The Payer Landscape

When providers talk about health plans, health insurance, and Managed Care Organizations (MCOs) they often use the three terms interchangeably. In fact, they have different meanings that hold important implications for providers, and ultimately for all of us. “Health plan” is a generic term that refers to any organization that provides coverage for healthcare expenses. Examination of the historical context will elucidate the important distinctions between an insurance company and an MCO. 

Health insurance began in the U.S. as a result of wage freezes imposed during WWII. Employers found that they could attract workers by offering it as a benefit, and the government made this easy by agreeing not to tax it as income. Blue Cross and Blue Shield were the first to step in and provide indemnity-based health insurance. Similar in concept to car insurance, in return for a monthly premium the subscriber was reimbursed for their financial losses related to a covered service, i.e., they were indemnified. That reimbursement was either a set amount or a percentage of charges. Prior to the Health Maintenance Organization (HMO) Act of 1973, indemnity insurance was the predominant form of coverage for most Americans. Under that model, the transactions were all between the insurance company and the patient. There was no provider network and therefore no contract between the insurance company and the provider. Patients saw whomever they chose, paid the provider directly, and submitted a claim for reimbursement. 

The HMO Act of 1973 forced employers with over 25 employees who offered health benefits to offer HMO coverage to their employees. It also created financial incentives for health insurers to become MCOs. The result was rapid expansion of HMOs over the next 20 years. While the HMO Act essentially expired in 1995, its overwhelming impact persists to this day. In becoming MCOs, insurance companies had undergone a transformation. They were suddenly responsible for establishing a network of providers, both physicians and hospitals, that contractually agreed to care for the members of the “health plan.”  Patients would receive care from those providers, but claims would be paid directly by the health plan to the provider – no more indemnification of the patient. Unlike insurance companies which function as financial intermediaries, MCOs sell a network of providers and services to their customers. As a result, they are at risk for issues such as access and quality of care. 

With the advent of managed care, health plans suddenly needed a clinical team for credentialing, quality oversight, and cost control, thus converting them into MCOs. In today’s world, MCOs administer a variety of managed care products such as HMO, Point of Service, Exclusive Provider Organization, and Preferred Provider Organization (PPO).  All of these are variations on the theme of health plan contracted networks and services that are sold to beneficiaries with an implied health plan accountability for access, quality, and provider payments.

While many providers might prefer to go back to the “good old days” of indemnity insurance, that model had its own drawbacks. Under indemnity coverage, insurance companies render denials after a service is provided if it is not covered by the policy. This could leave providers pursuing patients for payments for those services. Even if services are covered, many patients would not be able to afford to pay unless and until they receive payment from the insurer. As providers today often struggle to collect co-pays and deductibles, they would have significantly increased challenges with accounts receivable under a pure indemnity product.

Overall, as practices continue to struggle with the complexities of their relationships with payers, particularly if they are pursuing value based contracts, a deeper understanding of the health plan’s role will be critical to their success.