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TAXONOMY OF INSURANCE

There are 2 main branches in the US health insurance industry: the private sector and the public sector. These are comprised of the following:

  • Private Insurers (voluntary health insurance)

    • Blue Cross/Blue Shield plans

    • Commercial for-profit insurers

    • Self-funded employers

    • Individuals/self-pay

  • Public Insurers (social health insurance)

    • Medicare

    • Medicaid

    • Other public programs (State Children’s Health Insurance Program)

    • Veterans Administration, Department of Defense, Public Health Service

This chapter deals with the private insurers, who can also offer plans that cover many of the beneficiaries of public insurance programs. Chapters 18 and 19 deal with Medicare and Medicaid, respectively.

WHAT DO INSURERS DO?

Insurers perform several core functions in the healthcare value chain. They insulate their “members” (enrollees) against the unexpected burden of medical care costs; they contract with providers; they pay providers’ claims; they offer a variety of member services; they design, price, and then sell the insurance product; and they assume the underwriting risk for that product. Insurance is thus a mechanism to protect people from risk. Risk is defined as the possibility of substantial financial loss from an event whose probability of occurrence is relatively small in the case of a specific individual. For example, hospitalization is a high-loss, low-probability event, whereas dental care is a low-loss, high-probability event. That explains why there is more coverage of the former than the latter. Hospitalization is also more rare and riskier than a physician office visit, which helps to explain why hospitalization coverage has historically outstripped physician coverage: Between 1940 and 1965, the percentage of the population with hospital coverage rose from 9.3% to 80.6%, whereas the percentage with physician coverage rose from 2.3% to 58.8%.

A more fundamental answer to what insurers do is that their insurance coverage enables enrollees to access and use the healthcare system and to develop a regular source of care. All of these have demonstrated beneficial downstream effects on patients’ health status and survival.1

An insurer, also known as a “health plan” or a “payer,” is the firm writing the insurance. It is also known as a “third-party payer” that intermediates and links the provider with the patient (the first 2 parties). Reimbursement is what providers get paid by the health plan for treating the patient. In the private sector, health insurers are intermediaries in the healthcare value chain that link (1) employers and their employees with (2) provider networks who render care (Figure 17-1). The insurer receives a (usually monthly) premium from the employer to cover the care of employees and then uses those monies to process and pay the claims submitted by network providers for treating them. The insurer also determines which providers to include in the network, how much to pay them and which payment methods to use, and how to “manage” the medical care provided to minimize low-value, high-cost care....

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