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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.

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Dr Lustick

Dr. Martin Lustick

Senior Vice President, NextGen Advisors

Dr. Martin Lustick is a principal and senior vice president with NextGen Healthcare focused on supporting provider organizations in their successful transition from volume to value-based care.

Dr. Lustick earned a BA in History from Cornell and an MD from Columbia. After completing his pediatric residency at Children’s Hospital National Medical Center in Washington, DC, he was in clinical practice for 17 years with Kaiser Permanente of the Mid-Atlantic States. While there, Dr. Lustick held various management and leadership roles, including chief operating officer for the 800-physician medical group. He oversaw development of their hospitalist program, population health capability, and open access delivery model.

Dr. Lustick then served as chief medical officer for ThompsonHealth—a small health system in Canandaigua, NY—where he provided clinical oversight for hospital, SNF, nursing home, IT, and out-patient physician practices.

In 2005, Dr. Lustick assumed the role of SVP & CMO for Excellus BCBS which covers 1.6 million lives comprised of Medicare, Commercial, and Medicaid. In his 13+ year tenure there he led a variety of strategic initiatives, including a patient-centered medical home program which served as the foundation for the plan’s value-based payment strategy. He also led the implementation of an automated authorization program for care management services, development of a clinical quality improvement strategy, and creation of innovative programs in management of low back pain, screening and prevention, opioid addiction, and chronic disease management.

Dr. Lustick has also been very active in the community, serving on boards and committees confronting issues such as: healthcare capacity planning, Health Information Exchange, mental health, substance use disorders, social determinants of health, and childhood obesity.