Insurance Glossery

Insurance Overview & History

4. Private health care coverage

Approximately 70% of Americans are covered by private insurance with 60% obtaining the coverage through their employers and the remainder purchasing individual plans.

Insurance coverage is regulated by the states under the McCarran-Ferguson Act. Those regulations control what health care plans cover. Large employers are generally exempt from this Act and fall under the Employee Retirement Income Security Act.

4.1 Employer-sponsored
Most large employers offer some type of health care coverage. Frequently the company allows the employee to become part of the plan the company has contracted with and the company pays a percentage of the cost of the premium, in some cases as much as 85%. The employee pays the remainder. This benefits the employee with lower premiums and tax reduction but can be problematic when changing jobs.

The cost for health care insurance premiums paid through an employer has risen considerably in the past decade, far outstripping the increase in wages by as much as a four to one basis. The cost of offering the insurance has increased for the employer as well. Despite that, a 2007 study by the Employee Benefit Research Institute showing a small drop in enrollment indicates that there continues to be a stable percentage of employees choosing to take part. This situation is made tenuous by the fact that some employers in the interview said they would consider discontinuing the subsidized plans if a major employer did so first.

Recent years have also seen a decline of nearly half the number of companies that offer continued health care plans to their retired employees.

The Patient Protection and Affordable Care Act will levy a $2000 fine per employee on companies with more than 50 employees who do not offer full time employees a health care plan option.

4.1.1 Small employer group coverage
Compared to the over 90% of large companies that offer health insurance plans only about 60% of smaller firms do so and that number has steadily decreased since 1999. Cost was the major issue and the length of time a company had been in business was also a factor. For example, based on a 2005 survey, 43% of companies with less than 10 employees who had been in business 20 years offered health plans while only 24% of those who had been operating five years or less did.

Small companies face a larger cost burden as they cannot reasonably self-fund their plans, something larger companies can do more easily. The per-employee cost is higher. The American Enterprise Institute study of 2008 also found that the more mandates that existed for the self-employed relative to offering coverage the more likely that potential employer was to not hire other workers.

Small group plans often ask employees for health histories. These histories are used to determine rates.

Although the states regulate variations in what health care insurance companies can charge in premiums for small groups, those rates as they change over time are affected by the amount of claims filed. When claims go up, premiums will likely follow.

Small employers often rely on insurance brokers to help find plans since the brokers are more informed about the current offerings and pricing. Group commissions vary and brokers often help with enrollment and with benefit issues if they arise.

4.1.2 College-sponsored health insurance for students
Many colleges, universities and other training schools offer insurance plans to their students. Some schools will require the student to enroll in the plan if he or she does not have other coverage.

New government rules beginning in 2010 stipulated that if an employee has children that those children will be allowed to enroll or to continue their coverage until age 26. This is expected to help one third of all young adults get coverage.

4.1.3 Federal employees health benefit plan (FEHBP)
Full-time civilian federal employees are covered by the Federal Employees Health Benefits Program (FEHBP). Active and retired military are covered by their own plans (see 3.4).

4.1.4 “Portability” of group coverage
Two federal laws relate to maintaining coverage after employment ends.

COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1985) allows some individuals to extend employer-sponsored coverage. Employees may be required to play the full premium and COBRA only applies to companies with more than 20 employees.

HIPAA (Health Insurance Portability and Accountability Act of 1996) is concerned with employees that either move to another employer with a health plan or to those who have no other plan to move to. HIPAA ensures that the previous insurance coverage will cause the waiting period for pre-existing plans to be waived as along as not more than 63 days elapse between plans and if the employee had 18 months of continuous coverage prior to the break. Those not having access to coverage by a new employer’s plan are guaranteed the right to purchase some kind of individual coverage.

4.2 Association group health insurance
Members of certain associations sometimes are offered the option to gain coverage through their organizations under a group plan.

4.3 Individually purchased
Approximately 9% of Americans are covered by plans they purchased individually. The premium to obtain similar coverage to that offered by group plans is generally higher and the deductibles can be higher too. There may be additional co-payments or cost sharing called for by the plan. Major medical, the most common plan, is basically catastrophic coverage that also includes some free preventative benefits.

Premiums vary by age and in some states by health status. That type of discrimination caused by pre-existing conditions will end in 2014 with the Patient Protection and Affordable Care Act.

Self-employed individuals can get a tax deduction for their premiums and may see other tax benefits as well. Others may not see similar tax relief. There is some indication that competition is increasing among insurers and that prices may come down.

Individual health insurance falls under the McCarran-
Ferguson Act and is regulated by the state pursuant to that Act. The National Association of Insurance Commissioners also sets out model acts and regulations that states can choose to adopt and/or amend and if they do, those regulations gain the force of law.

4.4 Types of medical insurance

4.4.1 Traditional Indemnity or fee for service
Plans initially paid either a percentage of the charges for a service or a flat rate for that service. That is effectively the way things still work. The insurer pays what they have agreed to pay and the patient is responsible for the remainder.

4.4.2 Blue Cross Blue Shield Association
The Blue Cross Blue Shield Association is made up of 39 health insurance organizations that offer health care coverage in every U.S. state. Each one is a stand-alone franchise and in total they provide insurance to 100 million Americans. Additionally they administer Medicare in some states and provide coverage to government employees.

4.4.3 Health Maintenance Organizations
Health Maintenance Organizations (HMOs) provide managed care via hospitals, doctors and providers who contract with the HMO. The Health Maintenance Organization Act of 1973 requires employers to offer HMO options if they have more than 25 employees.

4.4.4 Managed Care
In order to reduce health care costs and improve the quality of care, so-called managed care is used. They are present in both HMO and private insurance organizations. Demand and usage is increasing.

4.4.4.1 Network-based managed care
In managed care, providers are selected to deliver medical services to the enrollees in a given network. There is an emphasis on preventative care. Costs can be well controlled but if an enrollee goes “out of network,” costs can quite high.

Networks can be “open” or “closed.” In closed networks only services from in-network providers are covered with few exclusions like emergencies. Open networks cover some costs from providers who are out of network. HMOs can be either open or closed depending on the plan.

4.4.2 Other managed care techniques
Other techniques include disease management, incentives for wellness, education, case management and utilization review.

4.4.5 Blurring lines
With all insurers trying to cut costs, the lines between the different types of health care insurance coverage is blurred in many areas. One may find preferred providers specified in an HMO, a PPO, a commercial company or a Blue Cross Blue Shield operation. Various plans fall under different regulatory oversight. The blurring continues within the industry’s trade associations and what were separate groups have now often merged.

4.4.6 New types of medical plans
New to the market is the HDHP (high deductible health plan). Spiraling costs have made it difficult for some to afford plans that offer a broad range of coverage but they can still get catastrophic care via an HDHP plan.

The HDHP can be coupled with a health care savings plan in which pre-tax dollars are set aside for health care expenses. This allows users to get services including doctor fees, Medicare part A or B fees and drugs through an HSA (Health Savings Account). There is also the Flexible Spending Account (FSA) that is commonly part of an employee benefit plan. The amount one can deposit in the FSAs may be limited by law.

Another new plan is the discount medical card. The offer only discounts from certain providers, no actual coverage.

4.5 Health care markets and pricing
Over 400 mergers in the past decade have concentrated health care options in fewer insurers. In 2006 Unitedhealth Group and Wellpoint had 67 million members and controlled 36% of the market. This large amount of control and influence is a matter of concern to many groups including the AMA. The larger insurers agree to raise their rates in return for the providers charging smaller insurers even higher costs for the same services.

The current pricing system is largely blamed for the rising health care costs that have gone up much more than economic growth. Public health insurance with its larger group size pays less than private plans for contracted services which can slow the overall rising costs for consumers.

5. Other types of health insurance

The insurance industry includes disability and long-term care insurance under the broad heading of health care insurance.

5.1 Disability income insurance (DI)
Disability income insurance plays benefits to those insured when they cannot work either due to illness or to injury. Instead of paying for care, DI pays for lost income. Policies can be written to cover short or long term disability or both.

The federal government also offers coverage under the Social Security Disability Insurance (SSDI) for workers completely and permanently unable to return to work if the disability is expected to last a year or longer or result in death.

5.2 Long-term care insurance
Long –term care insurance (LCI) pays the cost of long-term care needed due to age, disability or chronic illness. While similar to DI, LCI pays for care while DI pays for lost income due to the same circumstances. The cost for this popular insurance is also rising, especially if one waits to near retirement age to enroll.

6. Supplemental coverage

As the name suggests, supplemental insurance is an adjunct to primary insurance for medical care. The plans may offer supplemental coverage to existing Medicare coverage or take the form of dental or vision insurance, accidental death insurance or insurance for a particular disease.

The supplemental plans may pay co-payments or deductibles not covered by the primary plan or help with extra expense brought on by serious illness.

6.1 Medicare Supplement Coverage (Medigap)
Medigap plans are standardized in offering benefits to cover charges not covered by original Medicare A & B. One must be enrolled in A&B to qualify. If one signs up in the six-month open enrollment period when first eligible for Medicare acceptance is guaranteed.

6.2 Hospital indemnity insurance
This kind of insurance does not pay specific hospitalization costs, instead it pays a weekly or monthly benefit for the period of time the insured is in the hospital. It is usually a flat fee.

6.2.1 Scheduled health insurance plans
These are plans with limited benefits, anywhere from $1000 to $25,000 and can be used to pay for doctor visits and prescription drugs. They do not cover catastrophic care for major illness.

6.3 Dental insurance
Dental insurance assists in routine dental care with limits on types of services though all plans offer preventative care and cover the usual dental issues such as root canals or crowns. These can be in-network or open plans.

6.4 Vision care
Vision care insurance pays for routine eye care that most medical plans do not cover.

6.5 Specified disease
Specified disease insurance covers that, a specified disease, and can be used to cover costs related to treatment for that disease that are not covered by ones primary medical plan.

6.6 Accidental death and dismemberment
Accidental death and dismemberment pays benefits for loss of life caused by accident or dismemberment such as the loss of the limb or eyesight.

7. Criticism of the US health insurance system

In the United States the consolidation of so many health care insurers has led to problems. Instead of creating a class of strong insurers who negotiate effectively with the hospitals and health care systems to control costs while delivering needed services, the current insurers have not risen to that standard. Costs continue to rise for the consumer and smaller insurers who are charged more by the hospitals for the same services must charge similar premiums or fail to attract customers. Either way the smaller companies are at a financial disadvantage that can easily translate into the larger insurer getting an even bigger market share and more power.

Private insurers were paying an average salary of over $61,000 back in 2004 and were employing 470,000 — one reason why costs for private insurance are hard to control.

Instead of providing insurance in the traditional way by pooling risk, health insurers are instead behaving like low risk money managers who pocket the interest on what amounts to long-term health care savings according to analysts like Edward Beiser and Jacob Appel.

And while the insured find their premiums rising and benefits often cut, the largest health care insurance providers continue to post gains in their profits.