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How does health insurance relate to an employee's "health benefit package?"

Here, there are two distinctions which must be made: the difference between an employee's "benefits package" and their "health benefit package" and the difference between the health benefit package and health insurance. The benefits package should be viewed as all of the benefits that an employee receives from the employer, which includes a health component in addition to life insurance, disability insurance, 401 (k), tuition reimbursement, etc., (see question 5 for more detail). The health component, or health benefit package, of this overall benefit package can also be broken down into several different components. For example, the health benefits package usually includes a health insurance product and adds to that all, several, or none of the following things: an annual physical, blood and other health screenings, dental cleanings, dental insurance, vision services and products, and flexible spending accounts for items such as contact lenses, eyeglasses, vitamins, over-the-counter drugs, and other approved health related expenses. Most people refer to their health benefit package as their "health insurance." However, it is critically important to distinguish between the two.

The health benefit package may include payment for many routine medical expenses such as yearly physicals, dental cleanings, contact lenses, screenings and the like. Those things are anticipated medical costs and therefore cannot truly be insured against; remember that only unforeseen financial losses can be insured against. That is why the employer designs or contracts with a plan designer to come up with an overall health benefit package that meets the employee's health care needs beyond that which health insurance can provide. When people fail to make this distinction it distorts and dilutes the true meaning of health insurance and insurance in general. This makes debates over health care issues and policy initiatives more difficult, because people do not always mean the same thing when they use a term like health insurance.

What is a Health Maintenance Organization (HMO)?

A Health Maintenance Organization (HMO) is one type of Managed Care Organization (MCO). Whereas traditional health insurance would pay the beneficiary for any contractually approved medical expense incurred at virtually any facility, HMOs only provide compensation for care provided at their own facilities or within their "network of care." That model has certain advantages and disadvantages. By restricting the location of treatment or "point of care" the HMO could contain costs by negotiating for better rates, or simply choosing less expensive providers. The result was to stabilize the variability in incurred expenses from year to year. The company could then offer a cheaper, although more restrictive, insurance product. For many people, that was an opportunity to save money on health care, and for some people, a new opportunity to buy health insurance that they couldn't previously afford. HMOs were very popular at first and enrollments grew, because of the cheaper rates. The government also invited HMOs to participate in the Medicare program by creating Medicare + Choice, or Medicare Part C. Over time, as more people became familiar with the procedures and restrictions involved with HMOs, many people came to dislike HMOs.

What is a Preferred Provider Organization (PPO)?

A Preferred Provider Organization (PPO) is another type of Managed Care Organization (MCO). PPOs are very similar to HMOs, but are characteristically known for offering a managed care product with greater flexibility and choice. In comparing PPOs to HMOs, it can generally be said that on average, PPOs offer wider networks of care, greater choice of health care providers, and more generous benefits; they also charge higher premiums and incorporate deductibles. Many people prefer PPOs to HMOs and PPOs have come to dominate the managed care market, however, HMOs continue to fill a very important niche for those looking to save money and are willing to accept greater restrictions in service and benefits. Additionally, both HMOs and PPOs have become more flexible over time, offering beneficiaries the opportunity to seek approved treatments or services "out-of-network" for a fee-either a higher deductible or a different co-pay arrangement. By 1994, HMOs and PPOs combined to serve almost 40 percent of the market; that percentage grew to almost 90 by the year 2000.

What was the "managed care backlash?"

The dominance of managed care organizations, or MCOs, combined with the restrictions of "networks" and increasing annual premiums resulted in the notorious "managed care backlash" of the mid-1990s. Purchasers of insurance demanded greater benefits for the same cost, others wanted broader networks of physicians and facilities so they could see the doctor of their choice or have a procedure done closer to home, and some employees petitioned their employers to offer a variety of employer-sponsored health care plans.

The most outraged of patients brought lawsuits against MCOs for failure to pay for certain so-called "medically necessary" procedures or an approved procedure at certain facilities with arguably a better record of performing that procedure. Some people sought other avenues and lobbied Congress and state legislatures to enact stricter regulations on insurance providers-in some cases creating a standard benefit package, also referred to as "mandated benefits." At the federal level, lawmakers have tried to establish guidelines for managed care through regulation-known as the "Patient's Bill of Rights"-that would establish a restrictive standard for benefits and define rules of interactions between patients, doctors, insurers, and managed care organizations.

The managed care backlash has resulted in greater regulation of health insurance markets at both the state and federal level. That added regulation has on the one hand standardized benefits for those with insurance, but on the other hand it has reduced the variety of health insurance products offered and reduced the number of firms competing within the market, therefore driving some purchasers of health insurance out of the market. As standards become more unified across the industry there is less variation among products, making the option to buy health insurance one of "all or nothing."

What is a third party payer?

A third party payer is a third party to a transaction who finances the transaction. For example, in a transaction between a doctor and a patient, the insurance company (a third party to the transaction) pays the bill or most of the bill and is therefore the third party payer. A third party payer can be an insurance company, an employer, or a government body. At the beginning of the 20th century some Americans paid their medical bills directly or out-of-pocket, while others relied on their membership in mutual aid societies and labor unions. Insurance companies, employers, and state and federal governments had not yet begun to play a major role in paying for health care. In the 1930's insurance companies began issuing health insurance and the model of traditional health insurance dominated until the managed care organization revolution in the 1980's. Even earlier, American states began experimenting with publicly funded health care on a state-by-state basis after 1911, when Great Britain passed the British National Health Insurance Program. Soon after the notion of public funded health insurance became more popular, but it wasn't until the 1960's that it reached national proportions with the enactment of Medicare. During World War II, employers first began offering employer-sponsored health care benefits and have continued to do so through the present (see question 5 for details). Overall, the trend during the 1900s was a vast expansion of the role that each of these third party payers played in the financing of personal health care. As a result, individuals, mutual aid societies, and unions began to play a lesser role.

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