FOR A-PLUS WRITER ONLY

Paying for Healthcare Chapter Objectives After reading this chapter, you should be able to 1. Explain patient options for paying for healthcare. 2. Analyze the role that insurance plays in patients’ access to healthcare. 3. Evaluate the role that patients play as consumers seeking healthcare. 2 © Comstock Images/Comstock/Thinkstock Paying for Healthcare Chapter 2 The unique nature of healthcare sets it apart from nearly every other industry , in part because people require healthcare from when they are born through their final days. As such, various gov - ernments throughout the world establish differing methods for covering healthcare costs. Some governments, such as many in Europe, view healthcare as a social benefit to be supported by the country’s tax system. In the United States, payment systems include a combination of private insur - ance, government support, and patients paying out of pocket with personal funds. Some healthcare organizations in the United States are required to provide free services to maintain their tax-free status. Understanding the relationship of providers, insurers, and patients to healthcare costs is crucial for healthcare managers, because this topic affects so many aspects of the industry.

With the goals of making U.S. healthcare more accessible, protecting consumers from rising medical costs, and increasing competition among insurers, the Patient Protection and Affordable Care Act was signed into law in March 2010. This law will affect every healthcare consumer in the United States—on January 1, 2014, all U.S. citizens and residents will be required to purchase health insurance or face a tax penalty. Title I of the Affordable Care Act explains how the law will affect consumers:

This Act puts individuals, families, and small business owners in control of their health care. It reduces premium costs for millions of working families and small businesses by providing hundreds of billions of dollars in tax relief—the largest middle class tax cut for health care in history. It also reduces what families will have to pay for health care by capping out-of-pocket expenses and requiring preventive care to be fully covered without any out-of-pocket expense. For Americans with insurance coverage who like what they have, they can keep it. Nothing in this act or anywhere in the bill forces anyone to change the insurance they have, period. A mericans without insurance coverage will be able to choose the insurance coverage that works best for them in a new open, competitive insurance market—the same insur - ance market that every member of Congress will be required to use for their insurance.

The insurance Exchange will pool buying power and give Americans new affordable choices of private insurance plans that have to compete for their business based on cost and quality. Small business owners will not only be able to choose insurance coverage through this exchange, but will receive a new tax credit to help offset the cost of covering their employees.

I t keeps insurance companies honest by setting clear rules that rein in the worst insurance industry abuses. And it bans insurance companies from denying insurance coverage because of a person’s pre-existing medical conditions while giving consumers new power to appeal insurance company decisions that deny doctor ordered treatments covered by insurance.

As the law indicates, patients are indeed consumers. They have the ability to make choices about the types of insurance they purchase and the services they seek to receive. The most basic set of choices involves lifestyle decisions that may affect a person’s health and determine whether the individual needs more or less frequent access to health services. For example, someone with a minor illness or injury may choose to purchase over-the-counter medicine rather than contact - ing a physician. Under more dire circumstances, a patient may be delivered to an emergency room in an unconscious state. In between those two extremes, individuals and families choose doctors for routine visits, exams, and treatments of some ailments. Often patients decide when to go, and when not to go, to the doctor’s office.

This chapter explores the complex mix of choices and decisions that healthcare consumers face, as well as how health insurance providers interact with medical facilities and patients to pay for Methods of Payment for Healthcare Services Chapter 2 care. First the chapter outlines methods of payment for healthcare services. It then examines the insurance industry and its relationship with access to healthcare, for both patients and providers.

It ends with an exploration of the nature of patients as consumers.

2 .1 Methods of Payment for Healthcare Services As consumers, patients have options regarding the types of care they choose to receive. A primary factor that influences the choices that consumers make is the ability to pay the cost of healthcare insurance through an employer, through the government, or as an individual purchaser.

Many employers offer health insurance policies as part of a compensation package. According to the U.S. Census Bureau (2011b), the majority of Americans are covered by employment-based private health insurance. Businesses devote almost 6% of the nation’s economic output to pay for health insurance for employees (Porter, 2013). About one-third of Americans are covered by government-funded insurance programs, and a relatively small percentage of consumers buy their own private insurance. As of 2010, nearly 50 million U.S. citizens and residents did not have any type of health insurance. Table 2.1 indicates the distribution of Americans covered by private health insurance, government insurance, or no insurance prior to the enactment of the Affordable Care Act.

Table 2.1 Health coverage in 2010 (numbers in thousands) Covered by private or government health insurance Private health insurance Government health insurance Total people Employment based Direct purchase Medicaid Medicare Military healthcare Not covered 3 0 6 ,10 0 169, 26 4 (55. 3%) 3 0 ,147 (9.8%) 48,580 (15 .9%) 44,327 (14 .5%) 12, 8 4 8 (4 . 2%) 49,904 (16 . 3%) Source: U.S. Census Bureau, 2011.

Private insurance companies and government agencies provide the majority of direct payments to providers for healthcare services. Within these systems are various types of insurance.

Types of Private Health Insurance The types of private insurance that individuals can purchase or that employers provide include comprehensive policies, major medical coverage, catastrophic health insurance, disease-specific coverage, long-term care, supplemental insurance, and health savings accounts.

Comprehensive health insurance policies cover the widest range of healthcare services. Visits to physicians, clinics, hospitals, outpatient care facilities, rehabilitation facilities, and mental health providers are commonly covered by comprehensive health insurance, as are prescription drugs, medical equipment, and hospice care. Individual policies may include or exclude vari - ous types of services. For example, a routine dental visit may not be part of a policy, but when a person has a serious injury that requires a dental surgeon, the service may be covered by the comprehensive policy. Many experimental treatments are excluded from comprehensive health insurance coverage (Gross, n.d.). Methods of Payment for Healthcare Services Chapter 2 Major medical insurance coverage may be part of a comprehensive health insurance policy, or it can be acquired as a stand-alone policy. Major medical insurance covers illnesses that require hospitalization. Payments are made for a stay in a hospital room, as well as any tests, treatments, surgeries, physician services, and other expenses incurred while in the facility. Such policies often specify the number of days a person can stay and receive coverage for a disease, injury, or illness (A A R P Hea lt h, 2013).

Catastrophic health insurance policies provide benefits when extraordinary injuries or ill - nesses require long-term care. Often, such illnesses or injuries include treatments with expensive equipment or intricate surgeries. The length of the stay, along with the unusual expenses, can quickly bankrupt an individual or family without such coverage. Catastrophic health insurance may be purchased as a stand-alone policy, or the coverage may be offered as part of a comprehen - sive health insurance plan.

Disease-specific health insurance offers what the name implies. A person receives benefits when he or she experiences a named illness. One of the more common disease-specific policies covers various forms of cancer. Benefits are usually limited to per-day amounts or to a one-time payment, and they are intended only to supplement, rather than replace, other medical insurance.

Individuals who require health coverage for daily needs resulting from age, chronic disease, or disability may purchase long-term care insurance . In long-term care plans, daily activities that most adults are able to perform are referred to as activities of daily living (ADLs). Benefits are paid to individuals who can no longer perform a number of ADLs without assistance or who can show proof of cognitive impairment (for example, from Alzheimer’s disease) after deductibles or waiting periods have been satisfied. Long-term plans may cover some of the costs of nursing home care or assisted-living care, as well as adult day care facilities, hospices, or in-home care.

Most plans provide coverage for a set number of years or for as long as the person lives. Some long-term policies do not cover certain mental conditions, such as Alzheimer’s (http://www.

ltcfeds.com).

Supplemental health insurance covers expenses that are not paid by other types of insur - ance policies, such as for prescription drugs. Medicare supplemental insurance, also known as Medigap coverage, is one example of this type of insurance.

Health savings accounts (HSAs) provide a savings plan, tax benefits, and health insurance rolled into one account. HSAs were federally enacted as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. To establish an HSA, a consumer must enroll in a high-deductible health plan (HDHP) that meets certain requirements. Compared with tra - ditional insurance, HDHPs require greater out-of-pocket spending, though the premiums may be lower. HSAs offer consumers a way to save for higher-than-expected healthcare costs. A key advantage of an HSA is that it belongs to the individual who establishes it and is portable. Funds not withdrawn in a year can be rolled over and used in future years. Once the HSA is exhausted, however, there are no further tax advantages to help defray additional out-of-pocket expenses (Saleem, 2003).

Government Programs The U.S. government offers health coverage to many citizens in the form of Medicare and Medicaid. The services are entitlement programs, and beneficiaries have a legal right to partici - pate in them as long as they meet specific eligibility requirements. Medicare and Medicaid offer a “safety net” to many Americans who otherwise would not have access to healthcare coverage. Methods of Payment for Healthcare Services Chapter 2 Medicare Under the Medicare program, the federal government reimburses providers for services rendered to participants. Medicare is a health insurance program for U.S. citizens and permanent residents who are 65 years of age or older and who have worked for at least 10 years in Medicare-covered employment. Some disabled people under 65, including people with end-stage renal disease or any permanent kidney failure treated with dialysis or a transplant, also qualify for Medicare (http://w w w.medicare.gov).

The Medicare system involves several levels of insurance:

• Medicare Part A provides hospital insurance that is paid for by the government. It also helps pay for inpatient care in hospitals or in nursing facilities following a hospital stay, as well as for some home health and hospice services.

• Medicare Part B provides outpatient medical insurance and helps pay for care and services not covered by Part A. Because Part B supplements Part A, it requires the payment of a monthly premium.

• Medicare Part C, or Medicare Advantage, is insurance that is contracted by the govern - ment through private insurance companies. People who participate in this plan receive the same services offered under Medicare Part A and Part B, but they can pay an additional premium to receive services not covered under Part A or Part B, such as dental care or vision coverage. In addition, these plans allow patients to choose an insurance plan that provides the flexibility to meet individual needs.

• Medicare Part D provides prescription drug coverage.

Most people are automatically enrolled in Medicare Part A and Part B when they turn 65. People younger than 65 who already receive Social Security retirement disability benefits or railroad retirement benefits are also eligible for Medicare.

Medicaid Medicaid is a federal–state entitlement program for low-income citizens of the United States. The Medicaid program is part of Title XIX of the Social Security Act Amendment that became law in 1965. Medicaid offers federal matching funds to states for costs incurred in paying healthcare providers for serving covered individuals. State participation is voluntary. However, since 1982, all 50 states have chosen to participate in Medicaid.

Medicaid benefits cover basic healthcare and long-term care services for eligible persons. About 58% of Medicaid spending covers hospital and other acute care services. The remaining 42% pays for nursing home and long-term care (Kaiser Family Foundation, 2011). Although there are indi - vidual state differences for this program, states that choose to participate in Medicaid must offer the following basic services:

• Hospital care (both inpatient and outpatient) • Nursing home care • Physician services • Laboratory and diagnostic X-ray services • Immunizations and other screening, diagnostic, and treatment services for children • Family planning • Health center and rural health clinic services • Nurse midwife and nurse practitioner services ( http://w w w.surgeryencyclopedia.com) Health Insurance and Access to Healthcare Chapter 2 By 2001, Medicaid assists more than 44 million low-income persons and 24 million children liv- ing in poverty, as well as about 5 million elderly citizens, with most receiving benefits for nursing home care (Encyclopedia of Surgery, n.d.).

2.2 Health Insurance and Access to Healthcare A complex relationship exists among health insurance agencies (payers), healthcare providers, and patients. Health insurers offer various types of coverage and plans that result in differing forms of payment to providers. In turn, what patients can afford and are eligible for influences the coverage they can access, what they must pay that insurance doesn’t cover, and what health services they receive. Figure 2.1 outlines the exchange of services and funds among these three entities.

Figure 2.1 Relationship among healthcare payers, providers, and patients Patients (consumers) Payers (government, insurers) f02.01_HCA340 Providers of care Direct payments Health services Claims, bills Payment Insurance coverage Taxes or premiums Government or professional body Regulation Regulation Source: Bennett, S., Quick, J. D., & Velasquez, G. (1997). Public-private roles in the pharmaceutical sector: Implications for equitable access and rational drug use. World Health Organization, p. 14. From: WHO/DAP/97.12. Retrieved from http:// apps.who.int /medicinedocs/en/d/Jwhozip27e/ .

This section examines the relationship among patients, payers, and providers by outlining the various types of coverage and plans offered by insurance agencies and the resulting effects on access to care. Healthcare coverage is divided into two primary categories: fee-for-service and prepayment plans. Fee-for-Service Versus Prepayment Plans A fee-for-ser vice form of coverage provides a set of benefits with which the insured can obtain medical services. Then the insurer pays the provider for that service. The insured can choose the doctor, hospital, or clinic, and the insurance pays for part or all of the cost, according to a schedule spelled out in the policy. Blue Cross and Blue Shield are the best-known providers of fee- for-service health insurance. Fee-for-service policies are usually divided into two parts. First, the Health Insurance and Access to Healthcare Chapter 2 basic coverage includes the cost of visits to the doctor, hospitalization, surgery, and other medi- cal expenses. When that runs out, the major medical part of the policy provides benefits. Major medical pays benefits when a lingering illness or serious injury occurs.

Health insurance companies and physicians establish fee s chedules, which catalog the maximum cost a health plan will pay for a service that has been rendered. The schedule itemizes approved healthcare procedures and services and notes the charges for each one. The amounts are based on three commodities that physicians provide: medical judgment, time spent, and the actual service that has been rendered (USA Coverage, n.d.).

Fee schedules changed dramatically in 1992, when Medicare altered the method used to pay for physician services. A standardized payment schedule was established that was determined by a resource-based re lative v alue s cale (RBRVS). According to the American Medical Association (n .d .-c):

In the RBRVS system, payments for services are determined by the resource costs needed to provide them. The cost of providing each service is divided into three components:

physician work, practice expense, and professional liability insurance. Payments are cal - culated by multiplying the combined costs of a service by a conversion factor (a mon - etary amount that is determined by the Centers for Medicare and Medicaid Services).

Payments are also adjusted for geographical differences in resource costs.

Medicare’s adoption of this method influenced fee schedules for many other insurance providers.

Fee-for-service coverage may be offered at group rates through an employer or through an affin - ity group, such as a trade association. It may also be offered at individual rates. Whether offered at group or individual rates, this type of coverage remains the most expensive kind of health insurance (http://bcbs.com).

In contrast, the type of coverage known as a prepayment plan establishes a fixed, prespecified payment system for services. The insured can then obtain healthcare services with small copay - ments for office visits and some prescriptions. Prepayment plans are less expensive and are widely used in employment situations.

The term copayment refers to the part of a bill from a healthcare provider that the patient pays.

For example, a visit to the doctor may require a $25 copayment, although the doctor’s fee may be $250 for an office visit. After receiving the copayment, the physician bills the insurance company for the remainder of the charge. A deductible establishes the amount a patient or insured must pay before the insurer begins making payments for care. Copayments and deductibles ensure that patients will cover relatively minor costs that they can reasonably be expected to bear, which helps restrict the number of claims insurers must pay, keeping costs down for them and premi - ums down for patients. A standard deductible may be $500 for the policyholder and $1,000 for the policyholder’s entire family. Once the deductible has been made, many policies then set up coinsurance systems.

Coinsurance programs divide the cost of a medical service between the insured and the insurer.

Many such insurance policies begin payments after the deductible has been met. Then the plan establishes a range in which the patient or insured pays a certain percentage of a bill, and the insurer pays the rest. A standard split is 20% paid by the patient and 80% paid by the insurance company. When the cost of care reaches the top of the range, the policy states a maximum ou t- of-pocket e xpenditure point, such as $10,000 or $20,000. At that point, the insurance company pays 100% of the remainder of the bill. Health Insurance and Access to Healthcare Chapter 2 The coinsurance system is further compli- cated by insurance company contracts with healthcare providers for provider wr ite-offs , which are often dramatic deductions in the amount charged for a specific service. The coinsurance amount applies to the remain - der of the bill following the provider’s write- off. Such a system often makes a hospital bill and insurance statement difficult to follow and understand. The net outcome is that the patient really doesn’t know the real cost of a procedure or treatment.

As discussed in Chapter 1, over the years, the U.S. healthcare industry has expe - rienced as much change and turmoil as any other industry. Political forces, social trends, economic conditions, new technol - ogies, and competitive factors interact with each other and influence every type of healthcare provider, insurer, and patient. Insurance cover - age has also evolved and expanded over time to accommodate these changes. Conventional Indemnity Plans Historically, the most common form of health insurance has been a conventional indemnity plan , in which a policyholder chooses his or her desired doctor or hospital. With this type of policy, individuals purchase health insurance with several features. First, a deductible level is set.

The policyholder pays all the costs of healthcare until the deductible level has been met. Typically, the higher the deductible level, the lower the monthly premium for the health insurance. Thus, a policy with a $500 deductible is more expensive than one with a $1,000 deductible.

After the deductible has been met, the policyholder is responsible for making a copayment for any visit to a doctor or hospital. Consequently, when a doctor bills the insurance company $1,000 and the copayment is 20%, the patient is responsible for $200, and the insurance company pays the other $800. If, however, the insurance company determines that only $800 of the bill is eli - gible for insurance coverage, the policyholder has to pay 20% of the $800 plus the $200 that was not covered by the policy, for a total of $360.

The majority of conventional indemnity plans specify a maximum out-of-pocket dollar amount.

When a person’s medical expenses reach that amount in one year, the individual is no longer required to pay coinsurance or a copay. In the past, many of these indemnity policies established a lifetime limit for certain types of care. Once that limit was met, the insurance policy was not obligated to pay any more. The Affordable Care Act of 2010 banned this practice.

Many conventional indemnity policies are written for a person’s entire family. Each member of the family has a personal deductible level, unless the policy identifies a “household” deductible level. Currently, only a minority of households have such plans, as other types of plans have taken their place. © iStockphoto/Thinkstock ▲ ▲ Deductibles, copays, provider write-offs, and coinsurance complicate the ability to understand healthcare costs. Health Insurance and Access to Healthcare Chapter 2 WEB FIELD TRIP How much do you know about the Affordable Care Act? Take the quiz at ht tp: //www.kff.org to find out.

In the “Search KFF.org” field, type “Health Reform Quiz,” then select “Health Reform Quiz” on the results page.

• Do your quiz results indicate that you know more or less about healthcare reform than you origi- nally thought you did?

• Did any of the correct responses surprise you? If so, which one(s)? Managed-Care Plans A shifting landscape in the healthcare system has led to a variety of additional plans and arrange - ments, under the general banner of managed-care plans. These plans attempt to manage costs while maintaining quality by contracting with specific healthcare providers. Individuals partici - pating in these plans are required to visit these providers, which then charge a lower rate for their services. In general, the incentive for insurance providers is a guaranteed income stream and assurance of more patient encounters. To achieve these ends, the systems integrate the financing and provision of healthcare into a single organization. Three of the approaches are health main - tenance organizations, patient provider organizations, and point of service plans.

Health Maintenance Organizations Individuals who join health maintenance organization (HMO) groups pay a monthly (or some other regular time period) rate to maintain membership. The HMO group creates contracts with a series of doctors and other healthcare providers. These providers are paid a set amount for services, no matter how much care they provide. The types of contracts created by HMOs with providers include closed panels, open panels, group models, staff models, independent practice associations, and network models (Pla nSou rce.com, 2013):

• A closed-panel HMO means that physicians in the HMO only pro - vide services within that contractual arrangement, normally in a health facility owned by the HMO group, and not to any outside organization.

• An open-panel HMO establishes a plan in which physicians practice within the contracted group and out - side of the group.

• Group model HMO arrangements build contractual relationships with several specialties that provide care for HMO members.

• Staff model HMO arrangements involve groups of physicians that © iStockphoto/Thinkstock ▲ ▲ Health maintenance organizations and preferred provider organizations have reshaped the nature of healthcare insur - ance coverage. Health Insurance and Access to Healthcare Chapter 2 retain salaried employees of either the HMO group or the professional group practice of the physicians involved.

• An independent practice association creates a contract between the HMO and physicians who practice independently within their own offices.

• A network model HMO results from a contract with several groups of physicians, individ - ual doctors, or multispecialty medical clinics. The net result becomes the ability to provide a wider range of services (Kongstvedt, 2007).

In addition to diagnostic and treatment services, including hospitalization and surgery, an HMO often offers supplemental services, such as dental, mental, and eye care, along with coverage for prescription drugs approved by the medical providers.

Preferred Provider Organizations Some physicians, hospitals, diagnostic facilities, and clinics create organizations that contain elements of both indemnity insurance and managed care. A preferred provider organization (PPO) establishes a system in which individuals purchase insurance coverage that features a fee-for-service basis. The system includes deductible amounts, copayments, and coinsurance lev - els to be met. A PPO is a managed-care system because insured individuals pay less for health services if they obtain services from a network of preferred providers. These providers contract with insurance companies to provide services at discounted rates to patients in the PPO. When a patient obtains treatment from a provider not contracted with the PPO, the patient will pay a higher, undiscounted fee for service and will have to meet higher deductible and coinsurance limits for those services.

Point-of-Service Plans A point-of-service (POS) plan is similar to an HMO in that it begins with a primary-care physi - cian. Under a POS plan, the insured individual can obtain services from physicians and clinics that are outside of the plan but must make deductible and coinsurance payments. POS plans, which are also called open-ended plans , seek to provide greater flexibility than an HMO system. High-Deductible Health Plan with Savings Option Recently, new types of savings arrangements for healthcare have emerged. Two common forms are health reimbursement arrangements and health savings accounts. Health reimbursement arrangements (HRAs) are medical care reimbursement plans established and funded by employ - ers that can be used by employees to pay for healthcare. As mentioned earlier in this chapter, HSAs are savings accounts created by individuals to pay for healthcare on an annual basis. HSAs are portable, and unspent funds can be carried over to future years. HRAs and HSAs establish financial accounts for workers or their family members. These savings arrangements are often paired with health plans that have high deductibles (Kaiser Family Foundation, 2012).

According to the Kaiser Family Foundation (http://www.kff.org), high-deductible health plans with savings option (HDHP/SO) feature either a deductible of at least $1,000 for single cover - age and $2,000 for family coverage and are offered with an HRA (referred to as HDHP/HRAs), or a high-deductible health plan that meets the federal legal requirements to permit an enrollee to establish and contribute to an HSA (HSA-qualified HDHPs). Health Insurance and Access to Healthcare Chapter 2 Flexible Spending Plans A flexible spending account (FSA) is an account that allows an employee to save a portion of his or her wages and use the money to pay medical expenses as the year unfolds. The money is not taxed, which creates incentives for consumers to set aside money to cover healthcare. Current law establishes a $2,500 cap on healthcare FSAs for an individual, $5,000 for a working couple, or $5,000 for a person holding two jobs when both employers offer the plan.

Flexible spending plans differ from HSAs in that the person must qualify to receive reim - bursement for all monies set aside during the calendar year. If the person does not spend the allotted amount, all remaining funds revert to the organization managing the FSA account.

As a result, FSA plans feature a “use it or lose it” provision. In addition, an individual who also has an HSA can use FSA funds only as reimbursements for dental and vision expenses (Saleem, 2003).

Factors Affecting Insurance Coverage Individual circumstances dictate the type of insurance a person can access and will purchase.

Among them are a person’s age, marital and family status, employment status, and level of income.

Military service affords access to an additional form of insurance coverage.

Age affects the type of coverage a person may believe he or she needs. A young, healthy individual may think that only major medical and catastrophic policies are necessary. An older individual may purchase supplemental health insurance, disease-specific insurance, and long-term care insurance.

Marital a nd fa mily s tatus changes the price of insurance. Companies base coverage packages for spouses and children on the amounts of benefits that will be provided in the case of illness or injury. A couple seeking to have children will look for insurance that will assist them during pregnancy and cover any unusual circumstance, such as a difficult delivery or a child born with a birth defect. Employment s tatus affects access to health insurance. Individual companies may or may not offer health insurance plans and may or may not help cover the cost of that insurance. An unemployed or self-employed individual experiences fewer options, most of which are fairly expensive. The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 is federal legislation that allows an employee or an employee’s dependents to maintain group health insur - ance coverage through an employer’s health insurance plan, at the individual’s expense, for up to 18 months and, in certain circumstances, beyond 18 months. COBRA rules typically apply when an employee loses coverage through loss of employment (except in cases of gross mis - conduct) or due to a reduction in work hours. COBRA benefits also extend to spouses or other dependents in case of divorce or the death of the employee. Children who are born to, adopted by, or placed for adoption with the covered employee while he or she is on COBRA coverage are also entitled to coverage. All companies that have averaged at least 20 full-time employees over the past calendar year must comply with COBRA regulations (U.S. Department of Labor, n.d.). However, most individuals discover that COBRA coverage is extremely expensive, often making it unaffordable. Patients as Consumers Chapter 2 L e v e l o f i n c o m e also influences the price of insurance and the amount of coverage. Many employers offer health insurance plans in which premiums are charged based on the level of pay, with low-income individuals paying reduced rates. Some plans, such as disease-spe - cific insurance and long-term care plans, may be beyond the reach of many people, except for higher-income individuals and families. Military s ervice allows individuals to access an additional form of health insurance, called TRICARE. This insurance is available to individuals on active duty, members of the Reserves and National Guard, retired military, their families, certain former spouses, and survivors. TRICARE, a major part of the Military Healthy System, represents the combined health resources of the services, supplemented with civilian healthcare networks, including profes - sionals, facilities and providers, and pharmacies (Virginia Health In format ion, 2013). 2.3 Patients as Consumers As this chapter has explored, the U.S. healthcare system offers a variety of options when someone becomes ill. Consider a common health problem: the flu. Adults have several choices with regard to this illness. Some may believe the best option is a flu shot, taken at just the right time; so they rely on prevention. Others may fear the alleged connection between the flu shot and incidents of Guillain-Barré syndrome (Medical News Today, 2012) and decide not to be vaccinated. Those who suffer with minor flu symptoms have access to over-the-counter medicines, whereas more serious symptoms may require a visit to the physician, unless it is the weekend and the doctor is not available. In that case, the patient might choose a walk-in clinic. The most severe cases could lead the person to a hospital stay. Factors that might influence how an individual or family responds to the flu may be based on logic and reasoning, emotions and fear, family finances, access to health insurance, and a myriad of additional factors. A patient or consumer enrolled in an HMO or PPO faces some limitations when making these choices, as this individual must either stay within the system that was selected or pay more for care. This section investigates additional issues related to consumers within the healthcare system. Cost Versus Care Beyond the insurance and provider options available to individuals, two additional concerns emerge. First, there are many instances in which the decision to pursue © iStockphoto/Thinkstock ▲ ▲ Military personnel have access to an additional form of health insurance. © Hemera/Thinkstock ▲ ▲ An illness as common as the flu results in numerous con- sumer healthcare choices. Patients as Consumers Chapter 2 a specific treatment or medicine becomes highly i nelastic —meaning, price is not the primary consideration. For instance, imagine a person involved in a high-speed automobile accident. The person has a limb severed in the wreck. At that moment, if doctors in the hospital say the cut was “clean” and the limb can be reattached, does the patient care about the price? As another example, many new medicines offer hope to patients who would otherwise die. These people and their families often go to great lengths to obtain these drugs, no matter the cost. The same holds true for treatments that reduce pain or improve a person’s quality of life.

Second, for most people, the greatest demand for healthcare services occurs in the final years of life. In 1996, last-year-of-life m edical e xpenses constituted 22% of all medical, 26% of Medicare, 18% of all non-Medicare expenditures, and 25% of Medicaid expenditures. From 1992 to 1996, mean annual medical expenditures (in 1996 dollars) for persons age 65 and older were $37,581 during the last year of life versus $7,365 for nonterminal years. Mean total last-year-of-life expen - ditures did not differ greatly by age at death (Hoover et. al., 2002). CASE The Choice Henry Gonzales, a professor at a regional university in Southern California, faces the same decision annually. Each year, an open enrollment period allows all employees at the university to keep or change their health insurance plans. As a government-supported university, the system invites three major insurance companies to compete. Each company offers conventional indemnity plans, HMO coverage, and PPO coverage. In addition, Henry can specify an amount to be set aside in an FSA with a maximum of $2,500 annually.

Henry is 42 years old. His most recent checkup gave him a clean report card: his health is very good.

Unfortunately, Henry’s wife has been out of work for the past two years due to health problems.

She finally filed for and received Social Security disability payments. She has several ailments that require prescriptions and trips to the doctor’s office. She knows it will be impossible to return to work. The couple’s two children are ages 7 and 10 and are both healthy youngsters. The couple has taken measures to ensure that they will not have any more children.

The university system establishes premium rates, based, in part, on income. As a professor of micro - biology, Henry earns substantially more than other professors—$150,000 per year as compared with the $60,000 most professors at the same rank earn. He recognizes that the most expensive coverage—conventional indemnity—provides access to any physicians the family might choose. The HMO and PPO limit those choices.

Henry and his wife have discussed the possibility of her enrollment in Medicare. She became eligible when her disability judgment was favorable and she began receiving disability benefits. To receive Medicare, however, she would be required to pay a monthly premium. The couple has also dis - cussed major medical coverage, catastrophic health insurance, disease-specific coverage (especially cancer, as it runs in Henry’s family), long-term care, supplemental insurance, and HSAs.

1. Which factors are of greatest importance as Henry selects his health insurance plan? 2. What type of coverage should Henry select for his family? 3. How much should Henry set aside in the FSA? 4. What types of coverage are not necessary for Henry and his family at this point? Why are they u n n e c e s s a r y? Patients as Consumers Chapter 2 These two factors generate major implica- tions for health insurers and the health - care system. The impact of the rising costs of health services and the corresponding amounts insurance companies pay is unde - niable. Consider, for example, the costs of end-of-life choices with regard to do-not- resuscitate orders and other directives.

Prolonging a person’s life adds substan - tially to medical costs, often without hope of improving the person’s quality of life.

Managers in hospitals and other facilities that treat the elderly must diligently record all decisions made by individuals, families, and physicians with regard to treatment choices, again adding to the costs of care.

As another example, a person who leaves the hospital against medical advice may forfeit insurance and other payment benefits. Such actions must be carefully documented to protect all parties.

Furthermore, as the age of the U.S. population continues to rise due to the Baby Boomer effect, the stress it creates will affect healthcare facilities, the need for healthcare providers, insurance companies, and the federal government. In this instance, it would be possible to argue that no real consumer “choice” takes place, because the elderly simply require the care. Personal Health Management and Social Networking Two additional factors affecting an individual’s need to access the healthcare system include personal health management programs and social networking. Personal health management incorporates standard healthcare and preventive approaches with other actions and activities.

A person actively engaged in personal health management takes advantage of routine physical exams and screening programs. Thus, a woman seeks out mammograms, and a man over 50 has routine prostate-specific antigen tests and prostate exams. These same individuals actively exercise in health clubs, consume heart-healthy foods, and engage in stress-management tech - niques and programs. Beyond the health benefits, such approaches may greatly reduce the cost of healthcare for those individuals.

Social networking combines elements of personal health management with engagement in a wider social circle. Sets of friends meet at exercise facilities to encourage one another about stay - ing in shape. Various social clubs, such as TOPS (Take Off Pounds Sensibly), create social systems in which members inspire each other to keep trying to lose weight. Most recently, social networks also provide critiques of various healthcare providers, so that positive experiences, as well as negative encounters, are transferred by word of mouth. The ultimate results go beyond improved health to a wider social group, lower healthcare costs, and possibly improvements in the overall healthcare system.

Does the Profit Motive Belong in Healthcare?

At the end of the previous decade, the concept emerged that the United States could reduce the ballooning costs of the government’s healthcare entitlements by turning more of the system © iStockphoto/Thinkstock ▲ ▲ Most people spend the greatest amount of money on healthcare at the end of life. Patients as Consumers Chapter 2 over to the private sector—in essence, making healthcare more of a consumer’s market. The argument was that private companies would have strong financial incentives to identify and eliminate wasteful treatment. In addition, insurance companies and healthcare providers would encourage healthy lifestyles among beneficiaries, thus lowering the use of costly care, and com- petition for government contracts would keep the overall price down. New Y ork T imes editorial writer Eduardo Porter (2013) noted, “We now know this didn’t work as advertised. Competition wasn’t as robust as hoped. Health maintenance organizations didn’t keep costs in check, and they spent heavily on administration and screening to enroll only the healthiest, most profitable beneficiaries.” Numerous arguments against the profit motive as part of the healthcare system can be made.

First, some for-profit hospitals avoid providing services that are expensive or that generate smaller revenues, such as home healthcare and psy - chiatric emergency care, in favor of more profitable health services, such as open heart surgery (Porter, 2013). In essence, the profit motive leads to fewer services being made available. Furthermore, a continuing complaint against health insurers is that they seek out ways to exclude all but the healthiest individuals from the system. In that way, the companies collect premiums without needing to pay as many medical expenses. All the while, those most in need of care cannot afford it or cannot even pur - chase policies.

Second, given that healthcare profits are part of the gross national product, critics of privatization claim that the private system has further incentive to drive up costs. In countries that offer universal coverage, healthcare costs tend to be less volatile. For example in Britain, health costs account for only 10% of gross domestic product (GDP). The rates in Germany and France are 12%, whereas in the United States, healthcare represents 18% of the GDP, and yet millions of citizens remain uninsured.

Finally, in search of efficiencies, the quality of care may decline. Patient mortality rates tend to rise when a nonprofit hospital becomes profit seeking (Picone, Chou, & Sloan, 2003), which may be due, in part, to staff layoffs. Furthermore, it has been found that profit-seeking nursing homes tend to sedate patients with much higher dosages of drugs than their nonprofit counterparts, as a sedated patient requires less attention and a smaller staff (Porter, 2013).

Proponents of privatization, on the other hand, argue that government intervention into health - care eliminates freedoms and crowds out private enterprise. Furthermore, they claim that gov - ernment involvement in healthcare will drive up costs due to excess paperwork, lead to lower quality care, and place citizens at the mercy of an expanding bureaucracy. According to pro - ponents of privatization, without the private sector, incentives to innovate and create new best practices are not present with government intervention.

As the 2010 Patient Protection and Affordable Care Act moves into the phase in which all citi - zens will be required to purchase health insurance, the debate regarding the profit motive will undoubtedly continue. Both sides seem to recognize that the new law creates a different environ - ment in which healthcare will be delivered. Items as basic as insurance premiums, charges for © Creatas Images/Creatas/Thinkstock ▲ ▲ Does the profit motive belong in healthcare? Patients as Consumers Chapter 2 services, and preventive care practices will be affected (see Table 2.2). Managers in the healthcare industry will be expected to understand and adapt to these new regulations. The role of patients as consumers will undoubtedly evolve as well as this new healthcare system is implemented.

Table 2.2 Provisions of the patient protection and affordable health care act Provisions by year 2010 • Provided small businesses health insurance tax credits.

• Allowed states to cover more people on Medicaid.

• Assisted elderly with relief from the “donut hole” in the governmental prescription plan.

• Cracked down on healthcare fraud.

• Expanded coverage for early retirees.

• Provided access to insurance for those with pre-existing conditions.

• Placed healthcare information online.

• Expanded coverage to young adults under parent plans (up to age 26).

• Provided some free preventive care.

• Prohibited insurance companies from rescinding coverage.

• Created program for appeals of insurance company decisions.

• Regulated limits on coverage.

• Prohibited denial of coverage based on pre-existing conditions.

• Prohibited unreasonable rate hikes by insurance companies.

• Attempted to rebuild the primary care workforce.

2 011 • Established consumer assistance programs in each state.

• Funded prevention of disease and illness ($15 billion).

• Funded community health centers.

• Increased payments to rural healthcare providers.

• Added prescription drug discounts for Medicare recipients.

• Added preventive care provisions for senior citizens.

• Created program to reduce health insurance premiums.

• Addressed overpayments to insurance companies.

• Strengthened Medicare Advantage.

• Established Center for Medicare and Medicaid Innovation.

• Created Community Care Transitions Program, which helps high-risk beneficiaries.

• Established Independent Payment Advisory Board to develop and submit proposals aimed at extending the life of the Medicare Trust Fund.

• Created the Community First Choice Option, which allows states to offer home- and community-based services to disabled people through Medicaid.

2012 • Established Accountable Care Organizations with financial incentives to physicians.

• Sought to reduce “persistent health disparities.” • Created provisions to reduce paperwork and administrative healthcare costs.

• Created Value-Based Purchasing program with financial incentives for quality care. (continued) Patients as Consumers Chapter 2 Provisions by year 2013 • Increased preventive care for all insured.

• Increased Medicaid payments to physicians.

• Expanded authority for “bundled” payments to physicians.

2014 • Establish the Healthcare Marketplace to purchase insurance. CASE A Pain in the Back Colleen Hegarty suffered continually for two years. It began as a sore back that continued to increase in intensity and duration. She lost strength and became unable to lift any object weighing more than 10 pounds. Her initial response—purchases of over-the-counter pain medications specifi - cally for back pain—did not have a lasting positive effect. She started to worry that her pain was interfering with the quality of work she provided as a tax accountant.

Colleen visited a chiropractor, as many of her friends had experienced excellent results by getting an “adjustment.” She hoped for a similar outcome but was disappointed. The practitioner offered to provide a series of treatments over a period of months that would have quickly satisfied her insur - ance deductible, leaving her only to make copayments.

On the insistence of her husband, Colleen made an appointment with her family physician, who recommended going to a back specialist. The specialist told Colleen up front that he was “very conservative” in treatments of back pain, noting that many times more aggressive physicians would immediately recommend surgery. He expressed his concern that many times these procedures did not work and could even make matters worse. His advice was to try physical therapy first. The cost to Colleen would have been similar to the chiropractic care.

A key moment arrived when Colleen slipped on a wet floor. She collapsed in pain and knew that the problem, which the back specialist diagnosed as a bulging disc, had either been made worse or simply hurt more. She was driven to the hospital and spent an agonizing two hours in the waiting room before finally seeing an emergency care physician. The doctor recommended an overnight stay with pain medication and other measures to reduce her discomfort. This allowed time for an X-ray and other diagnostic procedures. The emergency care doctor told Colleen that his best advice was to obtain a second opinion from another back specialist— one who was more inclined to think about surgical options.

Colleen asked what would happen if she took the more conservative approach and tried either chi - ropractic or physical therapy first. “Well,” the doctor replied, “if you go that route, there is a good chance I’ll be seeing you again.” Colleen put her head down into her hands. What was she to do?

1. What healthcare options are available in this case? What costs and benefits are associated with each option? 2. What factors might have the biggest influence on Colleen’s decision? Would it make a difference if she had a conventional indemnity health insurance plan or was a member of an HMO? 3. How might Colleen’s employment status affect her decision in this situation? What other factors might be relevant? Key Terms Chapter 2 Chapter Summary The various entities involved in the healthcare system include suppliers, buyers, regulators, pub- lic health agencies, insurance providers, and consumers or patients, all of which interact with healthcare providers, including individual physicians, groups of doctors, and various forms of hospitals. The types of insurance that individuals can purchase or employers can provide include comprehensive policies, major medical coverage, catastrophic health insurance, disease-specific coverage, long-term care, supplemental insurance, and health savings accounts. Governmental programs for individuals meeting specific requirements include Medicare and Medicaid.

Health insurers offer several coverage options. A fee-for-service form of health insurance cover - age provides the insured with a set of benefits in which the person can obtain medical services and then pays the provider for that service. A prepayment plan establishes a fixed, prespecified payment system for services. Other terms that apply to insurance coverage include copayments (copays), deductibles, coinsurance programs, provider write-offs, and maximum out-of-pocket expenditures.

A primary feature of a conventional indemnity plan is a deductible level in which the policyholder pays all of the cost of healthcare. The policyholder is responsible for making copayments. Many conventional indemnity plans specify a maximum out-of-pocket dollar amount. Managed-care plans attempt to reduce costs while maintaining quality; three approaches are health mainte - nance organizations (HMOs), patient provider organizations (PPOs), and point-of-service (POS) plans. Two additional approaches to healthcare include high-deductible health plans with savings option (HDHP/SO) and flexible spending accounts (FSAs).

Individual circumstances, including a person’s age, marital/family status, employment status, level of income, and military service, influence the purchase of health insurance. Additional cir - cumstances that affect healthcare spending include situations that demand a specific treatment or in which medicine becomes highly inelastic and price is not the primary consideration. For most people, the greatest demand for healthcare services occurs in the final years of life.

Healthcare organizations have begun to recognize that marketing programs may be necessary to influence choices, especially given that, as of 2014, all Americans are required to purchase health insurance in accordance with the Affordable Care Act. As individuals become more involved in personal health management and engage in social networking, the challenges to providers con - tinue to grow.

Ke y Te r m s catastrophic health insurance a health insurance policy that provides benefits when extraor - dinary injuries or illnesses require long-term care coinsurance a health insurance program that divides the cost of a medical service between the insured and the insurer comprehensive health insurance a health insurance policy that covers the widest range of healthcare services conventional indemnity plan a form of health insurance in which the insured chooses any doctor or hospital he or she wants copayment the part of a bill from a healthcare provider that the insured pays Key Terms Chapter 2 deductible the amount the insured must pay before the insurer begins making payments for care disease-specific health insurance health insurance that pays benefits when the insured expe - riences a named illness, such as cancer fee-for-ser vice a form of health insurance coverage that provides the insured with a set of benefits with which he or she can obtain medical services and then pays the provider for that service flexible spending account (FSA) a type of account that allows an employee to save a portion of his or her wages, untaxed, and use the money to pay medical expenses health maintenance organization (HMO) a managed-care plan in which the insured pays a set membership rate and has access to a group of contracted providers who are paid a set amount for services, no matter how much care they provide health reimbursement arrangement (HRA) a medical care reimbursement plan established and funded by employers that can be used by employees to pay for healthcare health savings account (HSA) a federally enacted type of insurance that provides a savings plan, tax benefits, and health insurance rolled into one account high-deductible health plan with savings option (HDHP/SO) a health plan that features a higher deductible than some other plans and that is offered with an HRA (HDHP/HRAs), or a high-deductible health plan that meets the federal requirements to permit an enrollee to estab - lish and contribute to an HSA (HSA-qualified HDHP) long-term care insurance health insurance that provides daily or monthly benefits for day-to- day care arising from chronic disease, disability, or aging major medical insurance health insurance that covers illnesses that require hospitalization; as part of a comprehensive health insurance policy or as a stand-alone policy managed-care plan health insurance plan that attempts to manage costs by contracting with specific healthcare providers; the most common types are health maintenance organizations, patient provider organizations, and point of service plans personal health management an approach to healthcare that incorporates standard health - care and preventive approaches with other actions and activities that contribute to lower healthcare costs point-of-service (POS) plan a managed-care plan similar to an HMO but providing greater flexibility and choice preferred provider organization (PPO) a managed-care plan in which the insured purchases coverage on a fee-for-service basis; the insured obtains services from a network of preferred providers prepayment plan a health insurance plan that establishes a fixed, prespecified payment system for services supplemental health insurance health insurance that covers expenses that are not paid by other types of insurance policies, such as for prescription drugs (also known as Medigap coverage) Critical Thinking Chapter 2 Additional Resources Affordable Care Act http://w w w.healthcare.gov/law/ Health Insurance Marketplace http://w w w.healthcare.gov/marketplace/index.html Critical Thinking Review Questions 1. What factors make the healthcare system in the United States unique? 2. What publics are parts of the healthcare system? 3. What types of coverage do health insurance companies offer? 4. Name the types of healthcare providers that are part of the overall system. 5. Explain a fee-for-service and a prepayment health insurance plan. 6. Explain the roles of copayments, deductibles, coinsurance, provider write-offs, and maxi - mum out-of-pocket expenditures in health insurance plans. 7. What features are involved in conventional indemnity health insurance plans? 8. Name and briefly describe three managed-care health insurance plans. 9. Describe a high-deductible health plan with savings option. 10. What is a flexible spending plan in healthcare coverage? 11. What factors affecting health insurance coverage were described in this chapter? 12. How does the term inelastic demand apply to healthcare? 13. How does end-of-life care affect healthcare costs and coverage? Analytical Exercises 1. You are the director of a private, independent respiratory therapy facility. Describe the sup - pliers, buyers, regulators, public health agencies, and insurance providers that would most directly affect your organization’s operations. Explain why each plays such a major role.

What would be your facility’s relationship with physicians in the city and the local hospital? 2. For each of the following, explain why the individual or group should or should not try to purchase the forms of coverage listed below: (a) a single, 18-year-old male; (b) a married couple with no children but about to start a family; (c) a single, 40-year-old female with no plans to marry; (d) a couple, both age 32, living together but with no plans to marry; (e) a 65-year-old widow.

• Comprehensive health insurance • Major medical insurance • Catastrophic health insurance • Disease-specific health insurance • Long-term care insurance • Supplemental health insurance • Health savings account Critical Thinking Chapter 2 3. Marion has noticed a pain in his stomach for the past month. He decides to go to the doc- tor, where he is referred to a local diagnostic facility. Tests reveal a nonmalignant tumor that should be removed. He has a surgery, followed by some physical therapy to restore the strength in his midsection. Calculate his personal out-of-pocket medical costs based on the following:

• $25 copay for physician visit • $500 deductible • 20% coinsurance for the next $10,000 of medical costs associated with the tumor • Maximum out-of-pocket expenditure over $10,000 • Original physician charge $ 125 • Diagnostic facility charges total $ 3,400 • Diagnostic facility write-off $ 2,100 • Hospital charges total $ 18,000 • Hospital facility write-off $ 9,600 4. List the advantages and disadvantages for each of the following:

• Conventional indemnity plan • Health maintenance organization • Preferred provider organization • Health savings account • Flexible spending plan 5. For an employer where you work or where a friend or family member works, identify the cost of COBRA coverage should that person voluntarily leave and move to a new company. 6. Visit with someone under the age of 30, someone between the ages of 30 and 60, and someone over the age of 60. Ask each person to talk about end-of-life medical costs. Then describe how each reacts to the idea of do-not-resuscitate and leaving against-medical-advice directives. 7. Do you believe physicians, clinics, hospitals, and other healthcare facilities should advertise?

Does your belief depend on whether the organization is for-profit or nonprofit? Defend your response.