Healthcare Benefit Plan Design Considerations

The definition of healthcare benefits has evolved over the years; currently, healthcare benefits include doctor charges—including tests and associated procedures—hospitalization, dental, and vision expenses. Healthcare can also involve lost income, staying-well expenses, addiction-suppression expenses, and other costs.
For our purposes, we define healthcare benefits as including medical expenses, dental expenses, and vision-care expenses.
Healthcare benefit plan design is influenced by a number of factors and features. Recently, many design decisions, such as the following, have been influenced by the need to control escalating costs:

• Deductibles
• Co-insurance
• Copayments
• Exclusions and limitations
• Maximum benefits
• Preadmission testing
• Second surgical opinions
• Coordination of benefits
  The Payers
  In the United States, public health insurance is relatively new, but private insurance for healthcare has been quite prevalent. Commercial insurance has existed for healthcare benefits for some time. Casualty and life insurance companies usually extend their services to the healthcare field.
  Examples of commercial insurance companies include Aetna, Humana, and United Health Group. These companies usually provide group insurance coverage. Traditionally, healthcare benefits have been structured by these insurance companies through a process called an indemnity plan. With such a plan, also called a fee-for-service, an employee can use any medical provider—such as a doctor or hospital. Chapter 3, “Healthcare Benefit Financing,” covers this concept in more detail.
  Insurers have also created managed-care organizations, which strive to combine healthcare services and insurance into a single entity. These organizations are created by insurers that own their own providing network or that contract with other providers to form a network. The most common type of managed-care organization is the health maintenance organization (HMO), the development of which was encouraged by the Federal Health Maintenance Act of 1973.
  Under this particular law, HMOs were provided grants and loans to provide, start, or expand their organizations. The law removed certain state restrictions for federally qualified HMOs, and it required employers with 25 or more employees to offer federally certified HMO options if they offered traditional health insurance to employees. It did not require employers to offer health insurance.
  HMOs, at their core, attempt to control costs and, at the same time, provide effective healthcare by limiting patients to specific providers, through both a mechanism known as a provider panel and through primary care physicians who must authorize specialized care and other referral services; payments are not paid to employees who bypass this review process.
  HMOs grew in numbers throughout the 1980s and 1990s, but became less popular with employees because of the aforementioned limitations placed on them. In response to this, insurers developed an alternative program called a preferred provider organization (PPO). PPOs do not require their participants to use specific providers, electing instead to provide incentive for participants to do so anyway; the network providers typically agree to reduce prices for their services. Also, PPOs do not always require participants to go through the gatekeeper of a primary care physician review.
  Both HMOs and PPOs have ushered in the era of managed care. In general, these plans and organizations have been built to manage medical expenses by taking control of the decision-making process from their participants. These plans typically have five guiding characteristics:

1. They control access to providers.
2. They engage in comprehensive utilization management.
3. They encourage preventive care.
4. They facilitate risk sharing among the provider community.
5. They ensure the delivery of quality healthcare.
   Payment Options
   Healthcare programs’ payment methods fall into two primary processes: fee-for-service and capitation. For fee-for-service programs, three methods are offered:
6. Cost based: The payer agrees to pay for the costs incurred in providing services to the insured. Cost-based reimbursement is limited to allowable costs, which typically refers to costs directly related to the provision of healthcare services.
7. Charge based: When payers are billed for services, they are paid on a rate schedule. Most are paid as negotiated, discounted charges. Managed-care plans, due to large member groups, have the power to negotiate these discounts. The discount range fluctuates between 10% and 50%, or even more, on stated charges.
8. Prospective payments: The rates in this system are determined before services are provided and are not related to costs or charges. Instead, the common units of payment are per procedure, per day, or a global reimbursement process. In this last category, a single payment is given that covers all services for a single treatment or medical intervention.
   Capitation is a different process altogether. Under capitation, the provider is paid a fixed amount per covered life, per period (usually monthly), regardless of services provided. Payments are based on the number of participants assigned to the provider. The reimbursement is, therefore, fixed on the basis of population.