Principles of Insurance

Transcription

1 Principles of Insurance "Took a physical for some life insurance...all they would give me is fire and theft." Henny Youngman At the conclusion of this session, you will: 1. Understand the historical background behind private health insurance. 2. Understand the conditions under which an event is insurable. 3. Have a working knowledge of some key health insurance terms. 4. Understand the tradeoffs in pricing and selection of health insurance policies. 5. Have an appreciation of the coverage dilemmas facing employers and governments which mandate health care benefits. As governments have cut back on many of their benefits and shifted more cost to individuals, a market has arisen for private health insurance. Read the health insurance chapter section and article by Beichl et al. Understand the major points in these readings. Review the Newhouse article. I. History A. European Guilds B. U.S. 1. Mutual Benefit Associations and Fraternal Beneficiary Societies These organizations charged members regular dues for benefits. The earliest example in the U.S. was La Societe Francais de Bienfaisance Mutuelle de San Francisco, which was founded in 1851 and built a hospital in Other similar plans developed in California. By the late 19th century, associations developed at the workplace and were sponsored by employees, employees and employers, and, rarely, solely by employers. The main purpose of these associations was to provide cash payments for disability and death; rarely were medical benefits provided. Physicians were hired by these associations for advice and certification of disability. As these plans evolved into medical care plans, physicians were hired on a prepaid basis to care for members (more about this trend when we discuss HMO's). An early example of this type of plan was the Pacific Railway Beneficial Association, 1882.

2 2. Labor Unions In the late 19th century unions provided disability and death benefits from dues. Only several decades later were medical benefits offered. Q: Why do you think insurance developed in this way, i.e., first disability and death benefits then coverage for medical care? 3. Commercial Health Insurance In 1910, Montgomery Ward & Co., replaced its "Employee Establishment Fund" with an insured contract; this event is generally regarded as the first group health policy. By the 1920's more companies had their plans underwritten by commercial insurance companies. Not all benefits emerged simultaneously. During the 1930's, hospital expense insurance expanded; surgical expense insurance became more prevalent in the late 1930's; medical (non-surgical) benefits became more common in the early 1940's. Two events occurred during WWII which provided the major impetus for growth of commercial insurance. First, because of wage and price freezes, healthcare benefits became part of collective bargaining. Second, the IRS code was modified to make healthcare benefits tax deductible for the employer and tax exempt for the employee. Q: What effect did these events have on shaping the way we currently view payment for healthcare and the cost escalations we face today? 4. Blue Cross The origins of these plans were in the Depression -- hospitals set up their own insurance programs to assure income and payment for services. The problem with these plans was that they were limited to individual institutions; state insurance commissions wanted more freedom for consumer choice. To solve the problem, in 1933 the AHA sponsored multi-hospital programs in return for non-profit status for the plans -- Blue Cross plans were formed at the state level with a national organization comprised of its member plans. Three features characterized these plans: community rating, open enrollment and provider contracts. The national plan provides the following functions: Public relations, solicitation and maintenance of national accounts, research, advice on premium and reimbursement rates, and data processing. The problem with having special status was that the plans were regulated like utilities; for example, they were unable to raise rates or charge appropriately for benefits (group versus individual rates). Plans could not remain competitive with the traditional commercial insurers. Many Blue Cross plans have converted from

3 their special status to a traditional insurance corporation. A current trend is for individual plans to convert to full for-profit status. As of early 1999, Blue Cross and Blue Shield plans covered approximately 73 million members or about 26% of the entire U.S. population. As of year end 2003, Blue Cross and Blue Shield plans covered approximately 88.8 million members. There is also a trend among Blues plans themselves to merge and acquire non-blues plans. As of June 30, 2004 combined enrollment for the 41 independent affiliates of Blue Cross/Blue Shield was 91 million members for a total revenue for the first half of 2004 of $116.3 billion dollars and net income of 3.7 billion dollars. 5. Medicare and Medicaid We will discuss these programs in detail in subsequent classes. The importance of these programs is that commercial plans often follow government guidelines. 6. Self-Insured Plans Over half of all persons insured through employers are covered under these types of plans. A major piece of legislation which enabled employers to set up such programs was the Employee Retirement and Income Security Act (ERISA) of The real purpose of this act was to insure that workers entitled to private pension benefits actually received them when they became eligible. One of the "loop holes" (Section 514) allows employers exemptions from state laws pertaining to employees welfare benefits. The advantages to self-insurance include the following: a. No state insurance premium tax (2-3%) b. Exemption from state mandated benefits c. Exemption from financing reserve requirements d. Exemption from contributions to state risk pools e. Full access to claims data (which commercial insurers frequently do not and cannot often provide their clients) f. Ability to pay claims after they are received (enables the employer to "play the float" on reserves) g. No broker commissions h. Standardize benefits across states for multi-state companies (See Brown, R.E.: Access to Health Insurance in the U.S. Medical Care Review 46: , 1989.) Q: Can you think of any disadvantages to self insurance?

4 7. Consolidated Omnibus Reconciliation Act (COBRA) 1985 This act enabled workers and their dependents to extend group coverage when the covered member is terminated from employment, dies or divorces or separates from a spouse. (See the "Continuation of Coverage" page in the casepacket). 8. Health Insurance Portability and Accountability Act (HIPAA), 1996 There were two parts to this act. The first, was called Health Insurance Reform. Among other things, it provided workers some enhanced portability of healthcare benefits, e.g., if a waiting period was satisfied on a previous job then one need not wait again to access health insurance in a new job. Of course, this law only helps if someone both comes from and goes to a job and employer who provides health insurance. The second part of this law is called Administrative Simplification. We will discuss this portion in more detail in the section on information systems. II. Purposes of Insurance A. For the insured: Can budget for healthcare expenses by protecting against catastrophic events. B. For the insurer: Make money from premiums and investments. In the past, health insurance made money for the insurer as a loss leader by allowing the company to sell more profitable policies, e.g., life insurance, with it. III. Conditions for an event to be insurable A. It must be neither too frequent nor too rare (issue of frequency). Q: What would be the premiums at these two extremes? B. It must be accidental and sporadic, i.e., a random, unpredictable event (issue of unpredictability). Q: What would happen if the event were predictable? C. It must be statistically measurable and computable, or at least estimable (subject to actuarial study). D. From the insurer s viewpoint, large numbers of subscribers are needed who must make sufficient and regular payments.

5 IV. Definitions INSURANCE IS A NUMBERS GAME A. Insurance: Coverage by a contract where one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril. Webster s Dictionary B. Indemnify: To secure against hurt, loss or damage. -- Webster s Dictionary C. Cash Payment vs. Payment for Services D. Indemnity Plan vs. Service Plan We will discuss other definitions found in the glossary in the casepacket. Please refer to this glossary throughout the course and in the future should you have any questions about healthcare terms. V. Types and prevalence of health care products. We will discuss the different types of health care products, i.e., traditional indemnity insurance, indemnity insurance with utilization review, PPO s, point of service plans, and HMO s, as well as the trends concerning each. Detailed discussion of PPO s, point of service plans, and HMO s will occur in the lectures on managed care. VI. Tradeoff Hypothesis for Health Insurance Other than quality services (which we will discuss in a later class), people want four features from their health insurance: A. First dollar coverage B. Low premiums C. Freedom of choice of providers D. Comprehensive coverage Q: How many of these features can you design into an insurance policy and still make it economically feasible for the insurer? VII. Outcomes based on different types of plans Read the articles by Pauly et al and Barnum et al. Understand the tradeoffs among different payment mechanisms a country can implement. VIII. Read the article by Mattoo and Rathindran. Understand the major point they make about insurance coverage for international healthcare.

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