22.2: Group Health Insurance - An Overview, Indemnity Health Plans, Managed-Care Plans, and Other Health Plans (2024)

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Learning Objectives

In this section we elaborate on the following topics regardinggroup health insurance plans:

Changes with respect to employer-sponsored health coverage overtime
Indemnity health insurance plans—traditional fee-for-serviceplans: features, coordination of benefits, and cost containmentinitiatives
The transition to managed care: indemnity plans with networks,HMOs, PPOs, POSs, HSAs, and HRAs

Group Health Insurance: An Overview

Today, health insurance is very different from what it was twoor three decades ago. Most of us do not pay providers of healthcare directly and submit an insurance form for reimbursem*nt. Inaddition, most of us do not have complete freedom in choosing ourphysicians but must select from a list of in-network providers. Thedays of seeing any doctor and being reimbursed for any procedurethe doctor orders are gone. We live in an era of receiving healthcare under managed care: controlled access to doctors, procedures,and medicines. While limited access is the disadvantage of themanaged-care systems, there are many advantages. The most importantis cost containment through efficiency. Another advantage is thatmost patients no longer have to deal with paperwork. Insuredssimply make a copayment to the health care provider, and theremaining reimbursem*nts are done behind the scenes. Additionaladvantages include preventive care and higher standards for qualitycare.

Costs are no longer controlled because the underlying issuesthat created medical cost inflation never disappeared. The mainunderlying factors are medical technology development, medicalmalpractice lawsuits, drug and medication development, the agingpopulation, and the fact that a third party pays for the cost ofobtaining medical services. People made the transition from theopen choice of indemnity plans into the more controlledmanaged-care plans such as PPOs, point of service (POS) plans, andthe various types of HMOs, but medical technology improvements,introduction of new medications, aging of the population, andmedical malpractice continued in full swing. The cost-controlfactors of managed care that eased medical cost inflation duringthe transition period are not as effective as they once were. Oncemost of the U.S. population enrolled in managed-care plans, thecost saving factors no longer surpassed medical cost inflationfactors. The situation in the health market is discussed in the box“What Is the Tradeoff between Health Care Costs and Benefits?”

The old managed-care plans are no longer viable and new ideashave emerged to supplement them. While the old systems areconsidered defined benefit health programs, the new ideas call fordefined contribution health plans in which the consumer/employeereceives a certain amount of money from the employer and thenselects the desired health care components. Rather than employersnegotiating with insurers or managed-care organizations for thegroup health plans, consumers are encouraged to negotiate directlywith providers because these new plans are consideredconsumer-driven health plans. In some form, these are the HSAs andthe HRAs.

Table 22.1 Not all types of plans are included in the table.Exclusive physician organization (EPO) is another plan that doesnot permit access to providers outside the network. Also, HRA isnot featured here. describes the managed health care plansprevalent in the marketplace today. Note, however, that the varioushealth plans are no longer as distinct from one another as theyappear in the table. Since these plans were introduced, changes inhealth care regulations, coupled with new laws concerned withpatients’ rights, have eliminated some of the differences among theplans and they now overlap greatly. (For example, it is no longertrue that HMOs are necessarily cheaper than PPOs and HMOs with openaccess.) Figure $\PageIndex{1}$ provides the five most prevalenthealth insurance plans on a continuum of choice and cost. There areother health care plans, such as exclusive physician organizations(EPOs), where doctors have created their own networks in responseto the competitive environment, specifically, hospital chains,medical centers, and insurance companies acquiring group practices.These networks do not provide access to out-of-networkproviders.

Table 22.1 Spectrum of Health Plans
	Indemnity	Indemnity with Network	PPO	POS	health savings accounts	HMO
Choice Level	Highest					Lowest
Cost Level	Highest					Lowest
Main Characteristics	Comprehensive medical coverage withdeductibles and coinsurance. Open access to providers.	Comprehensive medical coveragewith deductibles and coinsurance. Access to providers in largenetworks and outside the network (with penalty).	Comprehensive medical coverage with deductibles,copayments, and coinsurance. Access to providers in networks andoutside the network (with penalty).	Comprehensive medical coverage with deductibles,copayments, and coinsurance. Access to providers in networks andoutside the network (with penalty). A gatekeeper.	Any type of health plan witha high deductible of at least $1,050 for a single individual and$2,100 for a family (in 2006). Rollover savings account withmaximum of $2,700 for a single individual or $5,450 for a family—orup to the amount of the deductible (2006). Employer and employeecontributions.	Comprehensive medical coverage with lowcopayments. Access to providers only in networks (except foremergencies). A gatekeeper.
Access to Providers	Access to any provider—no restriction.	Access to any provider in alarge network and outside the network (with penalty).	Access to any provider in a large network andoutside the network (with penalty).	Same as PPO, but required to see primary carephysician (PCP) first. Referral from PCP to see a specialist.(PPO+PCP)	Depending on the underlyinghealth plan	Staff model: facility only. Other models: innetworks only, with PCP as a gatekeeper.
Methods of Reimbursing the Providers	Fee-for-service: patient pays total feedirectly to the doctor for service rendered.	Fee-for-service, subject tousual, customary, and reasonable (UCR) limits.	Discounted fee-for-service.	PCPs by capitation; specialists by discountedFFS.	Depending on the underlyinghealth plan after the high deductible.	Staff model: salaries. Other models: capitations.Individual practice association: capitation for PCP, discounted FFSfor specialists.
What Is Required of the Patient?	Patient files claim forms; insurerreimburses coinsurance after the deductible, up to a maximum.	Same as indemnity, butreimbursem*nt is only for UCR.	CopaymentsCopayments can run from $10 for PCP to$35+ for specialists. Each plan is negotiated, so copayments maydiffer. See examples later in this chapter. in networks; out ofnetworks are similar to indemnity with penalties, up to amaximum.	Same as PPO.	Encourage participants tomake more informed, cost-conscious decisions about their healthcare. Patient has to open a savings account, pay deductible andother coinsurance, and copays up to a maximum.	Copayment only; traditionally, no out-of-networkreimbursem*nt except for emergency care.
The Benefits—Levels of PreventiveCareAll plans are required to provide preventivecare such as mammography screenings and Pap tests.	Comprehensive medical package with minimalpreventive care.	Comprehensive medical packagewith minimal preventive care.	Same as indemnity, with increased preventive careand well baby care.	Same as PPO.	Preventive care required bylaw is covered, as in other comprehensive plans (deductible doesnot apply).	Same as PPO with most preventive care,well-being, baby, physical exams, immunizations, extended dental,vision, and prescription plans.The distinction among the managedcare plans—PPOs, POSs, and HMOs—has become more fuzzy in recentyears because HMOs are required to provide emergency benefitsoutside the network and more choice. HMOs have begun unbundling thepreventive care services and charge additional premiums for morebenefits such as vision and dental care.
Prevalence	Lowest	Low	High	high	Growing (newest)

22.2: Group Health Insurance - An Overview, Indemnity Health Plans, Managed-Care Plans, and Other Health Plans (1)

The student who is new to this topic might best comprehend thechanges of the past three decades by first learning about theprofiles of HMOs and the indemnity plans of the late 1970s andearly 1980s. These two types of plans were truly far apart.Patients had unlimited provider choice in the indemnity plans andthe least choice in the HMOs. The HMOs supplied a person’s medicalneeds for about $5 a visit. The subscriber to the staff model HMOwould visit a clinic-like facility and see a doctor who was paid asalary. Baby, eye, and dental care were included. A new baby wouldcost a family very little. On the other side of the spectrum, thesubscribers of the indemnity plans could see any provider, pay forthe services, and later apply for reimbursem*nt. The premiums forHMOs were substantially lower than those for the indemnity plan. Inmost cases, the employer paid the full premium for an HMO and askedthe employee to supplement the higher cost of the indemnityplan.

Of these two extremes, who would select the HMO and who wouldselect the indemnity plan? You answered correctly if you said thatyoung and healthy employees most likely selected the HMOs. Itturned out that there was adverse selection against the indemnityplans, which saw the more mature and less healthy employees. Themanagers of the indemnity plans began looking at the other extremeof the continuum for help in reducing costs. This is how managedcare in traditional indemnity plans began. First, there wereindemnity plans with large networks limiting access to providersand reimbursing only for usual, customary, and reasonable(UCR) costs for that area based on studies of theappropriate cost for each medical procedure. But this was only thefirst step. The low copayment (copay) that HMOs asked was verydesirable. The newly formed preferred providerorganizations (PPOs) adopted the copay method and usedmanaged-care organizations to negotiate with doctors and allproviders for large discounts, with some more than 50 percent offthe usual, customary, and reasonable charges. The next step was tobring the gatekeeper, the primary care physician (which the HMOsused in most of their models and is discussed later in thischapter), into the structure of the PPO. When a gatekeeper wasintroduced, the new plan was called a point of service(POS) plan. This new plan is the PPO plus a gatekeeper, orthe individual practice association (IPA) HMO model discussed laterin the chapter.

The HMOs include various models: the model of one facility withdoctors on staff (the staff model), the group model, the networkmodel of doctors, and the individual practice association(IPA) of many doctors in one practice. The doctors in anIPA could see HMO and non-HMO patients. In many cases, the POS andIPA are very similar from the point of view of the patients, exceptthat when the POS is based on a preferred provider organizationrather than an HMO, there is more access to out-of-networkproviders (but with penalties). These days, many IPAs allow someout-of-network access as well, especially in cases of emergencies.In both the PPO and IPA-based networks with a gatekeeper (POS), theprovider specialists receive discounted fees for service, while thegatekeepers (primary care physicians) receivecapitation (a set amount paid to each providerbased on the number of subscribers in the plan). These are theareas where the distinctions among the plans become fuzzy. HMOswere forced to give more choices and services. Their subscribers,originally young, healthy employees, had become aging baby boomerswho needed more quality care. Many states have passed billsrequiring HMOs to loosen many of their restrictions. With all thesechanges came a price. HMOs became more expensive; with the bestpractices widely emulated, the offerings of all plans converged.The pendulum of choice versus cost has probably moved to besomewhere in the middle of the continuum shown in Figure$\PageIndex{1}$. For learning purposes, this chapter will regardHMOs as the plans with minimal access to out-of-network providers.A comparison of the actual benefits under the various plans isavailable in the employee benefits portfolio in Case 2 of "23: Cases in Holistic Risk Management".

What Is the Tradeoff between Health Care Costsand Benefits?

Health care coverage costs are growing at a faster pace thanalmost any other segment of the economy. One of the nation’slargest benefits purchasing groups, the California Public EmployeeRetirement Systems, saw its PPO rates rise 20 percent and its HMOplans increase 26 percent. Many other employers saw similarincreases. To balance their books, employers have to either passthese additional costs along to employees, find ways to cutbenefits or transition into health savings accounts (HSAs).

HMOs were once seen as the saviors of the health insurancesystem. Offering lower costs, they often attracted younger, healthyworkers. But now, as their costs are rising, even HMOs no longerlook like good deals. Many of the benefits they once offered arebeing cut. For many older individuals, or those with greater healthneeds, HMOs do not provide the level of care and flexibility theydesire. The PPOs they prefer, however, are becoming more and moreexpensive. And even with PPOs, benefits such as low copayments fordrugs are now being reduced. With the creation of HSAs, it appearsthat the satisfaction level is lower than that of comprehensivehealth coverage. A survey conducted by the Employee BenefitResearch Institute (EBRI) and discussed in its December 2005conference revealed that patients who are using the consumer-drivenhealth plans and high-deductible health plans, in the form of HSAsand HRAs, said that they (1) were less satisfied, (2) delayedseeing a health care provider, and (3) behaved in a morecost-conscious way.

At the same time, doctors are also feeling the pinch. Pressuredby insurance companies to cut costs, they are forced to see morepatients in less time, which can lead to medical mistakes.Insurance companies are also questioning expensive tests andmedical procedures and refusing to pay doctors the full amountsubmitted. Soaring medical malpractice costs are causing somedoctors to leave the profession. President George W. Bush calledfor tort reform to alleviate this problem during his State of theUnion address on January 31, 2006.

In the United States, those individuals who have insurance,primarily through their employers, are the lucky ones. Some 47million Americans have no insurance at all. Those who earn too muchto qualify for Medicaid but not enough to purchase private healthinsurance often find themselves paying huge out-of-pocket bills.Often, uninsured patients neglect treatment until their conditionbecomes an emergency. When they cannot pay, hospitals and doctorspick up the cost, and they make up for it by increasing priceselsewhere, which contributes to escalating health care costs.

Is rationing health care the answer? Canada and many Europeancountries have adopted systems of universal coverage, but suchcoverage comes with a price. Benefits, while universal, may belower. It may be difficult to see specialists, especially aboutnonemergency conditions. Long waiting times are not uncommon. Auniversal health care system proposed during the first Clintonadministration never got off the ground. Legislation aimed atgiving patients a greater voice in determining what procedureshealth insurers would cover under a patients’ bill of rights didnot materialize. However, the advent of HSAs is an attempt to allowpatients to carefully choose their own coverage and allocate theappropriate costs.

In addition to the defined contribution health plans, someemployers are looking to cut costs through disease managementprograms. With the majority of costs resulting from chronicconditions, such as asthma, diabetes, heart disease, and arthritis,human resource executives believe that they can reduce costs bydeveloping better ways to manage the health care of employees withsuch conditions.

In an effort to alleviate the strain of unaffordable medicalbills on the 48 million Americans without insurance, PresidentBarack Obama brought renewed focus to the issue of health carereform throughout his 2008 presidential campaign. President Obamaadvocates universal health insurance and expressed his desire tosee such a system implemented in the United States by the end ofhis four-year term. The Obama proposal emphasizes cost reductionsto guarantee eligibility for affordable health care throughmeasures such as insurance reform, abolishing patent protection onpharmaceuticals, and requiring that employers expand groupcoverage. A National Health Insurance Exchange would also beestablished for individuals not covered under employerarrangements, giving them access to plans pooled by privateinsurers and limited coverage through the government (in anarrangement similar to Medicare). Anyone, regardless of preexistingconditions, would have access to coverage at fixed premiums.Although more specific details have yet to emerge, President Obamasays that this plan would reduce premiums by $2,500 for the typicalfamily and would cost $60 billion to provide annually.

Critics contend that the Obama initiative would add a newgovernment entitlement program whose funding, like Social Securityand Medicare, would impose severe burdens because it does notresolve the fundamental issues responsible for escalating medicalcosts (discussed previously in this chapter). The eligibilityrequirements could also encourage adverse selection, leading tolarge deficits if an allowance for this is not built into thepremiums. Employers might view the plan as a substitute foremployee benefit options that they sponsor and a justification fordiscontinuing certain types of group coverage. Finally,nationalized health insurance risks alienating individuals who arecontent with their existing coverage and might resent having tofinance a program they could not see themselves utilizing. This, ofcourse, invites discussion about the merits of governmentintervention to such an extent in an individualistic society suchas the United States. Still, the insurance industry finds theconcept of cooperating with a national exchange preferable to thealternative of having to compete with a wholly public healthinsurance plan.

In his speech before a joint session of Congress on February 25,2009, President Obama reiterated his position, stating, “Healthcare reform cannot wait, it must not wait, and it will not waitanother year,” and he called for comprehensive reform efforts bythe end of 2009. Shortly thereafter, the White House Forum onHealth Reform was hosted on March 5. It presented findings from thegroup reports of over 30,000 participants in all 50 states who heldHealthCare Community Discussions in December 2008. Once the forumhad concluded, the Obama administration launched the Web siteHealthReform.gov, detailing intended reform efforts. A preliminaryhealth budget prepared by the Department of Health and HumanServices was also made available on the site. Highlights of thebudget include the following:

Accelerated adoption of electronic health records
Expanded research comparing the effectiveness of medicaltreatments
$6 billion investment for National Institutes of Health cancerresearch
$330 million in spending to increase the number of healthprofessionals in areas with personnel shortages
Additional outlays for affordable, quality child care
Fortifications to Medicare

The interested student is invited to go to healthreform.gov forcomplete details of the health budget. Ongoing developments can betracked at the interactive Web site, which also features the formalreport from the HealthCare Community Discussions presented at theWhite House Forum and group reports from discussions in allstates.

In March 2009, Senate Finance Committee chair Max Baucus(D-Mont.) published a white paper highlighting the proposals thathave been floated since President Obama took office. A consensus isforming in terms of reform priorities: containing medical costs,decreasing the number of uninsured people, and producing betterresults for patients. Cost containment emphasizes better value forhealth care dollars—streamlined payment systems and elimination ofredundancies. A greater insured population, it is reasoned,contributes to increased use of primary and preventive care so thatpeople do not suffer severe, debilitating, and expensive-to-treatailments by the time they seek medical intervention.

Lawmakers are focused on providing the best possible health careexperience at the lowest possible cost. Such a balancing of thescales may not be possible, as pointed out by Congressional BudgetOffice (CBO) director Douglas Elmendorf. Elmendorf explained, “Theavailable evidence suggests that a substantial share of spending onhealth care contributes little if anything to the overall health ofthe nation, but finding ways to reduce such spending without alsoaffecting services that improve health will be difficult.” Toreconcile this problem, the CBO director stressed changing theincentives within the current health care system, such as movingMedicare payments out of the fee-for-service realm, altering taxexclusions on employer-based coverage, and requiring greatertransparency regarding the quality of services and treatments bycare providers.

Despite the burdens of the economic recession, health reform hasremained on the frontlines of President Obama’s first-term agenda.The stimulus authorized by the American Recovery and ReinvestmentAct of 2009 (discussed in the box “Laws Affecting Health Care” in"20: Employment-Based Risk Management (General)") included over$20 billion in health-related targeted spending consistent withrecent reform measures. In February 2009, President Obama signed abill expanding the State Children’s Health Insurance Program toguarantee coverage of 11 million children, at a cost of $33billion. How these actions and proposals affect the quality of careremains to be seen, but Americans can certainly expect changes inthe days, weeks, and months ahead.

Questions for Discussion

Indemnity Health Plans: The Traditional Fee-for-ServicePlans

The traditional method for providing group medical expensebenefits has been by paying health care providers a fee forservices rendered. Health care providers includehealth professionals, such as physicians and surgeons, as well ashealth facilities, such as hospitals and outpatient surgerycenters. Medical expense benefits may be provided on an indemnity,service, or valued basis.

Indemnity benefits apply the principle ofindemnity by providing payment for loss. The insured (the coveredemployee or dependent) would receive, for example, the actual costsincurred up to but not exceeding $300 per day for up to ninety dayswhile confined in a hospital. Other dollar limits would be placedon benefits for other types of charges, such as those for ancillarycharges (such as X-ray, laboratory, and drugs) made by thehospital.

There are five major classifications of traditionalfee-for-service medical expense insurance: (1)hospital expense, (2) surgical expense, (3) medical expense, (4)major medical, and (5) comprehensive medical insurance. The firstthree types are called basic coverage and provide a limited set ofservices or reimburse a limited dollar amount. As the namessuggest, major medical and comprehensive medical insurance providecoverage for large losses.

Basic Health Care Benefits

Basic health care benefits cover hospital,surgical, and medical expenses. These coverages are limited interms of the types of services (or expenditure reimbursem*nts) theyprovide, as well as the dollar limits of protection. As Figure$\PageIndex{2}$ shows, basic medical coverage generally providesfirst-dollar coverage instead of protection against largelosses.

22.2: Group Health Insurance - An Overview, Indemnity Health Plans, Managed-Care Plans, and Other Health Plans (2)

The basic hospital policy covers room and board(for a specified number of days) and hospital ancillary charges,such as those for X-ray imaging and laboratory tests. The basichospital policy primarily provides benefits during a hospitalconfinement. In addition, it covers outpatient surgery and limitedemergency care in case of an accident. Many policies have a smalldeductible. Ancillary charges may be covered on a schedule basis,or more commonly on a blanket basis for all X-rays, laboratorywork, and other ancillary charges, with a maximum limit such as$5,000 for all such charges. Maternity coverage is included ingroup medical expense insurance policies because the Civil RightsAct forbids employer-sponsored health insurance plans from treatingpregnancy differently from any other medical condition.

The basic surgical policy usually paysproviders according to a schedule of procedures, regardless ofwhether the surgery is performed in a hospital or elsewhere. Thepolicy lists the maximum benefit for each type of operation. Asecond approach sometimes used by insurers is to pay benefits up tothe UCR surgical charges in the geographical region where theoperation is performed. UCR charges are defined as those below theninetieth percentile of charges by all surgeons in a geographicalregion for the same procedure.

A basic medical expense policy covers all orpart of doctors’ fees for hospital, office, or home visits due tononsurgical care. Often a plan only provides benefits when theinsured is confined to a hospital. Most policies have an overalllimit of a daily rate multiplied by the number of days in thehospital. Common exclusions are routine examinations, eyeexaminations, X-rays, and prescription drugs.

Basic health care coverage has been criticized for encouragingtreatment in the hospital, the most expensive site for medical caredelivery. For example, both the basic hospital and medical policiescover services primarily delivered on an inpatient basis. Newerbasic policies provide better coverage for outpatient services. Forexample, some provide X-ray and laboratory benefits on anoutpatient basis (up to a small maximum benefit) and cover the costof preadmission tests done on an outpatient basis prior to hospitaladmission.

Major Medical and Comprehensive Insurance

The hospital, surgical, and medical expense insurance policiespreviously discussed are basic contracts in the sense that theyprovide for many of the medical expenses on a somewhat selectivebasis and with rather low limits. They are weak in the breadth oftheir coverage as well as their maximum benefit limits. Two healthinsurance plans have been developed to correct for theseweaknesses: major medical insurance and comprehensive medicalinsurance.

Major Medical Insurance

Major medical insurance covers the expense ofalmost all medical services prescribed by a doctor. It providescoverage for almost all charges for hospitals, doctors, medicines,blood, wheelchairs, and other medically necessary items. Majormedical policies have four fundamental features: high maximumlimits (such as $1 million) or no limits, a large deductible,coverage of a broad range of different medical services, andcoinsurance provisions.

Maximum limits apply to the total amount theinsurer will pay over the insured’s lifetime. It may apply to eachinjury or illness separately, but it typically applies to allinjuries and illnesses regardless of whether they are related.

Internal policy limits often apply to specifiedservices. Hospital room and board charges are usually limited tothe hospital’s most prevalent semiprivate rate. All charges aresubject to a usual and customary test.

As Figure $\PageIndex{3}$ shows, the deductible in policies islarge, ranging from $300 to $2,000. The purpose of the deductibleis to eliminate small claims and restrict benefits to the morefinancially burdensome expenses, thus making possible high limitsand broad coverage at a reasonable premium rate. A new deductiblemust be satisfied each benefit period. In groupinsurance, the benefit period is usually a calendar year. Thedeductible applies to each individual; however, many policiesrequire only that two or three family members meet the deductibleeach year. This reduces the possibility of deductibles causingfinancial hardship when several family members have seriousillnesses or injuries during the same year.

The coinsurance provision gives the percentageof expenses the insurer will pay in excess of the deductible. Itmay vary from 70 to 90 percent; 80 percent is common. The insuredbears the remainder of the burden up to a stop-losslimit, for example, $3,000, after which 100 percent ofcovered charges are reimbursed. Some group contracts include thedeductible in the stop-loss limit and others do not. Figure$\PageIndex{3}$ shows the deductible included in the stop-losslimit.

22.2: Group Health Insurance - An Overview, Indemnity Health Plans, Managed-Care Plans, and Other Health Plans (3)

Deductibles and coinsurance requirements arecost-sharing provisions that increase the personalcost to the insured of using medical services. When insureds paypart of the cost, they tend to use fewer unnecessary ordiscretionary medical services. That is, deductibles andcoinsurance provisions reduce moral hazard and help keep groupinsurance premiums affordable. The stop-loss limit protects theinsured from excessive cost sharing, which could be financiallydevastating.

Comprehensive Medical Insurance

With major medical policies, the insurer pays most of the costfor medical services. However, major medical policy cost sharingmay still be sizeable, putting a heavy financial burden on theinsured. Comprehensive medical insurance dealswith this problem by providing smaller deductibles, typically $100to $300 per individual per calendar year (see Figure$\PageIndex{3}$). Comprehensive medical insurance is designed asa stand-alone policy that provides broad coverage for a range ofin-patient and out-patient services. Except for the smallerdeductible, the provisions of a comprehensive plan are usually thesame as those in a major medical plan. The comprehensive policy issold mainly on a group basis.

Coordination of Benefits

Many employees and their dependents are eligible for groupmedical expense coverage under more than one plan. For example, ahusband and wife may each be eligible on their own employer’s planas well as their spouse’s. Children may be eligible under both thefather’s and the mother’s plans. Workers with more than onepermanent part-time job may be eligible for coverage with more thanone employer. Coordination is needed to prevent duplicate paymentof medical expenses when employees or their dependents are coveredunder more than one group policy.

The coordination of benefits provisionestablishes a system of primary and secondary insurers. The primaryinsurer pays the normal benefit amount, as if no other insurancewere in force. Then the secondary insurer pays the balance of thecovered health care expenses. The total payments by the primary andsecondary insurers are limited to 100 percent of the coveredcharges for the applicable policies. Estimates are thatcoordination of benefits reduces the total cost of health insuranceby over 10 percent by reducing duplicate payment.

An employee’s group plan is always considered primary forexpenses incurred by the employee. For example, a husband’s primarycoverage is with his employer, a wife’s with her employer, and eachhas secondary coverage through the spouse’s plan. When a child isinsured under both parents’ plans, the policy of the parent whosebirthday falls first in the year is the primary policy. However, inthe case of separation or divorce, the primary coverage for thechild is through the custodial parent. Secondary coverage isthrough stepparents, and coverage through the noncustodial parentpays last. In some cases, these rules may not establish a priorityof payment, and then the policy in effect for the longest period oftime is primary. Any group plan that does not include acoordination of benefits provision is considered the primaryinsurer by all insurers that have such provisions. This encouragesalmost universal use of the coordination of benefits provision.

Cost Containment Initiatives for Traditional Fee-for-ServicePolicies

As noted above, escalating medical costs propelled high-costplans to look for effective methods to control costs. Thesecost containment techniques can be categorized asfollows:

Plan design techniques
Administration and funding techniques
Utilization review

Plan Design Techniques

Plan design techniques relate to deductibles, coinsurance,limits on coverage, and exclusions such as experimental proceduresor purely cosmetic surgeries. Most of the plans charge extra forcoverage of routine eye examinations, eyeglasses, hearingexaminations, and most dental expenses.

Administrative and Funding Techniques

When employers decide to self-insure their employees’ groupcoverage, insurers continue to have an administrative role. Theinsurers enroll the employees, pay claims, and reinsurecatastrophic claims. Through self-insurance, employers may be ableto avoid state premium taxes (usually 1 or 2 percent of premiums)levied on insurance; eliminate most of the insurers’ potentialprofits; and, in some cases, earn higher investment returns onreserves for health claims than those normally earned by groupinsurers. In addition, self-insured plans do not have to complywith state laws mandating coverage of medical care benefits (e.g.,alcoholism and infertility benefits). A small percentage ofemployers administer their plans themselves, eliminating anyinsurer involvement. The overall effect of these changes on thecost of health care can be characterized as significant in absolutedollar savings yet minor as a percentage of total costs.

Utilization Review

Efforts to control costs include utilization review techniquesdeveloped by insurers and employers to reduce the use of the mostcostly forms of health care—hospitalization and surgery. Some ofthese techniques are listed in Table 22.2. Most group plans usesome or all of these methods to control costs. The first ten arediscussed briefly in this section, and the others are describedlater in more detail.

Insurers will pay full coverage when the insured seeks a secondsurgical opinion before undergoing elective or nonemergency surgeryand a lower percentage or no coverage if the insured proceeds withsurgery after obtaining only one opinion. Second surgical opinionsdo not require that two surgeons agree that surgery needs to bedone before the insurer will pay for the procedure. Asecond surgical opinion provision requires onlythat the insured get a second opinion to increase the informationavailable before making a decision about whether to have thesurgery.

Insurers encourage patients to use ambulatory surgical centersor have outpatient surgery at the hospital or surgeon’s officerather than opt for a hospital stay. The reimbursem*nt rates alsoencourage preadmission testing, where patientshave diagnostic tests done on an outpatient basis prior to surgeryto reduce the total time spent in the hospital.

Table 22.2 Health Care Cost Containment Methods
Second surgical opinions Ambulatory surgical centers Preadmission testing Preadmission certification Extended care facilities Hospice care Home health care Utilization review organizations Statistical analysis of claims Prospective payment Business coalitions Wellness programs Health maintenance organizations Preferred provider organizations Managed-care plans

Most group fee-for-service plans require preadmissioncertification for hospitalization for any nonemergencycondition. The insured or the physician of the insured contacts theplan administrator for approval for hospital admission for aspecified number of days. The administrative review is usually madeby a nurse or other health professional. The recommendations arebased on practice patterns of physicians in the region, and anappeals process is available for patients with conditions thatrequire admissions and lengths of stay outside the norm.

Extended care facilities or nursing facilities, hospice care forthe dying, or home health care following hospital discharge may berecommended to reduce the length of hospitalization.Extended care facilities provide basic medicalcare needed during some recoveries, rather than the intensive andmore expensive medical service of a hospital. With hospicecare, volunteers and family members help to care for adying person in the hospital, at home, or in a dedicated hospicefacility. Home health care is an organized systemof care at home that substitutes for a hospital admission or allowsearly discharge from the hospital. The insurer covers the cost ofphysicians’ visits, nurses’ visits, respiratory therapy,prescription drugs, physical and speech therapy, home health aids,and other essentials. Cancer, diabetes, fractures, AIDS, heartailments, and many other illnesses can be treated as effectivelyand less expensively with home health, hospice, and extendedcare.

Employers or their insurers often contract for reviews by anoutside utilization review organization, sometimes called aprofessional review organization (PRO). Utilization revieworganizations, run by physicians, surgeons, and nurses,offer peer judgments on whether a hospital admission is necessary,whether the length of the hospital stay is appropriate for themedical condition, and whether the quality of care is commensuratewith the patient’s needs. When problems are identified, theutilization review organization may contact the hospitaladministrator, the chief of the medical staff, or the personalphysician. When treatment deviates substantially from the norm, thephysician may be asked to discuss the case before a peer reviewpanel. The medical insurance policy may refuse to pay for careconsidered unnecessary by the reviewing organization.

Utilization review organizations, third-party administrators,and many large employers collect and analyze data on health careclaims. This statistical analysis of claims hasthe purpose of identifying any overutilization or excessive chargesby providers of medical care. These studies usually establishstandard costs for a variety of diagnostic-related groups(DRGs). Each DRG is a medical or surgical condition thatrecognizes age, sex, and other determinants of treatment costs. Bylooking at each provider’s charges on a DRG basis, the analyses canidentify high- and low-cost providers.

Another cost containment technique using DRGs isprospective payment. In 1983, the federalgovernment adopted the practice of paying a flat fee for eachMedicare patient based on the patient’s DRG. Prospective paymentprovided an economic incentive to providers, specificallyhospitals, to minimize the length of stay and other costparameters. Use of prospective payment proved effective, and otherinsurers and employers now use similar methods. But the downside isthat the level of reimbursem*nt is too low and many providers donot accept Medicare patients. Assignment of incorrect or multipleDRGs to obtain higher fees can be problematic, and monitoring isnecessary to keep costs as low as possible.

Another cost containment initiative by employers has been tosponsor wellness programs designed to promotehealthy lifestyles and reduce the incidence and severity ofemployee medical expenses. The programs vary greatly in scope. Someare limited to educational sessions on good health habits andscreening for high blood pressure, cholesterol, diabetes, cancersymptoms, and other treatable conditions. More extensive programsprovide physical fitness gymnasiums for aerobic exercise such asbiking, running, and walking. Counseling is available, usually on aconfidential basis, as an aid in the management of stress,nutrition, alcoholism, or smoking.

Managed-Care Plans

The central concept in the area of health care cost containmentis managed care. The concept of managed care has grown in the lastfifteen to twenty years, and several characteristics are commonacross health care plans. Managed-care planscontrol access to providers in various ways. Managed-carefee-for-service plans control access to procedures throughprovisions such as preadmission certification, PPOs control accessby providing insureds with economic incentives to choose efficientproviders, and HMOs control access by covering services only fromHMO providers. Managed-care plans typically engage in utilizationreview, monitoring service usage and costs on a case-by-case basis.In addition, managed-care plans usually give economic incentives tostay in networks by charging penalties when nonpreferred providersare seen.

Preferred Provider Organizations

Preferred provider organizations (PPOs) werefirst formed in the 1980s as another approach to containing costsin group health insurance programs. PPOs are groups of hospitals,physicians, and other health care providers that contract withinsurers, third-party administrators, or directly with employers toprovide medical care to members of the contracting group(s) atdiscounted prices. They provide a mechanism for organizing,marketing, and managing fee-for-service medical care.

Unlike most HMOs, PPOs give employees and their dependents abroad choice of providers. The insured can go to any provider on anextensive list, known as the in-network list, supplied by theemployer or insurer. The insured can also go to a provider not onthe list, known as going out of network. If the insured goes to apreferred provider, most PPOs waive most or all of the coinsurance,which is a percentage of the fee paid to the doctor by the insurer.PPOs always charge a copay that can range from $10 to $30 or moredepending on the specialty or the contract the employer negotiatedwith the insurance company. Providers such as doctors and hospitalsare in abundant supply in most urban areas. Most operate on afee-for-service basis and are concerned about competition fromHMOs. To maintain their market share of patients, providers arewilling to cooperate with PPOs. The income that they give up inprice discounts they expect to gain through an increase in thenumber of patients. Employers and insurers like PPOs because theyare not expensive to organize and they direct employees to low-costproviders. The primary incentives for employees to use preferredproviders are being able to avoid deductibles and coinsuranceprovisions and only having to make copayments.

Cost effectiveness would not be achieved, even with discounts,if providers got insureds to accept more service(s) than necessaryfor the proper treatment of injury or illness. Therefore, many PPOsmonitor their use of services.

Health Maintenance Organizations

Health maintenance organizations (HMOs) havebeen around for over sixty years. In the 1970s, they gainednational attention for their potential to reduce health carecosts.

History of HMOs

The HMO concept is generally traced back to the Ross-Loos group,which was a temporary medical unit that provided medical servicesto Los Angeles construction workers building an aqueduct in aCalifornia desert in 1933. Henry J. Kaiser offered the same serviceto construction workers for the Grand Coulee Dam in the state ofWashington. During World War II, what is now called the KaiserPermanente plan was used for employees in Kaiser shipyards.Today,Kaiser Permanente is one of the largest HMOs in the United States,with operations scattered across the country.

The major turning point in popularity for HMOs occurred with thepassage of the Health Maintenance Organization Act of 1973. Thisact required an employer to subscribe exclusively to an HMO or tomake this form of health care available as one of the options tothe employees, provided an HMO that qualified under the act waslocated nearby and requested consideration. By the time thisrequirement was retired, employers were in the habit of offeringHMOs to their employees. Sponsors of HMOs include insurancecompanies, government units, Blue Cross Blue Shield, hospitals,medical schools, consumer groups, unions, and otherorganizations.

Nature of HMOs

As noted above and featured in Table 22.1, HMOs provide acomprehensive range of medical services, including physicians,surgeons, hospitals, and other providers, and emphasize preventivecare. The HMO either employs providers directly or sets upcontracts with outside providers to care for subscribers. Thus, theHMO both finances care (like an insurer) and provides care (unlikean insurer).

The scope of HMO coverage is broader than that of mostfee-for-service plans. For example, HMOs cover routine checkupseven when the employee is not ill. Copayments apply only to minorcost items, such as physician office visits and prescription drugs(e.g., a $10 copayment may be required for each of these services).The employee has lower cost-sharing requirements than withtraditional fee-for-service plans.

Two basic types of HMOs are available. Some of the oldest andlargest plans are the not-for-profit group practiceassociation and the staff model. In this arrangement, HMOphysicians and other providers work for salaries or capitation. Inindividual practice associations (IPAs), which canbe either for-profit or not-for-profit organizations, contractualarrangements are made with physicians and other providers in acommunity who practice out of their own offices and treat both HMOand non-HMO members. A physician selected as an HMO member’sprimary physician is often paid a fixed fee per HMO member, knownas capitation fee.An example of the calculation of capitationprovided by the American Society of Dermatology is featured in“Develop a Realistic Capitation Rate” at the society’s Web site:http://www.asd.org/realrate.html.When a physician is paid by salary or per patient, the primaryphysician acts as a gatekeeper between the patient and specialists,hospitals, and other providers. The group association, the staffmodel, and the individual practice association all pay for andrefer subscribers to specialists when they consider this necessary.However, if the HMO subscriber sees a specialist without a referralfrom the HMO, the subscriber is responsible for paying thespecialist for the full cost of care. HMOs either own their ownhospitals or contract with outside hospitals to servesubscribers.

Cost-Saving Motivation

Because HMO providers receive an essentially fixed annual incomeand promise to provide all the care the subscriber needs (with afew exclusions), they are financially at risk. If the HMO providersovertreat subscribers, they lose money. Consequently, no economicincentive exists to have subscribers return for unnecessary visits,to enter the hospital if treatment can be done in an ambulatorysetting, or to undergo surgery that is unlikely to improve qualityof life. This is the key aspect of an HMO that is supposed toincrease efficiency relative to traditional fee-for-serviceplans.

A major criticism of HMOs is the limited choice of providers forsubscribers. The number of physicians, hospitals, and otherproviders in the HMO may be quite small compared with group, staff,and individual practice models. Some individual practice plansovercome the criticism by enrolling almost every physician andhospital in a geographic region and then paying providers on afee-for-service basis. Paying on a fee-for-service basis, however,may destroy the main mechanism that helps HMOs control costs.Another concern expressed by critics is that HMOs do not haveproper incentives to provide high-quality care. A disadvantage formany of the baby boomers is the inability to seek the best healthcare possible. As noted in the Links section of this chapter,health care is a social commodity. Every person believes that he orshe deserves the best health care. Thus, if M.D. Anderson inHouston, Texas, were the best place to receive cancer treatment,everyone would want to go to Houston for such treatment. UnderHMOs, there would not be any reimbursem*nt for this selection.Under a PPO or POS plan, the insured may use the out-of-networkoption and pay more, but at least he or she would receive somereimbursem*nt. However, a recent national survey of 1,000 insuredsunder age sixty-five revealed that customer dissatisfaction withHMOs is lessening.“HMOs Tightening Consumer Satisfaction Gap:Survey,” National Underwriter Online News Service, July15, 2002. The explanation may be the narrowing gap in services andaccess to out-of-network providers that has resulted from anincreased concern for patient rights, such as the 2002 SupremeCourt decision that allows the states to challenge HMOs’ treatmentdecisions.Robert S. Greenberger, Sarah Lueck, and Rhonda L. Rundle,“Supreme Court Rules Against HMOs on Paying for RejectedTreatments,” Wall Street Journal, June 21, 2002. Manystates have subsequently created independent boards to reviewcoverage decisions.Steven Brostoff, “High Court Upholds States’ HMORules,” National Underwriter Online News Service,June 20, 2002.

Other Health Plans

Health Savings Accounts (HSAs)

Health savings accounts (HSAs) were created bythe Medicare bill signed by President Bush on December 8, 2003, andare designed to help individuals save for future qualified medicaland retiree health expenses on a tax-free basis. HSAs are modeledafter the medical savings accounts (MSAs). MSAswere used for small employers and the self-employed only and werenot available to individuals or large employers. Employers oremployees could contribute to the MSA but in limited amountsrelative to HSAs. The annual insurance deductible for MSAs rangedfrom $1,650 to $2,500 for individuals, of which no more than 65percent could be deposited into an MSA account. The range forfamilies was $3,300 to $4,950, of which no more than 75 percentcould be deposited in an MSA.

The Treasury Department created a document explaining thefeatures of HSAs, some of which are described here. An HSA is ownedby an individual, and contributions to the account are made to payfor current and future medical expenses. The most importantrequirement is that an HSA account can be opened only inconjunction with a high-deductible health plan(HDHP), as was the case with MSAs. Only preventive careprocedures are not subject to the high deductible. The HSA can bepart of an HMO, PPO, or indemnity plan, as long as it has a highdeductible. Eligibility is for individuals who are not coveredunder other comprehensive health plans or Medicare. Children cannotestablish their own HSAs, and there are no income limits to open anaccount. Contributions to the account are made on a pretax basis,and the monies are rolled over from year to year, unlike theflexible spending account explained in "20: Employment-Based Risk Management (General)". Healthcoverages that are eligible for HSAs include specific disease orillness insurance; accident, disability, dental care, vision care,and long-term care insurance; employee assistance programs; diseasemanagement or wellness programs; and drug discount cards.

In 2009, a high-deductible plan that qualifies for the HSA is aplan with a $1,050 deductible for a single person and a $2,300deductible for a family. The maximum allowed out-of-pocket expense,including deductibles and copayments, cannot exceed $5,800 forsingle person coverage and $11,600 for family coverage. Theseamounts are indexed annually for inflation.Internal Revenue Service(IRS), “Health Savings Accounts and Other Tax-Favored HealthPlans,” Publication 969 (2008), http://www.irs.gov/publications/p969/ar02.html#en_US_publink100038739(accessed April 22, 2009). The benefits are designed with limits.Not all expenses are added toward the out-of-pocket maximum. Forexample, the extra cost of using providers who charge more than theusual, customary, and reasonable (UCR) amounts is not included inthe maximum annual out-of-pocket expense. Preventive care is paidfrom first dollar and includes the required copayment. If theindividual goes out of the network, out-of-pocket expenses can behigher because the limits apply to in-networks costs. Deductiblesapply to all plan benefits, including prescription drugs.

Contribution to an HSA can be made by the employer or theindividual, or both. If made by the employer, the contribution isnot taxable to the employee. If it is made by the individual, it isa before-tax contribution. Maximum amounts that can be contributedin 2009 are $3,000 for single individuals and $5,950 for familiesor up to the deductible level. The amounts are indexed annually.For individuals age fifty-five and older, additional catch-upcontributions are allowed (up to $1,000 in 2009).Internal RevenueService (IRS), “Health Savings Accounts and Other Tax-FavoredHealth Plans,” Publication 969 (2008), http://www.irs.gov/publications/p969/ar02.html#en_US_publink100038739(accessed April 22, 2009). Contributions must stop once anindividual is enrolled in Medicare. Any amounts contributed to theHSA in excess of the contribution limits must be withdrawn or besubject to an excise tax.

HSA distributions are tax-free if they are taken for qualifiedmedical expenses, which include over-the-counter drugs. Tax-freedistributions can be taken for qualified medical expenses of peoplecovered by the high deductible, the spouse of the individual, andany dependent of the individual (even if not covered by the HDHP).If the distribution is not used for qualified medical expenses, theamount of the distribution is included in income and there is a 10percent additional tax, except when taken after the individualdies, becomes disabled, or reaches age sixty-five. Distributionscan be used for COBRA continuation coverage (discussed in "20: Employment-Based Risk Management (General)", any healthplan coverage while receiving unemployment compensation, and forindividuals enrolled in Medicare who encounter out-of-pocketexpenses. It can also be used for the employee share of premiumsfor employer-based coverage but not for Medigap premiums (discussedlater in this chapter). HSA distributions can be used for qualifiedlong-term care insurance (see later in this chapter) and toreimburse expenses in prior years.

HSAs are owned by the individual (not the employer), and theindividual decides whether he or she should contribute, how much tocontribute, and how much to use for medical expenses. The employerhas no right to restrict the employee or not allow rollover fromyear to year. The money is to be put in accounts with an HSAcustodian or trustee. The custodian or trustee can be a bank,credit union, insurance company, or entity already approved by theIRS to be an IRA or an MSA trustee or custodian. Trustee orcustodian fees can be paid from the assets in the HSA without beingsubject to tax or penalty, and the HSA trustee must report alldistributions annually to the individual (Form 1099 SA). Thetrustee is not required to determine whether distributions are usedfor medical purposes.

HSAs are not “use it or lose it,” like flexible spendingarrangements (FSAs). All amounts in the HSA are fully vested (see"21: Employment-Based and Individual Longevity RiskManagement"), and unspent balances in an account remain in theaccount until they are spent. The objective of the HSAs is toencourage account holders to spend their funds more wisely on theirmedical care and to shop around for the best value for their healthcare dollars. The idea is to allow the accounts to grow like IRAs(see "21: Employment-Based and Individual Longevity RiskManagement"). Rollovers from HSAs are permitted, but only onceper year and within sixty days of termination from the plan.

A survey by the Employee Benefit Research Institute (EBRI;featured in the box “What Is the Tradeoff between Health Care Costsand Benefits?”) pointed out that owners of HSAs are less satisfiedthan those in comprehensive health care plans. They also found thatthe owners delay seeking care and are making cost-consciousdecisions as intended, but lack of information makes thosedecisions very difficult.

The Wall Street Journal reported in its February 2,2006, issue that many large employers are adopting the HSAs fortheir employees. They regard it as giving the employees anopportunity to open a tax-free account. Among the companies thatoffer HSAs to their U.S. workers are Microsoft Corporation, FujitsuLtd., Nokia Inc., General Motors Corporation, andDaimlerChrysler.Sarah Rubenstein, “Is an HSA Right for You?President Proposes Sweetening Tax Incentives As More CompaniesOffer Latest Health Benefit,” Wall Street Journal Online,February 2, 2006,online.wsj.com/public/article/SB113884412224162775-jMcNHLtKsbwT1_WhQ90yKd2FDfg_20070201.html?mod=rss_free(accessed April 22, 2009). Most major banks offer HSA services.

Health Reimbursem*nt Arrangements

The move to consumer-driven health care plans described in “WhatIs the Tradeoff between Health Care Costs and Benefits?” includesanother plan that can be provided by the employer only. This planis also a defined contribution health program accompanied by ahigh-deductible plan. It is the health reimbursem*ntarrangement (HRA) in which employees use the accounts topay their medical expenses or COBRA premium, and they have theirchoice of health care providers. Under the IRS ruling, accountsfunded completely by the employer are not taxable to the employeesand can be carried over from year to year. At the time, this IRSruling was considered an important step toward creating theinnovative ideas of defined contribution health plans.“HewittPraises New IRS Health Account Rules,” National UnderwriterOnline News Service, July 2, 2002. The IRS has posted moreinformation about the HRA guidelines on the Internet atwww.ustreas.gov/press/releases/po3204.htm.

As noted, HRA plans are funded by the employer with nontaxablefunds. While these funds can be rolled over from year to year, theamount of carryover and the way in which the plan operates isdetermined by the employer. This is the exact opposite of whathappens with HSAs. Because the funds are the employer’s, any amountin an HRA usually reverts back to an employer if the employeeleaves the company, although employers may fold HRA funds into aretiree benefit program. HRA funds cannot be used to pay for healthinsurance premiums pretaxed though a cafeteria plan (as describedin "20: Employment-Based Risk Management (General)"). The onlyexceptions to this rule are that COBRA premiums or premiums forlong-term care can be paid for from an HRA.

Key Takeaways

In this section you studied the evolution of group healthinsurance and the components of different group plans:

Employers have transitioned from traditional defined benefithealth insurance arrangements to defined contribution plans thatshift costs and responsibilities to employees.
Factors responsible for the rising cost of medical care includetechnological advances, malpractice lawsuits, and drug/medicationdevelopment.
Traditional fee-for-service indemnity plans provided openaccess to subscribers, required high premiums, and reimbursedpatients for care received (less deductibles).
Basic coverages of fee-for-service plans include thefollowing:
- Basic hospital policy—covers room and board for a set number ofdays and hospital ancillary charges
- Basic surgical policy—pays providers according to a schedule ofprocedures, regardless of where the surgery is performed
- Basic medical expense policy—covers all or part of doctors’fees for hospital, office, or home visits related to nonsurgicalcare
Additions to basic coverages in fee-for-service plans are thefollowing:
- Major medical insurance—covers the expense of nearly allservices prescribed by doctors, subject to maximum and internalpolicy limits
- Comprehensive medical insurance—covers a broad range ofin-patient and out-patient services for a small deductible
Coordination of benefits specifies the order and provisions ofpayment when individuals have coverage through two different groupplans.
Fee-for-service cost containment techniques focus on plandesign, administration and funding, and utilization review.
Managed-care plans control access to providers as a way to dealwith escalating costs in the traditional fee-for-servicesystem.
- Health maintenance organizations (HMOs)—negotiate largediscounts with health care providers and require low copays, butthey limit access to in-network providers
- Preferred provider organizations (PPOs)—provide more freedom ofchoice when it comes to providers (for somewhat higher costs thanHMOs) and provide incentives for in-network coverage
- Health savings accounts (HSAs)—available only inhigh-deductible health plans, accounts owned by individuals fundedby employer or employee contributions of before-tax dollars to usefor out-of-pocket medical costs
- Health care reimbursem*nt arrangements (HRAs)—similar to HSAs,but accounts are owned by employers

Discussion Questions

What is the purpose of including deductible and coinsuranceprovisions in group medical insurance policies?
What characteristics should be contained in a managed-careplan?
What problem was managed care supposed to help solve? Did itsucceed?
What are some of the health care cost containment methods thatan insurer might utilize?
Explain how second surgical opinion provisions work to controlhealth care costs.
What services are provided by a home health service? How dohome health services reduce overall health care expenses?
How do PPOs differ from group practice HMOs? Is there muchdifference between a PPO and an individual practice HMO that paysits providers on a fee-for-service basis?
How does a PPO differ from a POS?
Describe health savings accounts (HSAs).
Jenkins Real Estate provides its employees with three healthplan options:
- An indemnity plan with a $200 deductible and 80 percentcopayment for all medical care and prescriptions ($70 a month + $70for spouse and dependents).
- A PPO, with a $200 deductible and a $10 copaywithin the network, a 70 percent copay out of network, and a $15copay for prescriptions ($50 a month for an individual, $75 for anentire family).
- An HMO with no deductible and a $10 copay forall visits within the network and a $10 copay for prescriptions; nocoverage out-of-network (free for employees, $20 a month for spouseand dependents).
Which plan do you think the following employees would chose?Why?
1. Marty Schmidt, real estate agent (age thirty-six, married, twochildren, wife is a stay-at-home mom, earned $80,000 last year).Neither he nor his wife have any health problems. The family is notparticularly attached to any doctor.
2. Lynn Frazer, real estate agent (age forty-five, not married, nochildren, earned $75,000 last year) suffers from diabetes and has alongtime doctor she would like to keep seeing (who is not in eitherthe PPO or HMO network).
3. Janet Cooke, receptionist (age twenty-two, single, earns$18,000 a year). She has chronic asthma and allergies, but noregular doctor.