The Profitability Of Insurance Premiums In Managed Care Plans

Final Paper

The Profitability of Insurance Premiums in Managed Care Plans

December 20, 2006

The Profitability of Insurance Premiums in Managed Care Plans

This paper will explore how insurance premiums are profitable in the context of managed care plans. Managed care plans use insurance premiums and co-payments as sophisticated methods that are designed to control the behavior of patients and perhaps reduce "moral hazard" (Campbell, Schmitz & Waller, page 6) among enrollees.

According to the reading Financial Management in a Managed Care Environment, "moral hazard" is a theory defined as "the risk that individuals will use more services simply because they pay little or nothing at the time of service." In addition, "morale hazard... applies to situations in which the insured tend to be less careful because they are insured." In other words, the Healthcare system is being abused by stakeholders and patients who use the system haphazardly because it is there. The Healthcare system is seen not only as a safety net for members who are insured, but also as a commodity to be used not necessarily relative to actual need.

Managed care and insurance programs emerged initially offset the cost of health care in the United States by pooling groups of stakeholders together and charging each a proportional amount of the cost for their treatment. Managed care is also a way of reducing moral hazard by reducing the amount of the access patients have to gain services.

Managed care as we may recognize it started in the nineteen sixties (Campbell, Schmitz & Waller, page 4). At that time most citizens received health insurance through work benefits. The elderly and disabled often lost out on many benefits due to incomplete work histories. They therefore did not qualify for services. Medicare and Medicaid and emerged as a result of these inequities. In the nineteen sixties, Medicare was designed to function as health care insurance for the elderly. Another program, termed Medicaid, was designed to manage health care benefits for the poor. These programs were funded through revenue gained from employed workers. The differentiation attributed to the way these programs were funded was through different levels of government and influence. Today, Medicare is funded through a payroll tax, while Medicaid is funded by the individual states and the Federal government. The percentage of revenue each state receives is proportional to the amount of people enrolled in the program who reside in each state respectively.

In the nineteen seventies, the Healthcare portion of the economy experienced rapid inflation. In this era of bloated Healthcare expenses the government encouraged the growth of Health Management Organizations. Health Management Organizations provided avenues and behavioral incentives to cut costs by limiting access to services. At this time various Health Management Organizations began contending with established health insurance programs offered by employers. The government provided financial incentives and offered health management organizations an avenue to encourage enrollment and thereby cut Healthcare costs per member per month. The more members a Health Management Organization had, the less money was charged per member for use of services.

During the nineteen eighties, Medicare spending increased exponentially due to increased enlistment, increased utilization, as well ever increasing Healthcare costs. A "new pricing" system was incorporated into the program (Campbell, Schmitz & Walker, page 6). Medicare began to capitate the amount of funds it provided as reimbursement to hospitals and other health management organizations based on the advent of diagnosis related groups.

Given that Medicare began capitate the amount of funds a provider received based on diagnosis related groups, Physicians and other Healthcare professionals became creative in the way they treated patients to receive the largest amount of revenue for their services. Hospitals that supplied services to patients who had several concurrent diagnoses could have lost out on needed revenue as reimbursement for services may have been based on the initial diagnosis upon admission. Diagnosis may change across hours even days as the symptoms of the patients may change accordingly.

Due to the rising cost of health care, in the nineteen nineties, Health Management Organizations and other privatized managed care plans, expanded their enrollment, while also decreasing their spending. The government tried to legislate and encourage the privatization of managed care plans, to push the cost of health care off of the Federal government and into private plans, that were not subsidized by the government.

As result of this maneuver Medicare and Medicaid coverage expanded and increased to cover the community members who were not covered in other plans. To decrease costs, several health management organizations, and privatized insurance companies, decided to force members to go through a Primary Care Physician to receive access to services. Administratively, this became a nightmare. Health care reform forced by the Federal government was mainly unsuccessful in providing adequate reform because the Primary Care Physicians who were contacted with the managed care plan were inundated with patients that overwhelmed the system and increased costs with increased utilization (Campbell, Schmitz & Waller, page 7).

In this century managed care received through the workforce or privatization is the major way most workers are eligible for health care benefits. The elderly and disabled, based on certain criteria, are eligible for Medicare and Medicaid. Pregnant women and small children may be eligible for certain government subsidized programs also based on conditions related to economic background. In today's society health insurance can be considered privilege and not a right of citizenship.

As of two thousand and four the poverty rate in the United States was at about 15.7% and the uninsured rate was also 15.7%. It is interesting to note that the rate of poverty and the rate of uninsured individuals was the same in 2004, even though the rate of Medicaid coverage rose .05% from two thousand and three. The rate of Medicare coverage rose by 6% from two thousand and three. Many members of society who were covered with health insurance through employment were dropped by their employers, by about .6%. This drop can be attributed to the rising costs of health care. Many employers could no longer afford to offer health insurance