As you requested, this paper provides background information on health plan benefits and a discussion of a standard, or "basic," health benefit plan. Also included is a discussion of how health plan benefits are designed to meet certain requirements, such as the need to cover certain population groups (e.g., the low income) or to conform to certain cost constraints. In addition, the paper presents and discusses several health benefit plan options.

The focus of this paper is on fee-for-service plan benefits, which is the most prevalent type of coverage in this country, as opposed to the benefit structure of health maintenance organizations. In addition, the discussion focuses only on health benefits for the nonelderly (under age 65) population.

The specification of the five health benefit plan options was determined in discussions with you. We agreed that we would use three plans already developed by the Congressional Research Service (CRS) as illustrative plans for our project on health insurance for the uninsured: a "typical" private employer-based plan, a "tailored" plan designed for the low-income, and a "catastrophic" plan for medical expenses that are large compared to family income. In addition, you requested that we develop (1) a typical plan that includes preventive services and (2) a reduced typical plan which includes greater enrollee cost sharing and excludes mental health and dental services, but includes preventive services. The relatively lengthy discussion of preventive services responds to your request for information on these frequently uncovered services.

* Report prepared by Janet Lundy, Specialist in Social Legislation, Education and Public Welfare Division, Congressional Research Service, October 24, 1989.

WHAT ARE THE BENEFIT DESIGN FEATURES OF FEE-FOR-SERVICE HEALTH PLANS?

The design of a health plan's benefits includes several features that define the benefits and help to determine what the benefits will cost. These benefit features include (1) covered services, (2) limits on allowable charges, (3) limits on services covered or total payments, (4) enrollee cost sharing and catastrophic protection, and (5) cost containment features. Only the first feature, covered services, pertains to the types of health care services covered by a plan; the other features define how the costs of health care services are divided between the plan and the plan enrollees.

Covered and Excluded Health Care Services

The major types of health care services that health plans cover include hospital services (inpatient and outpatient), surgical services (inpatient and outpatient), physician services, X-ray and laboratory tests, emergency care, prescription drugs, and mental health care, including substance abuse (inpatient and outpatient). Most employer health plans cover these benefits. What varies more from plan to plan than the types of services covered are the reimbursement levels for each service and the plan's cost containment features.

Other services sometimes covered in health plans include dental care, vision care, well-baby and child care, preventive care including routine physical examinations, home health services, and care in an extended care facility.

Any costs enrollees incur for services not covered by a health plan ("excluded" services) are neither paid for by the plan nor applied toward the plan's deductible requirements or catastrophic limits (described below). Examples of services and expenses that are

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; or treatments not experimental treatments; tests 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.

Limits on Allowable Charges

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.

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.

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 mental health care to a maximum number of visits per

Enrollee Cost Sharing and Catastrophic Protection

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 serv ices. 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 de ductible has been met by the insured.

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.

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 of amounts, who make most decisions about the use health care services. In addition, it is argued that any reductions in utilization because of cost-sharing re quirements are not necessarily desirable, since people may be discouraged from seeking needed medical

care.

Studies such as the Rand Health Insurance Experi ment (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

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

In addition to enrollee cost-sharing requirements, other 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.

Age

The uninsured are young: 32 percent are under age 18; 22 percent are age 18-24; and 19 percent are age 25-34.

Employment

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.

Income

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?

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.

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.

ISSUES IN DESIGNING A HEALTH BENEFITS PLAN

General

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:

-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?

59

-What is the framework for the health plan benefits?

These issues will be discussed below.

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.

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.

"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."

"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.

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 easi est 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.

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.

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

The typical private employment-based plan de scribed 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

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 em ployers. See U.S. Congress, House Committee on Post Office and Civil Serv ice, The Federal Employees Health Benefits Program: Possible Strategies for Reform, 101st Cong., 1st Sess., May 24, 1989, 138-140.

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

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 poliomyelitis, 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 screening 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.

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

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.

5 U.S. Preventive Services Task Force, Guide to Clinical Preventive Services (Washington, D.C.): 1989.