INTRODUCTION
Mr James Green is a 28-year-old man living in San Diego, California. He splits his nights between working as a server at a small restaurant, and his true passion—playing guitar in a local rock band. He is currently uninsured, but has always been healthy. This evening he was waiting tables at the restaurant when he began to have pain in his lower abdomen. He tried to ignore it and keep working but it steadily worsened. By the time he returned home from his shift, he was clenching his belly, uncomfortable and worried. Not knowing what to do or how worried he should be, he typed, “belly pain” into a search engine on the Internet. A list of “searches related to belly pain” returned1:
Appendicitis: “A serious medical condition in which the appendix becomes inflamed and painful.”
Gastroenteritis: “Inflammation of the stomach and intestines typically resulting from bacterial toxins or viral infection.”
Stomach flu: “A short-lived stomach disorder of unknown cause, popularly attributed to a virus.”
Irritable bowel syndrome: “A widespread condition involving recurrent abdominal pain and diarrhea or constipation, often associated with stress, depression, anxiety, or previous intestinal infection.”
James does not know if his abdominal pain could be something urgent like appendicitis or something “short-lived” like the stomach flu. He becomes very anxious about the emergency department (ED) and how much it might cost. This episode of abdominal pain could cost him about $100 for a simple urgent care visit, a couple thousand dollars for imaging, or tens of thousands of dollars for surgical treatment, and he has no way to know which it will be. He decides that he will try to “tough it out” a little longer. He lies down in bed, but by the middle of the night he is vomiting and curled over in pain. He calls a friend and asks him to come urgently to bring him to the hospital. He ultimately is diagnosed with a ruptured appendix from untreated appendicitis.
Adding to Mr Green’s initial uncertainty about access to care and how much it may cost is the fact that once a patient like him with severe abdominal pain arrives at the ED, he really has no way of knowing whether the care that his physician is ordering—and he is paying for—is the most appropriate for his condition. “Price shopping is improbable, if not impossible, because the services are complex, urgently needed, and no definitive diagnosis has yet been made,” notes San Francisco General Hospital emergency medicine physician Dr Renee Hsia and colleagues in an article about variation in ED pricing for appendicitis.2 “Even if a patient did have the luxury of time and clinical knowledge to ‘shop around,’ we found … hospitals charge patients inconsistently for what should be similar services.”
WHY WE NEED HEALTH INSURANCE
In the early 20th century, physicians often individually negotiated fees with patients based on their ability to pay.3 During this time, out-of-pocket cash payment for medical care was the norm, and by far the most common method of reimbursement.4 In cases where patients had limited ability to pay, physicians would barter or informally subsidize care by charging wealthy patients more and poor patients less.3 On the surface, this seems to make the most sense since virtually every other service or commodity that we purchase in the United States is paid for “out-of-pocket.” However, since that time, the complexity and cost of healthcare delivery have increased exponentially. This has made critical services too expensive to pay for in cash for most citizens and challenging to anticipate.
Compared to other service industries, healthcare is exceptional for a number of reasons. The first is that many people consider basic healthcare a necessity rather than a luxury. If healthcare is indeed a basic need, then a social contract to insure affordable care is appropriate. This is why health insurance differs from other forms of insurance, such as homeowner’s insurance, which is seen as an optional safeguard and therefore an individual responsibility. The challenge has always been in defining how much healthcare is actually “needed.”
In addition, as shown in the case of Mr James Green, the need for and cost of healthcare services are challenging to predict, making it difficult (and often impossible) to adequately plan for these expenses. Even under “more predictable” healthcare scenarios, such as a planned pregnancy where it would be conceivable for one to save for the eventual delivery costs, it is still rarely possible to know whether the cost will be a few thousand dollars for a routine delivery, tens of thousands for needed emergent care, such as a surgical cesarean delivery (“C-section”), or hundreds of thousands for a prolonged stay for the newborn in a neonatal intensive care unit to treat an unforeseen problem. It is this uncertainty that underlies why we buy health insurance. Health insurance is important “not just because healthcare is expensive (which it is),” stated Harvard health economists Katherine Baicker and Amitabh Chandra.5 “Lots of other things are expensive, too, including housing and college tuition, but we don’t have insurance to help us purchase them because they are not uncertain in the way that potentially needing very expensive medical care is.”
Another barrier to simple out-of-pocket purchasing of healthcare is that patients strongly rely on healthcare professionals to help guide their decisions. Under many circumstances they cannot make the purchasing decisions on their own since they require specialized knowledge. “Mr. Smith, would you like me to treat your pneumonia with azithromycin, doxycycline, levofloxacin, ceftriaxone or intravenous piperacillin/tazobactam?” This is not a fair question to ask a patient that does not have adequate knowledge about the potential risks and benefits of each of these medications, or the most likely microorganism causing their pneumonia.
In the United States, we have health insurance exactly because of the great uncertainty of who will need expensive and potentially life-saving care and when they will need it. We can confidently predict that some of us will be in an accident and need emergent surgical procedures, some of us will contract deadly infectious diseases requiring treatment, and some of us will develop cancer and will require expensive chemotherapy and radiation treatments. We just can’t predict who will need this and when. At its most basic level, all insurance is designed to mitigate risk of financial catastrophe. Insurance ideally spreads this predictable population-level risk among the entire group so that the unlucky afflicted individuals can afford to have these vital therapies when they need it. The idea is that lifesaving therapy should not necessarily deplete one’s life savings. One of the great challenges in modern healthcare, however, is that health insurance may also be necessary to make noncatastrophic and routine care affordable, and that different patients may carry very different healthcare risks.
HOW DID WE GET HERE: A BRIEF HISTORY OF HEALTH INSURANCE IN THE UNITED STATES
During World War II, companies in the United States faced a labor shortage, but due to wage and price controls in place they were unable to compete for workers by promising increased wages. Instead, they began to offer insurance as a benefit to entice employees.4 Thus the “fringe benefit” of employer-sponsored health insurance was born. Following the war, unions began to negotiate for health benefits, and a series of federal rules were enacted regulating how employer-sponsored insurance would be treated with respect to federal taxes and labor negotiations. This led to a rapid increase in private insurance.6 The number of persons enrolled in private health plans catapulted between 1940 and 1950 from 20.6 million to 142.3 million.7 At its peak in the year 2000, employer-sponsored insurance covered 66.8% of all nonelderly Americans.7
Currently, the majority of Americans under the age of 65 obtain health insurance from more than 1.5 million different employers, who in turn purchase insurance plans from more than 1200 different insurers.8 This has led private insurance in the United States to be a decentralized and nonstandardized system. As discussed further in Chapter 3, this insurance system is built on separate “negotiated fees” to providers. This means that different health plans will pay different rates for the same care to different providers; and providers will accept different rates for the same care from different plans. The question of “how much does surgery for appendicitis cost,” may not be met with an answer, but rather with the questions, “for whom, when, and where?”
These complexities and issues have led prominent Princeton health economist Uwe Reinhardt to state, “If we had to do it over again, no policy analyst would recommend this model.”7 Regardless, it is the world that we live in and the model that we now must work with.
Although private insurance companies administer the vast majority of employer-based insurance, this system is actually floating on a substantial government subsidy. While employers pay most of the health insurance premiums for their employees, this expense is tax-deductible, resulting in roughly $260 billion annually in foregone tax income for US state and federal governments (in 2009).9 This is by far the largest of the tax expenditures by the federal government.9
In addition, despite the term “employer-sponsored insurance,” employees themselves actually pay for their health insurance in the form of foregone wages and other benefits. For example some employers will offer their employees the choice of either receiving health insurance as a pretax benefit or receiving a higher salary. “In 2005, the average premium for family coverage of healthcare was $10,880, which, for the first time, was the equivalent of the wages paid annually to a minimum-wage worker,” health care policy expert Dr David Blumenthal has pointed out.7 “Thus, nested within the compensation package of each American worker with family coverage is the equivalent of another worker paid the minimum wage.” Increasing medical costs (premiums plus out-of-pocket expenses plus taxes devoted to healthcare) have led to stagnant real incomes for US families over the past decade.10
An alternative to employment-based health insurance is individual private insurance. Individual insurance is a relatively small but growing market. This is partially driven by the relentless skyrocketing annual premiums that have led employers, particularly small businesses, to no longer offer comprehensive benefits.11 In 2009, 11 million nonelderly Americans had private individual health insurance at some time during the year.12
Individual insurance generally costs more than employer-based insurance due to additional administrative and marketing costs and the higher risks that insurers bear with these policies.11,13 In addition, individuals have less bargaining power in negotiating premium fees compared with larger employers—a fact that motivated the formation of health insurance exchanges under the Patient Protection and Affordable Care Act (ACA), detailed below. More than half of adults who tried to purchase individual insurance in 2007 found it very difficult to impossible to find a plan they could afford, and 36% said they were turned down or charged a higher price because of a preexisting condition.11 As many as three-quarters of those seeking coverage in the individual insurance market between 2004 and 2007 did not end up buying a plan, most often because the premium was too high.11 Traditionally, these plans also tend to have less generous benefits than employment-related insurance, such as higher deductibles and copayments (Table 2-1 for insurance term definitions) and lower likelihood of prescription drug coverage.12 This ultimately leads to higher out-of-pocket costs for patients.14
Common health insurance terms and definitions
| Health Insurance Term | Definition |
|---|---|
| Accountable Care Organization (ACO) | Groups of doctors, hospitals, and other healthcare providers, who come together voluntarily to give coordinated high-quality care. |
| Beneficiary | The person that receives any of the benefits of the insurance coverage. |
| Capitation | The payment of a fee to a healthcare provider providing services to a number of people, such that the amount paid is determined by the number of total patients. |
| Coinsurance | The amount a beneficiary must pay for medical care after they have met their deductible. For instance, the insurance company may pay for 80% of an approved amount, and the patient’s coinsurance will be for 20%. |
| Copayment | The flat fee that a beneficiary must pay each time they receive medical care. For example, a patient may pay a $10 copay for every doctor visit, while the insurance plan covers the rest of the cost. |
| Coverage limits | The maximum amount that a health insurance plan may pay for certain healthcare services. Some health insurance policies may also have a maximum annual or lifetime coverage amount. After any of these limits are reached, then the policyholder may have to pay for all remaining costs. |
| Deductible | The amount the beneficiary must pay each year before their health insurance coverage plan begins paying. |
| Exclusions/limitations | Services that are not covered by a plan. These must be clearly defined in the plan literature. |
| Fee-for-service (FFS) | A payment system where healthcare services are unbundled and paid for separately. |
| Formulary | An insurance providers list of covered drugs. |
| Health Maintenance Organization (HMO) | A form of managed care in which all care is received from participating providers within the network. A referral from a primary care provider needs to be obtained prior to seeing specialists. |
| Health reimbursement account (HRA) | An account established by an employer to pay an employee’s medical expenses. Only the employer can contribute to a HRA. |
| Health savings account (HSA) | An account established by an employer or an individual to save money toward medical expenses on a tax-free basis. |
| High-deductible health plan (HDHP) | A plan that provides comprehensive coverage for high-cost medical events but features a high deductible coupled with a limit on annual out-of-pocket expense. |
| Individual health insurance | Insurance coverage purchased independently (as opposed to as part of a group), usually directly from an insurance company. |
| Medicaid | A federal program administered by individual States to provide healthcare for certain poor and low-income individuals and families. |
| Medicare | A federal insurance program that provides healthcare coverage to eligible individuals aged 65 and older and certain disabled people (such as those with end-stage renal disease). |
| Network | A group of physicians, hospitals, and other providers who participate in a particular managed care plan. |
| Out-of-pocket maxima | The maximum amount that an insured person can pay, after which the insurance plan pays all further covered costs. Out-of-pocket maxima may be limited to a specific benefit category (such as prescription drugs) or can apply to all coverage provided during a specific benefit year. |
| Preferred provider organization (PPO) | A form of managed care in which insurance policyholders have more flexibility in choosing physicians and other providers than in an HMO. Both participating and nonparticipating providers may be seen, however the out-of-pocket expenses paid by the policyholder will vary. |
| Premium | The amount the insurance policyholder pays to belong to a health plan. In general under employer-sponsored health insurance, the employee’s share of premiums is usually deducted from their pay. |
In summary, due to multiple economic factors, an increasing number of Americans are seeking private individual health insurance, and thus may be at great risk for higher premiums and exposure to out-of-pocket costs.11,14
In a system where the majority of insurance is employment based, naturally as Americans age and retire they would no longer be covered. This leaves those who generally need healthcare the most—the elderly—without any insurance. In fact, in the late 1950s, less than 15% of the elderly had health insurance.15 In addition, those that are unemployed, and therefore often poor, are also left out of an employment-based market. In response to these significant gaps, President Lyndon B. Johnson enacted tax-financed government health insurance in 1965, aiming to provide affordable care for the elderly (Medicare) and the poor (Medicaid).16
Although the creation of Medicare and Medicaid occurred in the 1960s, it is important to highlight that discussions of public insurance have dominated congressional debate since at least the 1930s. Shortly following his first election in 1932, President Franklin D. Roosevelt decided not to pursue universal healthcare.7 Although President Roosevelt had led the expansion of other government programs and had assigned a group to work on proposals to add healthcare reform to the Social Security Act, this met staunch resistance from the medical establishment, including prominently from the American Medical Association (AMA) who denounced “socialist medicine.”17 Despite the resistance, some see this as the most likely opportunity to have established national universal healthcare in the United States. Of interest, the father-in-law of President Roosevelt’s son was famous neurosurgeon Dr Harvey Cushing, who notably opposed the enactment of federal health insurance on its merits, and may have also affected President Roosevelt’s stance on the matter.7
Medicare is a federal health insurance program for all people aged 65 and older, regardless of income or medical history. It also provides coverage for those under 65 years if they have end-stage renal disease, or are blind. In 2012, Medicare covered approximately 50 million Americans, representing one-sixth of the total population.18 The Medicare program is structured into four parts (Table 2-2: Medicare Parts A-D).
Medicare parts A-D
| Description | Coverage | Premium Payments | Portion of Benefit Spending | |
|---|---|---|---|---|
| Medicare Part A | Hospital insurance plan largely financed through social security taxes from employers and employees. | Covers inpatient hospital stays, skilled nursing facility stays, home health visits, and hospice care. | Most people do not pay a premium as long as they or their spouse paid Medicare taxes while working. If one does not qualify for “premium-free Medicare Part A,” then they may pay up to $441 each month (2013). Benefits are subject to a deductible ($1184 for each benefit period [2013]) and coinsurance. | Accounts for 31% of total benefit spending (2012) |
| Medicare Part B | Outpatient services insurance financed by federal taxes and monthly premiums from beneficiaries. Covers people that are eligible for Medicare Part A and elect to pay the Medicare Part B premium. | Covers physician visits, outpatient services, preventive services, and home health visits. Also covers required durable medical equipment, such as wheelchairs and walkers. | Most people will pay a standard premium amount ($104.90 [2013]), however this amount may be adjusted up or down based on the beneficiaries’ income. Subject to deductible ($147 [2013]). | Accounts for 20% of total benefit spending (2012) |
| Medicare Part C | The “Medicare Advantage Program,” through which beneficiaries can enroll in a private health plan (such as an HMO) and receive all Medicare-covered benefits. | Plans may cover Part A, Part B, and/or Part D services. | Subject to premiums and deductibles determined by the private health plan, which vary. | Accounts for 22% of total benefit spending (2012) |
| Medicare Part D | The voluntary, subsidized outpatient prescription drug benefit. | Provides coverage for outpatient prescription drugs. | Most Medicare Prescription Drug Plans charge a monthly premium that varies by the plan (this is paid in addition to the Medicare Part B premium). Deductibles vary between Medicare drug plans, but may not exceed $325 (2013). The plans include copayments and/or coinsurance for prescription drugs, and many include “tiers” for different medications (see Chapter 13). | Accounts for 11% of total benefit spending (2012) |
Medicare plays a fundamental role in providing healthcare coverage for elderly Americans.19 About 40% of people on Medicare have at least three chronic medical conditions, and almost a quarter of Medicare beneficiaries have cognitive impairments.20
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