US Healthcare - Part I

8/3/2019 US Healthcare - Part I

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Chapter 1 - History of Insurancey History of Group Medical Coveragey History of Group Medical Insurance Coverage in the United Statesy Times of Transition

Chapter 2 -Basic Group Health Insurance

y Traditional Indemnity Plansy Coordination of Benefitsy Order Of Benefit Determination

Chapter 3 - Managed Carey Utilization Controly Large Case Managementy Pre-certificationy Utilization Reviewy Disease Managementy Demand Managementy Provider Networksy Health Maintenance Organizationsy Pharmacy Benefit Management Programsy Plan Design

Chapter 4 - Payery Types of Payersy Payer Differencesy Third Party Administratory What is COBRA?y Flexible Spending Accounts

Chapter 5 ± Risky Fully Insured Plansy Self Insured Plansy Stop Loss Coverage

Chapter 6 - Plan Documenty Summary Plan Descriptiony Eligibility and Enrollmenty Contributory vs. Noncontributory Statusy Effective Date of Coveragey Enrollment Cardsy Termination of Benefitsy Subrogation/Right To Recovery

Chapter 7 - Legislationy ERISA (Employee Retirement Income Security Act)y Health Insurance Portability and Accountability Act of 1996 HIPAAy Medicare

AcronymsGlossaryAppendices



CHAPTER 1 - History of Insurancey

y History of Group Medical Coveragey People have been coming together as a group for Medical coverage since they Artisans of imperial Romey Craft guilds in medieval Europe

y Mutual aid systems in Great Britain

In 1883, the first national compulsory health insurance law was passed in Germany. Todaythere are more than sixty nations that have some form of compulsory governmentinsurance program. The USA does not have a true nationalized health plan.

History of Group Medical Insurance Coverage in the United States

1798 ± Marine Hospital Act

To give direct medical care to seaman funded by the Federal Government.

1858 - Florence Nightingale evaluated the quality of hospital care using mortality rates.

1910 - American College of Surgeons developed a Hospital standardization program toevaluate and recognize medical schools

1910 - Abraham Flexner created the Flexner Reports which summarized medical educationin the United States

1911 - "Montgomery Ward" The first employer based program that provided weekly benefitsfor unabled workers (disability).

1916 - Ernest A. Codman published ³A Study of Hospital Efficiency´ advocates tracking endresults of hospital patients after discharge.

1917 ± Washington State doctors contracted with mining and Timber companies. FirstMedical Service Bureau

1917 ± "Mayo Clinic" First multi-specialty group practice ± efficiencies of group practice

1920s± Hospitals in Illinois, Iowa, Massachusetts and Vermont offered hospital expensebenefits based on an individual basis.

1929 ± The first group prepayment plan was started by Baylor University Hospital for 1500schoolteachers. The plan covered twenty-one days of semi-private room, board and hospitalextra in any one year. This was the first Blue Cross plan and was for hospitalization benefits

only.

1929 ± First prepaid group practice ± forerunner to HMO. During the depression, everyonesaved or held onto every possible item they could. They did not know what they may ormay not have. They were struggling just to live their daily lives.

1930 ± National Institutes of Health (NIH) informally started in 1887 administrative centerfor research conducted by U.S. Public Health Service.



1933 ± Blue Shield developed a group medical expense benefit for physician treatment ±Later this became BCBS.

1934 ± General Tire & Rubber Company had the Equitable Life Assurance Society of theUnited States add group health expense coverage to existing group life coverage.

1934 ± Occidental Life of California added hospital expense benefits to an existing short-term disability income policy for a large chain of grocery stores.

1935 ± Social Security Act established retirement benefits for older Americans.

1938 ± Kaiser was formed ± all doctors were employed by Kaiser.

1943 ± Blue Cross introduced group medical surgical benefits.

During WWII ± wage freezes caused employers to compete with benefits. One of thebenefits they could offer was health care benefits. Benefits were declared tax deductible.

1946 ± Hospital Survey and Construction Act (Hill Burton Act) - Authorized grants to states

for surveying hospitals and public health centers and for planning construction of additionalfacilities Grants could assist with construction

1949 ± Liberty Mutual Insurance Company introduced the first major medical plan

1950s ± Joint Commission on Accreditation of Healthcare Organizations (JCAHO) voluntaryaccreditation of hospitals.

1965 ± Social Security Amendments

Title XVIII ± Medicare (65 or older or disabled)

Title XIX ± Medicaid (low income or indigent)

*You can be eligible for both if you meet both requirements (even children).

1966 - Avedis Donabedian published ³Evaluating Quality of Medical Care´ Considered the ³Father of Quality Assurance´

1972 ± Professional Standard Review Organization (PSRO) ± monitors quality and medicalnecessity for Medicare.

1973 ± Health Maintenance Organization Act (HMO) ± stimulated HMO development byrequiring large to medium sized employers (at lease 100 or more employee¶s) that provided

health insurance to employees to offer at least one federally qualified HMO as an alternative(should one exist in the area).

1974 ± Employee Retirement Income Security Act (ERISA) ± regulation of pension & benefitplans including self-insured.

1975 ± Certification of Need (CON) ± regulatory tool to keep out duplication of services andinvestment in expensive equipment and construction.



1980s ± Peer Review Organizations (PRO) ± replace PSRO¶s to monitor quality of hospitals¶ appropriateness of admissions.

1986 ± Consolidated Omnibus Budget Reconciliation Act (COBRA) ± continuation of healthinsurance.

1993 ± Stark II ± Physicians owning facilities to refer patients

1990s ± Joint Commission replaces quality assurance with quality assessment andimprovement.

1996 ± Health Insurance Portability and Accountability Act (HIPAA/Kennedy±Kassebaum) ±ensure access to health coverage; pre-existing condition limitation with prior coverage;electronic transfer ability for payers; medical savings accounts; Security and Privacy.

Times of Transition:

1960s & 1970s ± Health Care practiced by individual professionalsPracticed a craft or an art

Some learned by apprenticeshipWorked independently in a decentralized systemTailored craft to each situationNo detailed data for analysisPersonally accountable

1980s & 1990s ± Industrialization of Health CareHMO¶s and Managed CareChanged the way risks are allocatedChanged how care is organizedChanged professionals incentivesIn the 21st century do we still have health insurance or do we have health benefits? What is

the difference?

Chapter 2 -Basic Group Health Insurance

The working definition of insurance is a large group coming together to share risk. Grouphealth insurance is a coverage usually offered by employers whose primary objective is toproviding financial protection against some of the economic consequences of illness orinjury.

Traditional Indemnity Plans ± Prior to 1970sy Most common group health coveragey Freedom in choosing providersy Medical expenses were gainedy Claims paid with little or no attempts to control costsy Little or no attempts to control patient behavior through plan designy Three Basic Coveragesy Hospital Expensesy Surgical Expensesy Physicians¶ Visit expenses



The role of the insurance company or payer is to evaluate charges incurred by a coveredperson for medical care and determine the amount that should be pay back.

Covered person ± Based on the plan¶s definition of eligibility, a determination must bemade as to whether this person is eligible for benefits. Most plans cover employees, theirspouses, and unmarried children (including stepchildren) to a usual limiting age of 19. This

limiting age for children can be extended if the child is a full-time student and stilldependent on the employee for support. Coverage may also be extended to a covereddependent child who reaches the limiting age and is totally disabled (incapable of self-sustaining employment by reason of mental or physical handicap).

Covered provider ± This can be broken down into two categories ± individual providers

and facilities.

Individual providers: Individual providers would include any practitioner who is licensedand regulated by a state or federal agency and acting within the scope of his or her license.Some examples are:

Doctor of Medicine (M.D.)

Doctor of Osteopathy (D.O.)Doctor of Podiatry (D.P.M.)Doctor of Chiropractic (D.C.)Master of Social Work (M.S.W.)Occupational Therapist (O.T.)Optometrist (O.D.)Psychologist (Ph.D.)

Facility : The most common example of a facility would be a hospital. Hospitals should beapproved by the Joint Commission on Accreditation of Healthcare Organizations or theAmerican Osteopath Association, Healthcare Facilities Accreditation Program, Medicare as ahospital. Which maintains diagnostic and therapeutic facilities for surgical and medical

diagnosis and treatment of sick and injured person by or under the supervision of a staff of physicians; and provides 24 hour nursing care. Other examples of facilities:Nursing homesBirthing CentersAmbulatory Surgical CentersMental health facilities

Covered service ± Most plans have a provision that states all care must be medicallynecessary and meet the following provisions:

Recommended or approved by a licensed medical practitioner or dentist Consistent with the patient¶s condition or accepted standards of good medical and dentalpractice

Is medically proven to be effective treatment of the condition Is not performed mainly for the convenience of the patient or provider of services Is not conducted for research purposes Is the most appropriate level of services which can be safely provided to the patient

All of this criteria must be met, however, merely because a medical practitionerrecommends or approves certain care does not mean that it is medically necessary. Inmany cases, plans will also choose to include or exclude very specific types of treatments ormedical services.



Submitted amount ± This represents the amount charged by the provider of services. Foreach service performed, there is a 5-digit procedure code called a Current ProcedureTerminology code (CPT). These codes are established by the American Medical Associationand there are separate and distinct codes for every medical procedure performed. Ranges of codes represent different types of services such as patient evaluation, radiology, laboratory,

and surgical procedures.

Allowed amount ± The dollar amount considered by the Plan to be eligible for benefits.

Deductible ± A deductible is a fixed dollar amount of covered expenses incurred during thecalendar year that must be paid by an individual before health benefits begin. For example,if a plan has a $100 deductible and the patient incurred a $300 charge, the deductiblewould be the responsibility of the patient and benefits would be calculated from theremaining $200.

Carry-over deductible ± A provision of some plans that states any covered chargesincurred in the last three months of the calendar year that are applied to the deductible willbe used to also satisfy the deductible of the next year.

Coinsurance ± The percentage of the costs of medical services paid by the patient. If aplan pays covered charges at 80%, the patient must pay the remaining 20%. Looking at theexample above:The charge is $300The patient pays the $100 deductibleThe plan considers the remaining $200 at 80% (plan payment = $160)The patient¶s coinsurance is the remaining 20% ($40)The amount payable by the Plan plus the patient¶s payment will equal 100% of the coveredamount.

Coinsurance limit ± This is often referred to as the out-of-pocket maximum. Once aperson¶s coinsurance payments equal a specified dollar amount, the plan begins to paycovered charges at 100%. The dollar maximum is determined by each health plan.

First dollar coverage ± A benefit that is covered at 100%, waiving the deductible.Probably the most common example of this is coverage for preventative care (routinecheck-ups).

Internal limits ± These are also sometimes referred to as plan maximums. Plans may havea dollar maximum that can be paid on a specific type of benefit. An example of this wouldbe a $1000 calendar year maximum on chiropractic care. Once the plan paid the $1000 inclaims for chiropractic care, there would be no more benefits available for this type of service until the next calendar year. Any charges incurred over the plan maximum would be

the responsibility of the patient.

Lifetime maximum ± The maximum amount that will be paid by any one plan for oneindividual¶s medical expenses. If limited, this amount is usually one or two million dollars.

Assignment of benefits ± When an insured wants the plan to pay the provider or caredirectly, he/she will assign the benefits of the plan to the provider. An example of astatement that would be signed by the patient is ³I authorize



Payment of medical benefits to the undersigned physician or supplier for the servicesdescribed below´.

Balance billing ± Defined as the situation when the provider bills the patient for anyamount not paid by insurance, hence the balance of the bill.Coordination of Benefits

Employers lessen the financial burden of increasing medical expenses incurred by theiremployees, and employee's dependents, by providing group health coverage. However, if aperson is covered by more than one plan of benefits, a consistent and orderly process mustbe followed to insure individuals do not profit from group health coverage and to avoid claimdetermination delays and misunderstandings.The possibility of a person profiting from an injury or illness, as a result of duplicatecoverage, could occur in the following situations:

both a husband and wife are employed the covered person or dependent has coverage through a professional association the covered person holds two job the covered person is retired from previous employment and again actively employed

the covered person has a covered dependent child who has not reached the age limitationin the plan and is also employed if a child is involved in a divorce situation and group coverage is available through boththe natural parents and the step-parents.

Coordination of Benefits:-The insurance industry developed the concept of Coordinationof Benefits (COB) which is used by most group plans to minimize instances in which aperson may profit from duplicate coverage and to establish uniformity in the payment of claims covered by more than one coverage. Generally, COB does not apply to individualhealth plans.

Order Of Benefit Determination (OBD)Primary payer ± The Plan that has been determined to be responsible for paying benefitsfirst with no regard to any other coverage.Secondary payer - The secondary and subsequent plans will pay the balance up to 100% of the total allowable expenses. Every Plan will determine the exact method in which COB ishandled, however the information below outlines the most commonly used rules.

A plan with no coordination provision pays before a plan that has a coordination provision. A plan that covers the claimant directly pays before a plan that covers the claimant as adependent The parent with the earliest birth month and day provides primary benefits (the birthdayrule)

A plan which covers a claimant as dependent of a male pays before a plan which covers aclaimant as a dependent of a female (the gender rule) If a priority for paying is not established by the above, the plan that has covered theclaimant for the longest time pays first.

Dependents of divorced parentsThe divorce decree takes precedence over all other rules in determining which parents planis primary.



In the absence of a divorce decree that establishes OBD, the plan of the natural parent withcustody pays first. The plan of the natural parent without custody pays as secondary. If theparents remarry (and assuming all parties have group health coverage that allowsdependent coverage) the plan of the natural parent with custody is primary, the plan of thestep-parent with which the child lives is secondary the plan of the natural parent withoutcustody is the third payer, and the plan of the step-parent without custody is the last payer.

Retirees that have dual coverageIn the event a retiree maintains his/her health plan from their original company and thenbecomes employed with a new company that has group health coverage, the retiree plan isprimary since it is the plan that has been in effect the longest.

The proper administration of the COB provision includes the following steps:

Recognition of Other Coverage Documentation of Other Coverage Information Determination of Primary/Secondary Status Determining Allowable Expense for COB purposes Processing Payment

These steps are discussed in detail in the following pages of this section.

Recognition of Other CoverageThe first step in proper administration of the COB provision is recognition of other coverage.

Most payers require either:

completion of an annual enrollment form, or completion of an annual claim form or other coverage questionnaire.

These forms request information regarding the existence of other coverage. If the forms askwhether coverage is individual or group, it should be clear that ³individual´ refers toindividually issued coverage and not ³single´ coverage through another group health plan.Often other group coverage is discovered when actual claims are received.

Documentation of Other CoveragePayers must review the part of the claim processing system that is set aside fordocumentation of the COB information. When a new claim form is received, the payer mustalso document the system with information on other coverage. When the other coveragerelates to a dependent child, the payer must also document the COB type of the other plan:

"Birthday Rule" or "Gender Rule"

The type of coverage must be determined and documented.

Order of Benefit DeterminationIf the claim form or another source of information indicates the existence of other coverage,the payer must determine if the plan is primary or secondary to the other coverage.

Determining Allowable Expense for COB Purposes



Once it is determined that the plan is secondary to other coverage and before a secondarypayment can be made, the other plan's payment amount should be verified. The payershould request a copy of the primary payer's record of payment, or Explanation of Benefitform (EOB). The EOB should state the reason for any disallowance or reduction in benefits.

Under the traditional COB provision, any expense which is allowed by either plan becomes

an "allowable expense" under the plan coordinating as secondary carrier.Allowable expense means a health care service or expense, including deductibles,coinsurance or co-payments, that is covered in full or part by any of the plans covering theperson. The definition of allowable expense may exclude certain types of coverage orbenefits such as dental care, vision care, prescription drugs, or hearing aids.

Processing Payment

If it is determined that the plan being administered is primary, the claim should beprocessed as though there is no other coverage.

If it is determined that the plan being administered is secondary, the plan should be

referenced to determine what type of COB benefit is paid, unless the claims systemautomatically performs the COB calculation.

There are two main forms of COB secondary benefit calculation:

1. Traditional Coordination - Most often the claimant will be reimbursed for 100% of allowable charges under this method. The theory is that because plans benefit greatly froma secondary position under COB, it is fair to require secondary plans to make the coveredperson whole with respect to allowable expenses when there is duplicate coverage. For thisreason, COB is to be administered without the preservation of deductibles, coinsurance orco-payments, and exclusions.

2. Integration of benefits allows the individual to receive as much in benefits as he or shewould in the absence of the other coverage. The secondary plan will only pay its benefits tothe extent they exceed the benefits of the primary plan. The end result of this approach isto give the claimant the benefits provided by the better of the two plans.

COB EXAMPLES

1) Primary PPO and Secondary PPO discounts - Same discount amount

Primary Secondary

Charge $200.00 Charge $200.00PPO Discount 20.00 PPO Discount 20.00

Allowed Amount 180.00 Alloowed Amount 180.00

Paid at 80% 144.00 Paid at 80% 144.00Due form patient 36.00 Secondary paid 36.00

Patient responsibility is $0.00.

2) Primary PPO (higher PPO discount) and Secondary PPO

Primary Secondary

Charge $200.00 Charge $200.00



PPO Discount 30.00 PPO Discount 20.00

Allowed Amount 170.00 Allowed Amount 180.00

Paid at 80% 136.00 Paid at 80% 144.00Due from patient 34.00 Secondary paid 34.00

Even though $36.00 is amount Secondary would have paid, Secondary never allows higher

PPO discount than Primary. Patient responsibility is $0.00.

Chapter 3 - Managed Care

After completing this chapter you will be able to:Identify different components of managed careo Medical Managemento Network of Providerso Plan DesignRecognize plan differenceso HMO¶s

o PPO

¶so POS¶sUnderstand contracts and fee schedulesIdentify types of Repricing MethodsBecome familiar with Pharmacy Benefit Management Programs (PBM¶s)Understand the differences between Disease Management and LargeCase Management

Managed Care TheoryMove risk from payer to providerProvider contracts with payer for discounts, not patientKeep members healthy instead of treating sickness onlyControl the overall cost of health care

Components of Managed Care Medical ManagementReview and control of high cost servicesMaintaining health of populationIncentives for Primary Care

Network of ProvidersProviders discount price of servicesPayers guaranteed time frame of paymentProviders can not balance bill patients

Plan DesignSteerage required between in and out of network benefitsUCR for Out of Network providersOut of Network providers can balance bill patients

Utilization Control

In spite of the best efforts of Utilization Management organizations during the 1980¶s and1990¶s, employers continued to see increases in the cost of providing health care for theiremployees. Highly complex patients with severe or chronic conditions requiring diverseresources were difficult for most conventional programs to manage successfully. As a result,



special units within organizations were created to address the intensive coordination andmanagement needs of these patients. Staffed with clinicians, the primary goal is to reviewand control high cost services. Working with the patient, his/her family, and the medicalcommunity, they help coordinate the patient¶s course of treatment utilizing the most costeffective methods.

Large Case Management (LCM)

As more and more utilization management organizations created specialty units to managethese complex cases, the process began to be commonly referred to as ³Large CaseManagement´. Large Case Management services are necessary because a small percentageof claimants are typically responsible for generating the majority of claims and therefore,receive a large portion of benefits. Consequently, efficient management of a few very highcost cases can significantly reduce claims costs, and hence, benefit the whole Plan.

Studies have shown that large claims account for over 80% of medical expenditures.Large Case Management has proven to reduce paid claims substantially, when institutedearly, in potentially catastrophic illnesses.

Case Management intervention may include:Arranging a transfer from the hospital to an extended care facility,nursing home, specialty facility, or home with home health care.Arrangement for durable medical equipment, medications andprofessional services as indicated.Family training and education, as well as counseling may also be part of the program.

The following situations where Large Case Management can frequently affect cost savingswhile enhancing appropriate care.

Some of these include:Repeated in-patient admissions, excessive lengths of stay, or frequenttreatment,Potentially large dollar claims,Chronic or progressive disease,Opportunity to transfer a patient to a facility offering an appropriate levelof care more cost effectively,Lack of qualified care-givers in the home setting,Multiple diagnosis,Acute or sub-acute rehabilitation of physical, speech, or occupationaltherapies which exceed three months of treatment,IV therapy or parenteral nutrition,Severe injuries, or

Durable medical equipment needs.

Pre-certification (Pre-Authorization)

Pre-certification is the process of collecting information prior to inpatient admissions andperformance of selected ambulatory procedures and services.

The pre-certification process permits advance eligibility verification, determination of coverage, and communication with the physician and/or member. Pre-certification also



allows identifying and registers members for pre-service discharge planning and specializedprograms, such as disease management, case management and prenatal programs.

The program is designed to help insure that all covered persons receive necessary andappropriate health care while avoiding unnecessary expenses. It is not designed to be the

practice of medicine or to be a substitute for the medical judgment of the attendingphysician or other health care provider.

The pre-certification process is started by a phone call from the covered person or familymember, the attending physician¶s office, or the medical facility notifying the pre-certification administrator of proposed medical care.

Before a covered person enters a medical facility on a non-emergency basis or receivesother medical services determined by the Plan to require pre- authorization, the pre-certification administrator, along with the attending physician will certify the care asappropriate for Plan reimbursement. If the particular course of treatment or medical serviceis not certified, it means that the plan will not consider that course of treatment asappropriate for the maximum reimbursement under the Plan. Plans frequently have

disincentives for failure to follow the approved course of treatments in the form or highercopays or higher coinsurance rates.

For emergency admissions or emergency care, Plans generally require that the physiciannotify the UR administrator within 48 hours of the first business day after the admission.

Utilization Review (UR)Utilization review is the process of reviewing coverage requests for initial certification:

After the service has been provided, orWhen the member is no longer an inpatient or receiving the service

o A review initiated while a member is hospitalized is considered aconcurrent review

o A review as the result of a pre-certifcation or claim denial is consideredan appeal.Retrospective review includes making coverage determinations for the appropriate level of service consistent with the member¶s needs at the time of service after confirming eligibilityand the benefits available under the member¶s benefits plan.

The purpose of retrospective review is:To analyze retrospectively any potential quality and/or utilization issues.To initiate appropriate follow-up action, based on quality or utilizationissues.To review initial requests for certification, in anticipation of claimadjudication, made after discharge or after the provision of service.To analyze submitted documentation to determine rationale behind

failure to follow patient management utilization guidelines.

Disease Management

According to some studies, in a typical group, 10 percent of the population accounts for 70percent of the healthcare costs. Disease management programs were developed to workwith patients who have specific medical conditions to prevent more acute episodes requiringhospitalization or other expensive treatments. The emphasis is on helping patients manage



their diseases, rather than treating periodic acute, and expensive, episodes. General criteriafor selecting a disease to be managed might include:

High dollar volume or high velocity drug usePotential for wide variation in treatment approachPotential for lifestyle modification to improve outcomesDiseases with high risk of negative outcomes

Some common choices for disease management programs include asthma, cardiovasculardisease, hypertension, depressive disorders, diabetes and obesity.

Patient education is one of the primary goals of disease management. Much emphasis isplaced on the following objectives:

Understanding the disease and teaching coping strategies.Ensuring that the primary care physician is kept informed.Teaching techniques of monitoring the progress of the disease andavoiding complications.Involving the patient in support groups or organizations that providecontinuing education, counseling and fellowship.Encouraging patients to make appropriate decisions regarding their care.

A Plan may choose to offer incentives to participants of the disease management program.For example, diabetic testing supplies might be furnished, at no charge to the patient, if he/she has diabetes and participates in the disease management program.

24-hour nurse line (Demand Management).

One of the most expensive places to receive medical care is in the emergency room of thehospital. People seek care there either because they do not have a regular primary carephysician or they are unsure if their medical condition is a true medical emergency.

Some companies offer a 24-hour nurse line. Participants are given a toll free number that

they can call at any time to discuss and medical condition and get an informed opinion,based on the symptoms they describe, as to how quickly and what type of medical care theyshould seek.

Not only can avoiding the emergency room save the Plan money, but it can also save thepatient a considerable amount of time.

Provider Networks

Plans seek to manage medical costs by contracting with a network of providers who arewilling to accept lower reimbursement rates for their services. Typically, in a PPO Plan,Participants can choose any health care provider but they will have to pay additional moneyif they use a provider who is not part of the network.

PPO Plans became a popular managed care option for employers trying tocontrol their health care cost without dramatically limiting their employees¶ access to health care providers. A PPO is a plan design that is similar to anindemnity plan design. A PPO plan uses a network negotiated with physicians,hospitals, and other health care providers to contract reduced fees for medicalservices. In return, patients are given an incentive to use the network providers,and payment for services is usually made more quickly. The incentive for theparticipant to use the PPO is usually a 20% or 30% difference in the amount of



coinsurance an employee must pay for services. This difference of 20% is knownas steerage.PPO¶s can be owned by insurance companies, medical managementorganizations, business health care coalitions, hospitals, third party claimsadministrators, employers or various combinations of these entities.When describing a provider that has a contract with a PPO network, that

provider is often referred to as ³in-network´ or a ³participating provider´.

For instance, a Plan may reimburse 80% when a participant uses a network provider andwill only reimburse 60% when a non-network provider is used.Advantage to employers

Employers can manage their health care costs while still allowing theiremployees flexibility in choosing their health care providers. Many employers aremore comfortable offering a PPO Plan to their employees than more restrictiveManaged Care Plans because patients can go outside the network and stillreceive benefits.Since a fee has been negotiated with each provider in the network, thecost to the plan will be lower than if a participant uses an out-of-network healthcare provider, allowing the Plan to save money.

Advantage to employeesWhen a participant goes to an out-of-network provider, he/she must paythe difference between what the provider charges and what the Plan pays formedical services. This practice of the provider billing the patient for any chargesnot paid by the plan is known as balance billing. With a PPO Plan, the patient willonly pay the copay or the difference between the negotiated fee and the planpayment.Usually, a participating health care provider cannot balance bill a patientfor any amount that exceeds the PPO negotiated fee.Typically, participating providers agree to file charges to the Plan for thepatient.Most often, with a PPO Plan, the patient can choose a physician, hospital,

laboratory or other health care provider without first obtaining a referral from aPrimary Care Physician or a medical management company.Responsibilities of a Network

Network¶s should have a carefully defined procedure for selectingproviders to participate. In selecting the participating providers, specificdocumentation should be maintained regarding the Network¶s processes andprocedures.The Network should conduct a thorough evaluation of each hospital¶songoing quality improvement and utilization review programs. Typically,participating hospitals should be accredited by the Joint Commission onAccreditation of Health Care Providers and hospitals should be in good standingby their state licensing agency.The physician evaluation process should include a review of each

physician¶s credentials. The PPO should verify that each participating physician:1. Is licensed to practice in the State of his/her practice.2. Has received the education and training that he/she claims tohave received.3. Is Board certified in his/her specialty.4. Has adequate malpractice insurance.5. Has not had disciplinary action taken by the State licensingboard.6. Has staff privileges at PPO hospitals.



7. Has a record of fulfilling hospital and contract requirements.The provider network should be extensive enough to provide all types of care that a patient might need within an acceptable distance and period of time.There should be a sufficient number of participating hospitals to cover the samegeographic region as the physicians cover. Access to care within 30 miles is acommonly used standard for measuring acceptable access.

Network¶s should provide Plans and Plan Participants information as tothe names, addresses, and phone numbers of their participating providers. Thisis usually in the form of a printed directory, website access, and a toll-freecustomer services line. It is critical that this information be accurate and up-to-date at all times.Network¶s should provide claims administrators with up-to-dateinformation on provider participation, fee schedules, and hospital contracts.If the network is providing re-pricing services, the turn-around-timeshould be clearly agreed upon in the contract with the payer.

Contracts and fee schedulesContracts and fee schedules represent the negotiated fee that a provideris willing to accept for a service. This negotiation takes place between theprovider and the PPO network.Fee schedules are common contracts between physicians, laboratories,durable medical equipment vendors, and other healthcare providers (usually notincluding hospitals) that denote a specific dollar amount that will be allowed fora specific service as billed with a procedure code. Some physicians do not acceptfee schedules and negotiate for a percentage off of their billed charges.Hospital contracts are most commonly based on a per diem rate, a caserate (flat fee for a specified type of confinement), a percentage off the billedamount, or a combination of these types of arrangements. Hospitals almostalways include an outlier or stop-loss amount in their contract. Simply stated,once a confinement reaches a dollar threshold, the entire bill can revert to apercentage off from the first dollar or from a specific dollar amount.As part of the participating provider¶s contract, they agree to ³write off´

any amounts they bill that exceed the negotiated fee or contracted amount. i.e.,the provider cannot ³balance bill´ the patient.

Repricing Methods

A PPO must make the claims administrator aware of fees or contracts they have negotiatedwith their providers so that the claims administrator knows what amount to consider forpayment on claims.

There are three common types of re-pricing:Claims are submitted directly to the PPO network that performs their ownre-pricing duties. They then forward the claim and a cover sheet detailing to the

claims administrator how much of the billed amount should be considered forbenefits.The PPO gives the claims administrator access to their fee schedules andcontracts via the internet. The claims administrator has a person or personswhose job it is to review bills, locate the correct provider information, andindicate to the claims examiner what amount to consider for benefits. Thisamount is referred to as the allowed or negotiated amount.The PPO provides the fee schedules and contracts in an electronic formatthat allows the claims administrator to load this information directly into their



claims system. Claims can then be repriced automatically as they areadjudicated.

Examples of administrative fees

Network¶s charge employer groups an administrative fee for the use of their network. Thereare two common arrangements for this.

Per employee per month is most commonly known as PEPM. The networkcharges the group a flat dollar amount for each employee that has access totheir PPO providers. These typically run about $3.00 to $5.00 per month peremployee. This is known as an access fee.The second method is based on a percentage of savings. The employerpays a percentage of the amount billed by the provider and the amountnegotiated by the network. This generally runs from 15% to 30% of the amountsaved.

How PPO Plan Designs effect benefits payable

Below are three examples of claims that show how benefits payable differ between a PPO benefit and a non-PPO benefit. Our basic plan of benefits will be:

PPO Plan Non-PPO Plan$200 deductible $400 deductible80% coinsurance 60% coinsuranceOffice visits are paid with a $25Co-pay and the deductible waived

EXAMPLES ± PPO vs. NON-PPO

A physician charges $500 for a surgical procedure. The patient¶s calendar year deductiblehas not been met.

PPO Plan Non-PPO plan

Charge = $500 Charge = $500Negotiate fee = $400 Minus deductible of $400Minus deductible of $200 Balance is $100Balance = $200 Coinsurance is 60%Coinsurance is 80% Benefits payable = $60Benefits payable = $160 Patient responsibility = $440Patient responsibility = $240Write-off = $100A physician charges $100 for an office visit. The patient¶s calendar year deductible has beensatisfied.PPO plan Non-PPO planCharge = $100 Charge = $100Negotiated fee = $75 Coinsurance is 60%

Benefits payable = $50 Benefits payable = $60Patient responsibility = $25 Patient responsibility = $40A patient is confined to the hospital for 3 days. The total bill is $3000. The hospital contractis based on a $500 per diem rate. The patient¶s calendar year deductible has been met.PPO Plan Non-PPO Charge = $3000 Charge = $3000Allowed = $1500 ` Allowed = $3000Coinsurance is 80% Coinsurance is 60%Benefits payable = $1200 Benefits payable = $1800



Patient responsibility = $300 Patient responsibility = $1200Exceptions to the ruleSome plans make allowances for use of a non-PPO provider so that the patient is notpenalized. Most common are:

RAP¶s ± This is an acronym for radiologists, anesthesiologists, andpathologists. Since these types of providers have not real incentive to join a

plan, their claims are usually paid at the higher PPO coinsurance rate if thepatient uses a participating physician or facility.If there is a medical emergency and the patient seeks treatment from thenearest healthcare provider.If the person lives or travels outside a PPO area and does not haveaccess to a participating provider.If there person requires a provider of a particular specialty that is notavailable in the network.

EXAMPLE of HOSPITAL PPO RATE SHEET Facility Name:Federal Tax ID #:Physical Address:Billing Address:Facility Effective Date:

Inpatient ServicesMedical $1040 per diemSurgical $1040 per diemICU/CCU $1380 per diemTelemetry $1090 per diemBariatric Surgery $11,000 flat rate up to 5 days, then applicable per diem

MaternityNormal Delivery 45% discountC-section 45% discountTubal ligation 45% discountBoarder baby 45% discount

Out patient servicesOutpatient surgery 30% discountEmergency room 30% discount

OtherImplants, prosthetics, 40% discountDME & selected pharmaceuticalsNote 1: Each hospital confinement of services exceeding $60,000 of eligible chargeswill be compensated at the rate of seventy percent (70%) of total billed charges inlieu of any per diem or discounted reimbursement.Note 2: Inpatient per diem shall exclude implants, prosthetics, durable medicalequipment and selected pharmaceuticals.

Health Maintenance Organizations (HMOs)There are three basic types of HMO¶s:

Staff model HMO¶s own and operate physician-staffed health centers thatoffer a broad range of medical care including laboratory, s-ray, vision, andpharmacy services.Group practice HMO¶s contract with medical groups to provide healthservice to HMO members.Independent Practice Associations (IPA¶s) are HMO¶s that contract withindividual physicians.

HMOs are the most different from traditional insurance plans. They offer both advantagesand potential disadvantages over other forms of health insurance. HMOs emphasize



prevention and are more likely to cover annual physicals or well child check-ups than areother insurance carriers. In addition, the HMO industry has made greater efforts to measurethe quality of care provided to members. While HMOs offer advantages over traditionalinsurance plans, there are also potential disadvantages. HMO members must live in theHMO service area and obtain care from health care providers who are in the HMO¶s network.This limits choice of providers. Typically, HMO members also are required to obtain approval

from their PCP before receiving care from a specialist. Members may not be able to get theirHMO¶s to provide them elective medical services, or may face delays for those servicesgreater than under a traditional fee-for-service plan. In addition, HMOs sometimes givephysicians or other health care providers¶ financial incentives to be more efficient managersof care. While these payment mechanisms provide an incentive to reduce unnecessary care,some people worry that these payment mechanisms also may provide incentives to withholdnecessarycare. In contrast, some people were concerned that traditional fee-for-service gavephysicians incentives to providing unnecessary care.(HMOs) have exclusive networks of providers. If you are in an HMO it will not usually payany part of your bill if you choose a provider outside of the HMO ¶s network without priorauthorization . HMOs do not require their members to pay a deductible although there maybe a co-payment each time you receive services.

Point-of-Service (POS)POS plans give members the opportunity to see providers outside the network . Memberswho use a provider in the HMO ¶s network pay less than members who see providersoutside the network . The HMO may still require the use of a gatekeeper to authorize in-network services, but no referral is needed for out-of-network services.Point-of-service plans (POS¶s) permit members to see providers outside the network. TheHMO will help pay part of the bill but will not pay as much as if you go to a provider withinthe network. For example, if you see a physician inside the network, the HMO will pay all of the costs except any required co-payment. If you choose to see a physician outside thenetwork, then the HMO may only pay 70-80% of the costs. You would be responsible forpaying the physician the remaining 20-30% of the costs. In addition, you may also have tomeet a deductible for out-of-network services, and will usually have to pay a higher

premium. Under state law, HMOs can exclude coverage for preventive services if you obtaincare from a non-network provider.Fee Schedule ExamplesPHARMACY BENEFIT MANAGEMENT PROGRAMS (PBM¶S)Services that PBM¶s provide include on-line claims processing, drug utilization review, on-line management reports, formulary management, prior authorization as well as diseasemanagement programs.PBM¶s may offerFlexible and innovative plan designReal-time client eligibilityIntegrated mail and retail programsMultiple formulary benefitsPersonalized comprehensive reviews

Reverse co-paysCustomized ID cardsComprehensive Discount Vision ProgramFully interactive web siteCompetitive pricingAll-inclusive administrative feeNetwork customizationOverview



Originally, PBMs only competed with actual drug pricing. Pricing is based on an averagewholesale price (AWP). PBM¶s would offer drug costs as ³AWP + xx%´. As competitionbecame stiffer, PBM¶s began implementing other cost saving and value added features.The current trend of pharmaceutical expenditures will continue to increase the need forPharmacy Benefit Managers (PBM's) and their efforts to develop innovative techniques toprovide affordable prescription drug benefits within managed care. The majority of past

attempts to control prescription drug costs have been focused on reducing pharmacyreimbursements. More recently, efforts have increased to reduce utilization, provide genericincentives, limit pharmacy networks, and implement more restricted formularies throughcost shifting.Obviously, savings are a function of to what degree each type of program is implemented.Listed below are features implemented that have proven to have the greatest impact onreducing cost:

Generic incentive programsDeductibles and Maximum benefit programsFormulary managementInnovative plan designsAdvanced on-line drug utilization review (DUR) edits and processingFormulary incentive co-pay programs

Flexibility can provide a wide variety of plan designs. This flexibility will afford the client theopportunity to develop a prescription drug program specifically for their purpose andwarrants. The client's signature acknowledges the acceptance of the plan features and thePBM will then begin processing the data into the system. The client may request a change inthe plan features at any time.PBM¶s can accommodate and support a variety of benefit designs and these design featuresinclude but are not limited to the following:

Various Copay OptionsDeductibles OptionsMaximum Benefit OptionsRetail Refill Limitation OptionsDay Supply/Dose Options

Drug Inclusion/Exclusions OptionsGeneric Restriction Options

Mail ProgramPBM¶s are able to offer clients¶ members using maintenance medications the convenience of home delivery through mail order pharmacy. Of all prescriptions written, up to 70% are forlong-term maintenance medication. Through the efficiencies of mail order servicescentralized mail service pharmacy, clients will benefit from mail service savings generatedby lower maintenance costs, longer-term supplies and drug utilization review.Mail order pharmacy uses the most advanced and efficient technology available to dispensemail order prescriptions that result in the maximum cost savings for clients. This allowsthem to integrate operational, quality control, and management reporting to support themail order pharmacy service.Quality control is of primary concern from receipt of the prescription order, through

dispensing, to final mailing. Using the information supplied on the confidential patient profileorder form, the possibilities of drug interaction or allergy problem are carefully evaluated.The integration of mail order with the retail pharmacy network component will provide acomplete pharmacy management program. The mail order pharmacy functions similar toany retail pharmacy in the PBM¶s network. Drug Utilization Review is provided on allprescriptions so a complete profile of drug use can be analyzed. PBM¶s recommend acombined retail pharmacy network and mail order pharmacy program.Retail Program



The PBM¶s retail card program provides membership packets that are sent to the client forindividual member distribution. This membership packet contains a directory of participatingpharmacies along with other written material and the drug card(s) that members willpresent at a participating pharmacy. PBM¶s will consult with the client to determine thebenefit plan design that best meets their objectives and requirements. This programintegrates the point-of-sale retail card program with management systems to accomplish

the objectives of the clients' needs:Flexible plan designDiscounted drug costOn-line claims adjudicationNational provider networksPharmacies added to the network for member convenienceOn-line Drug Utilization ReviewManagement reportsTwo standard identification cards per family plus one standardidentification card per full-time student.

FeaturesPBM¶s provide quality service and convenient access to clients' members. They can restrictthe pharmacy network or enlarge it in selected areas to increase member access at the

request of the client.As a result of rising prescription drug costs, the mail service pharmacy was developed toprovide a cost-effective management solution for maintenance medications, which compriseup to 70% of all prescriptions written. Through the utilization of this convenient service,clients may substantially reduce their costs.The mail service provider like all retail pharmacies is fully integrated with the national retailpharmacy network. This allows for a common source and control of eligibility, benefit plandesign, drug inclusions and exclusions, drug utilization review, prior authorization, and on-line edits. The pharmacy mail services program may be used in conjunction with retailpharmacy benefit programs or as a stand-alone benefit.Disease ManagementMost PBM¶s offer complete disease management programs for the client's members. These

programs are designed to interface with the physician and member in an effort to educateand empower the member toward better health through appropriate treatment protocols.Drug Utilization ReviewA Drug Utilization Review system is a more enlightened approach to cost containmentrequiring control of the qualitative, as well as the quantitative and fiscal issues of drugtherapy. Programs that were designed to encourage cost-effective, high quality drugtherapy have relied on retrospective utilization review techniques with only limited success.The Drug Utilization Review system should efficiently identify potential drug therapyproblems and notify the provider before the prescription is dispensed. This Drug UtilizationReview system is designed to act as an integral component of electronic claims adjudicationsystem.Drug Therapy ReviewThe pharmacist will initiate the transaction by entering the patient's ID and the prescription

data into the pharmacy computer terminal. If the patient is eligible, the system conductsfiscal and clinical adjudication simultaneously. Each new prescription is electronicallyscreened against the patient's central profile. This profile consists of the patient's activemedications, and, if available, allergy information and disease states. If disease states arenot available, Chronic Disease Predictors can be used to construct an implied disease stateprofile based on the patient's medication list.The results of both components of the adjudication are collected immediately andelectronically transmitted back to the pharmacist. A central record of prescription



transactions, clinical and fiscal problems, and action taken to resolve the problems aremaintained in the Clinical Event file for the patient, pharmacist and prescriber.Clinical Screening FeaturesThe Drug Utilization Review system contains a full spectrum of clinical screening functionsthat can be performed with typical prescription claim data in the absence of a patient drugprofile maybe with more advanced screening that requires a patient drug profile or a

Chronic Disease Profile. Examples of types of screening are as follows:Dose Range CheckDuplicate Therapy and IngredientsEarly RefillsDrug-Disease ContraindicationsMinimum / Maximum Adult Daily DoseGeriatric PrecautionsDrug IndicationsDuration of TherapyPediatric Dosing

Cost of drug development at new highA recent study by the consulting group Bain and Company noted that only one of thirteendrugs successfully advances from testing to FDA approval. The higher dropout rates for new

drugs in development have contributed to the increased cost of bringing a new drug tomarket.HCFA 2001 predicts #1 Seniors will spend $1.5T on Rx drugs over the next 10 years and #2Rx expense will rise from 4.4% of personal health spending to 16% by 2010.Pharmacy Benefit Management StrategiesCost Management

1. Squeeze Manufacturers (Rebates, Tiered Copays)2. Squeeze Distribution Channels (Retail, Mail, Internet)3. Management Function: Outsource (PBMs) vs. Insource

Utilization Management1. Care Management Programs

Disease Management

2. Cost Shifting3. Implement systems similar to Medical ModelsGeneric Drugs Q&AWhat is a generic drug? When a company receives a patent for a new drug, the governmentallows the manufacturer to develop and market the drug for 20 years without competition.Sometimes multiple patents can extend the period. When the patents expire, the drugbecomes ³generic´ and other companies are then free to manufacture and market thegeneric drug.How can I be absolutely sure a generic drug is equivalent to a brand name drug? The Food& Drug Administration (FDA) regulates both generic and original brand-name drugs. TheFDA reviews tests of all generic drugs to be sure they are ³bioequivalent/therapeuticallyequivalent´ to the original products. They look at such things as chemistry, formulation,potency, stability and purity. The FDA¶s approval means the generic product is recognized

as equal to, and interchangeable with the original drug. Your pharmacist provides onlyproducts that have been approved by the FDA.Why do generic drugs look different from brand-name drugs? While 20-year patents coverwhat is in the drug, trademarks cover the appearance. Under trademark law, anothercompany cannot use the name, color and ³look´ of the original drug.What is the advantage of a generic vs. a brand-name drug? Generic drugs cost less money.On the average, most generics are about half the price of the brand-name drug; somegenerics may cost up to two-thirds less than the brand-name version.Plan Design



Managed Care vs. Traditional fee-for-service plansIn a traditional fee-for-service system, the insurance company pays the bills but the patienthas freedom to choose the provider. In most managed care arrangements, the companylimits the network of providers. Managed care organizations usually give members afinancial incentive to obtain care from within the network.Cost saving features are often built into plans of benefits to encourage plan participants to

seek the most cost effective health care.Some examples are:Steerage ± This is a common plan design (and often required by PPO networks) that paysparticipating providers at a higher coinsurance rate than non-participating providers. Thisplan design results in less out-of-pocket costs to the plan participant.Usual, Customary, and Reasonable (UCR) reimbursement limits ± You will also sometimeshear this referred to as Reasonable and Customary (R&C). Reimbursement limits are pre-setby statistical data that determines what reasonable fees are allowed in a geographic areafor any procedure.Disincentives ± Many plan designs have higher copays or penalties for using a non-participating provider.Chapter Summary

The objectives of this chapter were to help you:Identify the different components of managed careRecognize the plan difference between HMO¶s, PPO¶s, and POS¶sUnderstand how managed care programs help reduce the healthcareplan¶s costsUnderstand pre-certification and the utilization review processesBe familiar with large case management

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