Organization and Financing of Health Insurance

The fundamental concept of any form of insurance is risk sharing: A large number of people who face a common threat of harm (auto accident, fire damage, costs of treatment for illness or injury) share their risks by paying premiums to an insurer who promises to finance payments to those who in the future actually suffer misfortune. All members of the risk-sharing group get a sense of security in return for their contributions even if they do not receive specific insurance payments (as a result of being personally harmed).

Ethical issues in risk sharing through health insurance are shaped by the insurer's decisions about how to organize and finance the common fund that members of a group rely on for protection against potential financial loss. For example, insurers may organize risk-sharing pools among individual subscribers, various age groups, business firms, or labor organizations. Financing might be done through a single, community-wide premium or through variable premiums tied to past utilization, health-risk or ethnic group or age or gender. The European approach was to develop social insurance mechanisms, or sick funds, initiated by the public sector. In the United States, the free market casualty insurance model was adapted in a unique form to fulfill the social insurance function. The resulting hybrid fails to satisfy either free market norms or social insurance ideals.

The major development in U.S. health insurance in the 1930s and 1940s was led not by government or business but by nonprofit corporations such as Blue Cross (hospital insurance service corporations), Blue Shield (physician insurance service corporations), and a variety of consumer and producer cooperatives that provided coverage for hospital and medical services. The corporate missions and characteristics of these organizations gave U.S. health insurance a strong social insurance tendency without fully incorporating the European approach.

Because they believed that the nonprofit organizations' approach to health insurance violated the basic tenets of casualty insurance, commercial insurers initially showed no interest in this market (Iglehart). Casualty insurance assumes that a hazard insured against is measurable and not something the insured person wants (such as checkups or preventive services), or can control (such as pregnancy).

From the beginning in the United States strict casualty insurance principles were ignored. While health insurance protects subscribers from the financial impact of relatively rare high-cost medical services, plans commonly also cover many low-cost services used every year by most members of the insured group. The typical health insurance plan provided to employees of large corporations includes coverage for some ambulatory care costs (office visits, X-rays, and laboratory services) and the major portion of emergency room and hospital charges. About 80 percent of the population will use some ambulatory care services, while only 10 percent of the population will need hospital care in any given year.

By the time the commercial insurers overcame their suspicion of the field, the nonprofit insurers had already brought much social insurance philosophy into the market. Consequently, while the health insurance language includes many standard insurance terms ("adverse selection," "moral hazard," "product lines," "lives covered by plans"), leading the casual observer to conclude that the field is a traditional casualty insurance market, it is, in reality, a form of social insurance peculiar to the United States. However, the competitive practices of commercial insurers have led to widespread use of experience rating, which undermines the social insurance spirit by making health insurance more expensive for those in greatest need. Health insurance plans use three basic methods to protect subscribers: indemnity benefits, service benefits, or direct provision of service. Indemnity insurance, typical of commercial insurers, reimburses a patient for a portion of incurred medical expenditures. Service benefits, typical of nonprofit insurers, pay physicians and hospitals directly on behalf of subscribers. Health maintenance organizations, by contrast, actually organize and deliver services directly to their members at clinics and hospitals that the plans usually own and operate, paying for professional services by salary or contract, not on a fee-for-service basis.

In a widespread effort to control medical care costs in the 1990s, managed care systems, especially those who were not associated with organized delivery systems, used various discounting and risk-sharing reimbursement mechanisms to pay medical service providers. By 2000, providers and patients had grown increasingly unhappy with the restrictions imposed by managed care strategies and the organizations could claim little success in controlling medical costs (Levit, Smith, and Cowen). New strategies relied on shifting costs to patients and members of insurance plans (Draper, Hurley, and Lesser; Christianson, Parente, and Taylor; Trude, Christianson, and Lesser). Six major tendencies characterize the way U.S. health insurance adapted casualty insurance concepts to serve a social insurance function: leadership by nonprofit corporations; a gradual shift from financing based on equal shares (community-rated premiums) to financing based on unequal shares (experience-rated premiums); consumer preference for comprehensive benefits; use of service and indemnity methods of benefit definition; carriers' preference for group rather than individual marketing of plans; and persistent ambivalence in the general public about the role of government in health insurance.

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