IV.

Types of Plans in the United States

Most Americans selecting private insurance plans choose either an indemnity plan (also known as a fee-for-service plan) or a type of managed care plan. Indemnity plans allow subscribers to go to any doctor, hospital, or other healthcare provider, and the insurance company and the patient then share the cost. Managed care plans deliver healthcare services by designated providers in addition to paying part of the cost of those services. However, the distinctions between indemnity plans and managed care plans have become increasingly blurred. For example, some indemnity plans offer incentives to subscribers who choose certain kinds of healthcare providers. At the same time, some managed care plans allow subscribers to visit a range of healthcare providers not employed directly by the plan.

The United States Department of Health and Human Services oversees publicly funded programs that provide limited health insurance for some Americans. The Medicare system provides coverage for elderly people and for people with qualifying disabilities. The Medicaid program provides coverage for some low-income Americans.

A.

Indemnity Plans

Until the 1970s the vast majority of people in the United States with health insurance were covered under indemnity plans, more commonly known as fee-for-service plans. Under this type of plan, the patient may visit any healthcare provider, such as a doctor or hospital. The patient or the medical provider then sends the bill to the insurance company, which typically pays a certain percentage of the fee after the patient meets the policy’s annual deductible. For example, a fee-for-service plan might pay 80 percent of a medical bill. The patient would pay the remaining 20 percent of the bill—an amount often called coinsurance—of the bill. Most indemnity plans contain provisions to increase coverage to 100 percent (rather than 80 percent) in years when medical bills become unusually large.

Owners of fee-for-service insurance plans generally prefer this type of insurance because it allows the greatest flexibility in choosing healthcare providers. For example, a participant in a fee-for-service plan typically is free to seek healthcare from specialists or to enter a hospital without first obtaining approval from the insurance company. Members of managed care plans often have less flexibility in their choice of doctor or hospital.

B.

Managed Care Plans

Managed care plans modify the traditional fee-for-service system of providing funds for medical care. Instead of focusing on paying the costs of treating illnesses and injuries as they arise, managed healthcare plans operate under the philosophy that it is better and more cost-efficient to prevent illness and injury in the first place. Accordingly, managed care organizations finance medical care in a way that provides incentives for patients to maintain good health. For example, managed care plans may reimburse patients for treatments to help them stop smoking, while most indemnity plans will not.

Managed care plans also attempt to make both patients and doctors aware of the costs associated with their healthcare decisions. Advocates of managed care claim that by emphasizing health maintenance and illness prevention, managed care organizations reduce the number of expensive medical treatments in the long run. For example, unlike many traditional indemnity plans, managed care plans generally cover the costs of regular immunizations and physical exams.

Managed care was developed in the United States in the early 1970s and quickly became widespread. By the mid-1990s most Americans were insured by managed care plans. Managed care health insurance plans include (1) health maintenance organizations, (2) preferred provider organizations, and (3) point-of-service plans.

B.1.

Health Maintenance Organizations

Health maintenance organizations (HMOs) agree to provide whatever medical services are required in exchange for the plan participant’s monthly premium payment. HMO members generally receive excellent coverage of routine healthcare services, but they often face restrictions on their choices of doctors and hospitals. Services provided by HMO member physicians and facilities are covered almost in their entirety. Services provided by nonmember physicians and facilities are not covered at all except in emergencies or when specialized care is needed and the referral is authorized in advance.

The way in which an HMO is organized determines which healthcare providers are available to its members. A group practice association, such as the Kaiser Permanente Medical Care Program, is both an insurer and a provider of healthcare services. It hires healthcare providers as employees and builds its own hospital facilities. Members of a group practice association may arrange for any physician employed by the group to be their primary care physician—their first contact for healthcare. An independent practice association establishes a contractual relationship with doctors and hospitals to provide services to its members. In a group practice association and in an independent practice association, patients who require specialty care usually may obtain referrals to see specialists only within the HMO, unless the specialty care needed is not available within the group.

B.2.

Preferred Provider Organizations

Preferred provider organizations (PPOs) combine characteristics of traditional insurance plans and HMOs. PPOs establish contractual agreements with healthcare providers, who accept lower fees for services rendered to PPO members. The PPOs distribute lists of these participating providers to their members, who then select a primary care provider. This primary care provider is the patient’s first contact for healthcare, providing healthcare services as well as referrals to specialists. PPO members who use the services of participating providers will generally receive more generous benefits than those who choose the services of healthcare providers not on the preferred list. Essentially, a PPO offers its participants some coverage for any doctor or hospital they choose, but participants’ costs will be higher if they go outside the network of preferred providers.

B.3.

Point-of-Service Plans

Point-of-service (POS) plans combine aspects of indemnity health insurance policies with some elements of PPOs. Like PPOs, point-of-service plans establish contracts with healthcare providers who agree to offer services to plan members. Unlike PPOs, which require participants to select a preferred provider in advance, point-of-service plans allow participants to choose at the time they need healthcare whether to seek treatment within the plan's network of healthcare providers or outside the network. Expenses for services received outside the network are reimbursed, usually after the patient pays a specified deductible amount and a coinsurance percentage. The benefits are exactly the same as in a PPO plan if the services are provided by a healthcare provider on the preferred list. The benefits are exactly the same as an indemnity policy if the healthcare provider is not on the preferred list.

C.

Government-Funded Plans

Established by the U.S. Congress in 1965, Medicare and Medicaid offer basic healthcare coverage to qualified individuals, but these programs do not always provide access to comprehensive medical treatment. Limited funding for these programs can also lead to long waiting periods for nonemergency procedures.

C.1.

Medicare

Medicare is a health insurance program in the United States that helps provide access to health services for citizens 65 years of age and older. It also provides health coverage for people under age 65 who have certain disabilities, such as kidney disease. Medicare is funded primarily by federal payroll taxes and by monthly premiums paid by participants.

As with other U.S. government health programs, Medicare provides a foundation of insurance, but it also leaves gaps in the services it covers. As a result, many Americans covered by Medicare choose to purchase private insurance—sometimes called “Medigap” insurance—to supplement Medicare’s coverage. While some employers offer supplemental coverage to their retired workers, many individuals purchase coverage designed to supplement Medicare when they first become eligible for the Medicare program.

Because insurance is regulated on a state-by-state basis, Medicare supplement policies can vary from one state to the next. However, in the 1980s the National Association of Insurance Commissioners persuaded many states to require that health insurance companies offer a core Medicare supplement policy called Plan A. Many insurance companies also offer nine additional plans (B through J) that feature increased benefits—and costs. In 2003 the U.S. Congress amended the Medicare program so that for the first time it provided a prescription drug benefit.

C.2.

Medicaid

Medicaid programs provide medical coverage for some people with low incomes, especially children and pregnant women. Depending on individual state eligibility requirements, Medicaid may also provide coverage for adults with certain disabilities. State programs that meet federal guidelines qualify to receive federal funding that pays for most of the program’s cost. These guidelines use federal statistics that define the poverty level (minimum level of income below which households are considered poor) to help states determine which low-income families are eligible for Medicaid.

As originally conceived, any household that fell below the federal poverty level would qualify for Medicaid benefits. In practice, however, budget shortfalls have forced states to vary eligibility standards for Medicaid. In a particular budget cycle, for example, a given state might set its eligibility requirements at 80 percent of the federal poverty level. For that year, households earning 79 percent of the federal poverty level could receive government-paid healthcare, but those earning 81 percent could receive no Medicaid benefits.

Advocates for the poor have led calls for Medicaid reform that would reinstate health insurance for all Americans below the federal poverty level. Between 1989 and 1995 the state of Oregon made changes in healthcare policy that many other states considered a model for national Medicaid reform. Oregon passed several pieces of legislation—collectively known as the Oregon Health Plan—that shifted its Medicaid requirements away from a mechanism that divided the population falling below federal poverty-level standards. Instead of asking who among the poor should receive state assistance with medical costs, the state asked what services the poor should receive, since there were not enough resources to provide all services to all qualified citizens. The Oregon Health Plan became the first state plan to limit public funding for certain healthcare services, but in doing so it expanded basic services to virtually all of the state’s poor citizens.