1. SCOPE OF SYNOPSIS

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1 INDUSTRY SYNOPSIS: SIC 6325 ACCIDENT, HEALTH, AND MEDICAL INSURANCE CARRIERS A. INDUSTRY DEFINITION: 1. SCOPE OF SYNOPSIS For purposes of this study, SIC 6321 and SIC 6324 have been combined into SIC 6325, Accident, Health, and Medical Insurance Carriers. The 1987 Standard Industrial Classification Manual defines SIC 6321, Accident and Health Insurance, as establishments primarily engaged in underwriting accident and health insurance. Establishments that provide health insurance protection for disability income losses and medical expense coverage on an indemnity basis are also included in SIC Although there are few exceptions, most of the products included in this industry are considered to be non-comprehensive, indemnity products. Indemnity is defined as a benefit paid by an insurance company for an insured loss. In the case of a traditional indemnity health plan, this includes payment to the health care provider for each service rendered (fee-for-service), a maximum dollar amount of benefits provided (benefit ceiling), and a limited amount of covered services (non-comprehensive). These insurance providers may be owned by stockholders, policyholders, or other insurance carriers. Establishments included in this industry are the following: Accident and Health Insurance Assessment Associations, Accident and Health Insurance Disability Health Insurance Fraternal Accident and Health Insurance Organizations Health Insurance, Indemnity Plans: except Medical Service Plans Insurance Carriers, Accident Insurance Carriers, Health Mutual Accident Associations Reciprocal Inter-insurance Exchanges Accident and Health Insurance Reinsurance Carriers, Accident and Health Sick Benefit Associations, Mutual According to the SIC Manual, establishments primarily engaged in providing hospital, medical, and other health services in accordance with prearranged agreements or service plans are classified under SIC 6324, Hospital and Medical Service Plans. Medical Service Plans are defined as service plans that provide benefits to subscribers or members in return for specified subscription charges plus additional charges for services rendered, if applicable. Participating hospitals or physicians provide the covered services to members while charging minimal additional fees, in any. In some cases, the plans may include a partial indemnity and service benefits component. All fee-for-service medical service plans included in this industry are considered to be managed indemnity products. They are not pure indemnity products. In addition, they are all prepaid health plans (medical service plans). Also included in this industry are separate establishments of health

2 maintenance organizations that provide medical insurance. Establishments classified in SIC 6324 include the following: Dental Insurance (providing services Hospital and Medical Service Plans by contracts with health facilities) Medical Service Plans Group Hospitalization Plans Basically, the distinction between SIC 6321 and SIC 6324 is the method of reimbursement. The two industries essentially produce the same product, coverage against a loss incurred as a result of accident or illness. The distinction is becoming more blurred as many commercial insurers in SIC 6321 have begun offering HMO or other similar managed care products that typically fall under SIC Thus, with the implementation of the North American Industrial Classification System (NAICS), the Accident and Health Insurance industry and the Hospital and Medical Service Plan industry will be combined into the Direct Health and Medical Insurance Carriers industry (NAICS ). Disability Income Insurance Carriers (NAICS ), Other Insurance Funds (NAICS ) and Reinsurance Carriers (NAICS ) will not be included in NAICS Therefore, the following types of establishments will most likely be included in this industry: Accident and Health Insurance Assessment Associations, Accident and Health Insurance Dental Insurance (providing services by by contracts with health facilities) Fraternal Accident and Health Insurance Organizations Group Hospitalization Plans Hospital and Medical Service Plans Insurance Carriers, Accident Insurance Carriers, Health Medical Service Plans Mutual Accident Associations Sick Benefit Associations, Mutual NAICS , does not include HMO s that provide services at their own facilities or through physicians employed directly by the HMO. Primary Output The primary output of SIC 6325 is risk protection and financial intermediation. Financial intermediation is the service of managing someone else s money generally with the goal of increasing its value. In order to assume the risk against a premature death, life insurance companies charge a premium which is insufficient to cover claims payments. Therefore, companies invest their premiums using the interest income generated to offset their lower premium rates in order to pay a death benefit to the beneficiary upon the death of the policyholder. Classification of Establishments Individuals may purchase health insurance from commercial insurers (stock or mutual companies), government agencies, associations such as Blue Cross and Blue Shield, fraternal organizations, assessment associations, high-risk state pools, and some employers who self insure. The most common types of accident and health insurance companies are commercial companies, which include stock companies and mutual companies. A stock company is a corporation, which is owned by stockholders. Most stock companies provide non-participating policies. That is, policyholders are not affected by any profits or losses of the company. A mutual company is a corporation, but it has no stockholders. Instead, it is owned by the policyholders themselves. Tax-free dividends are paid to policyholders essentially as reimbursement for the overpayment of 2

3 premiums. Commercial insurers are beginning to offer group health insurance only, although individual plans are still available from most. Due to the rise of managed care, many commercial insurers have begun offering HMO and PPO plans in addition to the traditional fee-for-service indemnity type policy. The federal government provides health insurance to many individuals through Medicare, the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS), and the Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA). All of these government sponsored health insurance plans that are not paid through a private insurance company are considered to be out of scope. Except for Medicare Part B, these programs provided by the federal government do not require monthly premium payments for those who qualify. Private fee-for-service plans (PFFS), and Medicare HMO s and Medicaid HMO s can replace traditional Medicare Part s A & B and may sometimes require a small premium to be paid by the member as well. The federal government provides funding in order to assist the state governments in providing health care coverage for the poor. This program is called Medicaid. As with the majority of federal programs, premiums are not required by participants. However, some states allow people to buy into the Medicaid program. One example is the Arizona Medicaid program. The federal government insures approximately 74 million Americans through Medicare and Medicaid. This represents almost one third of the population of the United States. Medicaid and Medicare Parts A & B are considered to be out of scope as well. Blue Cross and Blue Shield, commonly referred to as The Blue s, are currently non-profit community health service corporations that contract with hospitals, physicians, and other health care providers to provide prepaid health care to subscribers. Blue Cross and Blue Shield are separate companies that usually share office space and have joint enrollment and billing. Blue Cross began as a hospital insurance provider only. Blue Shield began as a medical service and surgical provider. Today, Blue Cross/Blue Shield offers comprehensive health care policies. There is a national Blue Cross and Blue Shield Association in Chicago that coordinates the sixty local Blue Cross plans and sixty-five Blue Shield plans. The majority of Blue Cross and Blue Shield s subscribers are in group plans, although individual plans are available. Unlike traditional commercial insurers, the Blues traditionally offer service benefits and first dollar coverage. The insured pays monthly premiums and does not have to pay additional charges for most medical services covered by the plan. Today, many of the Blues companies offer HMO and PPO plans. Also, some Blues are attempting to become for profit companies and model commercial insurers. Blue Cross and Blue Shield plans collectively insure approximately 68 million people. This represents one fourth of the total population of the United States. Fraternal Organizations are incorporated societies, which are formed solely for the benefit of their members and their beneficiaries. In the past, many fraternal organizations offered health insurance to their members through a self-funded plan. Today, many organizations negotiate special rates for their members through commercial insurers or other health plans. In this case, the fraternal organization would not be considered the health insurance provider. Assessment companies offer insurance to members of a fraternal organization as well as the general public. Like mutual companies, assessment companies offer dividends to their policyholders. However, these companies may also charge an additional premium or assessment. Another source of health coverage is a high-risk state pool. As of 1997, seventeen states had a high-risk pool. These risk pools offer guaranteed availability of health insurance to all individuals

4 regardless of their health. The pools are created for those who were denied health care coverage by commercial insurers due to a preexisting condition, those who have coverage at a high cost, or those who have coverage with severe limitations built into the policy. Although each state may have different rules governing its pool, the design of the pool is similar. In most cases, an association of all entities providing health insurance in the state, excluding large corporations that are self-insured, is created to offer insurance. One member of the association administers the plan under the guidelines for benefits, premiums, deductibles, and other matters as outlined in the state s law. Residents that meet the eligibility requirements are able to purchase insurance from the plan. The states that currently have high risk pools are California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Louisiana, Maine, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, and Wyoming. Since these high-risk state pools are state subsidized, they are considered to be out of scope. Today, many corporations are providing health insurance benefits directly to their employees through a self-insured fund. Corporations providing insurance to their employees through this mechanism are not bound by the same regulation as commercial insurers and other providers. Self-insured plans are governed by ERISA (Employee Retirement Income Security Act). This type of insurance is out of scope for PPI but will be collected for CPI. However, the fees received by an insurance company for administering claims for these policies are in scope for PPI. Other SIC s Possibly Confused with SIC s 6321 and 6324 (NAIC ): SIC 6311 Life Insurance Establishments primarily engaged in underwriting life insurance. Half of these establishments also provide health insurance. SIC 6331 Fire, Marine, and Casualty Insurance (Property and Casualty Insurance) Establishments primarily engaged in underwriting fire, marine, and casualty insurance. SIC 6371 Pensions, Health, and Welfare Funds Establishments primarily engaged in managing pension, retirement, health, and welfare funds. SIC 6399 Insurance Carriers, Not Elsewhere Classified Establishments primarily engaged in underwriting insurance, not elsewhere classified, such as insuring bank deposits and shares in savings and loan associations. **NOTE** Many health insurance companies provide life insurance and property and casualty insurance. Typically, there are separate departments with separate records for each service. Each department is to be considered a separate PMC. B. CONTEXTUAL OVERVIEW In 1992, total revenue of SIC 6321 was much lower than that of SIC Total revenue for SIC 6321 was $23 billion compared with $124 billion for SIC Revenues for both of these industries should increase as health care costs continue to rise and the population increases. In addition, the trend in federal legislation has been to require employers to offer policies providing 4

5 more coverage for longer periods of time, even after an employee is laid off. If legislation and medical inflation cause health insurance premiums to be so high that many more people will no longer be able to afford coverage, future revenue may decrease in this industry. Approximately 72% of households owned health insurance in Nearly 88% of all Americans had some form of coverage. As long as health care costs do not rise significantly, the number of those who own some form of health insurance coverage should continue to rise. HMO s have enabled many to afford health insurance coverage by offering more coverage, less options, and containing health care costs in general. In fact, most of the growth in this industry will be fueled by HMO policies. The difference between managed care (HMO s, PPO s, etc.) and fee-for-service products will be discussed in Types of Services and Estimated Value of Output. Currently, 80% of all Medicare recipients own supplemental or Medigap policies. As the population ages, more of these policies will be sold. In addition, more long-term care and disability policies will be sold. The following chart shows 1996 indemnity and managed care enrollment in the private, Medicaid and Medicare markets: Indemnity & Managed Care Enrollment Enrollment in Millions Private Indemnity Private Managed Care 34 Medicare Indemnity 4 Medicare Managed Care Medicaid Indemnity Medicaid Managed Care Type of Plan This chart shows the difference between managed care and indemnity plan enrollment in the private and public sectors of the accident and health insurance industry. Sixtyeight percent of people enrolled in a private health plan, are members of a managed care plan. The remaining 32% own an indemnity plan. Conversely, 24% of people enrolled in either Medicare or Medicaid were enrolled in some type of managed care plan. Seventy-six percent of people enrolled in a government subsidized health plan were enrolled in an indemnity plan. The number of people enrolled in managed care plans has been steadily increasing in recent years. This number is expected to increase even more as more Medicare and Medicaid members make the transition from traditional indemnity to managed care plans. The anticipated growth in the managed care market will most likely be at the expense of the indemnity market. The federal government already pays a large portion of the total cost of individual health care in America. It should also be noted that 29%, or 70 million, of all Americans are enrolled in some type of federal government subsidized health insurance program, namely Medicare and Medicaid

6 As the population ages, this percentage and number is likely to increase. In addition, a severe recession may cause many more people to be eligible for Medicaid. 2. INDUSTRY OVERVIEW A. NUMBER OF ESTABLISHMENTS AND COMPANIES According to the 1992 Census, there were 1,846 establishments in SIC The number of establishments has been steadily decreasing as mergers and acquisitions continue to occur in these industries. As competition increases, the need to be large enough to offer substantial cost savings to the consumer becomes more important. Approximately 96% of these companies were stock companies. The remaining establishments were mutual companies or non-profit corporations. In 1992, there were at least two companies domiciled in every state, including the District of Columbia. B. SIZE AND TYPE OF PRODUCTION BY SIZE The smaller health insurance companies generally solicit business in a very specific geographic area, near their respective headquarters. Larger companies tend to provide insurance nationwide or in multiple regions. However, the size of the company does not dictate the variety of health insurance products offered. C. MAJOR SERVICE PROVIDERS AND CONCENTRATION RATIOS The tables below provide a list of the top ten companies ranked by their assets for accident and health and medical service plan companies. In addition, the tables below give market share data. ACCIDENT AND HEALTH INSURANCE Company Total Assets Market Share (in billions) 1. Prudential % 2. Lincoln National Corporation % 3. Cigna Corporation % 4. Connecticut General Life % 5. Northwestern Mutual Life % 6. Mass Mutual Life % 7. Principal Mutual % 9. Liberty Mutual % 10. Aetna % Source: The Information Access Company (IAC),

7 MEDICAL SERVICE PLANS Company Total Assets Market Share (in billions) 1. Aetna % 2. Hartford Life % 3. Kaiser % 4. Group Health Coop of Puget Sound % 5. Pacificare % 6. Standard Insurance Company % 7. Foundation Health % 8. Wellpoint Health Networks % 9. Blue Cross/Blue Shield of MI % 10.Blue Cross/Blue Shield, FL % Source: Information Access Company, 1997 The following concentration ratios show the percentage of assets for the top 4, 8, 20, and 50 firms in each industry: Accident & Health Medical Service Plans Top 4 Firms 18% Top 4 Firms 15% Top 8 Firms 28% Top 8 Firms 22% Top 20 Firms 46% Top 20 Firms 41% Top 50 Firms 71% Top 50 Firms 65% Source: Information Access Company, 1997 D. STABILITY OF THE INDUSTRY Health insurance is a growing industry. As long as the population continues to grow and age, there will be an increasing need for health, long-term care, and disability insurance. Health insurance especially, is considered to be a necessity. However, the number of uninsured increased from 1996 to 1997 and is expected to increase even more in the future. Today, 16.1%, or 40 million of all Americans are uninsured. This is equal to one in six Americans. In addition, 15% of American children are uninsured. The decrease in the number of people on Medicaid, medical inflation, and the increase in the percentage of workers working for small companies that do not offer health insurance are partly responsible for this increase. Medical inflation has been contained recently. However, it could cause major problems in the future if it becomes uncontrollable. Even if health care costs continue to rise, causing premiums to rise, the extra revenue collected from those insured will most likely exceed the loss of revenue from those who

8 will no longer be able to afford coverage. Therefore, the outlook for revenue growth is still positive. Most small companies are able to compete with large companies through regional specialization. There are decreased costs associated with operating locally. In addition, many small firms exhibiting regional domination usually merge with or become acquired by a larger firm. Many of the companies formed more than fifty years ago are still in existence today. E. GEOGRAPHIC DISPERSION Geographic dispersion in these industries tends to be fairly even. However, the highest concentration of these companies tends to be in the South and Northeast. The geographic breakdown is given in the table below. REGION % OF COMPANIES West 18% South 29% Midwest 23% Northeast 27% Source: AM Best, F. SAMPLE INFORMATION The sample design was developed with an attempt to meet the needs of both PPI and CPI. For PPI we require a nationwide sample of companies sampled systematically with probability proportional to a measure of size. We also require that items be selected from these companies so that all of our product categories are publishable. The requirements from CPI include that all 87 of their primary sample units (PSU) are covered. The PSUs will be covered by sampling in the states in which the PSUs are located. A. SERVICE DELIVERY PROCESS 3. PRODUCTION INFORMATION The primary service of the health insurance industries, as in all insurance industries, is the protection from the risk of a potential loss as well as some degree of financial intermediation.. The main risk is the potential expense and/or income loss associated with either an accident or an illness. Policies included in SIC 6321 or SIC 6324 are promises to pay medical expenses and/or an income loss associated with an illness. In addition, a policy may cover an income loss resulting from a serious accident and subsequent disability. In order to provide this service, accident and health insurance companies are involved in rate determination, underwriting, marketing, and financial activities. 8

9 Rate Determination: Accident and health insurance policies are priced with the intention of covering all of the related costs associated with conducting business in addition to attaining a certain desired level of profit. Administrative and overhead costs are fairly easy to project. Claims costs are the most significant component of the premium rate. The costs associated with claims are directly related to health care costs in general. If hospital costs increase, claims costs will most likely increase. Thus, premiums will have to be increased in order to attain the same previous level of profit, provided everything else is constant. In addition, insurance companies are required to maintain a certain percentage of premiums as claims reserves. These reserves are used to fund claims, which are made at a later date. This cost is essentially a claims cost as well. Underwriting: Through underwriting, an insurer determines whether or not a potential client is a good risk. In addition, the rate a prospective client is ultimately charged is determined through underwriting. Basically, the underwriter uses various demographic statistics in order to determine the degree of risk and the premium rate. Age, gender, race, geographic location, occupation, marital status, and medical history are all examples of demographic statistics underwriters use to determine the degree of risk of a potential client. Less underwriting is needed for group policies than individual policies. The risk associated with an individual is greater than the risk associated with a group. Therefore, medical history is more likely to be a major consideration in the underwriting process for an individual versus a group. In fact, very little underwriting is necessary for large groups. For small groups, the medical histories and ages of potential group members may be more scrutinized during the underwriting process. Distribution: Since all forms of health insurance companies create similar products in the same way, it is important to mention how these products are distributed. Product distribution is a differentiating factor in the accident and health insurance industry. Agency System: Some agents operate independently, while others operated in company owned field offices. This is the main distribution method use by insurance companies to market their products. Long-term care, accident and disability products are most often sold through independent agents, whereas health insurance is most often sold through company employed field agents. Direct Response Distribution: Through this method, companies make their products available to consumers via television, magazine, telemarketing, and radio advertising. This method is not used very often. Financing: Insurance companies are involved in many investment activities. By investing in various types of high yield investments, insurance companies are able to avoid substantial premium costs and still be able to fund future claims costs and other expenses. However, this is less of a factor in the

10 accident and health insurance industry than it is in the life insurance industry. The main reason being that accident and health insurance companies receive claims almost instantaneously whereas life insurance companies usually do not receive claims until many years after the policy is initiated. In addition, claims costs are the most significant portion of the premium rate in the accident and health insurance industry. Thus, accident and health insurance companies have less money to invest and less time in which to invest it. B. TYPES OF SERVICES AND ESTIMATED VALUE OF OUTPUT The health insurance industries provide coverage against a loss incurred as a result of an accident or illness. This coverage is provided through health and medical insurance plans. These insurance plans can take on many different forms. The following pages describe the major service lines of this combined industry. The table below shows the value of receipts for each major service line within SIC 6325 and the percentage of total industry revenue that each service line represents. In addition, primary and other services are presented. Service Value of Shipments Percent (in 1000) Accident, Health, and Medical Insurance % Medical Service Plans % Group medical service plans % Managed care medical service plans % Fee-for-service medical service plans % Individual medical service plans % Dental service plans (stand alone) % Supplemental Medicare service plans % Other medical service plans % Accident and health insurance % Disability % Long term care % Hospital indemnity % Specified disease % Accidental death & dismemberment % Third-party administrative services % MEDICAL SERVICE PLANS The primary types of medical service plans include managed care, fee-for-service dental, and supplemental Medicare policies. Dental and supplemental Medicare policies can be offered as fee-for-service or managed care products as well. Both fee-for-service and managed care medical service plans are comprehensive plans with unlimited benefits. The fee-for-service plans are managed indemnity products. These plans are comprehensive, have unlimited benefits and have some form of utilization review in order to contain costs. 10

11 It should be noted that group business accounts for a much larger percentage of total industry revenue than individual business. Group business represents 85% of total industry revenue. For both health insurance and dental insurance, 90% of all policies sold are group policies. However, only ten percent of supplemental Medicare policies are group policies. The table below lists the various types of managed care medical service plans available to the consumer. In addition, fee-for-service medical service plans and dental medical service plans sold separately are included in the table. This table will be discussed in the next few pages. The main distinction between a managed care and a fee-for-service product is the method of payment by the client. Clients that own a managed care product generally pay a premium to establish benefits and copayments when services are rendered. Clients that own a fee-for-service product pay a premium to establish benefits and deductibles and coinsurance when services are rendered. Providers are reimbursed differently under the two systems as well. Once again, those that own a managed care product typically have less choice with regard to providers than do those that own a fee-for-service product. By giving up a certain degree of choice, clients that own a managed care product typically pay lower premiums and pay less out of pocket expenses for similar services received. In general, the method of payment is similar for each managed care plan and the degree of choice is different. Any differences in the method of payment between the various managed care plans will be discussed in subsequent pages. The chart shows the typical method of payment and the fee-for-service or managed care designation for each health insurance product type. PRODUCT NAME COVERED SERVICES PAYMENT CHOICE FEE-FOR-SERVICE INPATIENT HOSPITAL PREMIUM UNLIMITED SURGICAL DEDUCTIBLES MATERNITY COINSURANCE MENTAL HEALTH SUBSTANCE ABUSE PHARMACEUTICALS EMERGENCY LIMITED DENTAL AND VISION PPO SAME AS ABOVE PREMIUM HIGH MANAGED CARE DEDUCTIBLES COINSURANCE POS SAME AS ABOVE PREMIUM MEDIUM MANAGED CARE COPAYMENTS EPO SAME AS ABOVE PREMIUM LOW MANAGED CARE COPAYMENTS HMO SAME AS ABOVE PREMIUM LOW MANAGED CARE COPAYMENTS DENTAL PREVENTIVE PREMIUM UNLIMITED FEE-FOR-SERVICE DIAGNOSTIC DEDUCTIBLES PURCHASED RESTORATIVE COINSURANCE SEPARATELY EXTRACTIONS DENTAL (DHMO, DPPO) PREVENTIVE PREMIUM LOW - DHOM PURCHASED DIAGNOSTIC COPAYMENTS HIGH - DPPO SEPARATELY RESTORATIVE EXTRACTIONS

12 **NOTE** Comprehensive health insurance establishments can be organized as fee-for-service or managed care companies. However, the manner in which a company is organized does not limit the types of products it can provide. Many companies offer both fee-for-service and managed care products. Many of the larger companies offer all product types. It is important to note that PPO s are generally the only managed care type whereby the insured pays deductibles and coinsurance for services received. There may be exceptions. Most PPO s are offered by fee-for-service companies. Managed Care Medical Service Plans Unlike fee-for-service medical service plans, where the insured pays a premium, deductibles, and a percentage of the fees for services provided (coinsurance), managed care is generally a prepaid plan. The client pays a monthly or quarterly premium and small copayments when services are received. Managed care plans provide comprehensive health services to their members and offer financial incentives for patients who use plan providers. Office visits, hospital, surgical, emergency, maternity, mental health, substance abuse, dental, vision, and pharmaceutical benefits are all included in a comprehensive medical service plan. There are a variety of managed care plans that provide comprehensive medical coverage. The various managed care plans include health maintenance organizations (HMO s), preferred provider organizations (PPO s), point of service organizations (POS s), and exclusive provider organizations (EPO s). In both an HMO and an EPO, the client must receive care from plan providers. A plan member selects a primary care physician who coordinates the client s care, including providing referrals to specialists and hospitals. PPO s and POS organizations allow for reimbursement if care is provided from a provider outside of the plan network. When using a provider outside of the plan network, the level of reimbursement is lower than if a provider within the network is used. As for all insurance products, the choices available to the consumer with regard to health insurance are really part of a menu of options from which a consumer can choose the services, method of provision, and method of payment that most suits their needs. The health insurance product types differ in three aspects: degree of choice, premium amount, and method of payment as services are rendered. It is evident from the table on the previous page that the HMO product type offers the customer a low degree of choice. However, fees for services received are generally lower for managed care plans versus fee-for-service plans. In addition, the premiums paid for an HMO product are typically the lowest of all health insurance plans. The EPO is the PPO s answer to the HMO. This product type offers a low degree of choice and a low premium. The POS product type offers slightly more choice for a slightly higher premium. Non-affiliated providers may be used, but the customer is generally reimbursed less for these services than if they use an affiliated provider. The PPO product type offers the most choice of any managed care product type. It is generally the most expensive as well. In general, fee-for-service plans offer the most choice for the highest premium price. In general, fees for surgery and check up s are more expensive with this plan type than for any of the managed care product types. 12

13 In general, HMO s are the least expensive and require the least out of pocket expense for most types of medical care. Of course, the premium amount will depend on the company and the plan selected. HMO s are able to offer increased benefits at a lower cost by using utilization review to limit customer choice and the performance of unnecessary medical procedures. Patients choose a primary care physician from a list of approved physicians provided by the insurance company. This primary care physician acts as a gatekeeper. He or she decides which specialists will be seen, if at all. Physician decisions are then reviewed by the insurance company. In addition, specialists must be part of the HMO system, limiting choice even further. Should a customer use a non-affiliated provider or hospital, he or she must pay the entire cost. If an affiliated provider is used, the client generally pays a small copayment. This copayment generally ranges from $5 to $10 for office visits and pharmaceuticals, and $50 to $100 for surgery and emergency care. There are no deductibles for this type of plan nor coinsurance should affiliated providers be used. Major procedures, such as surgery, must be approved by the insurance company as well as the primary care physician. This extensive review procedure helps to contain costs. In most cases, premiums are less for HMO s than all other health insurance product types, especially fee for service. Again, the total price of an HMO plan is dependent upon the company, and its ability to contain costs. In addition, premium amounts depend on the profit goals of a particular company. EPO s are very similar to HMO s. However, the premiums are generally slightly more expensive. This is because EPO s are generally offered by PPO s in order to compete with HMO products. Utilization review is not as extensive for this product type as it is for HMO s. Should a customer use a non-affiliated provider or hospital, he or she must pay the entire cost. If an affiliated provider is used, the client generally pays a small co-payment. This copayment generally ranges from $5 to $10. EPO s are the least popular managed care product type. POS plans offer still more choice for a slightly higher premium. Customers may use nonaffiliated providers and generally pay slightly more than if they use an affiliated provider. Copayments are made for office visits and other medical procedures should an affiliated provider be used. Should a non-affiliated provider be used, coinsurance rates will apply. However, customers are generally not responsible to pay the full amount, as is the case with an HMO or EPO. The preferred provider organization is similar to an HMO in terms of structure. PPO s are panels of physicians, hospitals, dentists, and other providers who negotiate with employers, insurance companies, or other organizations in order to provide services at reduced fees to members of a specified group. PPO s may be group practices, individual providers, or facilities that offer a range of services or a limited set of services. Customers have the most choice and pay higher premiums than any other managed care product type if they are enrolled in a PPO. This type of product is a combination of a fee-for-service and a managed care product. Small deductibles must be met for some services before benefits are received. Once deductibles are met, the insurer pays a certain percentage and the customer pays a percentage (coinsurance). Coinsurance rates are generally less for a PPO than for a fee-for-service product. Customers may use non-affiliated providers at a similar cost, but are generally rewarded if they use affiliated providers

14 The following table shows the market share of each type of managed care plan within this sector of the industry. Type % of Total Managed Care Market HMO 49% PPO 39% POS 8% EPO 3% Health maintenance organizations are currently the most popular of the managed care plan types. These organizations can be categorized into four main types: staff, group, independent practice association, or network. HMO s that employ their own physicians and other providers are called staff model HMO s. Providers in a staff model tend to practice as a team out of a central facility or a series of area facilities. Group HMO s involve physicians and other providers who establish a partnership and share profits. Like the staff model, these providers typically practice as a team out of a central facility or a series of area facilities. Independent practice association HMO s involve physicians and other providers who practice out of their offices, but are contractually part of a group and share in group operations. HMO networks are chains, alliances, or franchises of provider groups or individual providers that cover large geographic regions. This type of HMO is becoming popular with large, multi-site companies. Mixed HMO s combine two or more of the four different HMO types. The chart below gives a breakdown of the prevalence of each type of HMO in the industry: HMO Market Share by Type 23% 8% 7% 4% Staff IPA Group 58% Network Mixed Source: Health Insurance Association of America The chart above shows that the IPA (Independent Practice Association) is the most popular HMO type. In fact, 58% of all HMO plans are IPA s. Physicians who are members of this type of HMO are typically paid by capitation. They receive the same payment per month for all members who chose them as their primary care physician, whether they see the patient or not. Mixed HMO s are the second most popular HMO type. Twenty-three percent of all HMO s are Mixed HMO s. Staff-Model HMO s are the least popular type of HMO. 14

15 HMO policies can be purchased through companies, unions, commercial insurers, Blue Cross and Blue Shield, associations, hospitals, medical centers, and other health organizations. Some are non-profit and others are for-profit. Like commercial insurers, most regulation is handled by the states, although applicable federal HMO laws and regulations exist. An example of federal legislation is the Health Maintenance Organization Act of This act provides the minimum standards for federally qualified HMO s. Fee-for-Service Medical Service Plans Fee-for-service plans offer unlimited choice, but higher deductibles and coinsurance than a PPO product. In addition, premiums for fee-for-service plans are generally the highest of any health insurance product type. Fee-for-service medical service plans can also be considered managed indemnity plans. Providers are reimbursed on a discounted fee-for-service basis, the insured pays a premium, deductibles and coinsurance and some sort of utilization review takes place in order to attempt to contain costs. A fee-for-service plan pays a medical provider a discounted fee for each service rendered. This serves to reduce the costs of the insurer. Insurers are able to pass some of these savings on to the consumer based on contractual agreements between the insurance company and a provider or group of providers. Providers receive a guaranteed volume of business. Insurance companies receive lower costs and the ability to employ utilization review in order to determine whether a procedure is medically necessary or not. Fee-for-service insurers generally reimburse nothing for procedures which are not deemed medically necessary by the provider and the company. Fee-for-service medical service plan products are also comprehensive health insurance plans. Under this type of plan, the client selects any medical service provider and the medical service provider submits a claim to the insurance company. In general, this type of policy does not reimburse one hundred percent of the claim. The level of reimbursement depends on the terms of the policy with regard to deductibles and coinsurance. Typically, the higher the deductible, the lower the premiums will be. These policies also have an annual, out-of -pocket maximum and a lifetime ceiling on benefits provided. Even though fee-for-service plans have a lifetime ceiling on benefits provided, they are not traditional indemnity plans. Indemnity plans do not reimburse the service provider on a discounted fee-for-service base. They are compensation for loss policies meaning they pay the exact cost for services provided. These plans assign a low maximum dollar amount to benefits provided, are usually not comprehensive, do not employ utilization review and the insurance company is not involved in the provision of health care services. Dental Service Plans Dental insurance can be purchased as part of a managed care or fee-for-service product, separately as a dental managed care product, or as a dental fee-for-service product. There are two dental managed care product types, the DHMO and the DPPO. The DHMO is very similar to an HMO and the DPPO is very similar to a PPO with regard to structure, method of payment, and provider reimbursement. Most of the revenue for dental insurance products sold separately is from the two managed care product types, approximately 90%. In addition, most dental insurance sold separately is group business, approximately 90%. Thus, experience rating is used based on groups

16 of similar size, in a similar industry and a similar geographic region of the country. Only 10% of dental insurance sold separately is purchased by individuals. Rating criteria for dental insurance sold separately is less detailed and stringent than rating criteria for health insurance plans. Typical benefits include check-up s and x-ray s (diagnostic), cleanings (preventative), fillings (restorative), extractions and anesthesia (oral surgery), gum treatment (periodontics), braces (orthodontics), crowns, dentures and bridges (prothodontics), and root canals (endodontics). The same dental benefits are usually offered when dental insurance is included with a fee-for-service or managed care, medical service plan product. However, the degree of benefits will vary of course. Supplemental Medicare Medical Service Plans This type of policy is private insurance. Medicare was never designed to be an all-inclusive health care plan. Currently, Medicare has very high deductibles and does not cover many items. Medicare does not cover skilled nursing facilities beyond one hundred days per benefit period, skilled nursing facilities not approved by Medicare, out of hospital prescription drugs, private duty nursing, care received outside the United States, routine check-ups, dental care, most immunizations, cosmetic surgery, routine foot care, eyeglasses, and hearing aids. Medigap. Since Medicare is so limited, 80% of seniors currently own Medigap policies. The Medicare Part B premium must be paid in order to purchase a Medigap policy. Medigap policies must cover certain gaps in Medicare. In addition, Medigap insurance may cover certain things, which Medicare does not cover at all. There are 10 standard plans available, designated by the letters A through J. All ten plans may not be available in every state, but Plan A must be made available to all Medicare recipients. Each plan covers different things or fills the gaps differently. Medigap plans can be fee-for- service or managed care plans. Medicare Select. This is a Medigap insurance product that may be available in designated states through either HMOs or insurance companies. It is essentially a managed care, Medigap product. The states where these policies are currently authorized to be sold are Alabama, Arizona, California, Florida, Indiana, Kentucky, Minnesota, Missouri, North Dakota, Ohio, Texas, Washington and Wisconsin. **NOTE** Medigap policies, including Medicare Select, are the only Medicare policies that are considered to be in-scope for this industry. All other types of Medicare policies are either completely or partially subsidized by the federal government. Insurance coverage provided by the federal government is out-of-scope. However, if the government purchases coverage from a private insurance company, this service is in scope. Medicare Plus Choice. This is a HCFA (Health Care Financing Administration) program through which eligible individuals may elect to receive Medicare benefits through enrollment in one of an array of private health plans that contract with HCFA. Traditional Medicare includes Medicare Parts A & B. In addition, seniors may purchase private fee-for-service insurance, managed care coverage, or a Medicare medical savings account. In order for the Medicare beneficiary to be eligible to choose one of these alternative plan types, he or she must first be enrolled in Medicare Part s A & B and pay the Medicare Part B premium.. 16

17 The managed care company is paid a set monthly amount per member should the managed care option be chosen. Seniors can choose between HMO, PPO, or POS coverage. In addition, the Medicare member may pay a premium to the managed care company. A Medicare member may choose private fee-for-service insurance instead of the traditional Medicare Part A (fee-forservice) option. Under this arrangement, Medicare will pay the plan premium for Medicare covered services. The insurance company may charge the Medicare member a premium as well. Medicare medical savings accounts (MSA s) are functionally similar to traditional MSA s. Medicare will pay the premium of a high-deductible, medical expense plan and deposit some money into a savings account. The Medicare beneficiary can use the money deposited into this account to pay for routine medical expenses or deductibles. The medical expense policy will cover catastrophic illnesses or accidents. The table below clarifies which Medicare policies are public, private, fee-for-service, or managed care. PUBLIC PRIVATE FEE-FOR-SERVICE MANAGED CARE PREMIUM MEDICARE PART A X X N/A MEDICARE PART B X X $ (1999) MEDICARE PLUS X X X X VARIES CHOICE MEDIGAP X X X VARIES Other Medical Service Plans. Prescription Drug Plan: Most health insurance plans, either fee-for-service or managed care, provide benefits for prescription drugs. Some stand-alone dental plans offer coverage for prescription drugs as well. However, the benefits these plans provide for prescription drugs may be limited. Stand alone prescription drug plans are supplemental plans that usually provide benefits after a deductible is met. Once the deductible is met, a small copayment is required for each prescription. The copayment for brand name prescriptions is usually slightly higher than the copayment for generics. In addition, there is usually a maximum amount of yearly benefits provided. The age of the insured and number of people included in the policy are usually the only two characteristics needed in order for an insurer to provide a price for these policies. Vision Expense Insurance: This type of policy provides reimbursement for routine eye examinations, eyeglass lenses, contact lenses, and the purchase and fitting of frames. Vision care policies are usually integrated into a major medical plan or are part of an employer, self-insured plan. Vision services included with a fee-for-service or managed care health insurance plan are usually very minimal. One eye exam and lenses may be covered. Frames are rarely covered. Employers typically offer this as a benefit to their employees. In this case, the employer is actually the insurer. If the employer is acting as the insurer, these services are out of scope

18 ACCIDENT AND HEALTH INSURANCE Accident and health insurance policies include disability, long-term care, hospital indemnity, specified disease, and accidental death and dismemberment. With the exception of disability insurance and credit health, all accident and health products are indemnity products. In addition, these insurance products are not comprehensive and they have a lifetime ceiling on the dollar amount of benefits provided. Disability and Long-Term Care Insurance Disability and long-term care insurance products are similar in that they provide benefits in the case of an accident or illness, which leaves the insured disabled either temporarily or permanently. However, long-term care insurance provides nursing home or home health care coverage for those who are disabled and generally over age 65. Long-term care insurance generally provides benefits for supportive functions that provide assistance with daily activities in order to minimize, rehabilitate, or compensate for loss of functioning due to disability. In addition, disabled individuals do not always require long-term care services. Disability insurance generally provides income replacement should an accident or illness cause the insured to be unable to work for a prolonged period of time. The table below describes general services included in these two service lines, services they are likely to cover, and payment methods. PRODUCT SERVICES PROVIDED METHOD OF PAYMENT SHORT-TERM INCOME REPLACEMENT PREMIUM DISABILITY SIX MONTHS TO TWO YEARS LONG-TERM INCOME REPLACEMENT PREMIUM DISABILITY FIVE YEARS UP TO INDEFIN ITELY LONG-TERM CARE NURSING HOME CARE PREMIUM RESIDENTIAL COMMUNITY CARE DEDUCTIBLES HOME HEALTH CARE COINSURANCE Disability Insurance: This type of insurance provides partial income replacement in case the insured is unable to work as a result of an accident or illness. The insured receives benefits as long as the accident or illness is not covered by workers compensation. Short-term disability insurance generally pays benefits up to twenty-six weeks, but can provide benefits as long as two years. Long-term disability insurance pays benefits for five years, ten years, until age 65, or indefinitely. Benefits typically expire at age 65. Maternity insurance is not sold separately, but may be included with the benefits of a long-term disability insurance product. The benefits are usually short-term unless complications arise as a result of the pregnancy. There are five different types of disability income insurance that can be purchased as either short- are not owners, should the principal owner of the business become disabled. DI-buyout term or long-term coverage. These include general DI (disability income), DI-loss of earnings, DI-overhead expense, DI-buyout, and DI-key person. The first two have to do with the coverage for individuals. The last three have to do with coverage for businesses. DI-overhead expense provides benefits for all overhead expenses, including salaries of and benefits to all employees that provides 18

19 a lump-sum benefit should the insured become disabled. The insurance company agrees to buy the insured s share of the business for a predetermined amount. DI-key person provides benefits to the owner of a company should a key person of the firm become disabled. Benefits are paid to the business until a replacement in found. If a replacement is found during the benefit period, a replacement benefit will be paid to the owner of the company. Several riders or additional services can be purchased as part of a disability policy. These include additional purchase benefit, waiver of premium benefit, rehabilitation benefit, deferred disability benefit, future increase benefit, indexed income benefit, and a social security substitute benefit. Typically businesses can only purchase the additional purchase benefit. However, they may sometimes purchase a future increase benefit. The options available to businesses depend on the company. The table below describes the additional benefits available to individuals. Additional Purchase Benefit Additional coverage can be purchased as income increases. Waiver of Premium Benefit Rehabilitation Benefit Deferred Disability Benefit Future Increase Benefit Indexed Income Benefit Social Security Substitute If the disability lasts longer than a certain period of time, the premium may be waived until the disability no longer exists. Rehabilitative therapy is included. Provides retirement benefits. The maximum benefit amount is increased to account for inflation. Benefits are usually indexed to the CPI. After twelve months of disability, the benefit is indexed to account for inflation. Increases the benefit at age 65 if benefits are not available from Social Security or a state plan. Long-Term Care: This type of insurance covers medical care, nursing care, and other assistance on a fee-for-service basis in the event that the person insured is unable to care for themselves for an extended period of time. Services covered under this type of policy are not typically covered under other health insurance policies. Usually, these policies pay a fixed dollar amount for each day care is received. Many of these policies have an inflation adjustment feature in order to provide adequate coverage in the future. Thirty- percent of long-term care policies are owned by individuals who belong to a group plan. Seventy-percent of long-term care policies are owned by individuals. The table below describes possible services covered by long-term care policies

20 Nursing Home Daily maximum between $50 and $200 Bed Reservation Alternate Facility Reserves a bed in a nursing home in the case of a temporary hospitalization. Benefits up to the daily maximum amount are usually paid. In addition, benefits are paid up to a maximum number of days. Includes care given in an assisted living facility or Alzheimer s care facility. Usually pays a percentage of the daily nursing home maximum. Home Health Care Includes care given at home or at Adult Day Care Centers. A percentage of the daily nursing home maximum is usually paid. Respite care is also included. This gives the informal care-giver a break from providing care. Benefits are provided on a twenty four hour basis for a maximum number of days. Hospital Indemnity: This type of insurance policy provides a per diem cash benefit to the client for each day he/she is hospitalized. There is usually a maximum number of days for which benefits are provided. The cash payment is made directly to the client who can use the money any way they choose. The client must be hospitalized for a certain number of days before the policy will be paid. Hospital/surgical policies include surgery benefits, should surgery be performed during a hospital stay, as well. Major Medical Expense: Insurance that provides benefits for most types of medical expenses up to a high maximum benefit. Such contracts are normally subject to deductibles and coinsurance. This type of policy provides hospital and medical expenses above a certain deductible. This type of policy is selected as a safeguard to cover the costs of a catastrophic illness when the lifetime benefit limit of a basic medical policy is low. This is a fee-for-service product. These policies may include a maximum lifetime benefit of a high dollar amount. Supplemental medical expense policies may be purchased to supplement a hospital indemnity or MSA (medical savings account) product. Accidental Death and Dismemberment Insurance: This form of health and accident insurance provides payment to an insured s beneficiary in the event of death or the insured in the event of specific bodily losses resulting from an accident. Accident Insurance: This is a type of insurance insures against a loss caused by accidental bodily injury. This type of insurance is usually purchased in order to compensate the beneficiary for a loss incurred as a result of work related travel. Other Accident and Health Insurance Plans Credit Health: This type of insurance will pay a particular installment loan for an individual should the individual be too sick or injured to work. The premium is paid monthly and added to the installment loan. This type of insurance can be purchased to cover a credit card loan, car loan, 20