- Purpose of Insurance
Health insurance is the primary way health care spending is financed in America. This novel mechanism provides “portable” financing for the patient— allowing them to choose broadly from providers, and having their ‘card” with them to provide their financing at the point of service, almost wherever they choose to go. The VA, DoD, the Indian health service are the main exceptions. Some employers also provide health services directly to employees.
Insurance is varied in type, and overall it is a huge business of collecting funds and expending them as patients choose their providers. Insurance is not the only mechanism for financing health care for people. In other countries we see “direct government provision” of services in some countries, where the government owns and operated the health system, and professionals are employees of the government (NHS in Britain is one example). In Canada, the government of each province provides free (tax paid) insurance like medicare-for-all for residents. Many countries have a mix of forms of financing.
The chart here describes insurance sector of the economy.
Only about 10% (in sept 2018 it was 8.8%) of Americans are not covered with some form of insurance. About half of all insurance is provided through employers (for people that have jobs that offer some kind of health insurance as a fringe benefit), 16% is Medicare, 22% is Medicaid (jointly funded by States and Federal taxes), and about 5% are covered through individual policies (with about half of these purchased through exchanges (in 2014).
Let’s step back. Why do we need insurance? The distribution of illness and other drivers of demand for health care, and spending, isnt equal across people. And when the need arises, the burdens are often catastrophic. It is common in countries where people have to pay for health care out of pocket (like it was in the U.S. before 1950 or so) for health spending by families to lead quickly to bankruptcy.(In the U.S., the burdens for unlucky persons and families, even with insurance with deductibles and copays, can sometimes lead to extreme financial burdens because of the high prices for drugs and some services.) This extreme financial burden of a small part of the population is the reason that insurance is useful. The chart below shows the distribution of spending for health care by people in America.
What this shows is that about 50% of the total health spending arises because of of needs of only 5% of the people. And, the lowest spending 50% of the people consume only about 3% of total health spending. It is a very unequal distribution of need for health care. The skewness arises because of the distribution of illness, or bad “luck” in most populations. Some people dont need much care, and other people have catastrophic needs.
Most societies have this issue. Most provide some form of “social” mechanism to help defray the burden for the unlucky segments. Some do it by providing public health facilities where the sickest can get the care they need. Others do some form of “passing the hat” to help out families in great need. Our society does a bit of both of these things, but for the most part, we use the mechanism of insurance.
The tool of insurance works the following way. People form themselves into groups to purchase most health insurance (typically employed groups). The members of the group each pay a “premium” based on the average usage or spending level for a year. Then, life happens, causing some to need very little care, while others need a lot. The insurance plan pays the bills. In the end, the persons who remain “well” end up subsidizing the persons who are “not well”. This is the insurance principle of “pooling risks”. It happens for home owners insurance, for auto insurance, and for health insurance.
Insurance is a contract. Client pays a premium in return for insuror paying for the “covered loss” when it occurs. Insurance companies set the premium based on the expected outlays (losses) for the group (private policies set premiums based on expected outlays that are about 85% of the premiums). The other components of premiums are administrative costs (12-15%) and maybe a risk margin of 1-2%.
There are three basic kinds of health insurance.
Private health insurance is sold by private companies (United, BCBS). Mostly these policies are sold through employee groups. The group’s experience with spending (experience rating) or the community’s experience in which they live (community rating) are used to set the premium. If an employer is involved, they may pay, say, 75% of the annual premium, and the employee has a payroll deduction of their 25% portion of the shared premium. Employees may also share in the costs of their care, thereby keeping the premiums lower. This cost sharing is done through deductibles (a fixed spending level per year before the insurance starts to pay) or copayments (sometimes also called user fees) that maybe a fixed amount or fixed percentage of charges incurred for the services used. This is often a n amount for basic primary care visits, a different amount for hospital outpatient care or tests, a different amount for specialty visits and for an ER visit.
The copayments and deductibles paid by individuals do not just help finance the premiums. They also are “premium containment devices” because the higher these are, patient can (and do) change their care seeking behavior, and consume fewer services. So, increasingly, these higher deductibles and copays are utilized by employers to keep their share of the premiums lower. Of course, employers are also trying to get the employees to pay a larger portion of the premium from payroll deductions too.
Health Care Plans. Generally group insurance works by allowing patients to seek care from many providers, as is their choice. But, there is a variation on that model. Sometimes groups of providers sell “insurance”. These so called health plans accept premiums, and provide all the services directly with the plan’s own providers. These plans used to be called HMO’s or Medicare advantage plans. These organizations essentially are both insurors and providers—they accept financial risk of paying for care for a group of people in exchange for a premium— and these plans have copayments too. Examples are Kaiser, Harvard Pilgrim, and HMO Blue.
Social Health Insurance. Social health insurance is health insurance where the government (eg tax money) pays some or all of the premium. Sometimes the government pays all the premiums (eg Canada, Medicaid) and often the pooled social insurance fund is jointly funded by government, business, and individuals (Germany, Medicare). The model of universal coverage (for everybody) often uses social insurance in order to combine business financing with government financing for those without jobs. (There are other non-insurance models of financing health care— the British model of the National Health Service, for example, or the VA. Both use tax financing to hire providers and run their own hospitals and provide care directly).
The options for insurance, and for no insurance, are shown on the chart below. The options vary in terms of
- who ends up paying the costs of the health care
- the extent of risk pooling (the extent to which the well end up subsidizing the sick)
Not having insurance, of course, provides no risk pooling protection and the “sick” have to pay everything. Comprehensive Social insurance, where the government pays everything from general taxes, the risk pooling is the broadest (across all taxpayers). Private employer based insurance is in the middle. Here, the costs of insurance is born largely by purchasers of the products and services of the firm.
This brings us to the three main functions of health insurance in our society:
- to pool risks wherein the “well” members subsidize the care for the “sick” members
- to create portable financing, allowing insured members to “take their coverage with them” as they choose their providers
- to create “purchasing” agents that buy health services in our health system
The basic idea of private health insurance, adopted by law as part of Medicare in 1966, is to allow patients to have free choice of providers, and the insurance coverage will provide “financial benefits” whatever their choice. But, clearly, forms of “restricted freedom of choice” have crept into the insurance marketplace in the forms of “Health plans” which restrict choice within the plan, to various kinds of network plans, which charge different copayments for some networks of providers, but more if out of network providers are used. These models limit choice in exchange for more Insurer control over spending. Most employers now offer a variety of plan choices, some with virtually free choice, or more restricted choice (which are usually lower premium plans).
The purchasing function of insurers (private, Medicare, Medicaid) is very important, given the lack of information of patients themselves. The purchasing function is practiced by:
(1) regulating quality of care of providers from whom care is purchased. Insurers set standards for being a “qualified” provider (accreditation, licensure). They also set standards for “coverage”, and regulate the procedures they will pay for and the setting of care they will pay for.
(2) Purchasers also determine how payments for care are distributed across different types of providers (inpatient, outpatient, offices, wellness/prevention, etc.). Insurance payers spend a lot of time trying to improve the way they pay in order to create the right incentives for provider behavior. Medicare has been the innovating payer in the U.S. in this regard, and has moved to set fixed rates for “bundles of services” for most types of providers (as an alternative to letting providers set their own rates). These new ways of paying providers encourage efficiency. More recent innovations by both Medicare and BCBS of Massachusetts have also initiated Pay for Performance (P4P) systems that provide bonuses/penalties for high quality of care.
2. Types of Health Insurance
Many kinds of private health insurance programs exist in this country.
Major medical is the most common. It covers all medically necessary hospitalizations, rehab and professional fees if they are deemed “medically necessary” unless specifically excluded in the contract. Generally this type of coverage will pay for care whichever provider you go to, as long as they are licensed to provide such services in the state they practice. This would be the traditional model.
Variations on this are “managed care” approaches that might impose various kinds of inspections of “medical necessity” in order to curtail expensive and not very useful services. This typically involves a “pre authorization” or referral from a designated PCP. These kinds of ‘restrictions on freedoms of providers and patients were heavily used in the 1980s and 1990s, and became unpopular with employers because of complaints from their insured workers. So such approaches to cost control were replaced by others.
The Plans started offering incentives for using cheaper providers. Cheaper was determined in one of several ways. One way was to designate a “network of approved providers” which could be used for one copayment level. If the patient went to an out-of-network provider, they’d have to pay a bigger co payment. The network may consist of providers with whom the plan was able to negotiate low fees. Now, this has morphed in the case of hospital coverage into what is called “tiered” copayments, one tier is for the community hospitals (eg the cheaper places to get care) and another tier for the “teaching hospitals (where prices are higher).
Another type of non traditional coverage is the catastrophic insurance approach. This may be roughly the same as the Traditional major medical, but imposes big annual deductibles (which allow the premiums to be less). So, the consumer is paying out of pocket for the first 5- 10,000 each year, and then if they get really sick, the insurance company will pay after the deductible for the year is met. These are called Consumer Directed Health Plans, and were advocated by the guy who wrote about Medicare Killing his Father. These catastrophic plans are usually coupled with a Medical Savings Account (tax free deposits from your income into a personal account that can be used for health care, and the balance rolled forward year to year if you don’t need to use it to pay).
There are other much different kinds of coverage (other than the major medical model); (1) dread disease coverage was sold for coverage for particular diseases (eg Cancer, Stroke). This used to be somewhat popular before Medicare came along and covered the elderly. It essentially paid a fixed fee per day after being diagnosed with the covered disease. Today, similar types of policies are not popular, nor permitted under the Obamacare reforms.
A similar kind of “dread disease” policy is sold now to cover the need for long term care. This kind of coverage pays for services, but mainly the plans are structured to pay up to a limit (say 200 a day up to a max of 200,000). So, you pay a premium while you’re middle aged, that will pay for some pool of benefits if you encounter the need for long term care.
The regulations have been minimal in the past on what can be sold as health insurance. You could write whatever coverage you want, put in exclusions you want, charge anything you want, and try to avoid selling it to anyone you want. This is more or less still true. The Obama reforms will limit this somewhat. Certain types of dread disease coverage will not be permitted, coverage for adult kids will be required of the insurers, and firms will have to stop providing better coverage for the executives than to common employees. But, Obamacare falls short in terms of full regulation of the private insurance market (he couldn’t pass the bill without some support from the insurance industry, which H. Clinton never got, and she tried unsuccessfully to bulldoze them). Prices – premiums are not going to be regulated, coverage “types” are not going to be standardized, etc.
Managed care attempts in the 1980s/1990s? Insurors and employers tried to introduce Managed Care concepts a generation ago. Second surgical opinion programs, preauthorizations for many services, denials of coverage for marginally helpful services, etc. The idea of doctors calling nurses who worked for the insurance companies to get permission to treat became a highly divisive issue. Doctors didn’t like it, patients didn’t like it either (having to wait, or to be told “no, what your doctor recommends isn’t going to be covered”. Doctors hated it, and people complained to their employers, employers began to push back on offering such plans, and eventually demand for managed care slowed.
To replace the low price point for insurance achieved by managed care plans, new kinds of coverage were developed by insurors(consumer directed health plans and medical savings accounts). High deductible plans were developed. They ask consumers to pay the first 5,000 or first 10,000 of care each year before the insurance steps in and provides coverage. In exchange, of course, the premiums are quite low. These plans clearly do three things: (1) they put consumers at financial risk for all basic health care spending, and indeed all spending up to the deductible amount. This cuts out some utilization and some spending to be sure. (2) one of the most obvious cuts is spending on prevention, or well care, which is almost always paid by the consumer in such plans and (3) they are plans that attract the people who expect to not need much care in the next year. As such, they defeat risk pooling (they take healthy people out of the pool, and raise the premiums for everyone else). More on this kind of insurance is covered below.
4. Impacts of insurance
Insurance (paying an upfront premiums, and lowering the point of service price to the patient) has profound impacts on service utilization in the health care economy. The basic idea of insurance is to prepay (eg. pay a premium) for the costs of care, and then a very modest copayment is to be paid at the point of service. Thus, the price paid by the patient at the point of service is very much reduced. That creates an incentive to buy more than would have been paid if the price had not been reduced– other things the same, people buy more at lower prices. This chart illustrates the impact of insurance on the quantity of care purchased:
The table here from the Rand Health Insurance Experiment (HIE) shows how a randomized clinical trial of cost sharing options affected the use of health services. This is still the main empirical study of what happens to the demand for care as a result of insurance. The columns in the table refer to the various “arms” of the study, each representing a certain “insurance” coverage for study participants.
What the table shows is that when insurance allows the patient to pay less at the point of service, they will consume more! This phenomenon is called “moral hazard” : prepayment to lower the costs of some “loss” will increase the likelihood of the loss occurring. Demand curves sloping down for health care usage is not rocket science– but the HIE is definitive proof of the effectiveness of the incentives facing patients from their insurance coverage. People with good insurance consume about 40% more health care than persons without any insurance. And, furthermore, the study did not confirm any noticeable effects of this difference in utilization on the health of patients! (to be fair, there were some chronic disease patients, like diabetics, for whom samples were too small to test the hypothesis about health effects of the incentives).
Generally, patient behavior in response to the financial incentives of cost sharing are limited to point-of-entry services (like the use of primary care, or some specialty and testing services). Once a patient is admitted to a hospital, on the other hand, the incentives of the plan don’t seem to matter as much. Once “in the system” the autonomy shifts to providers and they decide what services are used, and incentives facing patients don’t matter as much.
And, the HIE studied the differences between HMO enrollees (who must get care within the plan) and other persons with insurance in the FFS sector. The research found that HMO enrollees had far lower health spending than their FFS counterparts. And, most of the savings were attributed to 30% lower rates of admission to hospitals. Satisfaction with such care seems to be somewhat lower, but quality effects do not show much difference with fee for service insurance in spite of the considerable savings. These findings are generally taken to mean that plans that can control the behavior of their own providers do not spend premium dollars on unnecessary hospitalizations.
The results of the HIE have been partly corroborated in the study of the Oregon Medicaid program. There, the budgetary situation of the state forced a limit on eligibility for the Medicaid program. A lottery was designed wherein eligible persons were selected randomly from the pool of “eligible applicants. Some persons were left without coverage. A team of clever researchers exploited these randomly selected groups (ones who got insurance, and others who did not). They studied health care utilization for both groups. They pretty much confirm the HIE by showing that insurance stimulates higher utilization. This chart shows the results of the Oregon Study.
5. Insurance Spending Controls
How do insurors control their “losses” so they can survive when being paid a fixed premium? The chart here shows the main ways insurers try to control medical care claim costs (and remain solvent as businesses).
Some of these issues are discussed at more length in the following paragraphs.
Selection in Marketing. Insurers are acutely aware of the drivers of spending, and the way is relates to demographics. During the early days of the HIV epidemic, for instance, when most believed it was a “gay men’s disease” many insurers were aware of the kinds of employer groups that stereotypically employed many gay men, and they avoided selling to these groups. Some employer-based groups are just riskier than others with regard to health needs. In some states it is still possible to “experience rate” the premiums based on historical spending levels so as not to lose money. In other states it is now against the law to “experience rate” groups— and premiums have to be set on the “community average spending levels for demographic groups” (like in Massachusetts).
Coverage. The nature of the coverage is a mainstay of insurer cost containment. Obamacare eliminated some of these tools for health insurance in America, but these provisions may well be eliminated by the Republican administration (allowing more freedom to insurers to use whatever coverage they might want). Excluding coverage for preexisting conditions and putting limits on mental health benefits are two examples of tactics for “controlling” spending and keeping premiums lower for employers. Another tool is “preauthorization” for some services (provider needs to check with the insurer before doing it). But the main tool here is the coverage clause saying that coverage is for “medically necessary” services and products. This approach to writing the contract is more convenient than specifying exactly what is covered, and under what circumstances. But what does it mean? It generally used to mean that whatever the doctor thought was needed. It isnt that simple anymore. Preauthorizations often impose severe limits on coverage in practice. Many medications are simply “not covered” when providers check. Specific procedures deemed “medically necessary” by providers are often not covered. It is a huge game: providers at war with the insurers, employing increasingly large staff to chase permissions and payment from insurers. Today, providers spend a good deal of money fighting with insurors over coverage for expensive outpatient drugs, or new procedures, and other expensive services and products.
Administrative Expenses. Private insurance, particularly when insurance coverage in non specific and includes “medical necessity” imposes huge administrative costs on the payment for services. In retailing for example, computers and swipe care technologies allow administrative costs to be <1% of sales. In health care the private insurers themselves incur administrative costs of around 15%. Public insurers like Medicare incur administrative costs of 3-5%. But these are only the tip of the iceberg. Providers like hospitals and medical offices are spending huge sums to employ people to chase permissions and payment from private insurers. Private insurers have not really begun to compete by becoming more economical in their administrative spending. This will likely happen someday.
Cost Sharing. A very important cost containment device is manipulating the behavior of patients by controlling cost sharing at the point of service. Through experience, insurers are acutely aware, as are employers, that it is possible to reduce premiums if more patient cost sharing occurs at the point of service. The chart here shows the recent trends in cost sharing.
Obviously, households have born an increasing burden of health insurance costs. A substantial portion of the increase is in the form of copays and deductibles. Insurers and their employer customers both agree that this is the way to go! It keeps premiums down (for employers) and it keeps claim payouts down too (good for insurers).
Provider Selection and Contracting (supply chain). Insurers are able to control their spending levels for services if they choose providers who are more effective in keeping patients healthy (or at least keeping them out of the hospital). Formation of high value provider networks, putting in place provider quality incentives to perform effective procedures, and negotiating lower fees are all ways that insurers can reduce their spending levels.
6. Insurance & Fee for Service: The Perfect Storm
Insurance lowers the price of services to be below what the patient would otherwise have to pay. So, when the parents bring the child to the ER as a precaution after a playground fall, they maybe told that a CT scan isnt really needed under the circumstances. Without insurance, the parents may sigh in relief, dodging the bullet of a $1500 expense. But, with insurance, the incentives are different. Mom may say “but wouldnt it be safer just to do the test and confirm there isnt a problem”. And very often such testing is done, to excess, because of insurance, where the cost to the parents may be only $100 or $200.
However, in actuality the provider often has non neutral incentives to also want to do the test. When providers are paid Fee for Service (FFS) they get paid more if they do more. So, if the insurance company is paying the hospital 1500 per test, then the hospital will get nothing extra for testing if they dont do the test, and an extra 1500 if they do it (the same may be true of the doctor, the radiologist who read the test, and other providers). In FFS, the provider is incentivized to “be safe, and go ahead and do it” — just like Mom. So there are often two reinforcing incentives favoring “doing more for patients” — Mom wants the test even more because she’s only paying the 100-200 rather than the 1500 she’d have to pay without insurance. The hospital wants the test too, because they earn more revenue (and in an environment of high fixed costs, more of the fee is a contribution to profit). FFS and Insurance provide mutually reinforcing incentives to increase utilization and spending! These reinforcing incentives are at the heart of America’s spending-is-out-of-control problem.
One last note here. Many other countries have better insurance than we do (Canada has no patient cost sharing, European countries too have lower copays and often no deductibles). Yet their spending is far more controlled than in America. How do they control excess demand for marginally useful tests and therapies?
There are several tools in play in other countries. First, many providers are salaried by clinics and hospitals, and dont experience FFS incentives as they do here. They dont get paid more if they do more. Second, Hospitals are paid differently. They are generally paid a “budget” for the year even though they are usually private organizations. Budget limits cap their revenue for a year, and they dont get to earn “extra” revenue beyond that by doing more. This hospital payment method is called “Global Budgeting”. So, the hospital doesnt have the same FFS incentives either. Third, those providers and others in the health system are more accustomed to saying “no” to patients. Our system is based on a tradition where patients can get what they want, when they want, and from whom they want. This is not a universal expectation.
7. Consumer Directed Health Plans (high Deductible Plans)
Recent trends in the health insurance industry have emphasized growth in plans that have lower premiums. One particular type of plan that has become fairly popular is the “high deductible plan”. This kind of plan have been advocated by faculty of the Harvard Business School, who propose it as an option for public policy to control spending by promoting more patient “accountability” in the use of marginally necessary services. This approach has been labeled the Consumer Directed Health Plan (CDHP). It is seen by the originators as an alternative for controlling health spending that doesnt require regulating providers and other kinds of government action. The CDHP combines high deductible insurance policies ( maybe 10,000 a family per year, or 5000 a person per year) with the use of Medical Savings Account (MSA — a pretax medical savings account to be used to pay out of pocket costs for health care, and that can carry over the account balance from year to year).
Today maybe 18-20% of Americans have such “high deductible plans” often provided as options by their employers. Some use MSAs, others don’t. The chart below shows the recent trend in CDHPs and MSAs.
The impacts of CDHPs have been studied, with somewhat mixed results (there have been no randomized studies). One of the main researchers is Swartz, whose recent study reported:
Generally, the worry about these plans is (1) that people will understand enough so as to not use enough essential services and (2) the persons joining such plans are very selective. That is, persons who join tend to be much “healthier” than average. That is, they want the lowest possible premiums, and are “betting” that they will not have to pay much during the year for their care. The consequence, is that the risk pool for other types of insurance will be stripped of many persons who buy CDHPs. This will raise the premiums of the non CDHP insurance options in the marketplace.
8. Market Failure
Insurance is a complex product, and one where consumers are severely disadvantaged in the marketplace. The terminology, the lack of transparency about coverage, the troublesome “clauses” that might delimit coverage, and other features of the policy make it almost impossible to make value comparisons. When offered through the employer the range of choices are delimited, but probably some protection is available for the consumer because the Benefit Managers at the firm are better informed buyers of insurance products.
Special steps are taken to prevent asymmetry in information facing the individual buyers of insurance in some states, all the ACA insurance exchanges and most foreign governments that utilize private health insurance. Insurers are told to offer one or more “standardized” types of policies: plan A, B, C, etc. These plans are exactly the same. This assures that consumers are not “surprised” by special clauses that delimit coverage. And, if all plan A contracts are the same, then prices can be directly compared. And, competition between insurers can be based on price, and service quality. This solves the asymmetry problem in comparison shopping for insurance.
Voluntary Insurance markets can also fail because of requirements that hospitals and other providers provide “stabilizing” services to uninsured persons. Consider 4 parties:
- persons (workers)– get insurance coverage through employment, and use services
- employers– provide insurance to workers, and pay insurance premiums
- providers — incur treatment costs, and set charge levels to be billed to the insurers
- insurers — pay billed charges, and set premium levels
Lets assume that an agreement is reached about expected service use by the insured persons, the premiums, and the provider payment levels. Then lets introduce some indigent care in the hospitals, creating bad debt. The hospital didnt expect this as it set its charges for insurers. But now, it tells the insurers that charges need to be increased to “cover” the extra costs of providing unexpected indigent care. And, when charges go up, insurers realize their premiums are not high enough to cover their claims costs. And then, insurers in turn have to increase premiums to cover that problem. That creates a decision by employers as to whether they want to continue to have a health insurance benefit, or to raise employee premium sharing, or do nothing. And, looking across the whole employer marketplace, one or more employers might just say—that’s enough—we just cant be competitive any longer—so were going to stop paying for insurance as a voluntary benefit. Pressing ahead with the scenario— now somewhat fewer persons in the community now have health insurance. A few of these persons will get seriously injured or ill, and need expensive treatment in hospitals. This will increase bad debt expenses beyond the anticipated amounts— which will increase charges, and then premiums again. And, as expected, a few other employed groups will no longer offer insurance because the premiums went up, and offering insurance benefits is voluntary.
This cycle will continue. Higher charges by hospitals to cover more and more bad debt, leading to higher premiums and employer dropping out of insurance programs for employees. This had been our trend in the health insurance market place before the ACA. Higher charges, higher premiums, and fewer people covered by insurance. Private insurance offered voluntarily leads to market failure. Sure, many employers will need to continue to offer it because valued workers want it. But, many other employers will drop voluntary plans.
The “mandate” of insurance for either employers or employees changes the calculus and breaks this cycle. The ACA poses an individual mandate, not an employer mandate–though employers would have to pay penalties if they fail to provide insurance for employees.
9. Some History and Take Aways on Health Insurance
Health Insurance has been in existence in the U.S. for more than 170 years, with the first “sickness insurance” plan sold by the Massachusetts Health Insurance Company of Boston in 1847. Insurance was sold primarily to individuals and through professional groups, and some employers. But, the major expansion of health insurance coverage occurred with a huge program of government subsidy (contrary to the belief that there was a mega private market for health insurance, and no need for government to step in to create a financing system that was an affordable way to prevent families from going bankrupt from medical problems). The 1942 policy actions by the government, and more recent policies are summarized here:
What the government did was to make health insurance premium contributions by employers a tax deduction by employers (against their profit tax payments). This propelled the interest of employers in offering health insurance as a fringe benefit, and allowed many to effectively compete for good workers without needing to offer much higher wages. They ate it up, and by 1950 the vast majority of workers in large firms had health insurance for their families. The “cost” of the program to the government was billions of tax dollars that were no longer being collected from corporate income taxes. This program (tax deductibility for health insurance benefit payments) is today the largest health care government program in the U.S (eg bigger than Medicare).
The recent activities by BCBS of Mass deserve a comment. The approaches used by insurers (including Medicare) to pay providers have been various forms of FFS (DRGs for hospitals, RBRVS payments for doctors, fees for certain procedures done in outpatient and surgery centers, etc.) all have one thing in common: providers who do more, get paid more. This creates incentives to do more “volumes of care”. This contributes to higher spending and our “flat of the curve” health care system. BCBS of MA began a program 10 years ago to start paying providers on the basis of care quality. The Alternative Quality Contract (AQC) began by paying large medical groups of physicians according to a modified capitation program coupled with quality of care incentives. Their payment was made according to whether they met annual spending targets for their panel of patients, or not, and if they did, whether they provided high quality care (using criteria about practice patterns).
The AQC program saved money (see chart) relative to the control group. And the majority of provider groups received bonus payments for achieving the quality targets. The cost containment results are shown here:
The Medicare value based program, implemented as part of the ACA, used many of the principles of quality payment.
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