Taking the pulse of health-care insurance: discovering ways to cut the cost of medical coverage.

The selection of health insurance plans has become a struggle between employees' desire to use physicians of their choice and employers' efforts to keep the cost of coverage under control.

Caught between these two conflicting forces are the financial professionals--often CPAs--who must stay abreast of the field in an effort to minimize expenses. This article provides an overview of available health-care plan designs.

At one end of the design spectrum is the traditional indemnity plan--fee-for-service coverage that allows employees to turn to any health-care provider and be reimbursed to the full extent of the plan. Such insurance, while giving employees full control over the choice of health-care provider, leaves the employer no control over costs.

At the other end of the spectrum is the traditional health maintenance organization (HMO), in which a primary-care physician directs patient care within a network of pre-selected health-care providers. Such plans have built-in incentives to efficiently direct how employees use the plan and how medical care providers are reimbursed. Thus, employers maintain cost control at the expense of employees' freedom of choice.

There are many other plans in between that vary in the trade-off between employee freedom and employer cost control. Following is a look at the types of plans available to employers today.

TRADITIONAL FEE-FOR-SERVICE PLANs

Most employees are familiar with fee-for-service plans, the prevailing benefit offering for years. Such plans pay the full benefit no matter where employees or their dependents receive treatment. See any doctor, go to any hospital, be admitted for any problem and the plan picks up the full tab. Since doctors and hospitals are reimbursed for the services they provide, the longer the treatment, the greater the reimbursement.

Under this design, it is as if employers handed out free credit cards to all employees and said, "Buy whatever you want; don't worry about the cost. You're covered--it's on me."

To address this free spending, other insurance planners introduced such provisions as employee premium contributions, deductibles and coinsurance provisions. Premium contributions require all plan participants to share in some percentage of total plan costs. Deductibles and coinsurance provisions require those who use the plan to share in the costs, usually up to a predetermined limit.

To be sure, these options, the earliest attempts at controlling health plan costs, contain problems. For example, premium contributions allow employers to cut their costs immediately but do little to influence how employees use the benefit plan. Deductibles and coinsurance are effective in reducing plan usage but may discourage individuals from seeking care when needed.

MANAGED FEE-FOR-SERVICE PLANS

Cost-containment plans and utilization reviews attempt to balance conflicting needs of employer and employee by steering employees away from high-cost inpatient hospital stays and providing financial incentives to use lower-cost alternatives. To change employee behavior, deductibles and coinsurance are lowered or eliminated if hospital tests are run before admissions or when minor surgery is done on an outpatient basis.

Also, other areas not traditionally covered by insurance are included, such as home care or extended-care facilities.

Some other procedures that many insurance plans use to maintain a balance between employees' and employers' needs:

* Preadmission review (PAR) is designed for employers wishing to replace voluntary incentives with more disciplined measures. PAR plans require employees or their doctors to receive preauthorization for any hospital admission. A PAR reviewer, usually a registered nurse, determines whether a hospital stay is medically necessary or whether an alternative setting would be more appropriate. Penalties, such as an additional deductible or increased employee coinsurance, are imposed if employees fail to follow PAR procedures.

PAR has been effective in lowering the number of admissions and, when coupled with concurrent review of hospital stays, cutting the number of hospital days per stay. But offsetting its effectiveness have been skyrocketing outpatient costs, leading those using PAR to expand their review to some outpatient procedures as well.

* Second surgical opinion (SSO) is another service designed to influence employees' choice of treatment. It can be implemented on a voluntary or mandatory basis. If surgery is recommended, employees or their doctors call a toll-free number and give details on the recommended surgery. If the SSO adviser does not confirm the necessity of surgery, the patient must seek a second opinion from a list of board-certified surgeons. If the program is mandatory, penalties for not obtaining a second opinion are similar to those under PAR.

Many SSO programs have not proved all that cost-effective because about 95% of all recommended surgeries receive a confirming second opinion. As a result, some mandatory SSO programs have gone back to being voluntary, since the cost of operating the program has outweighed its benefits.

* Case management, on the other hand, has proven cost-effective. It focuses on prolonged illnesses such as cancer, leukemia and AIDS, as well as injuries, such as head or spinal injuries, needing specialized care.

Once a potential catastrophic claim is identified, a registered nurse is assigned as the case manager to coordinate all care provided to the patient. The case manager works closely with the attending physician, patient and family to assess patient needs and develop long-term treatment. The goal is to maximize quality of care while minimizing cost. Alternatives to inpatient hospital care are emphasized, such as home care, outpatient rehabilitation services and, if necessary, hospice care. Employers have reported savings of up to $7 for every $1 invested in case management services.

HEALTH MAINTENANCE ORGANIZATIONS

HMOs were the first managed-care systems, tracing their roots to the 1920s. Today, 17% of all employees enrolled in a health plan are covered by an HMO. An HMO is a prepaid health-care system in which the participating physicians assume the financial risk for providing care to members. Services are prepaid for each enrollee--before it is known what services will be provided.

There are several advantages to HMO participants. Usually, members pay no deductibles or coinsurance payments and fill out no claim forms. After rendering a small copayment, they normally are covered 100% for most procedures and tests, including hospitalization if needed. HMOs emphasize preventive medicine and cover items such as annual routine physicals and prenatal care.

With these advantages come some disadvantages; employees must agree to several restrictions. These restrictions vary depending on the type of HMO. The two most common HMO modes are staff models and independent practice association models (IPA).

In a staff model HMO, members must choose a primary-care physician from a list of doctors employed by the HMO and are provided care only from doctors at the HMO clinic. This facility usually houses the primary-care physician as well as specialists, a laboratory, X-ray equipment and a pharmacy. If hospitalization is required, the member is admitted to the HMO-owned hospital or a hospital that has agreed to accept HMO patients at agreed-on fees.

In an IPA, members can choose from a wider range of physicians who maintain their own practices but also agree to see HMO patients. Members are referred by their HMO primary care physicians to HMO specialists within the HMO network. Hospitalization usually can be provided in a wider range of hospitals than in a staff model HMO, but again only in hospitals participating in the HMO.

IPAs in general are more expensive than staff models. Although the degree of restriction varies, the HMO philosophy is constant. The key to cost-management success of any HMO is its provider-driven use management system. That means the primary-care physician directs a member's care through the network of HMO specialists, labs and, if needed, hospitals. And, except in an emergency, a member will not receive a benefit if care is received outside this network. Thus, HMOs have a 50% lower rate of hospital stays than fee-for-service plans.

PREFERRED PROVIDER ORGANIZATION 

Coverage that offers a preferred provider organization (PPO) plan combines fee-for-service plans' freedom of choice with HMO networks' managed-care incentives. A PPO establishes a network of participating medical care providers. The hospitals and doctors chosen agree to charge PPO members a lower fee for treatment in return for the PPO's directing more patients their way. The PPO's discounted rate of reimbursement to participating providers is negotiated in advance. This trade-off of discounting charges in return for referrals is the key to any PPO's success in trimming health plan costs.

A typical PPO plan offers employees two options: the employer's standard fee-for-service plan and the PPO network. Employees are free to use any medical provider and receive standard benefits. However, if they choose PPO treatment, the plan lowers or eliminates employee deductibles and coinsurance.

Some employers implement more aggressive plans. In some, employees receive the standard benefits only when a PPO provider is chosen; if care is received outside the network, the plan imposes higher deductibles and coinsurance.

EMERGING MANAGED CARE

New managed-care designs continue to evolve in response to employer needs and market pressures. One is the point-of-service HMO. This plan recognizes that some employees refuse to be limited to an HMO doctor or hospital in the event of serious illness or injury. In a point-of-service plan, also known as an "open-ended HMO," members can opt out of the HMO network, receive care from a non-HMO doctor or hospital and still receive coverage. This nonnetwork benefit, however, usually involves a high deductible and coinsurance. About 11% of all HMO enrollees receive coverage through a point-of-service plan.

Managed-care techniques also are being extended to mental health/substance abuse (MH/SA) programs; despite their high cost, they are achieving good cost-benefit results with proper management.

Managed care also has expanded to prescription drugs. In 1980, drugs constituted about 5% of total health plan costs. Today, that figure is as high as 15%, with drug costs for retrees in a medical plan consuming as much as 40% of the total medical bill. To keep a lid on drug costs, an increasing number of plans are turning to mail-order prescription drug programs and emphasizing generic drug substitution over brand-name drugs whenever possible; generic drugs often cost half that of name brands.

NEW RESEARCH

New efforts to control costs continue to be tested. One such initiative, called "outcomes research," seeks to evaluate medical procedures to determine which provide the best patient outcomes.

Also, employers are making greater use of computerized information systems to evaluate claims data and identify high-quality, efficient medical care providers. And insurance underwriting reforms, initiated on the federal or state level, can increase the availability of affordable group insurance, particularly to small employers, by easing restrictions and spreading risk equally among all insurers through community rating and reinsurance mechanisms.

Efficiently managing health care, rather than restricting access to it, is an achievable goal that employers, insurers, health-care providers, Congress and state legislatures can attain before decade's end.