Understanding basics and challenges of U.S. Health Insurance and lessons India can learn from them

United States has predominantly two types of insurance – Private and Public.  Private health insurance is often offered

United States has predominantly two types of insurance – Private and Public.  Private health insurance is often offered through employers or other organizations. Public insurance is funded by government broadly through two categories – Medicare and Medicaid.  Medicare is funded through federal government for aged population who are age 65 or older. Medicaid is state-run government insurance program that helps some people with lower income for medical care.

In this article, I will be focusing on Private insurance mainly. India seems to be  behind in health insurance from United States and at times I hear opinions that India should consider Health Insurance as an option to solve its healthcare challenges. Interestingly the current structure in India is more like it was in United States in prior to enactment of 1965 bill, mostly indemnity (fee-for-service) health insurance.

Background

The two main reason why health insurance picked up so much since 1950’s in United States, are

1.  Employer-paid health insurance became prevalent with the Stabilization Act of 1942 and with the Internal Revenue Code of 1954 (Alliance, 2013).

2. Due to the healthcare bill acted for Medicare and Medicaid, with that increase government participation and role in the healthcare expenditure spending.

Employer-provided plans have become prevalent, since the Stabilization Act sought to control inflation by restricting wages, though it allowed certain benefits, such as health insurance.  It became effective for employers to lure employees by offering good benefits packages, including health insurance.  In the 1950s, the new Internal Revenue Code underscored and clarified the tax exempt status of these benefits.

Employer saves its share of Social security taxes, and employees do not have to pay federal, state or Social security taxes on additional health insurance benefits (Feldstein, 2016). Through the intermediary of the employer, consumers get a discount, since the employer purchases the plans in pre-tax dollars.  The discount comes from the tax bracket of the employer.

As some economists argue, for supply and demand to function effectively, consumers need to pay the full value of goods and services received.  In 1950, 6.7% only of the population had private insurance, whether from an employer, purchased directly, etc.  By 2014, 66% of full time and 21% of part time US workers had an employer-sponsored plan (Long, et al, 2016).

In order to go further, we need to understand: what is private health insurance ?

Private health insurance is a mechanism for people

(1) To protect themselves from the potentially extreme financial costs of medical care if they become severely ill

(2) To ensure that they have access to health care when they need it.

With the rising cost of healthcare, it can be quite expensive, and only some may able to pay for the serious illness if a need arise. Private health insurance coverage products pool the risk of high health care costs across a large number of people, permitting them to pay a premium based on the average cost of medical care for the group of people. Having “insurance card” enables patient to receive care in timely manner as providers know that when they treat patient with health coverage, they are likely to get paid for the services in a reasonable time.

People without access to employer-sponsored insurance may obtain health insurance on their own. Though as seen in United States, most of these groups self-employed were not opting for health insurance until there was a need for medical attention. That is when, insurance companies started to protect themselves from adverse selection and had rules in place until the ACA acted in 2013. The insurance companies would not pay for pre-existing conditions like Cardiac problems or Kidney issues until a year from the enrollments. The health insurance had to wait for a year to get the medical treatments. The premiums would be higher for someone with the pre-existing conditions as they are the risky pool for insurance.

Currently, due to high cost of healthcare in United States, health insurance coverage includes inpatient as well as outpatient cost after deductibles are met. Health insurance has two parts to it – premium (Premium is the amount you pay on monthly basis to get the health coverage through an insurance company and it is tax deductible.) and deductibles (Amount you need to pay from your pocket before insurance paying for the balance).

There are variety of plans available in market for individual’s needs, more commons are

(1) High premium and low deductible plans (HPLD)

(2) Low premium and high deductibles plans (LPHD).

Usually employer-sponsored plans are high premium and low deductible as the cost of the healthcare insurance is shared between employer and employee. Self-insured and young, who need see less need of healthcare opt for low premium and high deductible plans. An example of HPLD is paying $500 monthly for a family of three (member, spouse and child) and $1000 deductible to meet before insurance start paying for the health care cost. Also, the insurance company also negotiate with providers (physician and hospitals) to reduce the cost for the member. So, if without insurance you will pay $100 for physician visit, with insurance you may only pay $75 for a physician visit. The insurance company wants to keep deductibles so members do not abuse the health insurance and reduce the loading cost* (Loading cost = is administrative cost occurred by company to generate and collect claims). For a young population, having LPHD works better as they do not want to pay upfront to insurance companies when they may not be using services. Hence they prefer, LPHD where they may pay $50 monthly for a member and $5000 as deductible, that is when insurance payments starts kicking in.

Another concept is types of plans, two mostly common are Health maintenance organization (HMO) and Preferred provider organization (PPO).

HMO’s are usually licensed under special state laws that recognize that they tightly integrate health insurance with the provision of health coverage.  They are insurers as well as providers. PPO on other hand is an entity, who does not actually provide health coverage. Rather, PPO’s are networks composed of physicians and other health care providers that agree to provide services at discounted rates and/or pursuant to certain utilization protocols to people enrolled in health coverage offered by a health coverage provider. Typically, PPO’s have lower copayments and cost for in-network providers versus out-of-network.

Due to providing high subsidies to buy insurance through employer and the aging population in the United States, there is concern among political parties to reduce the healthcare expenditures. The Obama care act (also known as affordable care act (ACA)) introduced new regulations and taxation for people who do not have insurance. ACA impacted American’s healthcare cost as it not only increased the eligibility for Medicaid but also removed pre-existing condition when someone buy insurance, hence cost of healthcare insurance went up. ACA provided subsidies based on geographical regions and wages. Government imposed taxes to give subsidies to poor and low income eligible families.

The strange but true fact is, U.S. government did not make any changes to Medicare, which is the major healthcare expenditure for government, as that is biggest voting population. One of the options they were exploring for the insurance companies to charge more to who bought private insurance on their own. They did not make any changes to employer-paid insurance either as that is the biggest interest group that supports and funds the government. The principle of economics and political challenges (vote bank politics) remain same whether it is India or U.S. Until government can take some steps to look into other aspects, it is difficult for government to reduce healthcare expenditure and control healthcare insurance prices.

These are some things to consider as India decides on its future course for Healthcare.

About the Author

Kiten Meena

Kiten Meena is Senior Business Analyst, working with a healthcare consulting firm in United States. She had thirteen years of experience in working in Healthcare Sector. She currently work as a consultant at Kaiser Permanente where she oversee new enrollments coming from state and federal exchanges. She is also currently pursuing Executive Masters of Health Administration at University of Southern California Sol Price School of Public Policy.

References:

  1. Feldstein, Paul. Health Policy Issues, Health Administration Press, 2016.
  2. https://www.cbo.gov/sites/default/files/…/51130-Health_Insurance_Premiums.pdf
  3. https://www.library.ca.gov/crb/07/02/07-002.pdf
  4. org/news/npr-employer-explainer/
  5. Long, Michelle, Matthew Rae, Gary Claxton and Anthony Damico, “Trends in Employer-Sponsored Insurance Offer and Coverage Rates, 1999-2014,” Henry Kaiser Family Foundation, 5/21/2016, from http://kff.org/private-insurance/issue-brief/trends-in-employer-sponsored-insurance-offer-and-coverage-rates-1999-2014/

 

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