Health Insurance, Simplified, Part 2. Today: Managed Care Plans

In the last couple of decades, managed care health plans (not "insurance" in the truest sense of the word, but the idea is the same) have become the norm. There are 3 main types of plans: Health Maintenance Organizations or HMOs, Preferred Provider Organizations or PPOs, and Point of Service or POS plans. These types of plans attempt to encourage medical care providers to keep costs low by paying a provider based on a pre-negotiated fee schedule. Therefore, these plans are generally much less expensive than traditional indemnity plans as an insured can take advantage of the economy of scale by being part of a large organization. I'll explain how each of the different plans work today.

HMOs: This was the first type of managed care plan used on a large scale. They are organized health care systems that provide care to "members" who live within a geographic region. They are like insurance companies in that they finance health care, but, unlike insurers, they also provide medical care. An HMO can be owned by an insurance company, by physicians, consumer groups, hospitals, etc. If you have ever had to choose between different medical plans at a large employer, you may have seen a PPO plan and an HMO plan offered by the same insurance company. HMOs encourage preventative care to keep costs low. These plans require enrollees to use salaried physicians that are often HMO employees. This also helps keep costs low as doctors are not incentivized to prescribe additional, more costly (and possibly unnecessary) care. However, this can work against the member, too. HMO docs often receive bonuses for keeping costs low. This puts an incentive for physicians to sometimes NOT prescribe necessary treatment or tests, thus putting the patient at risk. The only time a member can go outside the HMO is for emergency care. Plan providers file the claims.

PPOs: These plans became a middle ground between the extremes of traditional insurance and HMOs. They are generally more expensive than HMOs and much less expensive than traditional medical insurance. The PPO operates very much like a traditional plan, but uses the benefit of a provider network. The network doctors and facilities are paid based on a prearranged fee-for-service schedule. This fee is less than what a provider would charge a patient who was not on a PPO (or even a POS). Benefits are substantially reduced if a member is treated outside the network. Doctors like being in the network because vast numbers of insureds are incentivized to use network services. Subscribers like these plans because the premiums are relatively low while the plan still provides some choice in providers. These plans annual deductibles and usually copays. The deductible will be lower for in-network versus out-of-network care, $500 in-network and $1,000 out, for example. The copay allows the patient to see the doctor for a small fee of $15-30, depending on the plan, without worrying about satisfying the deductible. Providers file claims, except for out-of network situations, where the covered person files the claim.

POS Plans: This is a hybrid of a PPO and an HMO. There's really nothing new here that hasn't been discussed. It's a PPO that calls for more managed care than a regular PPO, and it's an HMO that allows subscribers to have flexibility in the choice of healthcare providers. It is typically more expensive than an HMO and less expensive than a PPO. The deductibles and copays work the same as a PPO. Providers file the claims for in-network, the member for non-network services.

This sums up how health insurance worked, and continues to work, today. 2004 brought some changes very quietly, changes that may revolutionize the industry within the next couple of decades. Next time, I'll discuss those changes and how you can benefit from them.

- finance guy