) AARP has a nifty calculator that can help.
Luckily for those of us who have these choices, health outcome differences between choices tend to be much smaller than the difference between no coverage and having any coverage. However, choices among health insurance options can make a big difference in your out-of-pocket spending and customer satisfaction. Deciding which plan is not always an easy choice to make, but at least it generally only happens once a year.
Author: Ellen Cannon
Ellen Cannon was the editorial director of the financial services sites at QuinStreet from 2010-2015. She has covered personal finance for magazines and websites for more than 20 years, including five years as managing editor of Bankrate.com. She lives in South Florida with her kitty and sunshine.
Over the years, we’ve used every plan mentioned except the ACO. We’ve changed plans over time depending on the projected health needs of our family and the premium costs. It also changes every time my husband gets a new corporate overlord (his company has been bought and sold 5 times in the 25 years he’s been there). So we spend about 30 hours each October figuring out which combination of benefits gives us the best projected outcome for the least cost. It would be nice to have a crystal ball to help us decide.
Opinions expressed are my own and do not necessarily reflect those of Texas A&M or the NBER.
I have been under the HDHP with an HSA. These have been beneficial for us because we end up paying lower premiums and in case we have to pay all of the deductable (which come from the HSA account) we break even with other plans offered by our company.
luckily
that, for U.S. healthcare is the key term
lucky to not have a pre-existing condition, lucky to have a job that offers some type of insurance, lucky to have the wherewithal to manage a complex system set against the consumer.
why not healthcare just because. yes, I’m talking single payer. I live among it, I see it work.
Yes, access to health insurance is definitely lucky in the US. Health outcomes are much worse for those without health insurance. 🙁
Healthcare shouldn’t be tied to jobs, its a flawed system and it needs to go.
I have used FFS, PPO, and the Kaiser Permanente HMO, and by far prefer Kaiser.
Decades ago Kaiser was quite difficult to deal with, slow and impersonal. They have improved customer service hugely, both in person and on the web site. I can call or email any of my care providers and they reply within a day, it’s great. Most appointments are very quick to make and agents try hard to make sure I see my own doctor or specialist, rather than a random one.
My whole family are Kaiser members and we’ve gotten great care, equal or greater quality to those of our friends in other systems. This applies to everything from broken bones to mental health, two healthy pregnancies, childhood illnesses, geriatrics and long-term Alzheimer’s care.
And all we do is pay a monthly fee and a small co-pay. No denial of care for anything clinically necessary, no large up-front payment, minimal arguments over what’s covered. We may spend more money in any one year, but save in the long term, and we avoid the opportunity cost lost in using time to deal with medical bills instead of working. They’re also a non-profit, so no shareholder pressure for growth or dividends.
I think HMOs are a much better model for health care than insurance. House and car insurance makes sense: most people will never have huge repair expenses. But everyone gets sick sometimes, and we’re all getting older.
(Disclaimer: I’m doing some computer systems consulting for them this year. But now I know that there’s a huge internal commitment to keeping quality high and cost slow.)
I really didn’t find this post helpful. It didn’t compare and contrast the plans in a detailed enough way that would help one to decide which was the appropriate plan for them and it glossed over important differences. For example, the author highlights the fact that PPOs give you greater choice of provider over HMOs, but doesn’t mention that using out-of-network providers result in higher co-pays, coinsurance and application of the deductible, such that it may be so financially disadvantageous to go out of network under a PPO that it feels as restrictive as an HMO. And the regular PPO plans can have fairly high deductibles (mine is $600 and moving to $1000 this year), so if you are fairly healthy and don’t consume much health care, the higher premiums of a regular PPO over a high-deductible plan may not be worthwhile, especially because you can divert the savings in premiums to your tax-advantaged health savings account, which the author doesn’t mention when offhandly stating that “A high-deductible plan carries more risk unless you have enough money to cover it.” Part of the way that you have the money to cover it is because you save on the premiums. And if you take care of your health (and are lucky) and don’t have to consume as much health care as you’ve saved in a year, you get the benefit of that. The author doesn’t mention that amounts saved in an HSA in connection with a high-deductible plan are portable and you don’t have to “use-it-or-lose-it” the way that you do with flex spending accounts in connection with a regular PPO (did she even mention these?).
On the topic of HMOs, one should consider the extent of the network in one’s location. I moved from a place where my HMO network was so extensive that I didn’t feel restricted at all, and my health care costs were incredibly affordable. I miss my HMO. Could the author provide some citations for this statement: “Patients tend to dislike HMOs, mainly because HMOs limit choice. You have a limited number of providers to choose from and you have to see a general practitioner or similar gate-keeper before you’re allowed to see a specialist.” But if you are the kind of person who may be willing to accept limited options in order to save lots of money (hello, GRS readers), you may like HMOs. The author clearly doesn’t like HMOs, and incidentally doesn’t recognize that in PPOs you effectively have to get a referral to see a specialist, too.
Is Get Rich Slowly becoming a content farm? Because that is the level of quality of this article. And it is not at all targeted to the audience for this blog, which is people who are trying to find smart and frugal approaches to their financial lives. I may be unlinking my RSS feed from GRS.
Thank goodness you only have to suffer through two more Saturdays of content! Whew.
I find these articles helpful and a good jumping off point for thoughtful discussion of issues in the health insurance market and
health care.
I am a bookkeeper for a very small business. By default I have to deal with HR including health insurance. It is the most difficult thing I deal with all year. We are not big enough to offer different plans. Our employees range from mid 20s females to 60+ males but we have to pick a one size fits all plan. This problem gets worse every year.
I don’t think health insurance should be tied to employment. It is onerous on small businesses and it limits worker mobility.
I find it difficult to understand the hostility to the Affordable Care Act (although I am sure someone will try to enlighten me in the comments). I am really interested to see how the insurance exchanges work. (If we get a chance to see them)
I liked the baby squirrel picture best
I disagree with Andrea. These articles on health insurance have been the most useful of any articles in the past year. I’ll be buying insurance on the open market when I retire, 5 years before Medicare, next year.
Thanks Joanna. These are great!
You should find next week’s article useful then!
The whole emphasis on “moral hazard” makes my blood boil. There are many of us with illnesses like Lyme disease and a host of autoimmune diseases who are consistently told that our symptoms are all in our minds or that we are hypochondriacs. If the HMO docs are all like that, we are stuck. For that reason, my husband and I will NEVER AGAIN be in an HMO. If he had not been, he might well have been actually treated 20 years ago and been able to work instead of being on disability.
Yes, going out of network can be more expensive, but if you need a better doctor who will actually listen to you and treat you before you die of your disease, it is worth it. And if the HMO doesn’t have anyone qualified to treat you, you can make them pay for it.
The whole “moral hazard” concept is being pushed by the insurance companies, who are far, far more interested in collecting premiums than in paying claims. They can use this argument to support letting people die prematurely of illnesses that they don’t want to recognize because they are expensive. This saves them substantial money.
I have a PPO. Now here’s my long story, last year I had to have a procedure done for varicose veins in my right leg. I’d put is off for years. Blood was pooling in my calf so I had tender dark purple bruises all the time as well the veins in the back of my leg and knee were constantly swollen and aching. By the way, I exercise daily, am 45 years old, and I am normal weight. Prior to the procedure I received approval for three veins to be removed in three separate procedures, which would eliminate the varicosities and stop the blood pooling in my calf. I had a letter from the insurance company saying this was approved, as did my doctor.
The third vein procedure ended up not being paid by insurance, and I received the bill. I kept calling the doctor’s office begging them to submit it again and again…finally they wrote it off (I appreciate that they did that, as well they said they were going to drop the insurance company I use). Everytime they submitted there was a tiny glitch in the code of the original submission, which caused it to be rejected. (This all gets more involved, but it seemed the insurance company was always going to find an excuse to reject.) Meanwhile our company’s local insurance agent told me while I was trying to fix this problem that the procedure was unnecessary, and that I should not have had it done. She explained that the insurance company wanted me to be a better consumer and not have unnecessary procedures. WHAT?? Is the insurance company a doctor??? Having a wire inserted into a vein is not something I want to do?!?! I had tried to avoid it for years!
In my opinion the insurance company broke an agreement between all of us: them (insurance), the doctor and myself. What can I do though? Where do you turn for help? Spend months and years going through the state insurance board? I also have to lead a life, and this seems like a protracted battle.
Aren’t we supposed to trust the ethics of the doctors and insurance companies; that they are exercising moral hazard? Isn’t blaming the patient the wrong person? I’m fortunate my doctor soaked up the cost (also I think I was getting pretty annoying because I kept calling to check on it every week), but what happens someplace where the doctor isn’t so kind or the business office manager isn’t so easily annoyed??? Also, at the same time I kept calling the insurance company, but they were so obtuse and it was so hard to get a person who…cared.
This is a good article and very helpful, but I have a lot of questions about the ethics of health insurance and the ‘moral hazard’ shown by insurance companies.
Thanks for listening out there…Maybe I need a baby mouse photo in this text.
You’re absolutely right. Denying claims that shouldn’t be denied is a form of moral hazard on the part of the insurance company. They’re making those decisions because they’re not bearing the full cost of their actions– they can’t feel the pain to the patient’s pocketbook.
I myself once sicc’d some nice ladies from a credit agency (that the hospital hired) on my insurance company back in Boston. They got everything figured out after a year of me continually resubmitting a claim they were supposed to have paid. (And made sure it didn’t affect my credit report to boot.)
Joanna, denying claims is not “moral hazard” for the insurance companies. It is their business model. Most people give up after a while.
The two are not mutually exclusive.
Hi Joanna,
Can you comment on the future of HDHP under the ACA? It seems like they will be required to cover preventive care if they didn’t already, but there are many sources online that say the ACA will reduce the number of HDHP or drastically increase their costs. Thanks!
I’ve heard both that HDHP will increase under the ACA and that they will be shut down under the ACA. What it hinges on is what is considered a minimal insurance plan, and how that fits with legislation and price increases going forward.
Personally, my feeling is that there will be increases in HDHP, even though they move risk from the provider to the patient. We can talk more about this in a couple of weeks. The hope in much of the policy community is that these ACO will work and they will really take off, because both HMOs and HDHP have the worrisome possibility that they could incentivize the under use of needed care and thus decrease health, but the ACO, if they work, will cut costs while increasing health. But getting those right is non-trivial.
I tried to add the standard disclaimer yesterday morning at the airport, but it doesn’t seem to have gone through. Here it is again:
Opinions expressed are mine alone and do not necessarily reflect those of Texas A&M or the NBER.
I’m always amazed at people who don’t like HMOs because they can’t pick their own doctor. Most people would have trouble picking thei own doctor anyway when they need new ones unless they are in the medical firld. You also run into the problem of the doctor not taking any new patients. I prefer to have my choice of doctors prescreened by the HMO. I must say by HMO I mean a staff plan like Kaiser.
This is good timing. Presently I have a PPO through my job. Next year we will have to choose between the PPO, and a new high-deductible/HSA option. I think I may choose the latter, as the company will give me $500 a year to use towards the deductible. Preventive care is covered 100%, and prescription drugs are covered with a low co-pay. I am a young person with no kids, so the odds are that my medical bills for the year will not exceed the $500 my company is contributing. And if they do, my emergency fund will easily cover the rest of the deductible.
You might want to consider waiting a year before switching. That will give you time to hear from others at work how well the new plan performs in customer service and actually paying the claims. My employer introduced a high deductible/HSA option a few years ago. One of the reasons I haven’t switched is that I keep hearing how much of a hassle it is to get them to pay. Lots of red tape. My BCBS PPO is hassle free and, so far, worth the extra cost.
Thanks! Under this plan, the company deposits $500 into my HRA at the start of each year, so then I can take it out as needed.
As a healthcare provider myself, I find the most frustrating thing about the conversation of healthcare reform is the lack of tort reform (aka malpractice). I certainly believe providers should be sued for negligence, however, there should be a cap on awards. Admittedly there are a lot of tests I order to cover my butt (NOT to pad my paycheck). I recognize that it’s not reasonable to expect the legislature which is comprised primarily of lawyers to put their other lawyer friends out of a job. I find that a lot of people practice what we call defensive medicine, meaning we order additional things to provide protection for ourselves in the event we would miss something and be sued in court.
Insurance companies frustrate us too: it is frustrating when patients don’t get the treatment that they should because the insurance companies reject them. Insurance companies have special requirements for coverage because they attempt to avoid paying out(i.e. if I write “chest pain” instead of “chest pressure” as my reasoning to order lab tests for a possible heart attack, they won’t pay for it)
The downfall of paying providers a flat fee is that you may find more and more providers becoming choosy about the kinds of patients they see. Who wants to have the HIV positive diabetic who won’t control his sugars and thus is chronically in the ER and hospital for uncontrolled infections? This patient would make doctors lose money. I think that patients have to have some kind of incentive to take care of themselves (I doubt that the audience of this blog would neglect their health but there are plenty of patients who will not help themselves by quitting smoking, losing weight, etc.)
I love medicine and I love my patients, but our current system and even that recently passed into legislature are far from perfect.
<>
Actually, if you are married and both employed, this isn’t actually true — and is another problem with having health insurance tied to employment. You have to go through the whole health insurance decision at least twice, during the times when each of your employers has open enrollment — which, in my experience, has never been at the same time. This is incredibly frustrating because they change the options every year, but you essentially have to make one choice before you even know what the other options are and their impact on your family finances.