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year (perhaps 50), with an annual maximum payment of $1,000 per year.
not covered under many health insurance plans are cosmetic surgery; infertility services; services not deemed "medically necessary" such as those done for educational, research, or vocational training purposes; experimental treatments; tests or treatments not needed for a particular condition; and services that do not meet generally accepted standards of medical practice. Plans may also specify the type of providers to whom payment can be made for covered services and may exclude treatment by others. For example, a plan may pay for mental health services only if provided by a psychiatrist or psychologist.
Enrollee Cost Sharing and Catastrophic Protection
Limits on Allowable Charges
In recent years, health plans have extended their use of enrollee cost sharing, including deductibles and coinsurance, in an attempt to reduce plan costs. A deductible is a specific dollar amount, commonly $100 to $200, that must be paid by the insured before the health plan will begin paying benefits. Typically, employer plans require the insured to pay a yearly overall plan deductible (also called a "major medical" deductible) prior to plan payment for covered services. Coinsurance is a specified percentage of each bill for a covered medical services that the insured must pay, commonly 20 percent. The coinsurance is applied to the remaining covered expenses after any deductible has been met by the insured.
Most health plans use some method for determining the extent to which a medical expense is eligible for payment. These methods are designed to exert some control over plan costs by setting limits on the amount of a health care provider's charges or costs that will be reimbursed. For example, in general, inpatient hospital bills are paid by Medicare under a prospective payment system, by commercial insurers as a percentage of the hospital's average charge for a semiprivate hospital room, or by Blue Cross and Blue Shield according to contract limits negotiated by the hospital and the Blue plan.
Many plans include as a benefit a yearly limit (also known as a catastrophic, out-of-pocket, or stop-loss limit) on the amount of cost sharing (coinsurance and sometimes deductibles) that the insured must pay from their own pockets. After that limit (commonly $1,000 to $3,000) is reached, the plan pays 100 percent of any additional expenses for services covered by the plan.
A plan may pay physicians according to a method known as "reasonable and customary" (R&C). Under R&C, payment is made according to the physician's actual charge for a particular service, limited by a maximum determined as a percentage of the average charge for that service by physicians in the same geographic area. Plans may also pay according to a fee schedule, where the plan establishes maximum payment amounts in each geographic area for each service. Blue Cross and Blue Shield plans generally limit payment to physicians by negotiating contracts under which the physician agrees to accept the Blue plan's payment as full payment for covered services.
Arguments exist both for and against the use of enrollee cost sharing. Clearly, cost sharing reduces health plan costs because the health plan pays a smaller proportion of the cost of covered health care services. Proponents for cost sharing maintain that requiring enrollees to contribute to the payment of their medical expenses makes them more sensitive to their utilization of medical care, potentially reducing utilization and, thus, health plan costs.
Opponents of the use of enrollee cost sharing argue that it does not reduce utilization since it is physicians, not the patients paying the cost-sharing amounts, who make most decisions about the use of health care services. In addition, it is argued that any reductions in utilization because of cost-sharing requirements are not necessarily desirable, since people may be discouraged from seeking needed medical
Limits on Services Covered or Total Payments
Health plans frequently set limits on the units of service (e.g., visits or days of care) covered by the plan, or on the maximum dollar amount paid by the plan per service, per year, or over the insured person's lifetime. For example, a plan's mental health coverage may limit payment for inpatient mental health care to 30 days per year and limit outpatient mer health care to a maximum number of visits per
Studies such as the Rand Health Insurance Experiment (HIE) have found that enrollee cost sharing can lead to lower utilization and lower health plan costs. The HIE found that per capita expenses for enrollees in a plan with a 95 percent coinsurance rate (i.e., the percentage paid by the insured) for outpatient services were 28 percent lower than expenses for those in a plan with no enrollee cost-sharing requirements. 1
The uninsured are young: 32 percent are under age 18; 22 percent are age 18-24; and 19 percent are age 25-34.
Enrollee cost sharing is sometimes defined to also include the enrollee's share of the premium payment. For typical large and medium private sector employer plans, the employer generally pays the full premium for employee-only coverage, but requires the enrollee to pay about 25 percent of the premium for family coverage.
Cost Containment Features
More than half (52 percent) of the uninsured are employed; most of the working uninsured (59 percent) are in small firms of less than 100. Workers whose jobs did not provide health insurance tended to be part-time rather than full-time workers, young rather than older workers, lower-paid rather than higherpaid workers, in small firms rather than in large firms. These workers also tended to be employed in the service-producing and retail sectors of the economy. Between two-thirds and four-fifths of the uninsured live in families where someone is employed.
In addition to enrollee cost-sharing requirements,
features are included in health plans to attempt to control plan costs. These include alternative financing arrangements such as self insurance; premium cost sharing between plan sponsor and enrollee; financial incentives to use services less costly than hospital care, such as home health care, hospice service, urgent care centers, etc.; managed care techniques, such as hospital utilization review and second surgical opinion requirements, and health promotion programs such as smoking cessation, substance abuse, weight reduction, and stress management. Another technique for controlling plan costs is to use preexisting condition clauses, which temporarily or permanently exclude from coverage an enrollee's medical condition that existed prior to coverage by the health plan.
Over half (61 percent) of the uninsured are low income (family income under $20,000). About 30 percent of uninsured persons live in families with incomes below the Federal poverty threshold for their family size.
WHO DOES NOT HAVE HEALTH CARE COVERAGE?
ISSUES IN DESIGNING A HEALTH BENEFITS PLAN
An estimated 36.8 million nonaged Americans (17.5 percent of persons under age 65) lack health insurance coverage. Persons who do not privately obtain health insurance, either through their jobs or by purchasing insurance, sometimes receive coverage from Government programs such as Medicaid. However, coverage from Government programs is contingent on meeting certain program eligibility requirements. Those who do not have private coverage and either do not meet the eligibility requirements of Government programs or choose not to participate in them are the 36.8 million (17.5 percent) who are uninsured.2 The characteristics of the uninsured are described below.
A health plan's benefits are designed to pay either all or a portion of the health care expenses of the population covered by the health plan. This is presumably the purpose of insurance—to ensure that the health care services used by the covered population are paid for, that unexpected health care expenses can be paid for, and that financial means do not become a barrier to seeking or receiving health care services.
Several questions need to be asked when designing a health benefits plan. These include:
1 Willard G. Manning, et al., “Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment,” American Economic Review (June 1987): 251-277.
2 The statistics on the uninsured are based on a Congressional Research Service analysis of the March 1987 Current Population Survey (CPS), a household survey conducted by the Census Bureau. The March 1987 CPS collected information on health insurance coverage for 1986. A more detailed description of these statistics can be found in: U.S. Congress, House Committees on Education and Labor, Energy and Commerce, and Senate Special Committee on Aging, Cost and Effects of Extending Health Insurance Coverage, 100th Cong., 2d Sess., October 1988.
- What benefits will be included? What is a “basic"
health benefits plan? How should the population to be covered help determine a plan's benefits? - What are some health benefit plan options? - What is the cost of the plan?
- What is the framework for the health plan benefits?
These issues will be discussed below.
Insurance plans have changed over time so that deductibles and coinsurance have been added to the basic coverage of many plans, and hospital and surgery are now covered in full by many comprehensive plans. Therefore, while the terms are still used, there is frequently little distinction between them. It is easiest to focus on individual plan features to understand the nature of a plan's coverage. This document uses the terms "overall plan deductible" and "overall plan coinsurance" to refer to the major medical features of health plans.
What Benefits Will Be Included?
In general, the goal of a health benefits plan is to provide payment for health care services needed or used by the covered population. Health care benefits "needed” by a given population can be defined either in terms of (1) the types of services used by the population to be covered by the health plan (for example, hospital services, outpatient prescription drug services, etc.), or (2) the financial means of the covered population to pay for health services. In designing a health benefits plan, one may wish to consider what is a “basic” health care benefits package.
In non-insurance parlance, “basic” health care services, and any health plan benefits that pay for such services, usually refer to some determination of the minimum health services that should be generally and uniformly available in order to assure adequate health status and protection of the population from disease, or to meet some other criteria or standard. However, there is little agreement on what constitutes a “basic" health benefits plan.
1. “Basic” Health Care Benefits—There is no clear definition of what comprises a "basic” package of health care benefits. In insurance terminology, most health insurance plans have been categorized as either “basic plus supplemental major medical” or “comprehensive major medical.” This distinction has become more confusing than helpful over the years. However, it is useful to define these terms since they often arise in the description of health insurance plans. "Basic" coverage originally meant coverage of certain expenses that were fully paid for by the insurer without any coinsurance or deductible (also known as "firstdollar coverage"). The most common type of early basic coverage (in the 1920's and 1930's) was for hospital services and physician services provided in a hospital setting.
Since a single definition of a "basic" benefits package does not exist, it may be helpful to use as a standard a common or typical health benefits package. Most Americans with health plan coverage (approximately 75 percent) are covered by employment-based health plans. While these plans vary considerably, it is possible to develop a hypothetical or composite plan that is typical of the most prevalent benefit provisions found in health plans offered by medium and large firms. The following is a typical 1988 private sector employment-based plan: 3
"Major medical" insurance was later designed to cover expenses, such as physician office visits and prescription drugs, that were not covered as "basic" expenses. Major medical coverage is generally characterized by the enrollee payment of a deductible and coinsurance, a high ceiling on the total amount payable by the plan, and a limit on cost-sharing expenditures by enrollees (also called an out-of-pocket or "catastrophic limit"). Since basic and major medical insurance plans were usually combined as one package, although often offered by two different insurers, the package became known as “basic plus supplemental major medical."
The typical private employment-based plan described above provides coverage for most health care services (hospital, surgical, physician, X-ray and laboratory, emergency, prescription drugs, mental health, and dental). The $100/$300 overall deductible (the amount the enrollee must pay out-of-pocket before the plan begins paying benefits) applies to all services except hospital and emergency. The enrollee out-ofpocket costs applied to the annual $1,000/$2,000 out-of-pocket (or, "catastrophic") limit include coinsurance amounts, but not the overall deductible. There is no limit on the maximum amount the plan will pay over the enrollee's lifetime. The coinsurance percentages are percents of reasonable and customary limits for covered services paid by the plan, except for the hospital room and board coinsurance, which is
"Comprehensive major medical" insurance originally subjected all covered expenses, including hospital-related expenses, to a common deductible and coinsurance. A typical design would be for the enrollee to pay 20 percent of all covered expenses after paying a $100 deductible.
* This "typical” employment-related health plan was developed by the Congressional Research Service and the Hay/Huggins Company (while under contract with CRS), based on data in the 1988 Hay Huggins Benefit Report, a sample of nearly 900 medium to large employers included in the annual Hay/Huggins Benefits Survey. This data base covers approximately 25 million people who receive health insurance benefits through these employers. See U.S. Congress, House Committee on Post Office and Civil Service, The Federal Employees Health Benefits Program: Possible Strategies for Reform, 101st Cong., 1st Sess., May 24, 1989, 138-140.
paid as a percentage of the hospital's semiprivate room rate. Thus, the maximum amount that the enrollee would pay for services covered by this plan would be $1,100 for an individual plan and $2,300 for a family plan, assuming that provider charges were not in excess of the plan's reasonable and customary limits.
weight, exercise). However, as presented in a 1988 report entitled Implementing Preventive Services, some believe the "reimbursers may be shortsighted in failing to provide financial incentives for prevention. If keeping people healthy is cheaper than remedying their illness, then prevention is not only a good investment for society as a whole in terms of the return of health benefits for dollars expended but may be profitable in the narrow sense for the reimburser as well, by reducing total dollar outlays.” 4
Typical Private Sector Employment-Based
Health Plan, 1988
The U.S. Preventive Services Task Force released a report in May 1989 (Guide to Clinical Preventive Services) that provides recommendations on more than 100 interventions for 60 potentially preventable diseases and conditions, designed to help health care providers select the most appropriate and effective preventive interventions for patients.5 The report also includes information on the burden of suffering for the preventable conditions (e.g., morbidity, mortality, cost of treatment, etc.) and the proven effectiveness of the intervention, based on the quality of the published research evidence. The report provides examples of the benefits of including prevention in medical practice, including:
-the decline of infectious diseases such as polio
myelitis, rubella, diphtheria, and pertussis due to
childhood immunization; -reductions in morbidity and mortality due to
early detection of diseases such as stroke (through screening for hypertension), cervical cancer (through pap tests), and childhood metabolic disorders (through routine newborn screen
ing and treatment); -effects on the leading causes of death through
counseling on personal health behaviors such as smoking, physical inactivity, diet, sexual practices.
The report cited lack of reimbursement for preventive services as one reason why physicians often fail to provide recommended clinical preventive services.
Routine physicals and tests Well-baby and well-child care.
However, the effects of preventive services on health status and on cost are not entirely clear. Certain preventive services, such as immunizations, are not without risk (and resulting cost). Other preventive services, such as tests for hypertension, will not in themselves result in improved health status, and follow-up therapy, such as drug therapy for high blood pressure, will not necessarily reduce medical
2. Preventive Health Care Services—The typical private employment-based plan does not provide coverage for routine, or "preventive" health care services not related to an illness. These would include periodic check-ups and health screenings (for example, pap smears, mammography, stool exams for occult blood); immunizations (e.g., tetanus, influenza, polio, DPT); and counseling programs (e.g., smoking, alcohol,
* Robert G. Evans, "Economic Barriers to Preventive Services: Clinical Obstacle or Fiscal Defense,” in Implementing Preventive Services, ed. Renaldo N. Battista and Robert S. Lawrence, American Journal of Preventive Medicine (New York: Oxford University Press, 1988), 114.
• U.S. Preventive Services Task Force, Guide to Clinical Preventive Services (Washington, D.C.): 1989.
facturer which designs and markets the drug and a physician---the learned intermediary-who prescribes the drug for a patient. 104 Thus, any effort to cut back sharply on the tort liability of the doctor is likely to redirect the pressure by the victim for tort relief towards the manufacturer (as has recently been evident in the rise of third party product suits by employees covered by no-fault workers' compensation). Because drug manufacturers do operate within a national market, the federal government must be especially sensitive to the possible impact of measures directed at doctors and patients alone. 105 This is not to imply that there is no legitimate federal responsibility for malpractice law itself. As the largest third party purchaser of health care, the federal government must be concerned about the impact of tort litigation on the costs and quality of that care. In addition, the federal government must be sensitive to the way its own legal policies (e.g., antitrust) interact with and occasionally obstruct the efforts by individual states to improve the situation. 106
We have reviewed a broad array of issues posed by malpractice litigation for the health care system. In the mid-70's and in the mid-80's, providers in many regions of the country felt grave concern about spiralling liability costs. Although much of the hue and cry has died down now that premium levels have plateaued, the empirical research we reviewed earlier shows there is ample room for another upsurge in the 90's in malpractice claims and premiums.
As In the interim, a host of policy changes have been
nforme proposed and adopted within each of the health care, legal, and insurance systems whose interplay generates the observed rates of patient injuries, tort claims, design and premium costs. We were asked to provide here a sed to review of the arguments for and against these various ideas, not to spell out and to defend our own favored proposals. As we have tried to indicate, though, there health are no easy solutions to this complex set of problems: indeed, apparently desirable changes in one area of The the law (e.g., antitrust) may run counter to equally appealing initiatives taken elsewhere (e.g., quality as- a this surance through peer review). Too often conventional tort reform has reflected rather narrow view not just of the actual source of the problems posed by malpractice litigation for doctors, but also of the need for some such liability mechanism to insure safe care for patients. Recently, some systematic empirical and analytical work has begun to emerge about more fundamental possibilities—e.g., the AMA's administrative fault proposal and the New York state study of the incidence, compensation, and prevention of patient injuries. At this point of time, then, it would be premature to endorse specific proposals for statutory change, especially for enactment at the national level What is needed, instead, is careful analysis of the growing body of data now available, and the design, implementation, and evaluation of demonstration projects. We would hope that this Commission whose primary focus is the availability and affordability of medical care, would recommend that a similarly systematic inquiry be mounted about the ways in which malpractice litigation or its alternatives can be best enhance the quality of the medical care thereby provided.
104 See Shulman, "The Broader Message of Acutane," American Journal of Public Health 79 (1989): 1565-1570. For a recent, revealing illustration of this phenomenon, see O'Gilvie v. International Playtex, Inc., 821 F. 2d. 1438 (10th Cir. 1987), where a doctor's misdiagnosis of toxic shock syndrome precipitated an $11.5 million jury verdict against the product manufacturer, including $10 million in punitive damages.
106 In Sweden, the institution of a no-fault insurance approach to medical injury was wedded to a no-fault program for compensation for drug related injuries, a program which is underwritten by drug companies. See Rosenthal, Dealing With Medical Malpractice: The British and Swedish Experience. In this country, a no-fault system for vaccine related injury has recently been instiuted by the United States Congress. Vaccines represent one of the two ex"eptions to the learned intermediary rule and thus vaccine manufacturers nust provide patients with a warning concerning the risks associated with vaccination. See Reyes v. Wyeth Laboratories, 498 F.2d 1264 (5th Cir. 1973), cert. denied, 419 U.S. 1096 (1974). At least partially as a result of this requirement regarding warning, vaccine manufacturers have faced a great deal of product liability litigation arising out of parties injured by vaccines. See Institute of Medicine, Vaccine Supply and Innovation (1985).
In response, Congress passed an amendment to Title III of the Omnibus Health Legislation which was known as the National Childhood Vaccine Injury Act. See S.1744, 99th Cong., 2d sess. (1986). The Act creates a mandatory no-fault compensation scheme for individuals injured by childhood vaccines. An injured party may either accept compensation awarded through the no-fault proceeding or bring a separate civil suit, but in the latter circumstance, theories of liabilities are significantly limited. Under the no-fault scheme, burden of proofs are lower, as is the potential compensation. A trust fund, consisting of an excise tax on dosages of childhood vaccine, provides compensation. See Budget Reconciliation Act of 1987, P.L. 100-203, sec. 4301-07.
Of course, childhood vaccines may be a special case. They are a necessary public health tool but not an area of great profit making by drug companies. Therefore, the industry's threats to absent itself from the marketplace in this particularly important area are likely to bring about Congressional intervention. Other types of drugs might have less of a claim on Congressional attention. Nonetheless, the Vaccine Act demonstrates that tort reform could extend itself to drugs and other products. We await some further maturation of this program so as to evaluate how well it functions.
106 Consider the following example. New York State's Malpractice Reform Bill of 1986 required hospitals to purchase excess coverage for physicians practicing on the staffs of the hospitals. Thus the hospitals had to bear new costs. They passed these costs along to Blue Cross/Blue Shield, commercial insurers, and to the state Medicaid program. However, federal Medi
care disallowed any reimbursement for these purposes, and the issue is sul o litigation. This demonstrates how the prominent federal role in the provisica of medical care creates federal interest in tort reform.