Business Insurance
Group Health Insurance
Chapter Seven
Health care in
the
The protections provided by group insurance contracts is typically limited in two significant ways:
1. It is typically only available during ones working years, and
2. In the case of life and disability insurance, it is seldom adequate, meaning the employees must supplement these two forms of group insurance.
Terminology
In all aspects of insurance, it is necessary to understand the terms relating to the industry.
Accrual: The amount of money that is set aside to cover expenses. The accrual is the plans best estimate of what these expenses are, and (for medical expenses) is based on a combination of data from the authorization system, the claims system, lag studies, and the plans prior history.
Actuary: An insurance actuary is the person trained in statistics, accounting, and mathematics. He or she determines policy rates, reserves, and dividends by deciding what assumptions should be made with respect to each of the risk factors involved (such as peril frequency, average benefits that will be payable, rates of investment earnings, if any, expenses, and persistency rates). The actuary endeavors to secure as valid statistics as possible on which to base his or her assumptions.
Adverse Selection: The problem of attracting enrollees who are sicker than the general population, specifically members who are sicker than was anticipated when developing the budget for medical costs.
Affiliated Provider: A health care provider or facility that is part of the HMOs network usually having formal arrangements to provide services to the HMO member.
All Inclusive Visit Rate: Aggregate costs for any one patient visit based upon annual operating costs divided by patient visits per year. This rate incorporates costs for all services at the visit.
Allowable Charge: The maximum charge for which a third party will reimburse a provider for a given service. An allowable charge is not necessarily the same as either a reasonable, customary, maximum, actual, or prevailing charge.
Benefit Package: Aggregate services specifically defined by an insurance policy or HMO that can be provided to patients.
Block Grant: Federal funds made to a state for the delivery of a specific group of related services, such as drug abuse related services.
Capitation: A method of payment for health care services in which the provider accepts a fixed amount of payment per subscriber per period of time, in return for providing specified services.
Carve Out: Practice of excluding specific services from a managed care organizations capitated rate. In some instances, the same provider will still provide the service, but they will be reimbursed on a fee-for-service basis. In other instances, carved out services will be provided by an entirely different provider. Because of great variations in cost from one patient to the next, HIV care, mental health services, and substance abuse treatment are types of services that are often carved out.
Case Management: A method of supervising a patients or group of patients utilization of services. The supervision typically is performed by a nurse or social worker and often is indicated in cases of catastrophic or chronic disease.
Closed Access: A managed health care arrangement in which covered persons are required to select providers only from the plans participating providers.
Coinsurance: Stated as a percentage, it is the portion of the costs of medical services that must be paid by the patient. A characteristic of the indemnity and PPO plans.
Community Rating: A method of calculating health plan premiums using the average cost of actual or anticipated health services for all subscribers within a specific geographic area. The premium does not vary for different groups or subgroups of subscribers on the basis of their specific claims experience.
Concurrent Review: The process by which health services are reviewed to determine appropriateness; the review is conducted at the same time the services are provided.
Copayment or Co-pay: An amount of money that the member or insured pays directly to the provider at the time services are rendered. Copayment is a flat sum, such as $10 per prescription or doctor visit. It is not stated as a percentage the way coinsurance is.
Cost Sharing: Payments made out-of-pocket by patients for a part of the cost of covered services. This includes deductibles, coinsurance, and copayments, but not the share of the premium paid by the person enrolled.
Deductible: A specified amount of covered medical expenses that a beneficiary must pay before receiving benefits.
Disallowance: When a payor declines to pay for all or part of a claim submitted for payment.
Discounted Fee for Service (
Enrollment: Initial process whereby new individuals apply and are accepted as members of a prepayment plan.
Exclusive Provider Arrangement (EPA): An indemnity or service plan that provides benefits only if care is rendered by the institutional and professional providers with which it contracts (with some exceptions for emergency and out-of-area services).
Exclusive Provider Organization (EPO): Uses a
small network of providers and has primary care physicians serving as care
coordinators (or gatekeepers of services). Typically, an EPO has
financial incentives for physicians to practice cost-effective medicine by
using either a prepaid per-capita rate or a discounted fee schedule, plus a
bonus if cost targets are met. Most EPOs are forms of
Experience Rating: The process of setting rates partially or in whole on evaluating previous claims experience for a specific group or pool of groups.
Explanation of Benefits (EOB): A statement mailed to a member or covered insured explaining why a claim was or was not paid.
Fee for Service (
Formulary: An approved list of prescription drugs that managed care plans may provide to their enrollees. Some plans restrict prescriptions to those contained on the formulary and others also provide non-formulary prescriptions. Drugs contained on the formulary are generally those that are determined to be cost effective and medically effective.
Gag Clause: A provision of a contract between a managed care organization and a health care provider that restricts the amount of information a provider may share with a beneficiary or that limits the circumstances under which a provider may recommend a specific treatment option.
Gatekeeping: The process by which a primary care physician directly provides primary care and coordinates all diagnostic testing and specialty referrals required for a patients medical care. Referrals and some procedures must often be preauthorized by the gatekeeper unless there is an emergency.
Global Fee: A total charge for a specific set of services, such as obstetrical services that encompass prenatal, delivery, and post-natal care.
Group or Network Model HMO: An HMO that contracts with one or more independent group practices to provide services in one or more locations, in which doctors are prepaid on a capitation basis.
Health Maintenance Organization (HMO): A form
of health insurance in which members prepay a premium for the HMOs health
services. The HMO is the legal entity that assumes responsibility for
health care services and for the cost of care. There are different
models, including staff, group, IPA, hybrid, network, and
Health Plan Employer Data and Information Set (HEDIS): A core set of measures by which employers can compare the value of their health care dollars across a variety of health care plans.
Incentives: Profit sharing arrangements offered by HMOs and managed care plans that permit subcontractors and physicians to share in amounts earned from plan savings through reduced hospital and specialty referral usage. Note: Federal fraud and abuse rules may affect the types of incentive plans that health centers and physicians may enter into.
Indemnify: To make good a loss (pay it).
Independent Practice Association (IPA) or Organization
(IPO): A delivery model in which the HMO contracts with a physician
organization, which in turn contracts with individual physicians. The IPA
physicians practice in their own offices and continue to also see their
In-Plan Services: Services that are covered under the state Medicaid plan and included in the patients managed care contract and/or are furnished by a participating provider.
Integrated Services Network (ISN): A network of organizations usually including hospitals and physician groups,, that provides or arranges to provide a coordinated continuum of services to a defined population and is held both clinically and fiscally accountable for the outcomes of the populations served.
Lock-In: A contractual provision by which members are required to use certain health care providers in order to receive coverage (except in cases of urgent or emergent need).
Managed Care Organization (
Management Information System (MIS): The common term for the computer hardware and software that provides the support of managing the plan.
Management Service Organization (
Medical Loss Ratio: The ratio between the cost to deliver medical care and the amount of money that was taken in by the plan. Insurance companies often have a medical loss ratio of 96 percent or more: tightly managed HMOs may have medical loss ratios of 75 percent to 85 percent, although the overhead or administrative cost ratio is concomitantly higher (concomitant: a circumstance or event considered as accompanying or coexisting with another an attendant fact or circumstance).
Medically Necessary Services: Those services which are reasonable and necessary in establishing a diagnosis and providing treatment for a medical/psychiatric problem in accordance with the standards of medical practice acceptable in the providers community.
NCQA: National Committee for Quality Assurance.
Network: A list of physicians, hospitals, and other providers who provide health care services to the beneficiaries of a specific managed care organization.
Out-of-Network Provider: A health care provider with whom a managed care organization does not have a contract to provide health care services.
Outcome Management: A clinical outcome is the result of medical or surgical intervention or nonintervention. Managed services organizations are now attempting to better manage clinical outcomes for their enrollees to increase the satisfaction of patients and payors while holding down costs.
Per Diem: A form of payment for services in which the provider is paid a daily fee for specific services or outcomes, regardless of the cost of provision.
Per Member Per Month (PMPM): Applies to a revenue or cost for each enrolled member each month.
Physician-Hospital Organization (PHO): An entity that merges hospital and physician services into a single organizational unit focused around a hospital or hospital system, which then contracts with employers or MCOs.
Point-of-Service Plan (
Preferred-Provider Organization (PPO): An organization that provides health care at discounted rates in return for expedited payment and assurance of a market share. Patients often have a choice of using the PPO or non-PPO provider, but there is a financial incentive to use the PPO.
Preferred Providers: Physicians, hospitals, and other health care providers who contract to provide health services to persons covered by a particular health care plan.
Prepaid Capitation: A prospectively paid, fixed, annual, quarterly, or monthly premium per person or per family, which covers specified benefits. A cost containment alternative to fee-for-service usually employed by HMOs.
Prepaid Group Practice Plan: Essentially similar to an IPA except the health plan contracts with physician groups instead of individual doctors. Depending on the health plan structure, the groups assume varying levels of risk ranging from primary care through inpatient care. It is also known as a Network Model HMO or Network Model IPA.
Primary Care Physician (
Prior Authorization: A formal process requiring a provider obtain approval to provide particular services or procedures before they are done. This is usually required for non-emergency services that are expensive or likely to be abused by enrollees or overused. A managed care organization will identify those services and procedures that require prior authorization, without which the provider may not be compensated.
Re-Insurance: Also called stop-loss insurance, it is a method of limiting the risk that a provider or managed care organization assumes by purchasing insurance that becomes effective after a set amount of health care services have been provided. This insurance is intended to protect a provider from the extraordinary health care costs that just a few beneficiaries with extremely extensive health care needs may incur.
Risk Pool: A pool of money that is at risk for being used for defined expenses. Commonly, if the pool money that is put at risk is not expended by the end of the year, some or all of it is returned to thoe managing the risk.
Staff Model HMO: An HMO in which the physicians are salaried employees of the HMO.
Stop-Loss Insurance: A type of insurance that managed care organizations purchase to protect against excessive costs associated with a few high-cost members (also see re-insurance).
Third-Party Administrator: An external organization that handles administrative duties and sometimes utilization reviews. Third-party administrators are used by organizations that actually fund the health benefits but do not find it cost-effective to administer the plan themselves.
Usual, Customary, and Reasonable fees (
Defining Group Insurance
Group insurance can involve medical, dental, life, disability, fire, and auto insurance. Any formal organization can seek group coverage but it is commonly purchased by employers, labor groups and fraternal organizations. When an employer offers group coverage to the employees it does not mean that the employer will necessarily cover the cost of obtaining it. Many times the employees must fully pay for their own premium, although it is usually less than the amount charged for an individual policy.
There are three general characteristics specific of group medical plans:
1. A group contract,
2. Experience rating, and
3. Group underwriting.
A group plan does not necessarily incorporate all three items. The only characteristic that individually issued plans has in common with group plans are the ability to bill directly through the employer. Few people do this with individually issued policies, however.
The Group Contract
The insuring contract is between the purchaser and the insurance company issuing it. Even when employees pay their own premium, the purchaser is still the employer. Group contracts seldom issue policies to employees; a certificate of insurability is issued to them instead. The employer receives the policy. The contract is with the employer, not with the employees who are insured. In fact, the employees are considered the third party beneficiary of the contract.
The master contract (with the employer) defines the contractual relationship that exists between the employer and the insurer. The purchaser determines which benefits will be offered to those who participate as insureds.
Group contracts are not always with companies. Other types of organizations may also be involved with group medical contracts. However, the purchase of a group medical contract may not be the primary purpose of the group. This prevents people from coming together merely for the purpose of obtaining insurance at lower rates. Why is this not allowed? Because it could cause adverse selection, the possibility of a group containing only those most in need of medical services.
Most group contracts have a period of eligibility. Depending upon the group, eligibility can be determined in multiple ways. For employers, it usually relates to date of employment, length of employment, or other characteristics determined by the job.
Experience Rating
Group claims experience is a factor in insurance pricing. In other words, the more expensive the group, the more a group policy is likely to cost. When the group is large enough, experience rating is not likely to be a factor since there will be sufficient variance simply due to the number of people participating. In small group policies, including individually written contracts, class basis is normally used to determine potential losses. Class basis is determined in a variety of ways, but most often it is based on the type of work performed.
Why would the insurer want to have an idea of who the group members are? In smaller groups, the insurer must consider adverse selection. Adverse selection is the possibility of a group containing only those most in need of medical care.
For example:
Ralph owns a small company employing only himself and his son. Ralph has many health problems while his son has few. Ralphs cousin is also experiencing health problems, but he has no insurance. Ralph employs his cousin so that he can join their small group policy. Over time, he also adds a friend who needs health insurance due to health factors. Ralphs company group policy now primarily exists of members who need medical care.
Insurers are well aware of the potential for group coverage abuse. There have even been problems of one person posing as another for the purpose of using their health care benefits. Medical providers are now usually required to obtain proof of identity prior to providing medical services.
Group Underwriting
Group underwriting will vary based on multiple factors, but there are some basics involved:
1. Group stability
2. Group composition, including ages, gender, and income
3. Group purpose
4. Group administration
5. Group persistency
6. Claims experience
7. Method used to determine benefits
8. Group eligibility
9. Geographical location of the group
10. Who pays the premium (employer or employees)
11. Type of workers being insured (industry, clerical, etc.)
12. Group size
The type of insurance will also affect how premiums are determined. For example, women tend to have more health care claims but men have higher death rates. Therefore it would make a difference whether the group plan was for medical benefits or life insurance.
Insurers prefer plans where the employer pays the full or primary cost of each employee. Why? It means that all employees will participate so that adverse selection is less of a threat for the insurer. When employees must pay the full cost or primary cost themselves it is possible that only the sick or elderly will participate. Younger healthier employees may not feel they need health insurance, especially if the cost affects their ability to afford other items.
Some occupations are more prone to illness or injury (although on-the-job injuries do not typically get charged to the companys health care plan; they are usually handled by the Department Labor and Industries).
People living and working across the country may be covered by the same health insurance plan. When this is the case, jurisdiction of the health plan typically rests with the location of contract. This is determined by the location to which it was delivered, often referred to as the situs. In order to qualify as the situs and determine the state jurisdiction, specific items are considered including:
1. Incorporation: it must be the state in which the company corporation was formed.
2. Principal location: companies typically have a location that is considered the home office. This is the principal location of the company and usually also the location of incorporation.
3. Employee count: many insurers use the state in which the largest number of employees work.
If a labor union is involved in the group contract, the principal location of the union will be considered as well.
Group Classification
Many types of group insurance divide the employees by class. While there can be variations of class separation, usually it is done by several key elements of employment:
1. Earnings
2. Position with the company
3. Length of employment
4. Pension benefits
These classes are often tied to eligibility of benefits.
Individual Versus Group Contracts
Group medical insurance is designed for illness and injuries that are not job related. Job related medical care is covered by workers compensation insurance.
Insurers must follow state requirements when issuing individually issued health care policies. Generally speaking, state legislation requires all individually issued policies to be uniform. Since many of the uniform provisions relate to loss adjustment they would not apply to group contracts.
Many types of individual policies have a pro-rating clause that would not be found in group medical plans. Rather, group plans use a coordination of benefits clause. Both are designed to prevent the insured from making a profit from illness or injury, but the way duplication is handled is different. Such clauses are often referred to as anti-duplication clauses. Anti-duplication clauses often come into play when a working couple is both covered by their employers group medical plan. In such cases, one contract becomes the primary with the second plan being designated as the secondary.
One of the reasons employer health benefits are desired has to do with the breadth of care that is covered. Individually issued policies cover many things, but seldom do they cover as much as group issued policies. A good example of this is dental insurance. Seldom can dental insurance be found on an individual basis. This is not surprising considering that anyone with teeth will use the benefits. Dental insurance automatically promises the chance of adverse selection since all enrollees are likely to use it.
Group medical contracts allow negotiation if the size of the group is large enough. Therefore, it is possible to negotiate the inclusion of dental coverage, although there will be limitations (usually stated in dollar amounts). Dental insurance typically has a yearly maximum, such as $1,500. There will also be limitations on services, such as a maximum of two routine check-ups and cleanings per year. Of course, each agent and insured must check the policy to determine benefit limitations. Group plans account for 99.5 percent of the total dental plans issued.
Group medical plans do not automatically cover all types of services. Some contracts may even exclude benefits that employees consider necessary, such as coverage for pregnancy. For years disability policies automatically excluded pregnancy, considering it to be a voluntary type of disability (therefore uninsurable).
Franchise Health Insurance
Also called wholesale insurance, franchise health insurance is available for both life and health benefits. This type of policy was designed for an employee group that is too small to qualify for group health insurance. Individual policies are issued and individual selection is practiced. This means that each policy is individually underwritten based on the health of each person. Obviously, this removes a primary advantage of group contracts. Premium tends to be less than individual contracts so price is still an advantage. Credit card companies, banks, and other loosely defined groups often market franchise insurance.
Blanket Insurance
A blanket policy is designed to insure all group members against a specified peril. Such policies are different from traditional group insurance in that no actual insured is named and there are no certificates of insurability issued by the insurer. People are often covered by these policies without realizing it. Every time we go to a ballpark or a sporting arena we are probably covered by a blanket policy. Even some occupations are covered by blanket policies, such as volunteer (non-paid) firemen. Blanket policies cover an ever-changing group, which is one of the reasons no certificates of insurability are issued. The policy is issued on a for whom it may concern basis.
Group Credit Health Insurance
Those who issue credit through credit cards and other avenues are selling a product: debt. Debt is bought and sold just like other commodities. Therefore, it may be necessary to insure ones ability to repay their debt. Credit Health Insurance pays the monthly installments on credit cards and other debtors accounts if health prevents the insured from working or otherwise meeting their financial obligations.
Self-Insuring
As we know, the cost of health care and the plans that cover it has been steadily rising. As a result, employers are considering alternatives including self-insuring plans. The first to try this was primarily cities and towns. Self-insured plans are totally self funded with benefits coming from current revenues or a trust specifically set up for that purpose.
When a business or other type of organization transfers its risk to an insurance company in effect it is saying: Here, you take care of the unpredictability of risks and loss and well pay attention to running our business or organization. By insuring through insurance companies business is relieved of responsibility that they may not be suited to or have experience with. The alternative to using an insurer is do-it-yourself insurance, called self-insuring. Typically this is only advisable when the insured group is large enough to offer diversification of risks by virtue of their size. While self-insuring will certainly free up premium dollars, those same dollars may need to be used for hiring personnel qualified to handle the chores that go along with insuring a group of people. The hope, of course, is that claims will be small enough to allow a savings.
Fundamental Characteristics of Group Health Insurance
Group Health insurance is similar in form to individual health insurance. The primary differences are the conditions under which a person may apply for coverage and the requirements for acceptance of benefits. Before applying through a group, the person must satisfy the waiting periods and employment requirements of the group. Once an application can be made, the conditions for acceptance are usually less strict than those of individual health policies, especially where health underwriting is concerned. Additionally, certain protections under the law are available for members of group policies that are not available to individual plan owners. Belonging to a group health insurance plan is not a guarantee that all services will be covered. Rules of the health care plan must be followed. Some of the rules come from federal and state laws, which the health care plan must, of course, follow.
When an employer is shopping for health insurance for his or her employees a good, experienced insurance agent is a necessity. Only an agent with experience in the group health insurance field should be considered. This is not an area that one can dabble in. Experience is the difference between an angry client and a satisfied one. If the agent has not previously written group health insurance, he or she should couple up with an agent who has to gain the necessary experience that will be needed.
A broker is a salesperson who has a state license to sell and service contracts of multiple health plans or insurers. A broker is considered to be an agent of the buyer, not the health plan or insurer. This is an important point for the plan buyer since it affords him or her more choices. The majority of group health insurance is written by brokers who are self-employed or work for an independent agency. It is common for a broker to represent from five to fifteen different insurers.
The type of insurance available to the business will depend in part on its size. The larger the company the better priced the insurance options will be. An agent that is experienced in all company sizes may be better able to assist the different types of companies since he or she will have products suited to all company sizes. Even the most willing agent may have difficulty placing some business, especially if the company is very small.
Many health insurance professionals have an RHU designation. Most accountants recommend to their companies that such a designation be sought in an agent since it means he or she is serious about their profession. RHU stands for Registered Health Underwriter. Additional schooling was required to obtain the RHU designation. An RHU agent has completed relevant education and then passed a series of exams pertinent to the industry.
Before an agent can assist the employer, needs must be established. It is not possible to select a group health insurance policy unless client needs are known. The clients needs would be based, to some extent, on the needs of the group. For example, if the group tends to all be older workers, coverage for pregnancy may not be necessary. The following should be considered:
1. If the plan will use a network of doctors, will the current physicians of most of the group be included in that network?
2. Will the plan allow medical care outside of its network of medical providers? Some plans allow outside use, charging the participant a higher co-payment.
3. Not all plans pay for routine medical care, such as routine checkups. It may be called well care in some policies. It is important to know precisely what types of well care are covered.
4. Most group participants desire some type of prescription drug coverage, but not all insurance plans will provide this. Forty percent of the cost of medical care is for prescription drugs.[1] Many health plans use a formulary system to determine which drugs are covered. Be sure that the formulary (the approved list of prescription drugs) is sufficiently extensive and that the group and their physicians primarily prescribe from the formulary. How would the agent know this? The agent could supply the employer with the list of formulary drugs prior to subscribing with the company.
Employees consistently rank health care benefits as the most important of all employee benefits. Even employers list health care options as an important element of their business in a competitive market. By pooling risk, businesses can purchase health coverage at a lower rate than individuals. Tax benefits may also ensure that health care is cost effective for the employers.
Health Care Classifications
While there are many new concepts in health care, generally they are based on fundamental health characteristics of the group market. They are likely to be based on either medical expense reimbursement insurance or income reimbursement insurance. The first type pays benefits for all forms of medical care costs, whereas the second pays for temporary or longer-term loss of income due to disability and accidental death and dismemberment benefits.
There are six classifications of health care contracts:
1. Group hospital-surgical-medical insurance,
2. Group major medical expense insurance,
3. Group dental and vision care insurance,
4. Group disability income insurance,
5. Group accidental death and dismemberment insurance, and
6. Managed care plans, such as health maintenance organizations.
Managed care plans have become common employer choices for group health care in recent years. Managed care administration may be incorporated into various types of health care contracts.
Group coverage was initially used for large employer groups, but this is no longer necessary. Group size requirements have continually decreased. In the first Model Group Accident and Health Insurance Bill, at least 25 certificate holders were required. Subsequent revisions of the model bill since 1940 reduced the number to 10 and then completely eliminated mention of any membership size requirement. As a result, a group policy could be issued with only one member. Of course, it is always necessary to find an insurer willing to do so. The setting of minimums for the size of the group now rests on the insurers and their underwriters. It is important to realize that individual states may have requirements different from the Model Group Accident and Health Insurance Bill. Agents should be fully educated on their states requirements.
There may be state requirements addressing employee percentage participation, (usually 75 percent) for group health contracts. In other words, if a company has 100 employees, 75 of them would be required to participate in the companys health care plan. Why would a state place such a requirement on group health plans? To prevent a company from instituting group health insurance primarily for the highest paid or most valued employees. By having a participation requirement group health plans become open to all employees. It is unlikely that participation requirements would apply to Health Maintenance Organizations since they usually have the desire to attract as many members as possible. In fact, to stay in business, an HMO typically must have several thousand participants.
Even though there are usually participation requirements, the employer does have the ability to select particular eligibility groups. These are based several things, including:
1. Length of employment,
2. Salary range,
3. Occupation, or
4. A combination of employment conditions.
An employer might select eligibility groups in order to reward some workers, as an incentive, or to otherwise reward specific employees.
Managed Care
Employers did not always use managed care organizations to provide health care benefits for their employees, but with todays high costs of providing medical care it is now the most widely used employer-sponsored form of health care. MCOL has defined managed care as: A complex system that involves the active coordination of, and the arrangement for, the provision of health services and coverage of health benefits.
The most common types of managed care organizations, termed MCOs, include Health Maintenance Organizations (HMO) and preferred provider organizations (PPO). Managed care usually involves three key components:
1. Oversight of the medical care provided,
2. Contractual relationships with both those providing the care and the organization of the providers giving the care, and
3. The covered benefits are tied to managed-care rules.
The term, managed care, was coined in the 1980s to provide an explanation of the concept for HMOs, PPOs, the provider delivery systems that contract with such health care plans, and the techniques and modes used by these companies. Modern PPOs emerged in the 1980s but HMOs were more common at that time than were PPOs.
The term, Health Maintenance Organization, was coined in the 1970s but the concept of HMOs date back to prepaid medical care for specific employee populations that were developed prior to the 1920s.
Managed Care Historical Data
We often assume that the creation of Medicare and Medicaid brought about managed care, but the timeline of such care dates back to 1917.[2]
1917
Western Clinic
in
1929
Dr. Justin Ford
Kimball at
Ross-Loss prepaid medical clinic started by Doctors Donald Ross and H. Clifford Loss under contract with the Los Angeles Department of Water and Power for its employees.
Rural Farmers
Cooperative Health Plan started by Michael Shadid in
1933
Sidney Garfield, MD,
establishes a prepaid plan to fund care for his
1937
Group Health
Association (GHA) started in
1938
Henry J. Kaiser
recruits Dr. Garfield to establish prepaid clinic and hospital care for his
Grand Coulee Dam project in
1939
Blue Shield program adopted for participating prepaid physician plans.
1942
At the request of Henry Kaiser, Dr. Garfield expands the program to Kaiser-managed shipyards and Kaiser steel mill.
1945
Group Health
Cooperative of Puget Sound is established in
Permanente
Health Plans opens to the public in
1947
American Medical Association (AMA) indicted and convicted of antitrust violations due to organized efforts to curb physician participation with Group Health Plans.
Health Insurance
Plan (HIP) of Greater New York was established to serve
1949
Eighty-one Blue Cross Hospital Plans and 44 Blue Shield Medical Plans covered 24 million Americans.
1952
Permanente Health Plans changed their name to Kaiser, while the medical group retains the Permanente name. Kaiser membership is at 250,000 members.
1954
The first IPA is
formed: the San Joaquin Medical Foundation in
1955
Kaiser expanded
to
1958
Kaiser expanded
to
1959
Blue Cross Companies cover 52 million and Blue Shield Plans cover 40 million Americans according to the Blue Cross Blue Shield Associations Blues History.
1963
Kaiser membership reaches 1 million enrollees.
1968
Kaiser expands
to
1970
Paul Ellwood coins the term Health Maintenance Organization.
1973
President Richard Nixon, using federal funds and policy to promote HMOs, signs the HMO Act of 1973 into law.
1976
Kaiser membership is said by their historians to have reached 3 million enrollees.
1979
The Blue Cross Blue Shield collectively covers 87.4 million Americans.
1980
Kaiser expanded their coverage to the Mid-Atlantic region.
1981
Kaiser membership is said by their historians to have reached 4 million enrollees.
1982
The Tax Equity and Fiscal Responsibility Act (TEFRA) made it easier and more attractive for HMOs to contract with the Medicare program.[4]
National total HMO enrollment reaches 19.1 million enrollees.[5]
1990
The total HMO enrollment nationally reaches 33.3 million people, according to the MCOL Managed Care Fact Sheets (a publication). Also according to this same publication, national PPO enrollment surpassed the HMO enrollment with 38.1 million members.
Also in 1990, the National Committee for Quality Assurance (NCQA) was established.
1994
Blue Cross Blue Shield Association eliminates the requirement that all Member Plans must maintain not-for-profit status (they can now be profitable).
1995
The national total HMO enrollment reaches 50.6 million people according to the MCOL Managed Care Fact Sheets.
1996
The Health Insurance Portability & Accountability Act of 1996 (HIPAA) includes patient privacy compliance and health plan portability provisions a milestone in health care rights.
The NCQA initiates accreditation of PPOs, which now covers 89 million Americans.
2000
The national total HMO enrollment declines for the first time, going down to 80.9 million enrollees from the previous years level of 81.3 million in 1999.
2003
Medicare Modernization Act establishes Part D drug benefit, establishes HSAs, renames Medicare+Choice program to Medicare Advantage and increases payment rates to Advantage plans.
2004
National total HMO enrollment is 68.8 million and national PPO enrollment is 109 million members.[6]
The Theory of Managed Health Care
In the past, the relationship between a patient and his or her doctor was strong. Patients relied on their physician to make health care choices for them, often without patient input at all. Today patients are less likely to have a personal relationship with their physician, opting for a more business-like give-and-take. Patients are more likely today to want to make their health care decisions rather than allowing their doctor to do so for them. Patients are also much more likely to sue their personal physician than ever before in history. It is no wonder that medical providers are leery of personal patient relationships.
According to Your Doctor in the Family[7] it is not necessary to have a personal friendship relationship with the family physician, although it is necessary to have confidence in his or her ability to deliver quality health care. In some cases, Doctor Rich noted, the medical relationship may be stronger if it isnt based on friendship. A patients view may not always agree with that of the doctor. Having a relationship that is more business than friendship allows the patient to firmly and logically assess the type of care being received without the handicap of personal friendship. Of course, the relationship must be one of alliance since health care is so important to our well-being.
When health care is based on a group plan through an employer, it may be necessary to forge a new doctor-patient relationship, since not all physicians participate in all group plans. For many people the thought of trading a trusted physician for one that is not known is very frightening especially if current health conditions exist. Many feel the traditional doctor-patient relationship is being systematically lost as managed group health plans gain an ever-larger share of our nations health care.
Since so many Americans seem to be against managed care, why is it so prevalent in our lives? The answer is simple: it is necessary to contain medical costs and managed care seems to be the easiest way of doing so. No one wants their health care rationed although in many ways that is the case. In order to deliver health care that is affordable, it is not possible to allow those that participate to have an open door to all tests, treatments, and procedures. Someone must be able to make decisions regarding what is actually necessary and what is not. This, of course, is the reason so many people are against managed care plans.
The most important point of a doctor-patient relationship is that of advocacy. In other words, the doctor must be working for the best interest of his or her patient. The fear patients have about managed care plans is that there will be no advocate for their best medical treatment. Most of us could not navigate the medical system on our own because we are not medically trained; we rely on our doctors training, experience, and caring to bring us through a medical problem.
Even physicians must be feeling the stress since they are caught in the managed care system as completely as the patients. However, it should be no surprise that managed care is financially necessary to our healthcare system. Medicare discovered that unlimited access to medical procedures created huge cost overruns because no one was minding the checkbook. Insurance companies who provided unlimited use of medical procedures under their health policies discovered the same thing. When patients and their doctors are allowed to use as many services as they desire, without a logical financial approach, it seems that more and more (and increasingly expensive) procedures are sought out. As a result, past approaches to health care, based on fee-for-services, could not survive.
The first
managed care plans were developed in
Medical providers outside of these organized groups disapproved of them from the beginning. There was always the fear that the doctors and other providers would be hindered from providing the full scope of care and services that they felt were necessary. Many of the physicians hired by employers, organizations, and other groups were not provided with good working conditions. Especially in the lumber and railroad industries, physicians often worked without the necessary tools and conditions that traditional doctors had. Of course, had the employers not hired the doctors, no medical care at all would have been available.
Traditional doctors pointed out early on that the mission of physicians was to practice their profession scientifically and ethically for fees that allowed them to do so. Contract health care, they felt, placed too much control in the hands of non-medical third party payers. While it was not specifically stated by the traditional doctors, many of the employers who hired and controlled the health care professionals felt that opposition was based not on the quality of care provided but rather on the ability of third parties to control financing and, therefore, physician incomes.
Medical organizations began to lobby both the general public for support and the state legislators, basing their opposition of managed care on the patient-doctor relationship. Their position was that third party payors prevented societys best interest when costs were controlled, limiting a physicians ability to practice medicine as they desired. Medical organizations claimed that those who practiced contract medicine were themselves inferior so were not able to practice standardized medicine. In fact, medical organizations often withheld membership to those who practiced contract medicine, making it difficult to purchase malpractice insurance and gain hospital privileges. Many state legislatures were persuaded to pass laws actually making contract medicine illegal. By the 1920s, medical organizations had so efficiently opposed contract medicine that many states no longer had them.
The goal of managed care organizations is often purely financial based on the administrative philosophies of policy experts, economists, and others who desire to bring accountability to what has been traditionally a totally non-financial way of operation. Thats a long way of saying something simple: managed care administrators want financial accountability in the health care system. Does that mean that financial accountability is not everyones goal? Primarily, it is not. The patients goal is good (yet affordable) health; the doctors goal is delivering good health while maintaining a sound personal income; the hospitals goal is delivering sound patient services while obtaining a strong profit. One thing is clear: people want to have good health but they also want to be able to afford obtaining it. Doctors and other health care providers also want to deliver the services necessary to maintaining their patients good health, but they want to make a profit while doing so. That means that patients want costs to be low while health care providers want incomes to be high. It is not possible to achieve both low cost and high profits.
The theory of managed care was that patients could maintain affordable (and good) health care services because a third party would contain costs through organization, prevention of service duplication, and tight administration. Standardization of services was thought necessary since it provided the ability to provide both quality and cost control. Opposition feared that the primary function of contracted medical care would be cost control rather than quality of services. Since cost control meant controlling fees paid to those delivering the care it is not surprising that this would become a political issue.
As every employer knows and understands, if the bottom line is not closely watched the business cannot continue to operate. The chief goal of any company is profitability. It does not matter what type of business it is: if money is not available for operation, it cannot continue (there is one exception: the government. They merely spend as desired and pass the cost on to the taxpayers). It is even true for nonprofit companies (including hospitals): there must be funds available for payroll, supplies, utilities, and perhaps even expansion. It does not matter how noble the other goals may be, profitability is necessary to continue operation.
Managed care organizations are no exception. Just as the traditional doctors who work on a fee-for-service basis must be profitable, managed care groups must also be profitable. Ironically, other nations have looked at health care as the rules exception: rather than deliver a profitable health care system they have chosen to set up an unprofitable medical system that is supported by government. Of course, Americans have continually refused that idea, feeling that it would mean less available health care.
What does all of this have to do with group health insurance plans purchased by employers for their employees? It all comes down to cost and how the employer views his or her ability to afford health care for the employees. Many employers who previously offered various health care options for their employees have scaled back the number of choices offered, often limiting it to managed care plans that control employer costs. Additionally, offering health care to their employees often means that other benefits, such as pay increases or pension plans must be scaled back. Employees would often prefer bigger paychecks than better health care. Because employers feel they cannot provide everything, choices are made.
An Expensive Business Cost
Everyone has an
opinion on the state of
At one time it looked like most employers were moving towards providing their employees with traditional health care benefits (any doctor, any service, at any cost). Companies wanted to attract and keep valuable employees and health care benefits were a big factor in this endeavor. However, as health care costs rose, followed by health care premiums, it has become more and more difficult for employers to provide these benefits. Many companies have moved towards managed care programs in an effort to control costs.
Some health care related costs are mandatory for businesses, such as contributions to workers compensation and social security. When group health care costs are added in, insurance programs (mandatory plus elected) may easily amount to one third of the total payroll cost. As far back as 1982 General Motors Corporation reported that they paid more to their health care insurance company than they did to U.S. Steel, Goodyear Tire, or Pittsburgh Plate Glass. General Motors Corporation was not alone. Other companies were reporting similar figures. Those costs certainly have not lowered or even remained stable. The cost of health care has risen faster than any other measured index, and health care premiums have risen along with those costs.
Like all types of group insurance plans, group health plans issue a master contract to the employer, union, association, trustees or other individuals that purchase and manage health benefits for their workers or members. Usually there is the option of including the workers or members immediate family in the plan, although the worker or member may have to pay a premium to include them.
Group insurance plans generally involve three parties: the group members, the insurance company or medical group, and the policyowner, often an employer (it could also be an organization, such as a union or association). Group involvement reduces the possibility of adverse selection since employees or members are not likely to be selected by their health. In other words, when a company hires an employee they are sure to consider many factors, but health status will not be one of them. Therefore, the mix of health conditions will be varied; there will be a lower chance of insuring just those who need medical services. If the group has minimum size requirements, this will especially be true.
It should be noted that not all groups are large; some may contain only two people. Of course, premium reflects the size of the group, with larger groups paying less per member than smaller groups in most cases. Although many feel the commercial insurance market is offering more at lower costs, a market survey sponsored by Zurich in North America found that while big corporate buyers reported flat or even decreasing rates in most commercial lines, small Mom and Pop companies reported the opposite. Their rates are rising dramatically in some cases. Independent agents, in the same survey, reported that premium hikes are looming in the future as well for their smaller company clients.
In follow-up interviews with the agents surveyed, it was reported that while risk managers have more loss-control tools and alternative market strategies at their disposal, smaller buyers find it difficult to exert much influence over their premium rates, which are driven more by market forces. Agents, in an effort to help their smaller clients keep prices affordable, must use continually larger deductibles, according to those agents interviewed.
Agents have always complained that it is difficult to find coverage for small business owners. Even middle-market companies may encounter problems locating affordable group health contracts. Most agents must establish relationships with carriers that focus on specific markets such as small business owners.
There is also less administration for groups than for individually insured. Since the insurer has fewer costs associated with group administration this enables them to offer better priced products.
There is three contract forms: group, franchise, and salary deduction plans. Most people are covered on a group basis.
Salary deduction may also be called payroll deduction or salary savings insurance. The employer deducts the amounts agreed upon from the persons salary and makes monthly premiums on their behalf. Each participant selects the type and the amount of the policy benefits. The premiums are usually paid entirely by the employee. This offers convenience for the employee and may offer a lower premium cost than if the employee shopped for health care insurance on his or her own.
Franchise is a plan under which a company mass sells individual policies. The contracting parties are the employee and the insurer, with a policy issued to each individual rather than one issued to an employer or association. The premium may be paid in full by the employee or by the employer and the employee on a cooperative basis. Usually no medical examination is required, although there will be medical questions on the application for insurance. Unlike group medical plans, the insurer may refuse the applicant.
Most people prefer to belong to a group medical plan. One obvious reason is the assurance that all will be accepted regardless of existing health conditions. The actual benefits of the group plan will depend upon the policy chosen by the policyowner (the employer or association). Of course, the more benefits that are included the more costly the plan will be. As a result, many employees have seen their health care plan diminish as employers try to contain costs by reducing benefits. Unions and other work related organizations have been using health care benefits as part of their collective bargaining for many years. Work strikes often develop over disagreements on how many health care benefits should be included in their fringe benefit packages.
Most group health plans offer the option of including the workers family, although that does not mean the employer will pay the cost of including them. Increasing numbers of small companies are requiring employees to bear greater amounts of the premium cost. Statistically, urban companies are more likely to offer group health benefits and pay the premiums for the employee than does rural companies.
Our health care system is undergoing great employer scrutiny as they try to decide whether or not they can offer their employees any health care at all. Since the government has not been successful in supplying healthcare for all citizens, employers have had to act on their own to control health costs, primarily by requiring employees to join managed-care programs. More than 100 million Americans are now covered by managed care.[8]
While managed care programs have been successful in controlling costs, it has also produced a backlash among patients and their doctors who feel that managed care programs impose too many rules and sacrifice quality. Some have even charged managed care with sacrificing life in the pursuit of price controls.
While there may have been success in the foothold gained by managed care programs, there has been no success for the nearly 39 million Americans who cannot afford to get sick because they dont have any insurance. Although the number of uninsured has fallen in the past few years, it is sure to rise again since that has been the tradition (as recession comes and goes). From the mid 1960s to the early 1990s the cost of health care leaped to double-digit levels. Ironically it was the very organizations opposed to managed-care that greatly helped bring this about. At the same time they were opposing managed care organizations, traditional fee-for-service physicians and medical providers, believing the group employer sponsored health plans were a bottomless financial well, delivered continually higher-cost services in record numbers. Additionally, to make up lost income from the uninsured, medical providers often had two fee levels: one for the uninsured and a higher rate for the insured. Faced with these costs, employers who were the largest supplier of insurance benefits, quickly turned to managed-care programs.
Although HMOs are the best-known type of managed care program, all types have some common features, primarily designed to control costs. For example, requiring their members to use a specified network of approved doctors and hospitals help to control costs. The organizations constantly review what the doctors provide. This includes requirements regarding services and supplies that are ordered. It is generally required that generic drugs be prescribed rather than the more costly brand names. It may be necessary for the patient to get the insurers approval before undergoing operations or other specified treatments (and such operations and treatments are often denied if all other less expensive avenues have not first been tried). If a member patient chooses to see a doctor or other provider that is not part of the managed care network, the beneficiary will have to pay the difference in cost or perhaps even the entire cost of the services. Managed care does not allow the traditional care route of the patient choosing the doctor and any and all medical procedures with the insurer simply picking up the bill without questioning the logic of the treatments or the cost.
Those who support managed care systems say it reduces wasteful spending, such as ordering batteries of unnecessary tests (which is often done to prevent malpractice suits). Supporters strongly feel that managed care insurance plans encourages people to get problems treated early since there may be only a small co-pay.
Critics of managed care plans say managed-care firms second-guess doctors, requiring patients to get the cheapest treatment rather than the best treatment. They further charge that patients are denied access to specialists who charge more for their services. Managed care has also been criticized for denying emergency room services if the care is not truly an emergency (making patients try to guess whether or not to seek emergency treatment).
The latest reform is the Patients Bill of Rights. At least 40 states have passed some version of this law and federal regulations give similar rights to the 80 million Americans covered by Medicare and Medicaid. The Senate approved a Patients Rights Bill in 2001. This bill provided greater protections for consumers enrolled in health maintenance organizations and other managed-care health plans. The latest patient rights bill would authorize managed-care patients to see a specialist if they want, have emergency treatment at any hospital and to appeal any HMO denial of coverage. As Congress considers national legislation regarding managed care, the U.S. Supreme Court is considering whether states can require an outside review of HMO decisions.
It is not certain whether managed care organizations will ultimately be successful at controlling costs since the real test is yet to come. One of the major reasons that medical care costs went up was the care given to increasing numbers of elderly citizens along with an explosion of new and very costly medical treatments. The real test will be the baby-boomers who are just now beginning to reach the age that calls for increased medical treatments as age-related health issues are addressed.
One of the largest aspects of health care is prescription drug coverage. Drug costs have risen by 17 percent or more a year for the past four years.[9] A study by the National Institute for Health Care Management says the increase is driven by the large amount of recent advertising for brand-name drugs. Pharmaceutical companies have only been permitted to run prescription drug advertising since 1997 and they have been quick to establish huge budgets for doing so. Critics say people are now asking for these brand-name drugs even though a generic may be available that achieves the same result. The affects are already being observed: General Motors was so concerned with the impact on their medical costs that they have begun their own employee campaign to promote use of generic drugs.
Many managed care plans require prescriptions to be purchased through a contracted mail-order warehouse. If members choose to purchase their prescriptions locally they pay a higher rate. Name brand prescriptions drugs will also be higher as an incentive to purchase generic drugs if they are available.
Employers Supply Most Health Insurance
Those that market insurance to businesses will not be surprised to learn that two-thirds of Americans under the age of 65 receive their healthcare insurance through their employers. Once age 65 is reached health care is primarily provided through the government in the form of Medicare. Medicaid, medical insurance for the poor, insures approximately 40 million of our poorest citizens (many of whom are children). Since there are strict limits on income, those with low paying jobs will not qualify for medical coverage under Medicaid. As a result, those least likely to have medical insurance (even if offered by their employer) are those in low paying jobs or those who work for small companies unable to offer health benefits.
The individual states and federal government are looking for areas where health care spending may be reduced. Health care benefits are sure to receive some of those cuts. Legislation has helped some people to either keep or obtain insurance benefits. In 1996, Congress passed a law making it easier for employees to take their health insurance from one job to another, as long as they are personally willing to maintain the cost of the premium. The same law also made it harder for insurance companies to refuse to cover people with existing health problems.
There are no easy solutions. Americans want traditional fee-for-service health care, they want health insurance for all our citizens, and they certainly want health care for Americas children, but few are willing to pay for it.
It is also interesting to note that a majority of our citizens criticize managed care organizations, yet more Americans belong to managed care plans than any other type. A majority also say they have had no problems getting adequate care in their managed-care program. In one survey, 84 percent reported that they were very or somewhat satisfied with the health care they have received so far. Additionally, while seven in ten people surveyed said they support a patients bill of rights, support dropped dramatically when told there would be a cost for obtaining it.
Observers of our health care system often feel that much of the criticism heard about managed care comes from those who are repeating the criticisms around them, but are actually satisfied with the care they are receiving. In fact, many in surveys have been unaware that their own health care program was a type of managed care plan, believing it to be a traditional fee-for-service contract. That would certainly indicate satisfaction with their health care services.
According to Strengthening Managed Care Research in Action Fact Sheet publication number 96-P045: recent AHCPR (Agency for Health Care Policy and Research)-supported research shows:
HMO doctors spent more time with their patients in one study than did fee-for-service doctors. Their patients received more preventive care, asked more questions, and were more involved in treatment planning. Family physicians were studied at a large HMO and three fee-for-service groups to obtain these figures.
Managed care patients spent 2 fewer days in an intensive care unit than did patients with fee-for-service health insurance, with the average stay for managed care patients costing $8,000 less. There was no difference in mortality or ICU readmission between the two groups, indicating comparable care. Patients were treated in the same teaching hospital by the same ICU specialists.
HMO patients were hospitalized 40 percent less than patients with fee-for-service plans and treated in solo practices. The study of 20,000 persons examined variations in health care delivery systems.
Fewer low birth-weight infants and cost savings resulted from a self-help smoking cessation program for prenatal care patients of Maxicare Health Plans, a large HMO. Women in the program were 45 percent less likely to give birth to low birth-weight infants. More than $3 in medical costs were saved for every $1 spent.
Group practice enrollees had shorter stays and incurred lower costs at a Cleveland hospital, but received the same qualify of care as traditional clinic patients at the hospital.
Chronically ill patients in managed care plans had better access to care than patients in fee-for-service plans, but their care was not as comprehensive, they waited longer for care, and physician-patient continuity was less in a study of 1,200 patients in three cities.
Additional research is constantly occurring as each side of the health care issue tries to prove their views.
Kaiser Permanente of
In
A Medicaid HMO in
Implementation of AHCPR guidelines is being studied at HMOs in
As employers seek medical plans for their employees, they hope to find health care that their workers will benefit from while maintaining employer costs at a level that can be sustained. Employers are most likely to select managed care programs because the cost is affordable. What does this mean for their employees? Like any type of health care plan, it means that each employee must be educated on what he or she has and how to use it. The newness of managed care for many people often brings about anxiety that their health care needs will not be met. In fact, this should not be the case.
Method of Reimbursement
There are three primary ways that managed care plans reimburse the physicians who render services:
1. Fee-for-service: Even managed care plans may use a fee-for-service reimbursement for physicians and other providers of health care services. Primary Care Case Managers are often reimbursed on a discounted fee-for-service basis. They may receive an additional fee to monitor and coordinate the services rendered to their patients.
2. Partial Capitation: Physicians could also be in partially capitated arrangements in which they are only at risk for certain services that are typically provided in their offices.
3. Full Capitation: Fully capitated arrangements place providers at total risk for all services. If doctors are in fully capitated arrangements they want to ensure that capitated rates are risk adjusted in a manner that incorporates the special needs of certain populations that they treat.[10]
Defining Managed Care
Since we know that employers often choose managed-care programs, what defines a managed care contract? The term managed care refers to how the health care plan is organized and delivered to those who enroll. The goal is cost-effective, high-quality care that can be easily used and understood by the enrollees. This is accomplished by the way in which the plan delivers the selection of, utilization of, and access to products and services from contracted providers. Since managed care involves a sharing of risk among its payers, patients, and providers, it is often the target of criticism. Managed care plans:
1. Place limitations on patient and provider choice.
2. Place limitations on access to providers.
3. Control utilization of services.
4. Use contracting procedures to obtain the lowest medical pricing.
5. Concentrate on preventive health care in order to keep larger health related costs down.
Managed care programs have collected and analyzed large amounts of data on and from their patients. Many feel this has enabled them to further reduce costs. Managed care concentrates on accountability from contracted providers.
Managed Care Contracts
Employers who select managed care contracts can typically plan on some elements in their certificate of insurability, including:
1. Contractual arrangements with selected providers.
2. A comprehensive offering of defined health care services for the members.
3. Explicit standards when selecting providers. These may involve specified payment contracts.
4. Formal programs for quality assurance and utilization reviews.
5. Significant financial incentives for members to use contracted providers.
6. Procedures, products, protocols, and providers associated with the organization.
Under fee-for-service (or indemnity) insurance, fees were negotiated between the physician and patient. Of course, what really happened was the doctor billed as he or she wished and the patient turned the bills over to their insurer for payment. If no insurance existed, patients either paid their own medical costs or went without medical care.
Our medical care
in the
Where fee-for-service is used, attending doctors and their patients jointly decide the course of treatment. Fee-for-service medicine does have two important advantages desired by patients:
1. Doctors are free to use their best clinical judgments and to access any treatments desired, even if they are outside of normal medical or scientific avenues.
2. Patients are completely free to choose their own doctors and see as many of them as they wish.
Unfortunately, fee-for-service medicine does not offer incentives for logical use of medical care. Patients can request and receive whatever services they desire, whether their medical conditions call for it or not. Some analysts believe as much as 30 percent of health care expenditures under fee-for-service care are spent on treatments with little or no actual benefit to the patient.
Many Americans believe that managed care is a single form of medical care, but actually it includes many different forms of care. For employers, selection of managed care will depend upon many variables, one of which is sure to be cost. The type of selected managed care even depends upon the geographical location with large cities having more choices than rural areas.
Managed care has developed to the point where it is difficult to provide one clearly defined description of it. There are two basic forms of managed care: risk-based and non-risk based. When there is an attempt made to define managed care it is often stated in the following manner: Managed care is medical care that attempts to coordinate, rationalize, and channel the use of health providers and services to achieve access, service, and outcomes while controlling costs effectively and preventing duplication of services.
The second description of managed care focuses on how costs are controlled. This may include many things, including preauthorization requirements, co-payments on services, and referral controls. Much of the control on costs is met by placing care providers at full, partial, or no financial risk for either all or part of the costs of care. Managed care organizations shift the burden of controlling costs by asking providers to take on a capitation and other incentive arrangements. In this respect, managed care may be defined as a contractual arrangement to provide health care and services for a defined population at a defined, fixed, prepaid price.
It is likely that additional definitions will develop as organizations providing managed care continue to evolve and redefine what managed care can be. The primary strategy will continue to be that of curtailing spending while providing quality care. Of course, not all individuals agree on what quality care is.
If one wants to
see how managed care can (and probably will) evolve we need only to look at our
history with the Medicare system. It is probably the best-known medical
modification program, using the Medicare Prospective Payment System (
By the time the HMO Assistance Act became law there were about 50 managed care organizations active in approximately 20 states that met the federal definition of HMO. In just five years that number grew to more than 200 HMOs operating in 37 states. Even with this growth by the 1980s only five percent of Americans were enrolled in prepaid plans, with 80 percent of those receiving their care from salaried physicians practicing in large organized group model HMOs.
Group health plans eliminate many of the problems associated with issuing individual health plans because adverse selection is not likely to play a role. A major reason for the rising medical costs is our countrys aging population, which uses much of the health care that is provided. Employers are also experiencing a rise in the average age of their workers.
Of course, age
is not the only factor in our rising health care costs. Advanced
technology certainly plays a role. These include bypass surgery, balloon
angioplasty, renal dialysis, artificial joints, and even heart
transplants. When diseases such as cancer and AIDS are factored in we can
clearly expect rising health care costs. According to Henry Aaron of the
Brookings Institution in
Selecting a Company Plan
Fee-For-Service Plans
While we might prefer to have a fee-for-service plan offered by our employer, it is much more likely that some type of managed care plan will be offered, primarily due to the cost of fee-for-service plans. However, if a fee-for-service plan is offered, it will be an indemnity contract. Indemnity insurance is simply another name for fee-for-service health care. Health care providers are reimbursed for each treatment or service provided. There are no obvious cost containment factors involved. Physicians and other health care providers may charge whatever fee they feel is necessary. What many people may not realize, however, is that even indemnity plans today may have some form of cost containment measure in them.
Only about five
percent of indemnity insurance contracts have no cost containment at all in
them. When there is cost containment, they are usually referred to as Managed Fee-For-Service plans (
Staff and Group Model HMOs
When the HMO employs their own doctors who work full time for a salary they are called staff model HMOs. Other HMOs may have exclusive contracts with large multi-specialty groups, which are called group model HMOs. For example, Health Centers Division of Harvard Pilgrim Health Care is a staff model HMO while Kaiser-Permanente is a group model HMO. Group model HMOs promote integrated, comprehensive care, with an emphasis on prevention and no paperwork for the patient. There may be some service out-of-pocket costs for the members.
Doctors also find some advantages, such as minimum start-up costs as well as a guaranteed salary with bonuses and regular working hours. Of course, it also means that some freedoms are lost to the doctors.
IPA and Network Model HMOs
Where physicians generally work on a full-time salaried basis under staff and group model HMOs, under a network model or IPA model, doctors are contracted rather than employed. In the network model, the HMO creates its own network and then contracts with the doctors in it. However, the more common method is a membership organization formed by the participating physicians, which is called an Independent Practice Association or IPA. The IPA contracts with the HMO. There are both single specialty and multi-specialty IPAs and networks. In IPAs doctors work out of their own offices and may take patients outside of the HMO as well as HMO enrollees. They may contract with more than one HMO. The first IPAs paid the doctors on a discounted fee-for-service basis, but now they are more likely to receive payment on a capitated fee set as a dollar amount per member per month for a specified set of procedures or comprehensive care.
Preferred Provider Organizations (PPO)
A PPO could be considered the child of an IPA and an HMO with the traditional fee-for-service as its godfather. Because PPOs do not fit into a specified mold, there are many variances making it difficult to precisely describe. They are a hybrid medical plan taking some elements of the IPA, the HMO and the traditional fee-for-service plans. In most cases, physicians agree to lower fees than they would normally charge. The discount varies, but it may be anywhere from ten percent to thirty percent less than normal fees. In some cases, the discount may even be higher than thirty percent. As managed care has become more accepted, PPOs have increased the intensity of their utilization review in an attempt to contain costs and maintain quality management programs. Physicians sometimes complain that too much of the utilization risk is being shifted to them making it difficult to run a profitable business and still provide the type of care needed and desired by the patients.
Point of Service Plans (
In 1988 Congress
passed amendments to the HMO Assistance Act allowing federally qualified HMOs
to offer a new type of care that permits members to use non-HMO doctors and
still be reimbursed for some of the costs. The non-HMO services may
consist of emergency medical care, routine procedures, or specialty care that
the HMO is not able to provide. That is where the name came from: point
of service plans.
Group Practice Without Walls (GPWW)
Private physicians must deal with the growing use of managed care organizations if they are to remain profitable. Increasingly they are merging into a single corporate structure that owns the office buildings and equipment, and provides administrative support, although each doctor or medical provider maintains their own private practice. They may all be in the same general location or they may each have their own location. The group is not dependent upon physical location but rather their agreement with one another allowing each practitioner to preserve physician autonomy and independence while taking advantage of economies of scale from such things as shared overhead, shared lab and diagnostic services, and unified marketing. Depending upon the GPWW size, it may also offer the advantage of negotiating with other managed care organizations and increase their ability to accept risk contracts for broader ranges of services.
Management Services Organization (
A management services organization provides practice management and other support services for doctors. It is usually owned by a hospital or by private investors who hope to make a profit. It also offers doctors specific advantages, including:
1. Marketing
2. Contract negotiations
3. Contract administration
4. Financial management
5. Management information systems
6. Utilization and quality management
7. Facility management
8. Personnel and benefits administration
9. Billing services
10. Staff recruitment and training
11. Legal advice
12. Strategic planning
13. Access to capital
Some doctors may
elect to turn over their office, building, equipment, accounts receivable, and
office management to the
Hospitals and
the doctors associated with them are forming separate legal entities, jointly
and equally owned by both the hospitals and the participating doctors.
When they legally join together they are called Physician Hospital Organization
Models. Some own their own surgery centers, labs, home-health agencies,
pharmacies, and other service agencies. The theory is that the PHO will
be able to provide a broad range of health related services, negotiate with
insurers and self-insured employers. However, it can be difficult for the
hospitals in PHOs to maintain a profit. Traditionally, hospitals exist
due to maintaining a high inpatient census. In order to compete with
managed care organizations it is necessary to minimize hospitalization since it
is such an expensive form of medical care. Therefore, hospitals in PHOs
face a dilemma: maintain a high patient census to financially thrive or limit
the inpatient care for the goal of containing costs. Obviously, the
doctors in such an arrangement want to minimize hospitalization in order to
compete with managed care plans.
Mixed Model HMOs
As we know, the many changes in managed care have blurred the lines between the different types available. Many consumers seem to distrust health maintenance organizations and their managed care techniques. In response to this mistrust many health care organizations offer different forms of managed care allowing employers to decide which form of care they wish to make available to their employees. Large companies may require available medical care for their employees that do not live within a service area of the HMO. The result has been a mixed model HMO, which offers health maintenance type services as well as point-of-service options within the same plan.
Integrated Health Care Systems
Large cities generally are able to supply managed care at affordable rates, but this is often not available (or not easily available) to those in rural areas.
In metropolitan areas that have been successfully marketing managed health care, we are seeing development of very large, fully integrated health care systems. These systems generally partner several hospitals, as well as a large multi-specialty group practice that is available for their enrollees. Generally, there is also IPA affiliations with physicians, one or more long-term care facilities, and a home health agency affiliation. These services may merge into a single organization or they may remain legally independent but have contractual relationships that form long-term alliances. The advantage of such a group is the availability of an integrated health system offering a single, unified continuum of care, that includes preventive care, comprehensive care, emergency services, inpatient hospitalization, care for chronic illness, sub-acute care, long-term nursing care, and home health services for those who can manage at home.
Provider Service Networks (PSN)
In the summer of 1997, Congress passed legislation that allowed doctors, hospitals, and other health care providers to form Provider Service Networks called PSNs. They are allowed to contract directly with the government to offer services to Medicare patients in the hope of containing health care costs. Congress passed this legislation in the hope that PSNs would facilitate doctor-sponsored health care plans, while also persuading doctors to take on a stronger role in Medicares market-based health care reform. The HMO industry strongly opposed Provider Service Networks, arguing that they should have to comply with state licensure requirements, pay premium taxes, and meet the state insurance requirements that are imposed on HMOs. Even though several states have passed specific PSN regulations, for the most part, they have failed to attract many enrollees.
Public Sector Managed Care
As we have seen, employers are steadily moving towards managed care plans of various types in an effort to contain business costs. For some large companies, health care premiums make up the largest expenditure. Beginning in the 1980s private employers used various incentives to convince their employees to switch from their fee-for-service indemnity plans to managed care plans. If age was involved, business owners also hoped to move those who qualified over to Medicare based plans. Private companies were largely successful in this move to managed care health plans. However, Medicare and Medicaid did not see the same success. Both remained primarily a fee-for-service system. Insurance that is administered by the government, such as Medicare and Medicaid, is called public sector insurance. Government is now pursuing the change to managed care in much the same manner that companies have and for the same reason: to control ever-rising costs.
The Medicare market is very specialized in that enrollees are primarily 65 years old or older. While it is possible to begin receiving Social Security at age 62, Medicare is not available until age 65 (except for those who have been on disability for at least two years or are receiving dialysis). Medicare HMOs attract new members by offering various benefits that would not otherwise be available in the traditional fee-for-service plans. While the incentives vary, they often include partial prescription or total prescription coverage, hearing aids, eyeglasses and preventive services. By 1995 about 44 percent of health plans surveyed by the American Association of Health Plans (AAHP) offered programs that had been specifically targeted to Medicare enrollees. An additional 34 percent said they intended to start offering a Medicare program to attract new members.
Managed Care Stages
Managed care has changed so much that even those that specialize in the health care industry report that it is difficult to keep up. Certainly insurance agents are among those who must keep current on the new trends. Many analysts feel it is easiest to consider it in terms of stages. The evolution of managed care and all of its offspring is likely to continue as costs continue to rise for healthcare, as we continue to see an increasing number of retired Americans, and as business owners strive to keep health care premiums affordable.
The following is based on the work done by J. Coile on managed care plans:
Stage 1: Unstructured
Originally there was little managed care. Hospitals and doctors, as well as other health care providers, functioned independently with no affiliations or consolidations. Where insurance existed, utilization of services was high. Those without insurance often went without medical care. Hospital emergency care was the only care many uninsured people sought out. Because use of medical procedures and services under fee-for-service care for those with insurance was over-used, it began fueling a rush to increase the availability of hospital beds eventually resulting in an over supply (and hospital vacancy rates).
Hospitals and doctors functioned as revenue centers, with little regard for cost-saving measures. It was simply easier to pass on costs to insurers or even the uninsured recipients of their care. Those with insurance were often charged a higher rate for services in order to make up shortfalls for those unable to pay. Health maintenance organizations account for less than 25 percent of the insurance market as employers continue providing fee-for-service indemnity plans.
Stage 2: Loose Alliances Form
Managed care is primarily in the form of discounted fee-for service, today referred to as managed fee-for-service plans. Limited capitation appears late in stage two. There is some consolidation and affiliation among hospitals. Group buyers, such as employers, develop more bargaining power as there is more emphasis placed on limiting premium growth while receiving a stronger focus on total cost of care.
Primary care physicians organize and hospitals form affiliations with them. Shared risk pools, joint contracting, and excess inpatient capacity develops. HMOs account for 25 percent of the insurance market.
Stage 3: Consolidation
Managed care begins to gather momentum as organizations and employers seek affordable insurance coverage. HMOs and PPOs and medical groups start to consolidate and actively seek enrollees. More capitation occurs, especially among primary care physicians. Integrated hospital systems form and compete for primary care practices. The number of hospital beds begins to decline. There is accelerated formation of primary care group practices. Specialty physicians form groups. HMOs now account for up to 50 percent of the insurance market.
Stage 4: Competing Systems
Now that managed care accounts for over 50 percent of the market place, employers turn away from fee-for-service plans in favor of some type of managed care program. Providers of medical services and insurers align in an effort to achieve quality services and cost containment. Independently practicing doctors often end up treating the uninsured, with a limited ability to pay for his or her services.
Specialists see their fees drop and pressure is put on hospitals to eliminate or empty bed supply. There is a stronger demand for general practitioners as the demand continues for cost effectiveness. As stage four matures, physician networks develop full continuums of care, especially sub-acute care.
Stage 5: Integrated Delivery Partnerships
Once a network completes capture of a solid market share, it can focus on its strengths and form partnerships with purchasers. These partnerships of purchasers and providers are designed to manage whole patient populations in order to keep them healthy (avoiding costly recuperative services). As further consolidation occurs through provider and purchaser, alliances over capacity in the system is driven out and providers are able to assume risk for full continuums of care.
While these five
stages may be an oversimplification they are a general outline as to the health
care development in
Medical Providers Are Affected
Managed care certainly affects those that provide medical care, primarily physicians and hospitals. With the rapid changes in our medical care that we have seen over the past twenty years, newer doctors may not feel as affected as those that have been in business prior to the managed care revolution. However, it has affected all whether they practiced during the fee-for-service era or not. The roles of our doctors have been forced to change with the emergence of managed care medical plans.
Physicians are estimated to be involved in about 85 percent of health care expenses, but their role extends beyond that since it is the doctors that refer patients to hospitals, labs, write prescriptions, and so forth. Today doctors have more to consider. In the past many diagnostic testing was done to protect the doctor from lawsuits (referred to as defensive medicine). The need to have a legal defense if necessary meant that unnecessary tests were performed with the cost passed on to insurers. While insurers may have been sympathetic to the physicians situation, they did not want to pay for unnecessary services simply for his legal protection. Today doctors must balance the cost of the services they perform or order and the benefits that result. In many cases, doctors must be able to actually document the need for testing and procedures (they must be able to document the value of the service).
Under fee-for-service indemnity medical contracts doctors did not need to show medical value of services; if they (or even their patients) desired a test or procedure it could be ordered and the insurer would pay for it, as long as the procedure was covered under the terms of the policy. Under managed care, this is not typically the case. While all types of procedures are covered under the managed care plan, the value of it must be demonstrated or documented. Many professional societies and other respected medical organizations have issued recommendations and guidelines on appropriate practice patterns in order to minimize the wide variability found in private physicians practices. While managed care doctors are not required to follow practice guidelines, they may be asked by a medical director or the insurer to explain their reasons for doing otherwise.
There was a time when patients felt their doctors were the guardians of their health. Today patients are more likely to be active participants in their health care decisions. Many people feel this is necessary to ensure that they receive the type of care needed to remain healthy. Todays doctors are often required to be a member of a team not the team leader. The doctor must often accept advice and information from a health plan medical director who will consider costs as well as benefits when making medical decisions. This does relieve the doctor from some of the legal liability previously faced by them. Since the medical director makes such financial as well as medical decisions, he or she must also accept responsibility for them.
There is little doubt that some people fear managed care will limit their ability to receive adequate and timely care. There have been many reports of delayed services in an attempt to first find a less expensive type of care. As the financial incentives of health care payment systems continue to change it is not possible to know if these fears will continue or be calmed. Some professionals express concern about the growth of large for-profit health care corporations and their increasing focus on stock prices and bottom lines. There is also concern regarding patient confidentiality, since corporations may own patient records not the doctors treating them. With multiple parties trading and sharing information, it can be difficult to provide sufficient security for private information.
Managed care organizations point out that the managed care system provides integrated delivery of care that is often easier for the patient to deal with. Coordinated care, they say, means:
1. Improved care for most patients,
2. Increased patient satisfaction with the ease of receiving care, and
3. Decreased costs for the patient.
The American Medical Associations Council on Ethical and Judicial Affairs has released ethical guidelines for physicians and organizations as a first step towards setting up adequate procedures for some of the concerns expressed. Some managed care organizations have set up internal committees to review existing policies and influence new managed care procedures, if needed. For example, PacifiCares ethics committee has drafted recommendations dealing with more specific situations (such as recommending that the owner of a medical group not be a member of its utilization review committee that looks at potential needed medical services for patients).
Although we may see newspaper articles on inadequate managed care, studies have not supported this view. Formal research has found little difference in the quality of care between traditional fee-for-service and managed care organizations. While both have had their successes and failures, studies consistently show that enrollees receive similar care.
Perhaps due to public perception, managed care organizations routinely survey member satisfaction. Most members report high levels of satisfaction with their medical care.
Managed care doctors do not always agree with the managed care organization. If the doctor feels a patient needs care that is not likely to be approved, he or she can file an appeal. The physician who disagrees with the utilization decision always has the option of trying to reach a person who has the knowledge and authority to respond to special circumstances. It is important to note that a doctor that does not go through the appeals process in an attempt to provide a service he or she feels is necessary could then be legally liable for not doing so.
Premium Costs
The majority of group health plans are written on a contributory basis, with the employees or members paying a share of the cost. Remember that not only employers can have a group medical plan. Labor unions and organizations may also institute a group medical plan. In an employer group this means that both the employees (who are certificate holders) and the employer (who is the policyholder) pays part of the cost for the medical plan. Some group health plans may be noncontributory, with the employer paying the entire cost for his or her employees. The employer does not usually cover the cost of their dependents. It is also possible for the individual plan participants to be responsible for the entire cost of some company-sponsored plans. When participants must pay the entire cost, the point of a group medical plan is to bring in a lower premium cost than would be available individually. A second reason would be to minimize or eliminate health underwriting, since many group plans accept all who apply regardless of existing health conditions.
The premium charges for group health contracts are based on rates developed for the standard group for the type, size, and duration of benefits. Some plans will also consider gender, age, geographic locations, and other factors. Rates are normally adjusted on anniversary dates, and may reflect the actual experience of the group, except for very small groups. Dividends may be used in participating contracts in order to vary the charges made each year based on the actual loss experience of the group.
Group rates are almost always lower than individually priced policies. The price difference is the result of several factors, including the employer paying part of the premium, which reduces employee cost, the favorable loss experience of a mixed group of participants, and administrative savings and payroll deductions. Since health care costs are outpacing incomes, those without group health care options are finding it harder to afford the price of health care or individually priced policies. Analysts say it isnt just those without group coverage that will be affected. U.S. health care spending will outpace overall inflation and wage growth during the next ten years, making affordable medical care more difficult to obtain, including the government, employers, workers and uninsured Americans.
Any organization or person who must obtain health care is affected, including federal spending as well as private spending. The amounts spent for private health premiums will be hardest hit, since the individual has fewer tools at their disposal to reduce costs. In fact, analysts say the cost of purchasing health care and health care insurance will grow faster than incomes. Private health care costs are expected to grow faster than disposable income in each year through 2014, according to new projections released in June 2005 by the federal Centers for Medicare and Medicaid Services. It is likely that some consumers simply will not be able to afford the costs of health care and will simply go untreated. Analysts predict that lower-income workers are the most likely to go without health care because these individuals are the least likely to be able to afford health care benefits, even if a contributory plan is offered by their employer.
The new figures that came out in 2005 show the government will be picking up nearly half of total health care spending by 2014, and suggest that Medicare and Medicaid are for more immediate cost concerns for the federal policy-makers than is Social Security.
Said David Cutler, an economics professor and expert in health care finance: It is absolutely clear that as costs increase more low-wage people will become uninsured. He went on to say that erosion of group health insurance coverage is likely to continue.
Paul Ginsburg, president of The Center for Studying Health System Change, a nonpartisan health research group in Washington, noted that low-income workers would rather have the cash in their paychecks than contribute to a group health plan because sickness or injury is not predictable. Their cost of housing, food, and other necessary costs are predictable. They cannot afford to insure their health care if it means they cant pay their rent or buy groceries.
The annual
Medicare-Medicaid report found that public and private spending for health care
would total $3.6 trillion by the year 2014. That amounts to approximately
$11,045 per person and will eat up a record 19 percent of gross domestic
product (
By the year 2014 it is expected that our government (which means the taxpayers) will fund 49 percent of all health care spending in the United States. This isnt entirely due to rising costs; much of this spending will be due to the new Medicare prescription drug benefit.
If American taxpayers must pay an increasing portion of health care costs, where will this money come from? It is likely that other types of spending must be cut. We will see less spent on transportation, education, community development, and other areas in an effort to cover needed medical services for our citizens. Long-term care costs will also rise dramatically as baby boomers reach the age of frailty. At this point, even more drastic cuts may be necessary in other areas to cover the long-term care costs that will eventually hit America.
The number of uninsured Americans had increased by 5 million by 2005 and analysts fear that number will continue rising. Health and Human Services will pick up some health care costs through Medicaid at the state levels.
It is likely that there will be tax credits given at some point to families who must purchase private health care. Even so, since the cost of such private health care is about $10,000 per year per family, it is unlikely that a tax credit would help much. Enrollment in company sponsored health care plans have steadily decreased, as workers feel pressured to cover their day-to-day living costs. Most analysts feel this trend will continue as health care costs outpace wage growth.
Group Hospital-Surgical-Medical Expense Plans
The group health plans that provide protection for medical care expenses operate on the basis of two different philosophies. Some plans cover essentially all the specified kinds of expenses from the first dollar on. These are called first-dollar plans. Certain maximums are usually set in terms of days of medical care or of maximum dollar limits. These limits may be set high enough to cover the costs of most normal losses, but all too often they are inadequate.
For Example:
Gordon has a First-Dollar plan through work. He selected this plan because the cost was lower than major medical coverage. Under his policy, each surgical procedure is assigned a dollar amount of coverage. If his surgical procedure expense is within the dollar amount assigned to it, he will be fully covered, but if the surgical procedure is more expensive than that assigned, Gordon must make up the difference out-of-pocket.
First-dollar plans may work well if medical procedures are not catastrophic in nature. Large losses are unlikely to be fully covered by such plans.
Major Medical Group Plans
Most companies do try to provide health care plans that will cover for the catastrophic costs of medical care. It is felt by most industry professionals that individuals can handle the day-to-day medical costs of immunizations, well-care exams, and common colds. It is the large expenses that are most likely to devastate a family and these are the types of expenses that major medical plans attempt to cover.
The main reason that major medical group plans have grown so rapidly is due to group enrollment plans. Of course, consumers recognition of the need of such coverage has also caused the rapid expansion of this type of coverage. Labor unions actively bargained for group insuring and other employers used it to attract and keep key employees.
Major medical plans have some basic features, such as deductibles (often $500 per hospital admittance), and coinsurance (such as $20 co-pays on doctor visits). Many of todays plans also utilize managed care concepts in an attempt to keep the premium cost affordable. No matter how good the health care contract is, if it is not affordable then it is unlikely to see employee participation unless the employer pays the full cost.
Early major medical plans often had a million dollar lifetime limit on benefits. Today, a million dollars would often not be adequate and this cap would now be considered a negative feature of the contract. The point of a major medical health plan is to provide catastrophic benefits for all types of medical expenses. In 1983 a report bragged that a new major medical plan had the high lifetime maximum limit of $100,000. Today, this would be considered very inadequate certainly not catastrophic coverage.
Defined Contribution Health Plans
As the cost of providing health care benefits continues to rise, many are seeking ways to offset the expense. Some professionals feel we are moving from a philosophy that sought to cover all equally to one of looking out for ourselves.
A provision in the Medicare bill expanded and makes permanent health savings accounts (HSAs), which was formerly known as medical savings accounts. This provision allows most Americans to set up tax-advantaged savings accounts when they also have a high-deductible health insurance policy. No tax is paid when the money is paid into the account or when paid out, which many consider to be an unprecedented new tax loophole.
Some people feel Defined Contribution Health Plans favor the healthy since they can save on their health plan by choosing large deductibles. It may also favor the wealthy because they have the financial ability to pay large deductibles. Some analysts also worry that this ability to have a tax break will encourage employers who already want to discontinue providing employee health care benefits.
In the past this type of plan was called a defined contribution plan, but now it may be called by a new name: consumer driven health care plans (CDHC). Defined contribution more aptly describes the type of plan, but the new name seems to be overtaking the old one.
Expect Continued Change
Our health care system will continue to change. As our care continues to cost more and more, our government, business owners, and employees will have to search for ways to contain costs while still providing necessary care.
The elderly population uses more health care than any other segment of our population, including children. We spend more on an individual in the last ten years of their life than we do on a childs first eighteen years. As more and more Americans require nursing home care our spending on the elderly will increase rather than decline. Since much of the care for our elderly comes from our tax dollars, the decisions that must be made affect younger working Americans as much as it does our older population.
Currently health care costs are outpacing incomes. This affects all of us but it especially affects those in lower paying jobs and those on a fixed income. Spending on health insurance premiums will surpass wage growth, forcing an increasing amount of people to give up their medical coverage in order to pay other expenses, such as mortgages, rent, car payments, and groceries.
Analysts expect health care spending to continue to outpace overall inflation and wage growth during the next ten years, making medical care harder for the government, employers, workers, and certainly uninsured Americans to afford. One aspect of health care that has risen so dramatically that we have begun looking to other countries is prescription drugs. In 2005 Medicaid paid for 18 percent of the prescriptions sold in America, Medicare paid for 2 percent, private health insurance paid for 47 percent of the drugs, 29 percent were paid by individuals out-of-pocket, and 4 percent were paid by other public agencies.[12] Medicare prescription drug coverage rises to 28 percent in 2006 as a result of recent legislation offering extended drug coverage.
Disability Insurance
While some companies do offer group disability coverage, it has been reported that few employees take advantage of it. Stacey Bradford in Smart Money recommends that disability be considered by anyone who can afford the premiums. Few people seem to realize that one is much more likely to be disabled than die. According to the Insurance Information Institute, young adults are four times more likely to be disabled by an illness or injury than die. Disability insurance replaces part of ones income if a disabling event happens.
Disability insurance may be referred to as income-replacement insurance and this is descriptive of its intent. Disability insurance plays no part in covering medical costs or other health related expenses; it is merely there to replace lost earnings.
One out of three Americans between the ages of 35 and 65 years old will be disabled for more than 90 days according to the American Council of Life Insurers. One in seven workers will be disabled for more than five years. It would be easy to assume these disabilities are the result of accidents but that is not the case. Most disabilities occur from illness, such as cancer and heart ailments.
Disability insurance is available for those who wish to purchase it. Stacey Bradford recommends that consumers only purchase from a qualified agent, however. While it is easy to purchase many types of insurance over the internet or through the mail, disability is one type that should not be bought this way. It is important for the buyer to understand their benefits and this is best accomplished through an agent.
As with most types of group insurance, group disability is based upon eligible groups of employees. Law typically regulates what constitutes an eligible group since certain tax benefits accrue to group participants.
Some employers do offer disability coverage, although they may not be adequate. A typical disability plan offered through an employer will cover up to 60% of the workers salary. Again, the amount of coverage will vary, so it is very important to seek this information before assuming anything. The disability benefit will be offset by other benefits received, such as workmens compensation. Privately purchased disability policies may cover as much as 80 percent of the workers salary. No plan will completely replace the workers salary (pay 100 percent). This would be an incentive to never re-enter the workforce. The policy will set durational benefits, such as five years. In other words, benefits will be paid to the disabled worker for a set period of time, often five years. It is possible to purchase a plan that will pay (if the worker remains disabled) until retirement age. At that time, benefits would cease. If the worker purchased a private policy, paying the premiums him or herself, the benefits paid during the disability are tax-free. This is not true if the employer paid the cost of the policy. Employer paid benefits are considered current income and taxed accordingly. Where employers pay a portion of the premium, with the worker paying the balance, the amount that is taxed will be in relation to the amount of premium paid by the employer.
It is not
unusual for an employer to pay for short-term disability (
Group disability, often referred to simply as DI, is written with the employer or other sponsor as the master policyowner. The employer retains the master policy with each participant receiving a certificate of insurance. Although an employer is not allowed to discriminate against an employee, the certificates of insurance may differ due to salary levels or other class basis conditions. DI will use a maximum monthly dollar benefit that will be specified in each certificate issued. That maximum will be different based on different job classifications. For example, an engineer is likely to be paid more than a receptionist so their disability benefits would reflect this difference in pay.
It is very difficult to compare group disability with an individual policy because there can be such wide differences in the benefits selected. Even within the same company, there will be benefit differences between short-term and long-term group policies. One aspect that may be common to both is the definition used for own occupation in the initial disability period. If the disability continues past a specified time period, it may be necessary to qualify for benefits under an any occupation definition.
It is important to fully understand the policys definition of disability. Some policies have a very strict definition that will not pay for many types of disability.
For Example:
Margaret purchased a disability policy that defines disability as the inability to perform any type of work for which she could be employed. When she becomes unable to perform the job she had been doing, her policy denied her request for benefits. Why? Because she was still employable just not at the job she had currently held.
While terminology will depend to some extent on the state of origin, the definition should use some term such as the inability to perform your own occupation. The key words are own occupation, which means the inability to perform the exact job held prior to becoming disabled. Own occupation policies typically cost about 40 percent more than those that do not use this policy language.
It is important to note that many people who become unable to perform their current job could still work. Of course, the pay may be minimal. Even so, unless the policy defines disability as the inability to perform ones present job, benefits may be denied. Many professionals feel the policy definition of disability is one of the most important features when considering a disability policy. Of course, you also want the policy to be non-cancelable and guaranteed renewable as long as premiums are paid in a timely manner.
Group DI covers non-occupational injury or sickness. Job related injury or sickness would fall under workers compensation. DI will not pay in addition to workers compensation or other types of disability plans.
Group plans often have stricter pre-existing conditions provisions than do individually issued policies. This is primarily due to the lack of underwriting in group policies. However, if a new DI policy is replacing a previously existing one, it is likely that any pre-existing period would be waived if the worker had previously satisfied a similar restriction under the old policy. Whether or not this is the case may depend in part upon state regulations, so it is important that each agent be aware of any state requirements that would pertain. It is important to note that employers do not want to encourage their workers to take disability leaves.
For example:
Sally signs up for disability income coverage at her workplace. She has been experiencing pain in her wrist for the past year, but she could not afford to take time off. Once her disability policy becomes active she decides that she can no longer perform her job due to her wrist pain and applies for benefits under her new DI policy.
If a person is considering disability insurance, he or she should first check to see if it is offered through their employer on a group basis. While the coverage offered may not be adequate, it is likely to be less expensive than an individually issued policy. The employee can purchase a policy to supplement the one provided through the employer if it is not enough coverage.
Many employer sponsored disability plans do have a cap expressed as a dollar amount, such as $5,000 per month or $60,000 per year. It is important to realize that the employer does not want to encourage the worker to remain off work. The point of employer-sponsored disability insurance is to help while he or she is unable to work without encouraging the worker to remain at home. There is often a second limit of two years total payments. After two years, no further disability would be paid even if the inability to work continued.
Short-Term Disability (
Short-term disability includes such things as sick leave. It is employer provided pay during a short period of illness or injury. The amount of employer-paid sick leave is seldom adequate for any long-term medical problem since it is designed for the occasional cold or flu.
There are policies that are called short-term disability coverage. These usually provide replacement income for short periods of time generally no longer than one year. Long-term disability benefits will not pay until all short-term benefits (including sick leave) have been exhausted.
Group short-term disability plans may have probationary periods following employment during which the worker establishes eligibility. Typically this period of time is three months or less, but a few plans eliminate the probationary period completely. Once the eligibility date is reached, the worker must be actively employed by the company in order to enroll.
Short-term
disability may be included as part of an employers major medical plan rather
than a separate entity. The actual amount of
While it is beneficial to have short-term disability benefits, it is the long-term disabilities that are especially harmful financially. Many long-term contracts are designed to begin after a short-term plan has expired. Unfortunately for many workers, long-term disability benefits are often made available only to higher-income workers, usually those on a salary rather than on an hourly rate. It is considered a benefit of being salaried and losing potential overtime pay. There is a reason for setting up long-term disability plans this way: lower-income earners may be covered by social insurance programs and also because insurer experience shows that lower-income and hourly employees as a group incur greater claim costs, so the risk is less desirable.
Long-Term Disability (
Like
Like individually written disability income policies, group plans may have a wide variance when it comes to elimination periods. Elimination periods may range from zero days to as long as a year, with options in between the two. A commonly selected elimination period is 180 days. While short-term disability plans may have one elimination period for sickness and a different one for injury, long-term contracts typically have the same elimination period for both.
Benefit periods are understandably longer for long-term disability income plans than they are for short-term disability income plans. Even so, the length of benefit in long-term disability plans can vary greatly. They may pay for as little time as two years or as long as lifetime (although some so-called lifetime plans still expire when the worker reaches and qualifies for retirement benefits).
When a long-term disability contract pays benefits for the insureds lifetime, insurers typically add additional restrictions. Some policies stipulate an upper age limitation on purchasing such a plan (the worker must be less than 40 years of age for example). There may also be a restriction as to the age at which the disability must begin (prior to age 50 for instance). Since advanced age may mean the arrival of adverse health conditions insurers do not want to issue policies to those who are at an age when disability is much more likely. When a worker who owns a lifetime disability income policy becomes disabled outside of the requirements, benefits then typically end at age 65.
For example:
Jacob has a lifetime disability income group insurance certificate that he purchased at age 40. His disability begins when he is 52. Since the disability materialized past the required age for lifetime benefits (age 50), his disability income will cease when he reaches age 65.
Insurance tends to be a discriminatory business, although such discrimination must be within legal guidelines. Employers and insurers may place restrictions on lifetime benefits, for example, but they must do so within the legal guidelines under the Age Discrimination in Employment Act. Under this law, it may be necessary to make required adjustments.
The amount of benefits received in disability income is traditionally expressed as percentages, but may have a dollar cap. For example, the policy may pay 50% of earned income, not to exceed $4,000 per month. Like short-term disability contracts, the percentages and dollar caps may vary by income level.
Some disability income policies will contain a rehabilitation benefit. It makes sense, from an insurance companys standpoint, to provide some way of returning the disabled person to work. Insurers have had success in achieving this through rehabilitation benefits, so the practice is spreading. While policies may vary, usually the disability policy pays a reduced benefit during a trial work period. In this way, the plan continues to pay income to the injured worker, but at a lesser rate. This allows the worker the time to find out if he or she can do the work before losing benefits entirely. While disability policies do not typically pay benefits where other income is available, this is an exception to that rule. Although the disability benefit is reduced, it still allows the worker to gradually return to work, which improves the chances that the individual will go back to work, rather than remaining disabled.
If the trial period is successful (the worker is able to do the job without affecting him or her physically) the DI benefits will eventually stop. On the other hand, if the worker finds they are not able to do the job due to their physical limitations, the disability income will return to its full payment without requiring a new elimination period.
Some policies will pay for rehabilitation benefits in the form of payments for vocational rehabilitation or medical rehabilitative services even though these benefits are not specifically listed in the policy. Insurers realize that returning an injured worker to the job is sound policy for them as well as the worker.
When a disabled worker takes a job that is not their original job, the pay may not be as much as they were previously earning. Since this could discourage a person from returning to work, some policies will pay what is called residual disability benefits. The insurer agrees to pay the difference in earnings between the two jobs in order to encourage the individual to return to the job market. The insurers goal is almost always to return the worker to the job market since that means benefits under the policy will either be reduced or cease entirely. Residual disability benefits may be called partial disability benefits in the policy.
Of course, not everyone needs disability insurance. It can be expensive for a good policy and unnecessary if lost income would not pose a problem. For example, a young adult that lives at home would lose income if they became disabled, but would still have a place to live and food to eat. If bills are minimal and there is an employer sponsored disability plan, that is likely to be the best option. Supplementing what the employer offers should only be necessary when lost income would greatly affect the worker.
Many people who made good decisions about life and health insurance do not even recognize the need for disability insurance. It is an area of insurance that has largely been overlooked (along with the need for long-term nursing home insurance). People seem to believe they will die with their boots on rather than suffer a lingering illness or injury.
According to Ernst & Youngs Personal Financial Planning Guide, third edition, an individual in their 30s or 40s has as much chance of being disabled as dying. While actual figures seem to depend upon who is providing them, it seems clear that the danger exists. The risk of disability does not drop significantly until an individual reaches his or her mid-fifties. Like many types of risk, it may be wise to transfer the risk of disability to an insurer.
Like other types of benefits, group disability is usually much less expensive than individually issued contracts. Coverage is basic (again, the point is not to provide an incentive for remaining at home). Group policies tend to be liberal in its definitions of disability for the first two years. After that, it is likely to be much more difficult to remain on the disability list. While the policy is likely to define disability as the inability to perform the workers own job, after two years it becomes much more restrictive. At this point, the definition of disability may change to the inability to perform any job. If the worker could be employed in any way, even if the employment was not his or her usual job, benefits are likely to cease.
It is true that group disability plans have limitations that can be avoided in individually issued contracts. Group plans are designed to promote a return to work and they usually cap out at specific dollar amounts per month. A highly paid worker would not likely be satisfied with the caps in the policy. Even so, the cost is usually affordable and the term of disability broad for the first two years.
Disability Terms:
As with all contracts, there are terms that an agent needs to know:
Benefit Period: This is the duration of the disability benefits. A longer benefit period will cost more than a shorter one. It does not necessarily coincide with the actual disability since it merely refers to the period of time for which benefits are payable.
Cost-of-Living Escalator: This is the same as Inflation Protections in long-term care policies. It allows the amount of benefit payment to rise in the desire to cover increases in the cost of living. The increase may not necessarily correspond with the actual increases in the costs of living, but it will offset the increase.
Presumptive Disability: A benefit that is paid on the presumption that a disability is imperative. This is typically used when a worker loses a limb or their eyesight. The elimination period is usually waived and disability benefits begin immediately.
Renewability and Non-cancelable: A guaranteed-renewable, non-cancelable policy cannot be canceled as long as premiums are paid in a timely manner. However, once the insured turns 65 years old, most policies will terminate; this provision will be stated in the contract.
Waiver of Premium: Some policies do not require continued premium payment once benefits become payable. Of course, this waiver only applies when benefits are payable under the policy. If benefits were denied, no waiver would apply. Since benefits may be no more than 60 percent of normal income, the ability to discontinue paying premiums can be very advantageous to the insured.
Benefit and Waiting Period
Although benefits were briefly discussed under long-term disability plans, it is worth taking a second look at them.
Workers do not usually receive payments from their disability the minute they cannot work. There is generally a waiting period that is selected at the time the policy is purchased. The waiting period is the time between the onset of disability and the first eligible benefit payment. Usually expressed as days not covered, the waiting period may be as short as seven days or as long as 180 days. This eliminates small claims and the employer administration that would go along with it. Also, the longer the waiting period, the lower the premium cost.
Disability benefits provided by employers can vary greatly. They may be as little as a few weeks or as long as lifetime (which will usually end at retirement age, not actually at the end of life as one might assume from the term). Any benefit that is two years or more is considered to be long-term disability. Anything less than two years is termed short-term disability.
Cost of Living Escalator
Cost of living increases or cost of living escalator is usually an option that is included in the disability policy for extra premium. Other forms of insurance may include this feature, primarily long-term nursing home policies (often called an inflation provision). Most escalator benefits are expressed as percentages, such as 5 percent. Under such a benefit, the amount purchased increases by a set percentage amount. For example:
Marilyn bought a disability policy that will pay her $100 per day if she is disabled. Her escalator benefit increases that amount by 5 percent per year or $5 per day. This means that the first year, her policy would pay her $100 per day. In the second policy year her benefit would be $105 per day and so forth.
Some contracts will cover a partial disability. A partial disability is one that keeps a person from performing one or more job-related duties. Benefits for partial disability are usually paid at the rate of one-half of those that would qualify for total disability, but not for more than a six month time period. Again, it is very important to review the definition of disability within the contract.
Renewable and Non-Cancelable Contracts
State laws will vary. Many states require by statute that insurance contracts meet certain renewable standards as long as premiums are paid in a timely manner. Of course, a policy will lapse if premiums are not paid when due. It is very important to realize the difference between renewable and non-cancelable. A guaranteed renewable policy allows only the insured to cancel (not the insurance company), but the insurer may increase the cost of the policy. Under a non-cancelable policy the contract must also be renewed if the insured wishes but there cannot be any increase in the premium amount. To recap:
Guaranteed Renewable:
Only the insured may cancel but premiums can increase if all contracts of the same class increase (they may not increase individually by insureds).
Non-cancelable:
Only the insured may cancel and premiums cannot increase.
Only disability policies usually use a non-cancelable option. Medical policies want the ability to raise premiums and would not use such a renewal option in the contract. Even disability policies tend to use other renewable options, unless required by state statutes. When an insurer does use a non-cancelable option, the definition of it is often mandated by state statute. It is commonly defined as: one in which the insured has the right to continue protection for a given period at a guaranteed premium rate. There is a point in time when the policy may not be renewed, but this would be stated in the policy and would be linked to exhaustion of benefits or retirement age.
Where state statute does not require policies to be renewable and non-cancelable, it is important to look for this feature in the policy contract. Policies that are cancelable allow the insurer the right to cancel the policy at any time (with a specified amount of warning given to the insured). Usually the insurer must mail a written notice of termination within a specified time period before doing so. In theory, this allows the insured time to find other coverage, but if age or health conditions have changed, a change in policy may mean much higher premium rates.
Guaranteed renewable contracts are the most commonly used. They guarantee the right of the insured to continue their policy as long as they are willing to pay the rates charged. Typically, this option is available up to a specified age, such as age 65. The insurer cannot refuse to renew a guaranteed renewable policy for any reason, except nonpayment of premiums. Some states mandate that such policies must be renewable for a specified time period, such as five years or provide a maximum benefit period, such as ten years. As always, it is important to know your states requirements.
Some types of policies, if state statute allows it, may be renewable at the option of the insurer. In other words, the policy is not actually canceled, but rather non-renewed at the policy anniversary date. In the optionally renewable type, the insurer may refuse to renew the contract, may increase premiums, or may add restrictions to the coverage. Usually contracts are renewed even if the insured has had claims or changes in their insurability.
Some types of
policies, again if allowed by state statute, may be conditionally renewable,
giving the insurer the right to refuse to renew the contract but only if
Under noncancellable policies only the insured has the right to terminate the contract. The insurer may not do so unless the policyowner fails to properly pay their premiums. Policy contracts may end however. Most disability policies have a length of life that is determined in the policy and selected at the time it was purchased. Nearly all disability policies end at the age of retirement, but many will end sooner than that if benefits are being received.
Benefit Coordination
Most disability
income plans do not cover occupational injury or sickness, only
non-occupational disabilities. Even so, benefits must be coordinated with
any other type of disability income that exists. This would include
workers compensation, Social Security, state cash sickness temporary benefits,
or any other government-sponsored benefit program. Where a sick pay plan
exists, often referred to as short-term disability, long-term disability would
typically begin when the
Waiver of Premium
Policies are written containing a clause that waives the premium payments after a disability has existed for a specified time period, often 90 days. A waiver of premium will only become effective if disability payments are due under the terms of the contract. Simply applying for disability payments will not be sufficient unless they are awarded. If premiums have been paid up to the time requirement, the policy cannot thereafter lapse during the disability period.
Marketing Disability Insurance to Employers
As an agent, it would be easy to advise our clients to provide as much disability as possible for their workers. An injured or ill worker certainly needs as much as he or she can obtain. However, we must recognize that the employers role is to employ. Therefore, it would be unwise to provide a level of disability benefits that encourage the worker to remain at home. The disability rule of thumb is to provide between 50 and 60 percent of income replacement. Not all businesses provide that much but whatever is provided is better than no benefits at all. Few employers provide more than that. Many offer such low amounts that workers must supplement it on their own to be adequately protected.
Disability is a market that could easily be expanded. Most companies have concentrated on health care benefits and may be unwilling to add another cost to what they are already paying. There is a way for employers to offer disability income coverage without increasing their costs: if such coverage were offered to the workers, many would purchase it even if they must pay 100 percent of the premium. The only cost to the employer would be that of payroll deduction and sending in the premium payment.
The employer may be willing to shoulder part or the entire premium cost once the program is presented. Group disability can be included with their existing health plan at minimal cost to the employer. Even if the employer is not willing to share in the premiums, the tax advantages to employees are important (no taxes paid on employee paid disability income).
Personal Finance for Dummies by Eric Tyson recommends that we only insure the big stuff and ignore the small risks. It is important to recognize that lost income can be big stuff. Consumer Education and Economics by Macmillan/McGraw states that people who become ill or injured (without disability coverage) lost more from their missed paychecks than they did from the cost of their medical bills (assuming their employer provided health care benefits). Therefore, agents will be playing a valuable role in our society if they recommend and implement group disability insurance.
Long-Term Nursing Care Insurance
As insurance products go, coverage for long-term nursing care is very new. It differs from disability insurance in that it does not provide income; instead it covers the cost of care provided outside of a hospital setting. It has only been within the last five to ten years that employers have even considered offering it as group coverage. Specifically, long-term care refers to services needed by individuals due to frailty, disability, or cognitive impairment such as Alzheimers disease. While long-term care is typically thought to be associated with older adults, increasing numbers of younger adults need long-term care assistance due to traumatic injury, neurological disease, or loss of function due to disease. Part of this increased use by younger people has to do with the inability to afford long-term hospitalization. Long-term care is associated with help needed to function from day to day. This would include help in getting in and out of bed or a chair, bathing, dressing, toileting, taking medications, or eating.
There is very little funding for long-term personal care. If a person has used up all their assets, they may qualify for financial help through Medicaid. Otherwise, most individuals are on his or her own financially.
Many people assume long-term care means care in a nursing home, but that has not been true for a long time. There are many types of long-term care performed in a variety of settings that do not include a nursing home or a hospital. Long-term care is seldom received in a hospital since the cost would be prohibitive.
Long-term care insurance works differently than other types of health insurance. A long-term care policy seldom pays all of the costs associated with long-term care. Most policies are set up to pay a specified amount per day of confinement or per type of care. Long-term care insurance usually is purchased years before the need for care becomes apparent. Premiums build up over the years to pay for quite large costs faced by the patient when illness or an injury finally requires this type of care.
The editor of Encore, The Wall Street Journals quarterly guide to retirement, Glenn Ruffenach, stated that group presentations for employees are often too basic. As a result, workers often do not fully understand what is offered and whether or not it would appropriately benefit them. While something may be better than nothing, workers often miss key elements that are offered or do not fully understand the benefits that may be offered, so fail to utilize them. Despite the shortcomings of group plan presentations, he states that premium rates are typically beneficial because they are lower than individually issued contracts. Additionally (and perhaps most importantly for older workers) group contracts typically do not require individual underwriting. Underwriting requirements for individually written contracts can be very strict.
According to Limra International, a research and consulting firm in Windsor, Connecticut, approximately 6,600 employers offer workers the chance to buy long-term care coverage, which is double the number just five years ago.
Glenn Ruffenach cites nursing home costs at $150 per day currently (though rates will vary according to the level of care required and the geographic location of care) and is estimated to reach $400 per day by 2025. For most types of insurance, costs in twenty years would not be an issue. That is not the case for this type of coverage since participants often do not use the benefits for twenty years or longer.
In general,
group plans offer two ways to keep pace with rising costs: an automatic benefit increase, called
The FPO gives
policyholders an option to buy extra coverage at selected intervals, usually
every two or three years. While automatic benefit increase (
Of course those with an FPO can decline to increase their coverage. The insured certainly is not required to increase their coverage. The problem, says Glenn Ruffenach, is that workers are likely to purchase the less expensive plan without realizing the importance of the difference between the two options. He says that when the two options exist, about 70% to 80% of consumers are choosing the less expensive FPO; he believes these workers do not realize what they are passing up.
How Costs Are Covered
Long-term care policies are not necessarily designed to pay all costs, although some types of policies, such as integrated plans, may come close to doing so. Generally, policyholders plan on some out-of-pocket costs and their medical plan may pay for some items associated with long-term care needs.
Long-term care insurance contracts can be very difficult for the layperson to read and understand. They deal with elimination periods (a deductible expressed as days not covered), terms that many people would not be familiar with, benefit periods, maximum benefit periods, renewable benefits, waivers of premium, plus many other elements.
When underwriting a long-term care policy, insurers look carefully at potential health problems that would cause a long-term care need. Of course, simple frailty caused by age is considered likely by the time a person reaches their eighties. Because care is likely to be needed by that age, companies set prices based on assumptions about how many years they are statistically likely to collect premiums before care is needed. Those who wait until later ages to consider long-term care insurance may have difficulty obtaining a product that is affordable. Additionally as costs rise for receiving such care, premiums rise to keep pace.
Individual policies allow the purchaser to make all decisions regarding policy benefits, but group plans may limit choices since the business rather than the employees own the policy. Even so, group long-term care plans are likely to be an advantage for the participant since prices are probably less than individually issued contracts.
Companies who have offered long-term care group plans report little interest from their workers. Another issue relates to adverse selection because younger workers are seldom interested, whereas older workers nearing retirement are likely to be. With other types of group policies a diverse group of participants automatically occurs since the benefits apply to all workers. With group long-term care contracts younger employees may not see a benefit for themselves since they are statistically far less likely to need such coverage until they reach retirement age. The employer seldom pays the premiums for long-term care group plans. Instead the employer merely makes it available for those workers who wish to participate (paying the full cost themselves).
The odds of needing long-term care services are surprisingly high as we age. While changing medical technology and health promotion have lessened the rate of disability over the past twenty years, it is unclear how long-term care needs will affect the future (especially the government and its taxpayers who may end up paying much of these costs).
The most authoritative study looked at 1980s data. Kemper and Murtaugh conducted this study in 1991. It found that 22 percent of 65-year-old men and 41 percent of 65-year-old women can expect to need nursing home care for more than three months. Fourteen percent of men and 31 percent of women can expect to have a nursing home stay that lasts longer than one year. Only 4 percent of men were likely to be in a nursing home longer than five years, but 13 percent of women can expect to experience a stay lasting that long.
It is important to note that these figures only apply to a nursing home confinement. They do not apply to the thousands of men and women who receive care at home or in outpatient facilities. When we figure in the amount of people who use assisted living facilities, home care agencies, or are cared for by their spouse, the numbers receiving care become very large.
For the agent considering the long-term care market, he or she must first be aware that many states require specialized continuing education prior to doing so. This is true whether you anticipate marketing group plans or individual plans. Consult with your states insurance department to see if your state has specific education requirements.
Since long-term care insurance benefits are expensive to purchase, any group plan is likely to offer a reduced cost, even if the employee must pay 100 percent of the cost. Of course, not everyone may need this protection. Those that may not need this type of insurance include:
1. Individuals without assets or with few assets. Depending upon the quoting source, few assets could be considered less than $40,000 or the cost of nursing home care for one year, which does vary by geographical location.
2. Individuals who are already disabled or who have serious health problems that would disqualify them from purchasing a long-term care insurance policy. The insurers do not take long-term care underwriting lightly since the benefits provided are great.
3. Individuals who may not be able to afford the premiums for several years (perhaps as many as twenty years).
State Statutes On Long-Term Care Group Insurance
All states regulate insurance products sold within their state. They also regulate specific products, such as long-term care products. It is important to realize that long-term care insurance is not specific to nursing home care.
While states will vary on their regulation, all follow a basic pattern. Most regulation specifies policy language in an attempt to standardize policies as a consumer protection measure. Most require some form of basis for continuation of coverage. Also called conversion clauses, this means a policy provision must exist allowing coverage to continue under the existing group policy when such coverage might otherwise terminate, subject only to the continued timely payment of premiums. Group long-term care policies that contain incentives to use certain providers or facilities or provide a restricted list of providers and facilities may be required to provide continuation of benefits that are substantially equivalent to the benefits of the existing group policy. Why would the policy restrict providers of the medical service? The most likely reason would be an affiliation with a managed care group that contracts with or owns their own services, including nursing homes.
What would the basis for conversion be? While there may be some variances, typically it means a policy provision that requires an enrollee whose coverage under the group policy would otherwise terminate (or has already been terminated) for any reason be entitled to the issuance of a converted policy by the same insurer that provided the group coverage. There is likely to be some time requirements involved, such as continuous coverage under the group policy for no less than six months. The continuous coverage is an important point. A worker who has had intermittent coverage may not qualify. That could be the case for seasonal workers, for example, that cannot afford to continue the coverage during periods of unemployment (when they would pay the full cost themselves). When conversion coverage is issued, generally there is no underwriting requirement. In other words, the person does not have to prove his or her insurability.
A converted policy provides the enrollee in a long-term care insurance group plan the same coverage that existed under the group policy. The insurer generally may not reduce benefits unless the enrollee chooses that option in order to reduce his or her premium.
Coverage must continue uninterrupted when a conversion takes place. In order to accomplish this, there may be time requirements during which the worker must apply for the conversion in order to avoid underwriting. Usually the time requirement imposed is 31 days after termination of coverage under the group policy or 31 days after the date notification of conversion rights is mailed to the certificate holder. Remember that employees do not own the policy; it is owned by the purchaser (employer) so employees have a certificate rather than a policy. The converted policy must then be issued effective on the day following the termination of coverage under the group policy.
Once a policy is converted, the insured must pay their own premiums, although few employers pay the premiums on long-term care benefits even during employment. What usually happens is that the amount of premium paid increases after conversion because the enrollee is no longer part of the group, so no longer receiving the group rate. The premium for the conversion may be calculated on the basis of the insureds age at the inception of the coverage under the group policy. If it is calculated at the point of conversion this will certainly affect the rate of premium charged, so it is best to have it calculated from the date of group participation (when the enrollee was younger). If the company did not continuously use the same insurer it is possible that the premium will be calculated from the date the most recent group coverage took effect. This is not as good as using the date of the first insurer, but it is better than using the date of termination.
For Example:
Pete Yamamoto signed up for his companys group long-term care coverage in June of 1995 when he was 50 years old. His premium was $100 per month, but his benefits were generous. In 2002, due to rising premium costs, his company changed insurers. Pete was now 57 years old. When Pete retired at age 62, his conversion premium was based on his age of 57 when the second company took over the group plan rather than his original age of 50. Had it been based on his earliest age his conversion rate would have been lower because he was younger.
In most cases, it is mandatory to offer conversion coverage. There are exceptions, however. If termination of the workers group coverage resulted from the individuals failure to make required payments of premiums in a timely manner, then conversion is not mandatory. It also would not be mandatory if the group plan was replaced within a specified time period (usually 31 days) by another group plan, as was done for Pete in 2002. The benefits must typically be as good or better than the original group plan. If they are not, then Pete may be able to obtain a conversion policy from the first insurer.
Premiums
Probably all long-term care policies are written with the insurers ability to increase the cost. However, they may not increase based on individual policyholders or certificate holders. When rates increase, they must increase for all that are in the same class. Some states do not allow premiums to increase in individual policies based on attained age (growing older). Most states now require that policy premiums be based on the age at policy issue. However, this may not be true of life insurance policies that contain a long-term nursing home clause (benefit).
Long-Term Care Benefits
The benefits provided in the policy will be based on the choices of the purchaser, which would be the employer or trustees of a group plan. Like all types of group policies, the group may not be formed primarily to achieve group insurance status, savings, or medical eligibility. The group must have been formed for some other purpose, and pursue that other purpose.
Many states have minimum standards for long-term care policies. If this is the case, these minimum standards will include such things as types of benefits, prohibited exclusions, and marketing requirements. There may also be requirements regarding the inclusion of assisted living or community-based services. If home health care is included in the policy, there will also be requirements pertaining to those benefits. At one time home care benefits were so severely limited by insurers that they carried little value. That is no longer true today, since states have focused on these policies, eliminating many of the restrictions.
Long-term care policies offer inflation protection. The increase usually must be at least 5 percent compounded annually. Some states may allow either a simple percentage increase or compound percentage increase with the subscriber choosing one or the other at the time of purchase. Many states do not allow the simple percentage increase since it is less effective at keeping up with inflation. What is the difference between the two? A compound increase uses the previous years total amount when increasing the benefit. A simple increase always uses the original benefit purchased (does not take into consideration previous years inflation increases).
Simple Increase (5%) Compound Increase (5%)
First Year Benefit: $100 First Year Benefit: $100
Second Year Benefit: $105 Second Year Benefit: $105
Third Year Benefit: $110 Third Year Benefit: $110.25
Fourth Year Benefit: $115 Fourth Year Benefit: $115.76
Fifth Year Benefit: $120 Fifth Year Benefit: 121.54
Since many people hold a long-term care policy for twenty years or more, significant differences will eventually exist between simple and compound inflation protections. Many states mandate that inflation increases must be no less than five percent and that is the most commonly seen percentage in policies.
Since certificate holders (employees or organization members) do not own the policy, they do not have many of the choices that a person applying for an individual policy would have. Many states do not therefore provide the same requirements of group policies that are applied to individual policies. The states will require that mandated options must be available to the purchaser (employer or group trustees) who will make selections that are then available to the certificate holders.
Outlines of coverage or some other mandated form that describes the group plan must be provided for all who enroll so that workers may understand what they are buying through the group. Outlines of coverage tend to be state mandated for uniformity. Even the font size may be specified by the state regulating authorities. It will include specific statements (THIS IS NOT MEDICARE SUPPLEMENT COVERAGE); the duration of the benefits, which may be expressed as days covered or a total dollar amount of coverage; covered services such as the nursing home, home care services, or assisted living benefits; exclusions (This policy does not cover unlicensed providers or care provided by family members); additional benefits that were selected by the policyowner; and anything else that pertains to the contract.
Many states are now requiring that a Shoppers Guide also be provided which is in a format developed by the National Association of Insurance Commissioners. It is designed to help the certificate holder or policyholder to understand the options that are available to them.
In the last few years the long-term care industry has developed many policy terms that are unique to this type of contract, such as assisted living and assisted living facilities, adult day care, adult medical day care, asset qualification, and many other terms. Many of these terms are state defined. It is important for a selling agent to be aware of the terms and the definitions under their state laws.
Activities of Daily Living
The defined quantities of activities are different for federal non-taxable long-term care policies than for state taxable forms. While federal forms offer a premium deduction on federal taxes, it would only apply to those who itemize and meet all requirements. Activities of daily living include:
1. Eating
2. Transferring in or out of a bed, chair or wheelchair
3. Dressing
4. Bathing
5. Toileting or continence
Many also include ambulance as an activity of daily living. Ambulation is often the first activity to be lost as a person becomes frail so the lack of that activity in the federally mandated long-term care programs is an important omission. A policy that receives favorable tax status is one that meets federal standards of HIPAA 1996, including clearly disclosing in the policy and in the outline of coverage that such policies are intended to be a long-term care insurance contract eligible for favorable tax status under Section 7702B of Chapter 79 of the Internal revenue Code of 1986.
Asset Protection
It is often assumed that as a person ages he or she can merely transfer his or her assets to children or grandchildren in order to be Medicaid qualified (covered by the government for care). This is seldom as easy as it might sound. There are look-back periods for asset transfer so if this is the avenue one selects it must be accomplished prior to the actual need for care. If it is not completed far enough in advance, then Medicaid benefits will be denied on the basis of an illegal asset transfer.
It is possible to protect ones assets without transferring them if the individual lives in a state that provides for asset disregard. Asset disregard means the total equity value of personal property, assets, and resources not exempt under Medicaid regulations may be disregarded if the person has purchased a Partnership Long-Term care policy from one of the very few states that offer them. If this is the case, there is either dollar-for-dollar asset disregard or total asset disregard. Dollar-for-dollar asset disregard means the amount of the disregard is equal to the sum of qualifying insurance benefit payments made on behalf of the qualified insured. Total asset disregard means the amount of the disregard is equal to the total sum of assets owned by the qualified insured person once the qualified insured has exhausted all qualifying insurance benefits.
Integrated Long-Term Care Policies
Traditionally long-term care policies have been indemnity plans paying a specified amount per day for the care of those who qualified under the insurance contract. Now there is another way to receive benefits under a long-term care contract called Integrated Policies. An integrated policy refers to any qualified long-term care insurance policy or certificate that provides coverage for both long-term care facilities, such as a nursing home, home care, and community care services. The insured has great latitude in how they choose to use the available funds since it is not based on a per day benefit. In effect, it provides a pool of money that may be spent in any manner as long as the type of care qualifies under the terms of the policy.
Many states are mandating how integrated benefits must be delivered. There may be a requirement regarding the minimum amount of the dollar pool (the equivalent of a years nursing home care, for example). It may require equality in how nursing home and home health care benefits are delivered. A case management agency may also be required to monitor how funds are spent. Again, it is important for each agent to be aware of their states requirements.
Assisted Living Benefits
We are constantly finding newer and better ways of dealing with ill, frail, or injured people. One such method is the use of assisted living facilities (which may also be called residential care) for those who are not frail or sick enough to need a nursing home, but who do require regular supervision. These facilities provide care 24-hours per day and other services sufficient to support the needs of people resulting from an inability to perform the activities of daily living or due to a cognitive impairment. Those with cognitive impairments can often perform all the daily functions of life but require supervision to prevent harm to themselves or others.
These facilities have trained personnel on staff at all times to provide or supervise care of the residents. Meals are provided in a common dining room. At least two meals are provided (lunch and dinner) with most providing all three meals. Some states mandate that they must include all three meals.
Assisted living facilities generally provide each resident with an apartment-like setting, featuring such things as a living room, bedroom, bathroom, and kitchenette. Often the residents bring their own furniture, pictures, and other personal items to personalize their living areas. Some assisted living may provide only a bedroom and bathroom; of course cost of care will depend upon the living quarters provided and the level of care received.
Many states are now mandating that policies must offer the option of assisted living care. Some policies will make the feature part of the master contract while others may require additional premium to include this feature.
Marketing Group Plans
At this point, there are very few group issued long-term care polices but individually purchased plans have dramatically risen. For employers who are struggling with the cost of offering health insurance benefits for hospitalization and routine medical care, it is unlikely that there would be any incentive for them to pay any part of the cost for their employees. While medical insurance may provide a better, healthier worker, long-term care coverage seems more of a benefit for retired workers. Essentially, this is correct. As a result, few employers or organizations have offered group contracts for long-term care benefits. It is likely, however, to gain interest as time goes by and the need for such benefits become a negotiating tool between employees and their employers.
Thank you,
United Insurance Educators, Inc.
End of Chapter Seven
[1] Insure Insurance Resources Group Health Insurance tips and Resources
[2] Overview History Archives: Timeline Gallery Copyright 2005
[3]
[4]
Centers for Medicare and Medicaid Services Key Milestones in
[5] MCOL Managed Care Fact Sheets
[6] MCOL Managed Care Fact Sheets
[7] By Doctor Rich Your Doctor in the Family.com, Copyright 2000
[8] Public Agenda, 2005
[9] 2005 Public Agenda publication
[10] Capitation: The act of assessing risk by the individuals enrolled in the medical plan
[11] Paving the Pathway to Managed Care Medicine, 2005
[12] Centers for Medicare and Medicaid Services