Insurance: Choosing the right plan

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.