This document is a lecture on financing health care in the United States. It discusses how health insurance works by spreading risk over large pools of people. Insurers pay providers based on diagnosis and procedure codes, using contracted rates. The lecture describes the types of private health insurance like indemnity plans, Blue Cross/Blue Shield, and various managed care plans. It also discusses the roles of government programs like Medicare and Medicaid, as well as laws regulating private insurance such as ERISA, COBRA, HIPAA, and the Affordable Care Act.

1. Introduction to Health Care and
Public Health in the U.S.
Financing Health Care, Part 1
Lecture d
This material (Comp 1 Unit 4) was developed by Oregon Health & Science University, funded by the Department
of Health and Human Services, Office of the National Coordinator for Health Information Technology under
Award Number 90WT0001.
This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International
License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/4.0/.

2. Financing Health Care, Part 1
Learning Objectives - 1
• Describe the history and role of the health
insurance industry in financing health care
in the United States, and Federal laws that
have influenced the development of the
industry. (Lecture a)
• Explain the importance of the health care
industry in the U.S. economy and the role
of financial management in health care.
(Lecture b)
2

3. Financing Health Care, Part 1
Learning Objectives - 2
• Describe models of health care financing
in the U.S. and in selected other countries.
(Lecture c)
• Explain the differences among various
types of private health insurance and
describe the organization and structure of
network-based managed care health
insurance programs. (Lecture d)
3

4. Financing Health Care, Part 1
Learning Objectives - 3
• Describe the various roles played by
government as policy maker, payor,
provider, and regulator of health care.
(Lecture d)
• Describe the organization and function of
Medicare and Medicaid. (Lecture e)
4

5. Health Insurance in the U.S. - 1
• How does health insurance work
• How insurers pay health care providers
• Sources of health care funding
• Who can offer health insurance
• Types of health insurance plans
• Managed care
• How laws regulate private insurance
5

6. Health Insurance
• Spreads risk over a large pool of people
– 5% of people account for about 50% of
spending
• Cost influenced by:
– Prescription costs
– Technology
– Aging population
– Chronic conditions
– Government subsidies
– Administrative costs
6

7. How Insurers Pay Providers - 1
• Provider submits claim
– Uses two kinds of codes
o Diagnosis code = ICD-10-CM
o Procedure code = CPT code or DRG code
• Medical claims examiner or adjuster
processes claim
– Determines “usual and customary” charge
o Deducts portion patient is responsible for
o Deducts contractual provider discount
o Reimburses remainder
7

8. How Insurers Pay Providers - 2
• Patient and provider receive explanation of
benefits (EOB), also called remittance
advice (RA), from payor
• Claim can be denied for many reasons:
– Coding errors
– Insufficient information
– Procedure considered experimental or
otherwise not covered by the policy
• Rejected claims can be appealed
8

9. The Multi-payor U.S.
Health Care System
• Contributors
– Private sources
o Employers and employees
 Contributions to private health insurance
 Out of pocket
– Public or government sources
o Federal, State, and local
 Payroll and general tax revenues
 Special tax, e.g. sales tax
 Pooled into large funds
9

10. Public vs. Private Insurance
• Public – Government run
– Medicare
– Medicaid
– Children’s Health Insurance Program (CHIP)
• Private – Individual organizations
– State-licensed companies
– Self-insured employer plan
o ERISA regulates
o Third-party administrator
10

11. Types of Private Health Insurance
• Indemnity plans - “traditional” plans
– Fee for service
– Simply provide reimbursement to providers
– Less prevalent today
• Managed care plans
– Offer financial incentives to providers and
patients
– Integrate financing and delivery of care within
a single system
11

12. Blue Cross/Blue Shield
• Independent, state-licensed organizations
• Blue Cross reimburses hospitals
• Blue Shield reimburses physicians
• Historically set up as not-for-profits under
special state laws
• Today, some organizations operate as
commercial insurers
12

13. The Managed Care Business Model
• Integrates financing and delivery using
managed care techniques
– Provider reimbursement
– Comprehensive quality medical care
• Features:
– Controlled access to comprehensive care
– Reduce costs
– Improving quality care
• Rationing and quality of care concerns
13

14. MCO Models
• Health Maintenance Organization (HMO)
– Prototype MCO
• Newer MCOs
– Preferred Provider Organization (PPO)
– Exclusive Provider Organization (EPO)
– Point of Service Plan (POS)
• Newer MCOs Use:
– Mix and match reimbursement methodologies
– Greater patient choice
– Increased costs 14

15. The “Managed” in Managed Care
• Managed care
– Accessibility
– Controls costs
o Patient and provider incentives
– Utilization review
o Determine medical necessity of care
o Role as gatekeeper
– Different types of managed care plans
o Plan differences based upon cost and provider
choice
15

16. Cost vs. Provider Choice
• Various plans are defined by choices in
what providers the patient can use
• Fewer choices = lower premiums and out-
of-pocket costs
• Types of plans:
– Health maintenance organization (HMO)
– Preferred provider organization (PPO)
o Exclusive Provider Organization (EPO)
– Point-of-service plan (POS)
16

17. HMO Models
• Lowest cost
• Various types:
– Staff model
– Group model
– Open-group model
– Independent physician association (IPA)
– Network model
– Mixed model
• Reimbursement to HMO providers only
17

18. Preferred Provider
Organization (PPO)
• Any provider
– In-network providers
o Lower deductibles, copayments, and coinsurance
– Out-of-network providers
o Higher deductibles and coinsurance for the patient
• EPO – Must use in-network providers
– No reimbursement for out of network provider
services
• No gatekeeper for either a PPO or EPO
18

19. Point of Service Plan (POS)
• Gatekeeper
– All services through primary care physician
– Controls access to all medical services
– Referrals generally to in-network providers
only
– May refer out-of-network
• No reimbursement for services to out-of-
network providers unless previously
authorized by gatekeeper
19

20. Indemnity vs. Managed
Care Programs
4.9 Table: (2011, CC BY-NC-SA 3.0).
20

21. Regulation of Private
Health Insurance
• States control the legal structure and
monitor their finances
– Ensure the company can meet its obligations
• Private insurance companies are also
regulated by federal laws
21

22. Federal Regulation of Private
Health Insurance - 1
• Employee Retirement Income Security Act
(ERISA) 1974
– Permits and regulates self-insured health
plans
o Does not require employer plan
o Requires plans to meet minimum standards
o Requires a grievance and appeals process
o Gives participants the right to sue for benefits
22

23. Federal Regulation of Private
Health Insurance - 2
• Consolidated Omnibus Budget Reconciliation
Act (COBRA) 1985
– Amendment to ERISA
– Allows continuation of group benefits in certain cases
o Voluntary or involuntary job loss
o Reduction in hours worked
o Transition between jobs
o Death of a spouse, divorce, and certain other life events
– Individuals may have to pay higher premiums
– Not required for companies with >20 employees
23

24. Federal Regulation of Private
Health Insurance - 3
• Health Insurance Portability and
Accountability Act (HIPAA) 1996
– Amendment to ERISA
– Defines “protected health information” and
helps ensure its privacy
– Protects participants in group health plans
24

25. Federal Regulation of Private
Health Insurance - 4
• ERISA mandated coverage
– Newborns' and Mothers' Health Protection Act
1996
o 48-hour hospital stay following childbirth
– Mental Health Parity Act 1996
o Requires equality for coverage of mental illness
– Women's Health and Cancer Rights Act 1997
o Provides certain post-mastectomy benefits
25

26. Federal Regulation of Private
Health Insurance - 5
• Patient Protection and Affordable Care Act
(PPACA), or Affordable Care Act (ACA)
of 2010
– Ends lifetime limits
and most annual limits
on care
– Provides free access
to preventive services
– 50% discount on
brand-name drugs on
Medicare
– No limit or denial for children
under 19 with preexisting
conditions
– Adults no longer denied due
to preexisting condition
– Allows children under 26 to
stay on parent’s plan
26

27. Financing Health Care, Part 1
Summary – 1 – Lecture d
• Insurance works by spreading financial
risk
• Insurers pay providers based upon
– Diagnosis and procedure codes
– Contracted rates
27

28. Financing Health Care, Part 1
Summary – 2 – Lecture d
• States license and regulate private
insurance
– Types of plans include indemnity, Blue Cross
and Blue Shield and managed care plans
– Managed care uses techniques that result in
lower health care costs and improved quality
• Some Federal laws regulate private health
insurance
– ERISA, COBRA, HIPAA, and the Affordable
Care Act 28

29. Financing Health Care, Part 1
References – 1 – Lecture d
References
American Association of Preferred Provider Organizations. Resources.
http://aappo.interactivemedialab.com/Resources.aspx. Accessed January 23, 2017.
American Association of Preferred Provider Organizations. PPO Toolkit.
http://aappo.interactivemedialab.com/Portals/0/Documents/PPO%20Toolkit.pdf.
Accessed January 23, 2017.
Bihari M. Understanding the Medicare Part D donut hole: learn about the Medicare Part D
coverage gap.
http://healthinsurance.about.com/od/medicare/a/understanding_part_d.htm. Updated
October 6, 2016. Accessed January 23, 2017.
Centers for Medicare and Medicaid Services. Children’s Health Insurance Program
(CHIP). https://www.cms.gov/Outreach-and-Education/American-Indian-Alaska-
Native/AIAN/CHIP-Grantees/Overview.html. Accessed January 23, 2017.
Centers for Medicare and Medicaid Services. http://www.cms.gov. Accessed January 23,
2017.
29

30. Financing Health Care, Part 1
References – 2 – Lecture d
References
Congressional Budget Office. Testimony on CBO’s analysis of the major health care
legislation enacted in March 2010, Committee on Energy and Commerce, U.S. House
of Representatives. March 30, 2011.
https://www.cbo.gov/publication/22077?index=12119. Accessed January 23, 2017.
Cornell University Law School. Workers’ Compensation: an overview.
http://topics.law.cornell.edu/wex/Workers_compensation. Accessed January 23,
2017.
Department of Labor. Employee Retirement Income Security Act (ERISA) plan
information. http://www.dol.gov/general/topic/health-plans/erisa. Accessed January
23, 2017.
Health and Human Services. Summary of the HIPAA security rule.
http://www.hhs.gov/hipaa/for-professionals/security/laws-regulations/. Accessed
January 23, 2017.
Kaiser Family Foundation. The Facts on Medicare Spending and Financing. 2015.
http://kff.org/medicare/fact-sheet/medicare-spending-and-financing-fact-sheet/.
Accessed January 23, 2017.
30

31. Financing Health Care, Part 1
References – 3 – Lecture d
References
Levey NM. Questions and answers about new rules on appealing rejections of health
insurance claims. Los Angeles Times. July 22, 2010.
http://articles.latimes.com/2010/jul/22/nation/la-na-health-rules-qa-20100723.
Accessed January 23, 2017.
Marcinko DE. Understanding the Medicare Prospective Payment System. September 17,
2009. http://medicalexecutivepost.com/2009/09/17/understanding-the-medicare-
prospective-payment-system. Accessed January 23, 2017.
MCOL. Managed care fact sheets. http://www.mcol.com/factsheetindex. Accessed
January 23, 2017.
Medicare.gov. How do Medicare advantage plans work? https://www.medicare.gov/sign-
up-change-plans/medicare-health-plans/medicare-advantage-plans/how-medicare-
advantage-plans-work.html. Accessed January 23, 2017.
National Association of Workers’ Compensation Judiciary. http://www.nawcj.org.
Accessed January 23, 2017.
National Bureau of Economic Research. Prospective Payment System (PPS) data.
http://www.nber.org/data/pps.html. Accessed January 23, 2017.
31

32. Financing Health Care, Part 1
References – 4 – Lecture d
References
Obringer LA, Jeffries M. Understanding Health Insurance.
http://health.howstuffworks.com/medicine/healthcare/insurance/health-insurance.htm.
Accessed January 23, 2017.
U.S. Department of Health and Human Services and U.S. Department of Justice. Stop
Medicare Fraud. http://www.stopmedicarefraud.gov. Accessed January 23, 2017.
U.S. Department of Labor. Health Plans & Benefits. http://www.dol.gov/dol/topic/health-
plans. Accessed January 23, 2017.
U.S. Department of Labor. Workers’ Compensation.
http://www.dol.gov/dol/topic/workcomp/index.htm. Accessed January 23, 2017.
WorkersCompensation.com. http://www.workerscompensation.com. Accessed January
23, 2017.
Charts, Tables, Figures
4.9 Table: Indemnity vs. Managed Care Programs (2011, CC BY-NC-SA 3.0).
32

33. Introduction to Health Care and
Public Health in the U.S.
Financing Health Care, Part 1
Lecture d
This material was developed by Oregon
Health & Science University, funded by the
Department of Health and Human Services,
Office of the National Coordinator for Health
Information Technology under Award
Number 90WT0001.
33