Chapter 9

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Earned Premium

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portion of a premium for which protection has already been given.

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Unearned Premium

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portion of a premium for which policy protection has not yet been given.

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Service Area

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the primary geographical area of coverage and service provided by a Health Maintenance Organization (HMO).

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Subscriber

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a person applying for coverage through a service provider.

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Insured

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a person applying for coverage through an indemnity provider.

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Classification of Health Insurance Providers

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1. Indemnity Providers (Reimbursement)
2. Service Providers
3. Self-Insured Providers (Self-Funded)

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Indemnity Providers (Reimbursement)

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– pay benefits to the insured for expenses
incurred.

In California, Indemnity (Reimbursement) Health Insurance Providers typically have
the insured complete and submit the claim forms, as well as pay benefits directly to the
insured for expenses incurred.

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Service Providers

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– pay benefits to the providers of health care rather than to the
insured. This includes Blue Cross and Blue Shield, Health Maintenance Organizations
(HMOs), Preferred Provider Organizations (PPOs) and Point of Service plans (POSs).

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Self-Insured Providers (Self-Funded)

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– consists of employers who pay claims out
of their own funds instead of funding claims through an insurer.

In California, Labor unions, fraternal organizations, and co-ops may opt for a self-insured
medical and disability plan.

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Commercial Insurers

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1. Over 800 insurers market health insurance.
2. They traditionally market a reimbursement type contract that pays directly to the
insured.
3. These insurers offer both individual and group plans.
4. Some insurers have formed HMOs (Health Maintenance Organizations), PPOs
(Preferred Provider Organizations) as well as POSs (Point of Service plans) to provide
a more competitive method of delivering health care. The insurer acts as a third party
payor who establishes the contractual arrangement with the physicians and hospitals.

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Blue Cross And Blue Shield Associations (BCBS)

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1. Blue Cross and Blue Shield are prepaid plans since plan subscribers pay a set fee,
usually monthly, for the services of doctors and hospitals at a predetermined price
(negotiated fee).
2. Blue Cross is a hospital service plan with a contractual agreement with the hospital.
3. Blue Shield is a physician service plan with a contractual agreement with the physicians.
4. Each local Blue Cross and Blue Shield is an entity operated by a governing board that
establishes specific practices for the plan. Individual and group plans are offered.
5. In most states, the Blues are considered not-for-profit organizations and are regulated
under special legislation. They are also given some special consideration by the IRS.
6. The Blues have traditionally offered benefits in the form of services, not indemnity or reimbursement
plans. The payments are made directly to the providers under a contractual agreement (fee for service).

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Health Maintenance Organizations (HMOs)

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In 1973 Congress passed the Health Maintenance Organization Act, requiring an HMO to
meet federal standards and operate as this Act directs. Since that time, state requirements
have increased. HMOs must operate under both federal and state requirements. HMOs
offer a comprehensive health care plan and heavily market the employee/employer groups.
Any of these groups may be a nonprofit organization. The following is a brief description of
HMO requirements as per the Act of 1973:

1. An HMO is regarded as a managed health care system providing a comprehensive
array of medical services on a prepaid basis (normally in its own health care facility)
to voluntarily enrolled persons (subscribers) living within a specific geographic area
(service area) limiting the choice of care providers.
2. HMOs are sponsored by government, medical schools, hospitals, employers, labor
unions, consumer groups, commercial insurers, and hospital-medical service plans.
3. HMOs emphasize preventive medicine and early treatment with prepaid routine
medical exams, stress management and diagnostic screening techniques. This reduces
unnecessary hospitalizations (hospital coverage includes inpatient laboratory work and
x-rays).
4. Most HMOs are structured for profit; however, some may be classified as not-for-profit.
5. HMO members may be required to pay a small copayment for basic health care
services and a larger copayment for services such as alcohol or drug rehabilitation. The
copayment discourages unnecessary use of medical resources, such as emergency room
services for non-emergency care.
6. HMOs are deemed to be both a health care financing and servicing mechanism.
7. The principal objectives are to reduce medical expenses by:
a. Stressing preventive medicine through physical exams and diagnostic procedures.
b. Reducing the number of unnecessary hospital admissions.
c. Reducing the average number of days per hospital visit.
d. Reducing duplication of benefits.
e. Saving on administrative costs
8. HMOs are established as either open panel or closed panel.
a. An open panel means the doctor can work with anyone, including HMO members.
b. A closed panel means the doctor can only work with HMO members.
9. HMOs are required to provide basic health care services including the usual physician,
hospitalization, laboratory, x-ray, emergency and preventive services and out-ofarea
coverage. Other supplemental benefits such as medical equipment, dental care,
psychological, optical, physical therapy, chiropractic services and pharmaceutical
benefits including prescription drugs are optional. Charges for convenience items (private
rooms, television, etc.) are at the expense of the insured.
10. After an HMO has been in operation for 24 months, it may have an annual open enrollment
period of at least one month during which it accepts enrollees up to the limits of its capacity.
11. HMOs provide payments to member hospitals on a predetermined basis.
12. Excluding high risk subscribers is not allowed; however, an individual enrollee may be
rated or excluded.
13. For emergency care, the HMO pays for the necessary services at the nearest emergency room.
14. It can generally be said that there are three HMO models:

a. Group Model
1) Under this arrangement, the HMO contracts with an independent medical group
that specializes in a variety of medical services to provide those services to
HMO subscribers.
2) Under the agreement, the HMO pays the medical group entity, not the individual
service providers. The medical group itself chooses how to pay its individual
physicians, all of whom remain independent of the HMO rather than becoming
salaried employees.
3) The HMO pays the group a capitation fee, a fixed amount paid monthly for
each HMO subscriber.
b. Staff Model
1) In a staff model HMO, contracting physicians are paid employees working on
the staff of the HMO. They generally operate in a clinic setting at the HMO’s
physical facilities. As hospital services are required, staff doctors and HMO
administrators arrange for these services.
2) Unlike the group model, practitioners in the staff model are under no financial risk.
They are employed by the HMO, and the HMO corporation takes the risk.
c. Independent Practice Association Model
1) This model gives HMO members the maximum freedom of choice of physicians and
locations because the HMO is allowed to contract separately with any combination
of individual physicians, medical groups, or physicians’ associations.
2) In this model, there is no separate HMO facility. Physicians operate out of their
own private offices and their HMO patients may be individuals the physicians
were already attending.
3) Payment to the physicians is by capitation or on a fee-for-service basis. The
fees are negotiated in advance.
4) A Primary Care Physician (Gatekeeper) monitors health care needs and helps
to control costs by not recommending unnecessary services (including referrals
to other physicians and specialists). Not utilizing the primary care physician
will cause a claim to be denied.

5) The Primary Care Physician in consultation with the specialist and the
covered person, shall determine if the covered person needs ongoing care
from the specialist. This information is required to make a standing referral
of up to one year or longer, when the consultation between the specialist or
specialized treatment center and the Primary Care Physician deems the time
period necessary for proper health care treatment.
15. In all models of HMOs the providers agree, under no circumstances shall a subscriber
be asked to pay charges above or beyond that agreed to by contract between providers
and a HMO. This agreement does not prohibit collection of copayments, supplemental
charges, or fees for non covered services delivered on a fee-for-service basis.
16. Each subscriber will be entitled to receive an individual contract and/or evidence of
coverage. Each group contract holder is entitled to receive a group contract as approved
by the state. The contracts and evidence of coverage certificates will contain the
following for all HMOs:
a. Name and address of the HMO.
b. Telephone number of the HMO
c. A toll free or collect call phone number, within the service area, for calls to the
Health Maintenance Organization without charge to members.
d. Coverages, copayments and effective date of coverage of the HMO.
17. When a subscriber utilizes medical services outside the HMO, the HMO will not pay for
any of the expense unless prior approval or referral is on file with the health care manager.

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Preferred Provider Organizations (PPOs)

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1. PPOs are an arrangement under which a selected group of independent hospitals and
medical practitioners, in a certain area, agree to provide services to subscribers at a
prearranged cost.
2. The contracting agency or organizer of a PPO might be a traditional insurance company,
Blue Cross/Blue Shield, local group of hospitals, local group of physicians, an existing
HMO, large employers, trade unions, etc.
3. The organizers and the providers agree upon medical service charges that are generally
less than the providers would charge patients not associated with the PPO. Unlike
most HMO arrangements the providers are paid on a fee-for-service basis rather than receiving a flat monthly amount.
4. As a general rule the subscribers have more choices among doctors and hospitals under
a PPO than under an HMO arrangement. Typically, there are no claim forms necessary
to be completed; only an I.D. card is necessary for services. A very small copayment fee
is charged per visit or admittance to help offset administrative costs.
5. If a participant opts to utilize a provider other than a preferred provider, the PPO usually
pays a reduced amount and the individual must pay the balance.
6. While both HMOs and PPOs share the concept of cost reduction by health care
management, they differ in that PPOs haven’t any separate physical facilities as
HMOs generally do. HMOs have to meet state requirements as well as the standards
established by the federal government. PPOs tend to be less stringently regulated since
any group agreeing upon the arrangements may be a PPO.

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Modified Fully-Insured Plans

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– in addition to conventional fully-insured plans
discussed earlier in this chapter there are also modified fully-insured plans that include:
a. Premium-delay arrangements – allow employers to defer payment of
monthly premiums by lengthening the grace period to enable themselves to
have continuous use of a portion of the premium for other purposes. The
portion of the premium that is available for other purposes is approximately
equal to the claim reserve for medical expense coverage. In other words, the
employer can potentially earn a greater return by investing delayed premiums
than accruing interest on the claim reserve. If a premium-delay arrangement
is terminated, the employer is responsible for paying the delayed premium;
however, the insurer is legally responsible for paying all claims incurred prior to
termination even if the employer fails to pay the delayed premium.
b. Reserve-reduction arrangements – under this arrangement the employer
is allowed to retain for other purposes an amount of the annual premium that
is equal to the claim reserve. This arrangement is generally allowed only after
the first year of issue to establish a more accurate pattern of what claims and
reserves likely are to be. Any amounts retained by the employer are payable to
the insurer if the plan is terminated
c. Retrospective-rating arrangements – with this arrangement the insurer
charges the employer an initial premium that is less (up to 10% less) than
would be justified by the expected claims for the year. If claims exceed the
expectation, the employer would have to pay any additional premium at the end
of the year. Since the employer would have to pay any additional premium, the
advantage of the arrangement is the employer’s use of the funds during the year.

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Partially/Fully Self-Funded Plans

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a. The employer provides the funds to make claim payments in part or in total for
their employees.
b. Variants to employer self-funding are:
1) Administrative Services Only (ASO) – an insurer provides claim forms,
administers claims, and makes payments to providers, but the employer
provides the funds.
2) Minimum Premium Plan (MPP) – the insurer administers the plan while
the employer is self-insured to a specified limit. The employer has a stop-loss
policy with the insurer; after the limit has been reached, the insurer pays the
claim over and above the stop-loss up to the policy limits.
3) Third Party Administrator (TPA) – a TPA provides administrative services
for employers. It acts as liaison between the insurer and employer in certifying
eligibility, processing claims, etc.

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Point of Service (POS)

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plans combine medical expense and HMO benefits. If
the insured goes outside the network for medical services, the benefit is paid from the
medical expense portion of the plan with very high deductibles and copayments due. If
the insured stays in network, benefits are paid as an HMO. POS plans were developed
to enlarge the number of providers over the HMO plans.

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Surgicenter

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a facility where outpatient surgery is performed for those patients that
require general anesthesia but are not required to stay overnight.

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Urgent Care Center

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facility, usually staffed 24 hours a day and seven days a
week, where a patient can receive acute, but non-life threatening, medical treatment
without an appointment.

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Skilled Nursing Facility

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a facility for patients that no longer require hospitalization
but are not yet able to care for themselves at home.

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Home Health Care

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for patients that are at home but cannot fully provide for all their
needs. Often this care is provided by a visiting nurse or person other than a physician.

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Tri-Care (The Uniformed Services Health program)

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three levels of care: Basic,
which replaced CHAMPUS (no premiums charged), Level II, and Level III. Levels
II and III provide greater benefits and have a monthly premium charged per level of
benefits.

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Consumer-Driven Health Plans (CDHP)

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plans that establish health spending
accounts into which employers contribute pretax dollars to be used for health care
expenses (i.e. medical savings accounts, health savings accounts, health reimbursement
arrangements, high deductible health plans). CDHPs allow consumers to customize their
benefits and provider networks.

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Exclusive Provider Organization (EPO)

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a type of PPO where
subscribers use particular preferred providers as opposed to a choice of a variety of
providers as under a PPO. Subscribers see a primary care physician who monitors their
care and makes referrals to a network of providers.