Question

Discuss the role of insurance in healthcare delivery and productivity in the United States. The discussion needs to include the critical role of health insurance in a cost-effective health care system and on consumer incentives and insurer behavior. Discuss the following concepts: market forces, competitive healthcare system, Value-based Purchasing, Promoting Healthy Behavior. What are the unique characteristics of the healthcare market in the United States?

Answer 1

That variance is reflected in huge disparities in health care spending. In 2016, the top 5% of US health spenders accounted for 50% of total spending, or about $50 000 per person. The bottom half of the population, based on health expenditures, accounted for only 3% of total health spending, or $276 per person in 2016. People in both groups buy health insurance, but the benefits they gain from doing so are different.

In addition to helping people stay healthy and improving their health when they get sick, our system of health insurance serves at least 6 functions to enable everyone to benefit from being insured. These functions, however, are not always compatible.

1. Financial protection to individuals with catastrophic health events. Health insurance, like car insurance, protects individuals from unpredictable and financially catastrophic events. Like car crashes, catastrophic health events are both rare and difficult to predict, and their costs are far beyond most people’s means. Drugs to treat cancer or multiple sclerosis can run more than $10 000 per month, a crushing amount for all but the few. Organ failure requiring a transplant can lead to hundreds of thousands of dollars in costs. Policies aimed at improving this function of health insurance include capping annual out-of-pocket expenses, ending lifetime benefit limits, and ensuring coverage for people with preexisting conditions.

2. Broad access for small usage fees. Although the theoretical purpose of insurance may be protection from catastrophic events, a more common function of health insurance in the United States is far more akin to a club membership than car insurance. In exchange for an annual fee, beneficiaries receive access to free or low out-of-pocket cost services, such as routine doctor visits. These services are largely predictable—such as well-child visits for people with children or medication refills for people on lipid-lowering medications. Policies aimed at the club membership function generally aim to customize policies to people’s needs. Medicare beneficiaries enrolling in Part D prescription drug coverage, for instance, enter the medications they are currently taking to find the plan that best subsidizes those items.

3. Negotiating health services. Health insurers leverage their market power to obtain price concessions from clinicians or hospitals and health care systems or, alternatively, to screen out high-cost providers from their networks. Covered patients benefit from these discounts even when paying out of pocket for services (with the exception of prescription drugs, for patients often pay list prices even when they have insurance). Policies that focus on this function of health insurance affect the negotiating leverage of clinicians and hospitals relative to insurers. Medicare, for example, sets payment rates via fee schedules, rather than allowing health care systems to use their market leverage to drive up the prices they charge. The Affordable Care Act (ACA) encouraged insurers to construct “narrow” networks of clinicians and hospitals to help commercial plans obtain lower rates through increased negotiating leverage. Insurance company consolidation strengthens the insurer’s negotiating position as well.

4. Enhancing and ensuring the quality of clinicians and hospitals. Both commercial and government insurers have developed measurement efforts that aim to monitor and improve the quality of hospitals. Examples include both quality ratings that help patients and plans select which hospitals to engage, and exclusion of certain hospitals from providing types of services based on quality. Medicare Advantage plans have quality ratings. Medicare limits which hospitals can perform the transcatheter aortic valve replacement procedure to those with adequate volume and expertise. Policies focused on this function of health insurance focus on more comprehensive measures and quality measurement.

5. Nudging individuals toward staying healthy. Health insurers for the past decade have experimented with benefit designs that encourage healthy behavior. This includes premium reductions for individuals who join health clubs or stop smoking. Value-based insurance design (VBID) is another example. Under VBID-type policies, individuals pay little or nothing out of pocket for health services deemed beneficial, such as preventive services and certain medications that prevent complications of diseases like diabetes.

6. Wealth transfer. Health insurance is the vehicle of sizable wealth transfers. The wealthy pay more than the nonwealthy through taxes to fund Medicare and Medicaid. But the wealthy disproportionately benefit from tax-subsidized health insurance premiums paid by employers. Policies often target these transfers, such as the ongoing debate over the “Cadillac tax” that would reduce the tax subsidy for especially generous insurance plans. As another example, the ratio of premium differentials between young and old was limited to 1 to 3 in the ACA, but one of the bills intended to repeal the ACA contemplated widening the ratio to 1 to 5 (lessening the wealth transfer from younger to more elderly individuals). Subsidies for rural hospitals transfer wealth out of cities and suburbs. And of course, health insurance works via risk pooling, which is to say, transferring wealth from the healthy to the sick.

That health insurance has disparate functions may explain why policy makers can arrive at vastly different reform proposals. The objective of providing better catastrophic financial protection, which depends on pooling the risk of many who will not experience those events, runs counter to the objective of selling insurance that is highly customized to a patient’s anticipated needs. Encouraging narrow networks could obtain lower prices, but at the cost of excluding high-quality providers (if prices are concordant with quality).

While the above list is an effort to enumerate the functions of health insurance in the United States, it would be far shorter if we described only what health insurance succeeds in doing well. Insurers may negotiate for lower unit prices, but unit prices for US health care are still higher than they are in other wealthy nations. Although prescription drug insurance may be good enough for many, US residents are 6 times more likely than residents of other countries to not take medications because of out-of-pocket costs. Similarly, insurance may aim to nudge people toward healthier behavior, but US rates of diabetes, obesity, and maternal mortality exceed those in Europe. Even with quality measurement in place, the US maternal mortality rate is more than 3 times that of Canada, France, or Australia.

Of course, considering the functions of health insurance is a conversation that excludes a very large number of people in the United States: the 29.3 million who lack health insurance altogether.

The major characteristics of us health delivery

The United States has a unique system of health care delivery com-
pared with other developed countries around the world. Almost all other
developed countries have universal health insurance programs in which the
government plays a dominant role. Almost all of the citizens in these coun-
tries are entitled to receive health care services that include routine and
basic health care. In the United States, the Affordable Care Act1 (ACA) has
expanded health insurance, but it still falls short of achieving universal cov-
erage. Besides insurance, adequate access to health care services and health
care costs at both the individual and national levels continue to confound
academics, policy makers, and politicians alike.The main objective of this chapter is to provide a broad understanding

of how health care is delivered in the United States. The U.S. health care

delivery system is both complex and massive. Ironically, it is not a system

in the true sense because the components illustrated in Figure 1.1 are only

loosely coordinated. Yet, for the sake of simplicity, it is called a system

when its various features, components, and services are referenced.

Organizations and individuals involved in health care range from edu-

cational and research institutions, medical suppliers, insurers, payers, and

claims processors to health care providers. There are nearly 18.4 million

people employed in various health delivery settings, including profes-

sionally active doctors of medicine (MDs), doctors of osteopathy (DOs),

nurses, dentists, pharmacists, and administrators. Approximately 451,500physical, occupational, and speech therapists provide rehabilitation ser-

vices. The vast array of institutions includes 5,686 hospitals, 15,663 nurs-

ing homes, almost 2,900 inpatient mental health facilities, and 15,900

home health agencies and hospices. Nearly 1,200 programs support basic

health services for migrant workers and the homeless, community health

centers, black lung clinics, human immunodeficiency virus (HIV) early

intervention services, and integrated primary care and substance abuse

treatment programs. Various types of health care professionals are trained

in 192 medical and osteopathic schools, 65 dental schools, 130 schools

of pharmacy, and more than 1,937 nursing programs located throughout

the country (Bureau of Labor Statistics, 2011; Bureau of Primary Health

Care, 2011).

There are 201.1 million Americans with private health insurance

coverage, most of whom are covered through their employers. An addi-

tional 103.1 million are covered under 2 major public health insurance

programs—Medicare and Medicaid—managed by the U.S. government.

Private health insurance can be purchased from approximately 1,000 health

insurance companies. The private managed care sector includes approxi-

mately 452 licensed health maintenance organizations (HMOs) and 925

preferred provider organizations (PPOs). A multitude of government agen-

cies are involved with the financing of health care, medical and health ser-

vices research, and regulatory oversight of the various aspects of the health

care delivery system (Aventis Pharmaceuticals, 2002; Bureau of Primary

Health Care, 2011; Healthleaders, 2011; National Center for Health

Statistics, 2007; Urban Institute, 2011; U.S. Bureau of the Census, 1998;

U.S. Census Bureau, 2007).SUBSYSTEMS OF U.S. HEALTH CARE DELIVERY

In the United States, multiple subsystems of health care delivery have

developed, either through market forces or through government action to

address the special needs of certain population segments.

Managed Care

Managed care seeks to achieve efficiency by integrating the basic

functions of health care delivery, and it employs mechanisms to control

(manage) utilization and cost of medical services. Managed care is thedominant health care delivery system in the United States today. It cov-

ers most Americans in both private and public health insurance programs

through contracts with a managed care organization (MCO), such as an

HMO or a PPO. The MCO, in turn, contracts with selected health care

providers—physicians, hospitals, and others—to deliver health care ser-

vices to its enrollees. The term enrollee (member) refers to the individual

covered under a managed care plan. The contractual arrangement between

the MCO and the enrollee—including descriptions of the various health ser-

vices to which enrollees are entitled—is referred to as the health plan (or

plan for short).

The MCO pays providers either through a capitation (per head)

arrangement, in which providers receive a fixed payment for each enrollee

under their care, or via a discounted fee arrangement. Providers are willing

to discount their services for MCO patients in exchange for being included

in the MCO network and being guaranteed a patient population. As part of

their planning process, health plans rely on the expected cost of health care

utilization, which always runs the risk of costing more than the insurance

premiums collected. By underwriting this risk, the plan assumes the role of

insurer.

Figure 1.1 illustrates the basic functions and mechanisms that are

necessary for the delivery of health services within a managed care envi-

ronment. The four key functions of financing, insurance, delivery, and pay-

ment make up the quad-function model. Managed care integrates the four

functions to varying degrees.

Military

The military medical care system is available mostly free of charge

to active-duty military personnel of the U.S. Army, Navy, Air Force, and

Coast Guard, as well as to members of certain uniformed nonmilitary ser-

vices such as the Public Health Service and the National Oceanographic

and Atmospheric Association. It is a well-organized system that provides

comprehensive services, both preventive and treatment oriented. Services

are provided by salaried health care personnel. Various types of basic ser-

vices are provided at dispensaries, sick bays aboard ships, first aid stations,

medical stations, and base hospitals. Advanced medical care is provided in

regional military hospitals.

Families and dependents of active-duty or retired career military per-

sonnel are either treated at the hospitals or dispensaries or are covered byTriCare, a program that is financed by the U.S. Department of Defense.

This insurance plan permits the beneficiaries to receive care from both pri-

vate and military medical care facilities.

The Veterans Administration (VA) health care system is available to

retired veterans who have previously served in the military, with prior-

ity given to those who are disabled. The VA system focuses on hospital

care, mental health services, and long-term care. It is one of the largest

and oldest (dating back to 1930s) formally organized health care systems

in the world. Its mission is to provide medical care, education and train-

ing, research, contingency support, and emergency management for

the U.S. Department of Defense medical care system. It provides health

care to more than 9.6 million individuals at over 1,100 sites that include

153 hospitals, 807 ambulatory and community-based clinics, 135 nursing

homes, 209 counseling centers, 47 domiciliaries (residential care facilities),

73 home health care programs, and various contract care programs. The

VA budget exceeds $55 billion, and it employed a staff of about 280,000 in

2010 (Department of Veterans Affairs, 2011; National Center for Veterans

Analysis and Statistics, 2007).

The entire VA system is organized into 21 geographically distributed

Veterans Integrated Service Networks (VISNs). Each VISN is responsible

for coordinating the activities of the hospitals and other facilities located

within its jurisdiction. Each VISN receives an allocation of federal funds

and is responsible for equitable distribution of those funds among its hos-

pitals and other providers. VISNs are also responsible for improved effi-

ciency and cost containment.

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