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Definition of Key Terms - Glossary |
Adverse selection The process of choosing health insurance plans under which one plan (or insurance pool) gets a disproportionate share of sick people. Since the plans must charge premiums that cover their costs, plans with a disproportionate number of sick people will have to charge higher premiums, other things equal. After the premium hikes, even more young and healthy may leave the pool, leading to a "death spiral of adverse selection." Policy Concern: Any insurance reform that prohibits health plans from charging a premium equal to the risk (or expected health care costs) a person brings to the pool will tend to result in some adverse selection. The reason is that the health plans will compete to attract the "good risks" (those who are overcharged) and avoid the "bad risks" (those who are undercharged).
Community rating Under "pure" community rating, everyone is charged the same premium regardless of health status. Under "modified" community rating, premiums may vary due to age, gender or geographic location, but not health status. Policy concern: If premiums do not reflect health risks (or expected health care costs), some people will be overcharged and others undercharged. Those who are overcharged will tend to underinsure or choose to be uninsured. Those who are undercharged will tend to overinsure or pressure their employer or government to expand health insurance benefits. As a result, some people will have too little insurance, while others have too much. Cost-shifting The act of overcharging some patients in order to finance the deficit caused when other patients pay less than the real cost of their care. This is alleged to occur when uninsured people receive free health care, and when Medicare and Medicaid pay physicians and hospitals less than the actual cost of medical care for their beneficiaries. Policy concern: Although most proposals before Congress would reduce the number of uninsured (and therefore lower the amount of cost-shifting from those who lack insurance), these proposals also would cut funding for Medicare and Medicaid, making the total amount of cost-shifting even greater and causing private health insurance premiums and charges to private patients to rise. As the medical marketplace becomes more competitive, cost-shifting will become more difficult. If costs cannot be shifted, patients who underpay (or whose health plan underpays) will tend to get reduced-quality services or rationed care. Employer mandate A government requirement that employers pay for all or part of their employees' health insurance coverage. Policy concern: Nearly all studies of the economic impact of employer mandates conclude that mandates will result in lost jobs or lower wages. Since fringe benefits are a substitute for wages, most employees will lose in wages what they gain in health benefits. However, where the costs cannot be offset - because of minimum wage laws or union contracts - employees are likely to lose their jobs. The social benefits of mandates may not exceed their costs. Hawaii, which has had an employer mandate for 20 years, still has an uninsured rate of about 9 percent, or about 7 percent if the state's limited health insurance benefits for the poor are included. Fee-for-service The traditional medical relationship in which patients pay their doctors a fee (often reimbursed by a third party) for the service rendered. Under fee-for-service health insurance, the beneficiaries can choose their own doctors and reimbursement is based on the fees the doctors charge. Policy concern: Many of the major health care reform proposals before Congress, including the original Clinton plan, would greatly limit the ability of fee-for-service insurance to survive in competition with health maintenance organizations (HMOs) and other managed care plans that limit the choice of doctors and pay doctors a fixed fee, independent of services actually performed. Federal Employees Health Benefits Plan (FEHBP) The health insurance program that covers about 9 million federal employees and their dependents. During an annual "open season," most federal employees can choose among eight to 12 competing plans. Several proposals before Congress call for an expansion of the FEHBP or an FEHBP-type program to cover many of the uninsured. [See Managed Competition.] Policy concern: While the FEHBP has provided good coverage for federal employees, it has not managed to hold down costs. Moreover, the number of fee-for-service plans has been falling and some argue that fee-for-service plans ultimately cannot survive in the FEHBP. Severe adverse selection problems exist and some argue that the health plans have an economic incentive to underprovide services to the sick. Flexible Spending Accounts (FSAs) Also known as "cafeteria plans," these accounts are offered and administered by employers. They provide a way for employees to set aside out of their paycheck pretax dollars to pay for the employee's share of insurance premiums or medical expenses not covered by the employer's plan. FSAs have a "use it or lose it" clause, under which money the employee does not spend is returned to the employer. By contrast, a Medical Savings Account [see below] would, in effect, replace the "use or lose it" provision with a "use it or save it" provision instead. Policy concern: Most versions of the Clinton health plan would eliminate FSAs, thereby reducing employees' ability to self-insure for smaller medical expenses. Global budgets A government-set budget establishing how much money doctors and hospitals may spend on health care. Policy concern: The amount of money the government allows providers to spend is almost always less than the amount actually required to meet all health care needs. As a result, global budgets force providers to ration health care to some people. Guaranteed issue The practice (often enforced by regulation) of accepting all applicants to an insurance plan, regardless of health status. Guaranteed issue regulations are often combined with premium regulations, such as community rating (requiring insurers to charge all applicants the same premium). Policy concern: If people can purchase health insurance after they get sick, there is no incentive for a healthy person to purchase coverage. As a result, guaranteed issue regulations almost always lead to an increase in the number of people who are uninsured. Guaranteed renewable policy The commitment (sometimes enforced by regulation) to allow beneficiaries to continue their coverage in future years, even after they become sick. Policy concern: Guaranteed renewable policies are generally more expensive, but the higher price is usually worth paying. With guaranteed renewable insurance, people have no worry about losing their coverage or facing premium increases because they get sick. Health maintenance organization (HMO) An organization that serves both as an insurer and a health care provider. Under the traditional HMO arrangement, doctors receive a fixed fee per beneficiary, rather than fees for services rendered. This eliminates the incentive to provide unnecessary medical care, but it creates an economic incentive to underprovide services. With fewer services, the doctor's costs are lower, but his revenues remain the same. HMOs are promoted as a solution to rising health care costs, since the organizations control and limit the amount and type of health care their physicians and hospitals provide. Policy concern: Most studies show that switching to an HMO results in a one-time reduction in health care expenditures, but that the rate of growth continues at approximately the same rate as that of traditional health insurance. Moreover, to the extent that HMOs do control costs, the problem is to make sure they have not done so by lowering quality. Individual mandate A government requirement that individuals purchase health insurance. This mandate is sometimes combined with an employer mandate, requiring employers and employees to share the cost of health insurance. Global budgets A government-set budget establishing how much money doctors and hospitals may spend on health care. Policy concern: The amount of money the government allows providers to spend is almost always less than the amount actually required to meet all health care needs. As a result, global budgets force providers to ration health care to some people. Guaranteed issue The practice (often enforced by regulation) of accepting all applicants to an insurance plan, regardless of health status. Guaranteed issue regulations are often combined with premium regulations, such as community rating (requiring insurers to charge all applicants the same premium). Policy concern: If people can purchase health insurance after they get sick, there is no incentive for a healthy person to purchase coverage. As a result, guaranteed issue regulations almost always lead to an increase in the number of people who are uninsured. Guaranteed renewable policy The commitment (sometimes enforced by regulation) to allow beneficiaries to continue their coverage in future years, even after they become sick.
Policy concern: Guaranteed renewable policies are generally more expensive, but the higher price is usually worth paying. With guaranteed renewable insurance, people have no worry about losing their coverage or facing premium increases because they get sick. Health maintenance organization (HMO) An organization that serves both as an insurer and a health care provider. Under the traditional HMO arrangement, doctors receive a fixed fee per beneficiary, rather than fees for services rendered. This eliminates the incentive to provide unnecessary medical care, but it creates an economic incentive to underprovide services. With fewer services, the doctor's costs are lower, but his revenues remain the same. HMOs are promoted as a solution to rising health care costs, since the organizations control and limit the amount and type of health care their physicians and hospitals provide. Policy concern: Most studies show that switching to an HMO results in a one-time reduction in health care expenditures, but that the rate of growth continues at approximately the same rate as that of traditional health insurance. Moreover, to the extent that HMOs do control costs, the problem is to make sure they have not done so by lowering quality. Individual mandate A government requirement that individuals purchase health insurance. This mandate is sometimes combined with an employer mandate, requiring employers and employees to share the cost of health insurance. Policy concern: Advocates claim an individual mandate will result in universal coverage, but there is no evidence to support that claim. Any health insurance reform proposal that requires people to pay part of their premium will never achieve universal coverage, since some people will refuse to pay the premium. [See Employer Mandate.] Managed care Any act of intervening in the doctor-patient relationship by third-party payers in order to control health care costs. The mildest form of managed care gives price discounts to people who go to selected doctors and hospitals. The strongest form of managed care dictates protocols to physicians, instructing them on how to treat various diseases, what tests to perform, what drugs to prescribe, when to admit a patient to a hospital, etc. Policy concern: The biggest problems are limits - on the patient's freedom of choice and on the physician's freedom to practice medicine. Both types of limits could lower the quality of care. Managed competition An attempt to create an artificial market for health insurance in which individuals choose among competing health plans that are forced to charge the same premium to every applicant, regardless of expected health care costs. [See the Federal Employees Health Benefits Program.] Policy concern: Since all enrollees (and their employers) pay the same premium, regardless of health status, no plan could afford to attract large numbers of sick people such as AIDS patients or coronary bypass candidates. As a result, plans would actively try to avoid the sickest (highest-cost) patients - much more so than under the current system. Ultimately, the plans would have an incentive to reduce the quality of care for the sickest patients to encourage their shift to another plan. Medical Savings Accounts (MSAs) Accounts from which people pay medical bills. Annual deposits are usually made by employers in lieu of more generous insurance coverage, and employees get to keep whatever money they do not spend from their account (unlike Flexible Spending Accounts). Under a number of proposals before Congress, these deposits would be made tax free and unspent funds would be allowed to grow tax free over a person's working life. The money could then be used for postretirement health care, rolled over into a pension fund and included in the account holder's estate. Policy concern: MSAs are a promising tool for controlling costs. Unlike managed care programs, which interfere in the doctor-patient relationship, MSAs give individuals incentives to control their own health care costs because when they purchase medical care they are spending their own money. Portability The ability of employees who have employer-provided coverage to continue their coverage (by paying premiums themselves or through another employer) after they leave a job. Policy concern: Portability solves the problem of "job lock," under which employees are afraid to switch jobs because they might lose health coverage. It also would greatly reduce the number of people with preexisting conditions who become uninsured and are then unable to obtain new insurance coverage. Preexisting condition A medical condition that already exists at the time one applies for health insurance. Insurers sometimes refuse to accept applicants with preexisting conditions. If they do accept them, they may charge a higher premium, refuse to cover medical expenses relating to the preexisting condition or refuse to do so until after a waiting period of six to 12 months. Policy concern: Like guaranteed issue, if insurers were forced to accept applicants who have a medical condition, many people would simply wait until they got sick to buy health insurance. Purchasing alliances Also known as health insurance purchasing cooperatives (HIPCs), these are organizations through which employees with employer-paid coverage and individuals who purchase their own coverage select among competing insurance plans. Policy Concern: Some proponents such as Rep. Jim Cooper (D-TN), want the alliances to function like a farmer's market, with few controls over the participants. Others such as managed competition architect Alain Enthoven want alliances to exert considerable control. Under the original Clinton plan, everyone would have been forced into an alliance, and alliances would monopolize geographical areas. Under all similar schemes, alliances suffer from severe adverse selection problems because of guaranteed issue and community rating requirements. Rationing Limitations on the provision of medical care to a patient because of budgetary, equipment or personnel constraints. Policy concern: Some argue that there is already rationing in the Medicaid and Medicare programs because government does not pay the full cost of care the beneficiaries are supposed to receive. The experience of other countries shows that rationing always results when national health care global budgets are imposed. Risk adjustment Because managed competition would result in adverse selection, with some plans having a disproportionate number of healthy people and others a disproportionate number of the sick, all proponents of managed competition favor taking income away from plans that attract healthier people and giving it plans that attract sicker people. Policy concern: No one has yet figured out how to design a risk adjustment mechanism that works. Attempts to adjust the premiums at the time of enrollment would simply be guesswork, and attempts to adjust money after costs are incurred would reward health plans for whatever they spend - undermining incentives to hold down costs. Risk pools Currently, 28 states have passed legislation creating risk pools, which sell insurance to individuals who are uninsurable because they are sick or at high risk. In most states the premium for risk pool insurance is 50 percent higher than for comparable policies. One study found that extending risk pool insurance nationwide would have cost only $300 million in 1989, out of a national health care bill of $604 billion that year. Policy concern: The biggest problem with risk pools is that they are sometimes underfunded. Texas, an extreme case, has had a risk pool on the books since 1989 but has never approved funding. At least one state excludes certain medical conditions from coverage. And some states exclude people from coverage if they have reached the lifetime benefit provided by the plan. Single-payer system A system like that of Canada, under which the government collects taxes and perhaps some premiums, and pays most health care bills. Private health insurance for covered medical services is outlawed under a single-payer system. Policy concern: Virtually every country with a single-payer a system has fallen far behind in technology and has strictly rationed the provision of expensive medical services. Moreover, contrary to the claims of the adherents, single-payer systems tend to be much less efficient than market-based health care systems - which is why most countries with a single-payer system are seeking ways to introduce market-based incentives into their health care systems. (These include Britain, Sweden and even Canada.) Universal coverage A condition under which 100 percent of the population has health insurance. Many believe that universal coverage may be achieved through employer and individual mandates. However, as long as people are required to pay part of the premium in order to be insured, there will always be people who refuse to do so - or who are homeless or irresponsible. For that reason, some have proposed redefining universal coverage as, say, 95 percent of the population covered. Policy concern: Most proposals to achieve universal coverage would have adverse side effects. For example, mandates would impose costs on business and lead to a loss of jobs. Voluntary approaches that rely on subsidies often create very high effective marginal tax rates for low- and moderate-income people and would also lead to less employment and, therefore, less output.
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