Health Insurance Lingo – Drivers of the Health Insurance Business

“What are words for when no one listens anymore”

- Missing Persons, 1982

Words, words, words

When advising healthcare start-ups strategically position themselves in the healthcare marketplace I often see gaps in understanding key industry terminology. This lingua franca represents the business rules the health insurance industry operates under, and the key drivers of revenue. Understanding and internalized these terms within a product or service is a prerequisite for successfully doing business with healthcare payers.

Provider network terminology

Network Adequacy

Health insurance carriers are required to ensure a sufficient number of all types of providers and facilities within a defined milage radius in all counties they sell their products within. This requirement applies to all services and benefits covered by the specific insurance plan sold. Rural counties generally have a larger radius allowed than urban counties.

• Why this matters: while telehealth and virtual services are easing this requirement to some extent, many states require in-person provider access to meet network adequacy requirements. Small companies with limited capacity to deliver their services across broad geographies will be challenged if they cannot provide equal access to those services to all covered consumers in all counties.

Health Maintenance Organization (HMO)

Sometimes referred to as a “narrow network” or an “HMO plan.” An HMO network is the directly contracted network of providers, facilities and vendors underlying a health insurance plan. This type of plan does not offer out-of-network benefits. A person covered by an HMO plan can only use their insurance benefits at one of the contracted (or in-network) providers or facilities. If they seek care out-of-network they will pay all costs out-of-pocket.

• Why this matters: insurance carriers prefer HMO plans because they can select which providers to contract with and negotiate lower reimbursement rates because providers believe visit volumes will be directed to them vs a competing clinic that is not in-network. This relationship between payer and provider also lends itself to capitated payments and shared risk agreements.  

Preferred Provider Organization (PPO)

Sometimes referred to as a “broad network” or a “PPO plan.” Unlike an HMO plan, PPO plans offer two levels of out-of-pocket costs to consumers. They have the option to seek care from an in-network provider and pay a lower out-of-pocket cost or see any other provider but pay a higher out-of-pocket cost. Carriers often will have a different out-of-pocket maximum and deductible for out-of-network care in an attempt to drive expenses to their directly contracted in-network providers and facilities.

• Why this matters: consumers generally prefer PPO plans based on the perceived broader choice of providers and facilities. Interestingly, insurance carrier data generally indicates that consumers on PPO plans end up seeing in-network providers the majority of the time despite having other options. Providers typically demand a higher reimbursement rate for PPO plans vs HMO plans because they believe they will see lower visit volumes. The data does not necessarily support that belief.

Plan administration terminology

Coinsurance

When a consumer uses their health insurance to receive care there is often an out-of-pocket expense they must pay. Coinsurance is one form of payment. It is based on a percentage of allowed reimbursement amount defined by the contract between the provider and the insurer. The percentage of coinsurance is often higher for out-of-network providers vs in-network providers.

• Why this matters: consumers hate coinsurance because there is no way for them to know in advance or at the time of service what their out-of-pocket expense will be. Providers are left to try and collect the coinsurance after the fact because they do not know the amount either, since the reimbursement rate from each insurance company for a specific service (or CPT code) is different. Coinsurance is a key barriers to cost transparency in healthcare.

Copayment

Similar to coinsurance, copayments are a predefined out-of-pocket cost paid by the consumer at the point of service. Copayment amounts are defined by the contract between the provider and the insurer, and the amount is often higher for out-of-network providers vs in-network providers.

• Why this matters: copayments offer a limited level of cost transparency. Providers prefer them to avoid the challenges of collections post-visit. Copayments for recuring services such as a course of physical therapy can create sufficient friction and financial hardship that consumers will quit before they complete the full treatment course. Therefore, for some high cost conditions such as post-procedure cardiac rehabilitation, carriers may waive copayments entirely.

Deductible

Health insurance carriers require consumers to pay out-of-pocket costs up to a defined deductible for care before the carrier starts to pay for anything. There are often two deductible amounts on an insurance plan, with a higher deductible that must be met for all out-of-network care and a lower deductible based on all in-network-care. Additionally, carriers often require each individuals within a family to meet separate deductibles, as opposed to an aggregate deductible that applies to the entire family.

• Why this matters: the deductible game is key to insurance companies’ financial success. They are effectively postponing their financial liability and transferring that liability to the consumer. The vast majority of insured consumers never meet their deductible during the plan year – effectively negating many of the benefits of purchasing health insurance. Consumers don’t usually understand the nuances between a combined family deductible vs separate deductibles for each individual and end up pretty pissed off when they see the insurance company passing all costs along to them.

Out-of-pocket maximum

Similar to deductibles, out-of-pocket maximum amounts set upper limits on the total amount a consumer will pay during the plan year. Like deductibles, there is often one amount for in-network care and a higher amount for out-of-network care. And like deductibles, there are often separate upper limits per person and not combined across a family.

• Why this matters: for most consumers, these limits don’t matter. Unless consumers face a significant chronic condition or need a major health procedure, they are unlikely to meet their annual maximum. Regulators view these limits as consumer protections. But health insurance companies have gamed the system to the point where these limits don’t help many consumers.

Coverage terminology

Preventive care

With the passage of the Affordable Care Act (ACA)in 2010, specific preventative screenings and immunizations – such as mammograms and colonoscopies - were mandated to be covered at no cost to consumers on all plans sold on healthcare.gov or the various state exchanges. Some states have added additional care modalities to the base list specified by the ACA. Many carriers only cover these services at no cost when delivered by an in-network provider.

• Why this matters: CMS and state health departments indirectly leverage these screenings to create financial incentives for carriers and providers, in the hopes of increasing utilization of preventative services. Increasing utilization by consumers is challenging due to misinformation, procrastination, and lack of awareness. Every carrier and provider group struggles to increase the percentage of their patient panel who receive all the recommended preventative screenings and immunizations, even though there is no cost to the consumer.

Referral

Referrals are a requirement by a health insurance carrier that a doctor submit a written order to see a specialist or get certain medical services. Referrals are common on HMO plans, and sometimes are included on PPO plans. Without insurance carrier prior approval, the carrier will not pay for the services.

• Why this matters: referrals are another tool used by carriers to reduce costs by introducing friction into the care continuum. Some provider groups curate the list of specialists within their EMR to nudge doctors to refer consumers to specific specialists based on business relationships. Referral requirements are deeply unpopular with consumers and providers alike. They are becoming somewhat less common but are often being replaced with prior authorizations.

Preauthorization (PA)

The PA requirement is becoming a more frequent tool used by health insurers to limit access to high cost or specialty care, and in some cases to prescription drugs. They may be called prior authorizations, prior approvals or pre-certifications. Providers are required to submit a request to the insurance carrier for prior approval. Big, national carriers deny these requests at an alarming rate. Interestingly, when these denied PA requests are submitted a second time, or an appeal is submitted to the carrier, over 80% of them approved. This rate of successful appeals highlights the game being played by carriers to try and not pay for covered care. One example is Molina Healthcare with a denial rate of almost 18%. They have bragged to investors about their “strong operating performance and medical cost management.”

• Why this matters: the bad actors in the PA game are facing ever greater scrutiny from CMS and elected officials for their dishonest behavior. These carriers maintain they have done anything wrong and are only trying to limit “low value” care. But if something looks like a fish and smells like a fish, it’s pretty likely to be a fish.

Prescription drug terminology

Formulary

Health insurance plans all include a specified list of covered prescription drugs. That list, known as a formulary, typically divides into multiple tiers of drugs. Each tier has a specified out-of-pocket cost the consumer pays. An example would be Tier 1 generic drugs; Tier 2 preferred brand-name drugs, Tier 3 non-preferred brand-name drugs; Tier 4 specialty drugs. Carriers must cover a minimum of drugs for any specific condition. However, they typically do not cover all FDA approved drugs for that condition.

• Why this matters: ever ask yourself why CVS purchased Aetna health insurance? Just follow the money. Insurance carriers curate their formularies to ensure the drugs covered by their health plans are either manufactured by their corporation or offer advantageous unit costs. Carriers also place expensive drugs or drugs with high utilization on tiers with higher out-of-pocket costs to shift more of the expense to consumers. The Biden administration has begun negotiating with pharmaceutical corporations to reduce the cost of the ten most expensive drugs proscribed to Medicare and Medicaid patients. But it remains to be seen what impact if any that will have on consumers with insurance through their employer or who purchase insurance themselves.

Opportunity

This is not a complete summary of all the terms used in the industry, but it is solid start. They all represent business strategies deployed by health insurance carriers to control costs, manage utilization, and direct volumes to venues and drugs advantageous to their bottom line.

These words matter when doing business in the healthcare market. Strategically integrating these concepts into a product or service will increase the likelihood of successfully doing business with healthcare insurance corporations.

Copyright 2itive 2024

2itive is a Portland based consultancy founded by Erik Goodfriend, offering a unique combination of market intelligence, knowledge of healthcare payment systems and creative business strategy insights. Feel free to contact us at info@2itive.com