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The Great Insurance Experiment
From the Great Insurance Experiment to Managed Care of Today. How Did We Get Here?

By Kevin McNamee, DC, LAc

In the 1960's and 70's, the "great insurance experiment" took place. Insurance companies wanted to determine which payment schemes were the most effective for healthcare dollars spent and medical services delivered. The insurance industry contracted with RAND, a healthcare research organization in Santa Monica, California to study this.

Several medical plans were studied. At one end of the spectrum was the plan in which patients paid 100% of their health care expenses; at the other end was the plan in which patients' employers paid 100%. Within the range were various combinations of deductible and co-payment plans. For example, some plans had a 20% co-payment by the patient and 80% by the insurance company. The study determined that when patients paid a deductible prior to the insurance company paying, services were delivered efficiently and in the most cost-effective manner for patients, employers, doctors, and insurance companies. The insurance companies then adopted the deductible and co-payment method as suggested by the study findings, and for a while, things worked as planned. Healthcare was delivered and cost was manageable.

An Experiment Gone Wrong
Over time, healthcare dollars became more competitive. No one had expected doctors to search for ways to make their practice more affordable and desirable to their patients. Originally, doctors received 100% payment in full from the patient, and the patient then submitted the bill to the insurance company for reimbursement. For example, if a patient was scheduled for three weekly visits over four weeks at $50 per visit, the cost amounted to $600 per month. Paying for medical services up front meant that patients needed a large cash reserve while they waited for the insurance company's partial reimbursement. This could be a heavy financial outlay, especially for patients under continuous care.

To entice patients, doctors offered to bill the insurance portion if the patient paid the co-payment amount. The doctor saw more patients because services were more affordable to the average person. It was easier for the patient to pay 20% of $50, or $10 per visit ($120 per month for three visits per week), while the doctor waited 30 days to be paid for the 80% balance or $480 in accounts receivable.

As more doctors did this, competition for patients increased. To further increase their attractiveness, some doctors waived the co-payment and accepted the 80% insurance reimbursement as payment in full. Thus, the patient's only financial obligation was the deductible. Eventually, doctors began waiving the deductible as well as the co-payment and accepted the insurance portion as full payment.

Without patients paying the deductible or co-payment (a built-in cost containment method), doctors made up the loss by over treating and over billing of services. Thus, the cost of health care escalated, and a vicious cycle ensued. Doctors billed for unnecessary and/or unperformed services; an increasing incidence of malpractice lawsuits caused a dramatic increase in the number of sophisticated, costly (but sometimes unnecessary) diagnostic tests; and the cutting edge technology required for such tests was expensive. As a result, insurance companies began to pay more for their members' care.

Hospitals and doctors purchased the "latest and greatest" technology to try to keep their patients, only to discover that they were unsuccessfully competing against each other for patients' healthcare dollars. Soaring costs were the result of duplicate technology and ever-increasing malpractice insurance. This increased cost of healthcare was ultimately passed on to the patients. The insurance industry's "great insurance experiment" had gone awry and administrators were hard pressed to find the answers.

In Comes Managed Care
In the early 1980's, approximately 80% of the health insurance available was indemnity insurance, which means that the insurance company paid upon demand with no limits. During the 1980's, managed care companies began organizing and marketing their new healthcare delivery designed to reduce costs and curb over-utilization.

By the end of the 1980's, 80% of the health insurance overage was delivered through some form of managed care, including Health Maintenance Organizations (HMO's), Preferred Provider Organizations, (PPO's), Independent Provider Associations (IPA's).

1999 -- welcome to managed care. Due to the factors mentioned above, managed care is here to stay. However, a re-evaluation of the benefit of managed care relative to quality of care delivered has begun. There seems to be an evolution towards something like indemnity insurance, yet due to economic pressures, it will never fully reach that point. How it ends up is anyone's guess.

Today's Insurance Trend
The current trend in healthcare insurance is giving patients the option for a traditional indemnity plan with a deductible and co-payment or the managed care option. If a patient stays with the HMO providers, he or she patient can pay the $5 or $10 office visit fee with no deductible. Patients can also go to a non-HMO provider of their choice or doctor's recommendation and simply pay the deductible and co-payment. This gives patients and doctors a choice and more flexibility.

For providers who might be thinking about participating in a managed care panel, here are some issues to consider. First, take a look at the potential benefits and negatives, as it could be a tremendous benefit to your practice or the biggest mistake of your professional life. The primary factor to consider is whether you can make an acceptable living with the fee reimbursement the managed care offers. The answer depends on the actual cost of seeing a patient in your office. If the HMO or IPA is offering a fee schedule you can live with, then sign up for it. If not, don't sign up for the panel. To help you do this evaluation in a step-by-step method, read "Should I Sign-up with the HMO's?".

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