Understanding Medical/HMO Insurance
Contracts of Adhesion
All health care agreements, including both Health Insurance and Managed Care agreements, are “contracts of adhesion.” This basically means that you either take the agreement as written, or you leave it; with the exception of minor options, you really can’t negotiate the terms. For this reason it is especially important for you to understand the differences between one plan or policy and another.
Given that you cannot negotiate the terms of these contracts, and a long-term illness can bankrupt most people, it is crucial that you be able to compare different plans and determine which ones to consider and which to avoid.
HMO’s and PPO’s
Two of the most common medical care delivery systems are the HMO (Health Maintenance Organization) and the PPO (Preferred Provider Organization). The designations and details of each differ.
The HMO is a plan managed by one primary doctor. When you need medical services, you go to him or her for treatment and/or referral.
The PPO is a plan in which you may seek the care of a physician of your own choosing so long as the doctor is one approved by the PPO and included in their Providers Directory. With most PPOs you can also select a physician from outside the Directory, if you are willing to pay a higher portion of the doctor’s charges out of your own pocket.
HMO’s generally charge higher premiums in exchange for broader coverage, and they require fewer user fees and paperwork. PPOs, on the other hand, provide a greater choice of doctors and treatment options.
There are other names for plans in addition to HMO’s and PPO’s. (Point of Service Plans, Healthcare Service Plans, Participating Physicians Programs, etc.) But the basic distinction remains the same: whether you have one primary doctor versus a choice of doctors that you may go to directly.
Other distinctions between plans may become blurred under the terms of a particular contract. For example, some HMO plans do allow you direct access to specialists without having to request approval from your primary doctor, if specific conditions are met.
Many health care providers have responded to changes in healthcare industry laws and costs by cutting services, increasing deductibles and limits and establishing co-payment procedures and other charging arrangements. Some have also instituted “capitation agreements,” where a doctor or group of doctors receives a monthly flat fee based on the number of patients assigned to the doctor, regardless of whether the patient does or does not visit the doctor that month.
In addition, other containment features have become common, such as utilization reviews. Utilization review is a process by which a health care plan makes treatment decisions. Sometimes, a plan employee makes these decisions instead of a treating medical doctor.
Individual Health Coverage
Individual health policies require individual underwriting or risk assessment. In other words, individuals to be covered by the policy must be assessed individually, in terms of age, sex, risk factors (such as smoking), medical history, current medical condition, residence location, coverage desired and other variables. The person submitting the application for insurance provides detailed information on each person to be insured. The carrier or plan then determines whether or not an applicant is accepted as a member; and, if so, the premium to be charged and the conditions of coverage.
Group Coverage (other than employer-employee groups)
Group policies generally include several-to-thousands of members and their families. Group policies can be written for organizations of any type, including professional or business groups and social organizations. Often, depending on the size, demographics and healthcare terms and conditions being offered, the underwriting characteristics of individual members of the group are less important than that of the group as a whole.
For example, the underwriting characteristics between the NCAA Cross-Country Runners Association and the Smokers Rights League would vary dramatically.
While some groups provide members with a choice between different plans or insurance companies, most groups give one insurance company exclusive access to the entire group in exchange for reduced rates, or other financial incentives.
Employment Based Coverage
A common group medical coverage program sold today are plans offered through employment. Many employers offer a choice from a number of HMO or PPO options.
Some employers also offer a form of self-insurance, which means the employer directly pays up to X dollars per year in health benefits for each employee. This type of arrangement usually includes a catastrophic policy benefit covering certain medical expenses incurred above a threshold amount. For example, such an arrangement might provide that the employer pay up to $6000 per year in medical care costs for each employee. Amounts above $6000 would then be covered by a separate catastrophic healthcare policy.
Employers can administer health care in many different ways. This is a very important subject because it impacts access to information and claims handling. Some employers administer their own plans through their company’s Human Resources Department; others “outsource” programs through a separate claims servicing, or HR company. The amount of help that a particular employer may give to its employees toward understanding and exercising their rights under an employment based plan depends on the motivation of the particular employer. Some employers are determined to provide maximum coverage and assistance to their employees in order to keep them healthy, happy and dedicated to the company. Others are principally concerned with controlling the company’s bottom line.
In evaluating any company program, you should use the factors and considerations described below.
The one crucial distinguishing factor separating employment-based plans from others is that with an employment plan most employees and their covered dependents lose virtually all of the rights and leverage they would otherwise have under the consumer protection, court decisions and insurance laws and regulations of their state. (See ERISA in our Glossary Section).
How did this come about? First, some background. Over the past several decades each state, through its own laws and court decisions, developed protections for insurance policyholders. This happened at the state rather than the federal level because years ago, as described elsewhere on this site, Congress enacted legislation preventing federal regulation of the insurance industry. This Congressional legislation was known as the McCarran Ferguson Act. It provided that any regulation of the insurance industry had to be enacted at the state rather than the federal level. Various “model” state statutes eventually developed and were enacted. These uniform statutes included unfair claims handling regulations and other laws adopted on a state by state basis.
These state statutes, along with state court decisions, gave policyholders the right to take legal action against carriers engaging in unfair claims handling practices such as underpayment, misrepresentation, delay or fraud. Consumer groups argued that the right to hold insurers accountable in this way gave policyholders leverage to compel the fair settlement of valid claims. However many insurance companies complained that lawsuits were costing the industry too much money and that the solution was to bar people from suing them. Most states were simply unwilling to do this.
In 1987 the US Supreme Court, at the urging of the insurers, did precisely what state legislatures had been unwilling to do. In the case of Pilot Life v. Dedaux, the Court ruled that if a person obtained his or her health insurance through their employer, they could no longer rely on state laws, or state courts, to protect them if their rights were violated. Instead, their rights were to be limited by an existing federal law known as the Employee Retirement Income Security Act (ERISA). Interestingly, this law was not originally enacted with insurance in mind at all. It contained none of the standards or consumer protections afforded by most states in non-ERISA situations.
The elimination of state insurance protections for employees who obtain their health benefits at work is called “ERISA Preemption”.
There are limited employee exemptions to ERISA preemption (notably for state employers and employees of religious organizations). In addition, a number of efforts have been launched in an attempt to rectify this situation through the enactment of remedial legislation. But the bottom line is that so far, the Supreme court’s 1987 Ruling remains the law. Unless you are exempted as a government or other excluded employee you lose all of your rights under your state’s laws and protections if you are ERISA Preempted.
If you have any choice between purchasing an ERISA governed plan, versus one that is not an ERISA plan, Insurance Consumers recommends that you select the latter.