operates independently in a specific
geographic area. Under BC/BS,
there is generally a group of partici-
pating physicians and hospitals.
Like commercial insurers, BC/BS
sponsors the three major types of
medical plans. The EBS defines
BC/BS plans as FFS (rather than
PPO) even when benefits differ
between participating and non-
participating providers. This is
because the vast majority of doctors
and hospitals in any area typically
accept payment from BC/BS. In
essence, there is no explicitly limited
network of preferred providers. An
individual can go to almost any
doctor and still receive the most
advantageous reimbursement.
However, if there is a more restric-
tive list of doctors than just BC/BS
participating providers, then it is
EBS policy to categorize such a BC/
BS plan as a PPO.

In addition to non-HMO plans,
BCYBS sponsors various HMO’s
around the country. BC/BS sponsors
standard HMO’s and HMO’s with
point-of-service options. In addi-
tion, BC/BS HMO’s can be any of
the model types described previously,
such as group, independent practice
association, or network.

Independent organizations. These
organizations are normally HMO’s
because they provide and finance
medical benefits on a prepaid basis.
They routinely operate in more than
one State and they are not affiliated
with either insurance companies or
BC/BS. In 1993, somewhat less
than one-fifth of full-time workers
with employer-sponsored medical
benefits received them by way of
independent organizations. This
category also includes organizations
that operate in a single State or
limited geographic area.

Combined financers. Sometimes
establishments use two different
financial intermediaries to provide
benefits. Fewer than 1 percent of
medical plan participants in 1993
were covered under combined
financing arrangements. Establish-

7 Compensation and Working Conditions

ments may, for example, contract
with BC/BS to pay part of the
medical benefits and with an
insurance carrier to pay the remain-
der. Under a combined financing
arrangement, payments come from
at least two of the previously
mentioned financial intermediaries
based on the type of medical benefit.
As an example of combined financ-
ing, an establishment may use BC/
BS to cover basic claims for hospi-
talization, physician services, and
surgical procedures and a commer-
cial insurer to cover major medical
claims that are excluded under basic
coverage or go beyond the basic
provisions."' This differs from a
minimum premium plan where the

responsibilities for paying claims are
based on the level of payment. An
example of what EBS considers a
minimum premium plan would be
an establishment that self-insures a
certain level of payments and
contracts with an insurer to pay any
outstanding claims above this level.

Types of plans and financing
methods

The relationship of plan types and
financing arrangements can be
confusing. As noted above, in
today’s health insurance market each
type of plan can be associated with
each type of financial intermediary.
This dynamic situation is shown in
tables 5 and 6, which cross-tabulate *

Table 5. Percent of full-time employees recelving health care benefits, by type of
financial intermediary and fee arrangement, medium and large private

establishments, 1991

1991
Blue |Indepen-| Com-
Type of fee arrangement Total | soi. |P7"TM=4 Crosa/| dent | bined
insurers, C2! | Blue | organ | finan- | Other
insurerq Shield | izations| cers
Total ... x 2 17 12 6 1
Fee-for-service . 33 7 12 0) 4 1
Preferred provider
organization .... 6 6 6 3 (’) 1 (‘)
Health maintenance
organization .... 7} 2 2] 2] (0 -
‘ Less than 0.5 percent. dividual items may not equal totals. Where

NOTE: Because of rounding, sums of in-

applicable,dash indicates no employees in
this category.

Table 6. Percent of full-time employees recelving health care benefits, by type of
financial Intermediary and fee arrangement, medium and large private establishments,

1993
1993
arrangement | Blue indepen- | Com-
Type of fee arrange Tota | Set [CORM*") Crosar | "dent bined
insurers Blue organ- inan-
insurers Shield izations cers
100 46 21 14 18 ¢)
50 30 12 8 (0) ()
26 16 6 3 ¢) (0)
23 - 3 3 7 (Oy

* Less than 0.5 percent.
NOTE: Because of rounding, sums of in-

September 1996

dividual items may not equal totals. Where
applicable,dash indicates no employees in
this category.



' See, for example, Robert B. Grant, “Outpa-
tient Surgery: Helping to Contain Health Care
Costs,” Monthly Labor Review, November
1992, pp. 33-36, and Thomas P. Burke, “Alter-
natives to Hospital Care Under Employee Ben-
efit Plans,” Monthly Labor Review, December
1991, pp. 9-15,

2 These developments have also created a di-
versity of choice for employers and employees,
‘See Michael Bucci and Robert B. Grant, “Health
Insurance: Employer Offerings and Employee
Choice in Smail Private Establishments,” Com-
pensation & Working Conditions, August 1994,
pp. 1-3; Michael Bucci and Robert B. Grant,
Health Insurance: Employer Offerings and Em-
ployee Choice in State and Local Governments,
1992, BLS Report 94-7, July 1994; and Michael
Bucci and Robert B. Grant, -sponsored
Health Insurance: What's Offered, What's Cho-
sen?" Monthly Labor Review, October 1995, pp.
38-44.

5 Janet L. Norwood, “? ing the Cost and
Incidence of Employee Benefits,” Monthly Labor
Review, August 1988, pp. 3-8.

* From 1979-1986, the Employee Benefits
‘Survey studied private industry establishments
with either 50, 100, or 250 employees or more,
depending on the industry; coverage in the ser-
vices industries was limited, The 1987 survey
examined benefits in State and local,
with 50 or more employees, while the 1990,
1992, and 1994 surveys included government es-
tablishments of all sizes. In 1988, 1989, 1991,
and 1993, the survey included private sector es-

—Endnotes—

tablishments with 100 or more employees in all
nonagricultural industries. The 1990, 1992, and
1994 surveys covered private establishments in
all nonagricultural industries with 1-99 employ-
ees. Since 1990, State and local governments
andsmall private establishments (1-99 employees)
are surveyed in even-numbered years, while me-
dium and large private establishments (100 or
more employees) are surveyed in odd-numbered
years. We do not believe that the changes in sur-
coverage materially affect the data presented on
health insurance; however, readers are cautioned
that the survey dimensions were not uniform over
‘time. For selected tables comparing the 1988 sur-
vey (which represented the first in the current se-
ries of medium and large private industry estab-
lishment surveys) with the prior 1986 survey cov-
erage, see Employee Benefits in Medium and
Large Firms, 1988, Bulletin 2336, Bureau of
Labor Statistics, 1989, pp. 122-139,

5 Anita J. Slomski, "How Business is Flatten-
ing Health Costs, " Medical Economics, July 11,
1994, pp. 87-99.

*David Azevedo, “PHOs: Castles in the
Sand?" Medical Economics, October 24, 1994,
pp. 71-84.

Lauren M. Walker, "Where Doctors Fit in
‘Those New Hospital Networks,” Medical Eco-
nomics, Aptil 25, 1994, pp. 124-130.

In the discussion that follows, the organiza-
tion responsible for paying medical claims is con-
sidered the financial intermediary. Within an es-
tablishment, different arrangements may be made

for paying the claims for supplementary benefits,
such as dental or vision care.

° Fundamentals of Employee Benefit Pro-
‘grams, 4th ed., Employee Benefits Research In-
stitute, 1990, p. 179,

"To keep survey procedures from becoming
overly complex, we decided to ignore the special
case of a health maintenance organization provid-
ing benefits to its own employees. This could be
viewed as a self-insured arrangement. In the sur-
vey tabulations, employees of HMO’s or organi-
zations administering HMO's are included in the
data for HMO’s rather than for self-insurers,

1 Asnoted above, this discussion is limited to
methods of financing medical benefits, Itis com-
moa, however, for establishments to use different
intermediaries to finance dental and vision care
benefits.

In this context, “basic” benefits referred to
cases where the plan paid all or some of the ini-
tial expenses incurred by the plan subscriber. In
contrast, “major medical” benefits did not pay
for initial expenses, due to the imposition of a
deductible

* Paul Ellwood, M.D. and Alain Enthoven,
“Responsible Choices for Achieving Reform of
the American Health System,” A Draft Discus-
sion Paper from the Jackson Hole Group, March
1995, p. 23.

“ American Academy of Actuaries, “Medical
‘Savings Accounts: An Analysis of the Family and
Medical Savings and Investment Act of 1995,”
Public Policy Monograph, October 1995, p.i.

38 Ellwood, M.D. and Enthoven, p. 22.

Compensation and Working Conditions September 1996 10



Table 4. Percent of full-time participants with medical benefits, by financial
intermediary, medium and large private establishments, 1988 and 1993

1988 1993
100 100
u 47
Ky 21
6 13
16 18
5 W)

hospitals, doctors believe that they
can better defend their role in
medical decision-making against
continued encroachment from non-
medical professionals.” However,
these new fee arrangements are still
telatively rare.

These innovations have made it
more difficult to sort health care
plans into distinct categories. What
were once discrete plan types are
now merging into hybrid forms that
mix and match access to medical
services, reimbursement methods,
and financing arrangements. In
some aspects, exclusive provider
organizations, a type of FFS plan,
resemble HMO's, especially in
restricting the employee’s choice of
health care providers. But unlike
HMO's, they do not provide services
for a prepaid fee. On the other hand,
point-of-service HMO’s emulate
PPO’s by allowing employees to
select non-network providers. Yet,
like traditional HMO’s, they provide
prepaid services.

Survey analysis techniques and
data presentations have evolved over
the past 15 years in an attempt to
describe this rapidly changing
environment. In the early years of
the surveys, data on specific plan
provisions (such as hospital room
and board coverage and surgical
benefits) were presented for all types
of plans together, because participa-
tion in non-FFS plans was not
sufficient to affect the tabulations
significantly. By the early 1990s,
however, survey techniques had
evolved to present data separately for
the three main types of plans,
recognizing differences in the ways
plans reimbursed medical services.

The growing incidence of PPO’s and
HMO’s permitted the generation of
separate estimates for these major
plan types that met survey statistical
quality standards.

Methods of financing

Methods of plan financing have
changed in tandem with innovations
in plan delivery and reimbursement
mechanisms. The term “financial
intermediary” refers to the organiza-
tion that bears the risk for payment
of health care claims.' The financial
intermediaries currently tabulated by
EBS are: Self-insurers; commercial
insurers; Blue Cross/Blue Shield;
independent organizations; and
combined financers.

There has been steady growth in
the percentage of participants
covered by self-insured plans in
recent years, Data from the 1993
EBS for medium and large private
establishments showed that 47
percent of medical care participants
were in self-insured plans compared
with 34 percent in 1988, and 11
percent in 1979. The increase in
self-insured plans (up 13 percentage
points) during the 1988-93 period
matched the total decline in the
share of medical care participants
who were in commercially insured
plans (down 9 percentage points)
and Blue Cross/Blue Shield plans
(down 3 percentage points). Table 4
shows the percentages of full-time
Participants in medical plans by
financial intermediary, without regard
to fee arrangement.

Self-insurers. Establishments may
finance the cost of benefits out of the

general revenues of the company or
they may set up a trust fund. Self-
insured plans are particularly attrac-
tive to employers because they are not
subject to State insurance premium
taxes. They also, in the view of some
observers, give the employer more
control over health care costs?

There are many varieties of self-
insurance arrangements. While
many self-insurers administer their
own plans, others hire organizations
to handle the administrative aspects
like claims processing or legal
questions by using “administrative
services only” contracts. Moreover,
some self-insured employers may
pay claims up to a certain level then
contract with an insurer to pay any
claims above this designated level in
an arrangement known as a “mini-
mum premium plan.”

All types of health plans except
HMO’s can be financed on a self-
insured basis, according to EBS
definitions. HMO’s are not consid-
ered self-insured because they are
prepaid on a capitation basis."
Capitation refers to a uniform fee per
“head” or person. Whereas conven-
tional insurance plans customarily
reimburse participants for covered
charges they incur, HMO’s operate by
charging periodic fees up front in
retum for providing covered medical
services.

Commercial insurers. Instead of
financing the costs of medical
benefits themselves, establishments
may contract with commercial (for-
profit) insurance companies to pay
the costs of medical claims. Com-
mercial insurers charge a premium
for the protection that they offer.
The premium covers such items as
the benefits to be paid, administra-
tive costs, taxes, and profits. Insur-
ance companies sponsor all three
primary types of medical plans—
FFS, PPO, and HMO.

Blue Cross/Blue Shield (BC/BS).
This organization is a network of
non-profit insurers. Although many

plans use the BC/BS name, each
member of the network usually

Compensation and Working Conditions September 1996 6



health insurance participants for the
1991 and 1993 surveys of medium
and large private establishments by
type of plan and by financial
intermediary. The financing of
HMO's illustrates this trend, with
HMO’s being financed by commer-
cial insurers and Blue Cross/Blue
Shield organizations, as well as by
independent organizations.

When the survey began in 1979,
the environment was very different:
Virtually all health care participants
were covered by FFS plans. The
survey classified participants by type
of intermediary according to type of
medical benefit: Basic hospital,
basic surgical, basic medical, and
major medical.’ In that year, over 9
in 10 participants received basic
hospital benefits, which were
provided through BC/BS organiza-
tions to 31 percent of plan partici-
pants, with commercial carriers
accounting for 48 percent, and self-
insurers for 11 percent, HMO’s
were included as a type of financial
intermediary and covered 2 percent
of participants. The coverage
figures differed for basic surgical,
basic medical, and major medical
benefits. For example, commercial
carriers provided major medical
benefits to 7 in 10 plan participants.
This scheme made it difficult to
determine overall what proportion
of health plan participants were
covered by each type of intermedi-
ary.

As the survey tracked the
changing circumstances surround-
ing health care through the mid-
1980s, this classification scheme
became less and less satisfactory.
Employees increasingly enrolled in
alternatives to FFS plans; addition-
ally, employer efforts to stem the
rising tide of health care costs led
many plans to abandon basic
coverage in favor of major medical
coverage by subjecting initial
expenses for services like hospital
toom and board to deductible and
coinsurance provisions. These two
developments made the EBS data
presentation of plan types and
funding media both outdated and
difficult to compare over time.

Tn 1986, PPO’s were added to the
survey, and by 1988, a new classifi-
cation scheme was adopted. This
new scheme classified each major
type of plan by each form of finan-
cial intermediary. Data were
summarized for three major catego-
Ties of care: Medical care, dental
care, and vision care.

Evaluation of survey classifica-
tions

Two methods for assessing a
survey’s classification scheme are to
examine how many cases are classi-
fied as a residual or “other” category,
and to measure how long it takes the
survey to track new developments. In
evaluating the survey’s performance
against these criteria, however, the

survey’s standards of precision also
should be considered.

As tables 2 and 3 show, the
classification of plan types accounted
for at least 98 percent of plan
participants each year between 1979
and 1993. The “other” or residual
category never exceeded 2 percent of
participants. When new types of
plans, such as PPO’s, point-of-
service HMO’s, or exclusive provider
organizations, were introduced, they
never exceeded 1 percent of the total
number of health care plan partici-
pants. Given the survey’s sample
size, and accompanying limitations
on precision, these results show that
the scheme for accounting for plan
types has been satisfactory.

The assessment of the funding
intermediary definitions and classifi-
cations is less sanguine. In the mid-
1980s, the survey clung too long to
the classification scheme inaugu-
rated in 1979. As a result, it
became very difficult to gauge the
overall incidence of the plan types.
Additionally, because the new and
old classification schemes were not
explicitly linked, it is very difficult
to compare current survey results
with those recorded prior to 1988.

It is evident that, with continued
innovation in all aspects of health
care plan design, the Employee
Benefits Survey will have to monitor
the changing scene very carefully to
ensure that it provides up-to-date,
relevant information.

Compensation and Working Conditions September 1996 8


Changing Survey
Strategies in the
Evolution of Health

Care Plans sy Jon KANE, ALLAN P BLOSTIN,

AND JORDAN N. PFUNTNER

rom 1979 to 1994, the structure of employer-sponsored health insurance plans

dramatically changed in response to economic pressures. During the period,

employers sought to curb the rising cost of care by restructuring their health plans
to emphasize cost containment techniques.'! Under these pressures, innovative health
insurance plan designs emerged, creating a diversity of methods for delivering health
care benefits and reimbursing subscribers that did not exist in the early 1980s.? The
methods available for financing health care benefits evolved along with the develop-
ments in benefit delivery and reimbursement systems.

Keeping pace with this rapidly
changing environment has been a
challenge for the Bureau of Labor
Statistics’ Employee Benefits Survey
(EBS), which studies the incidence
and detailed provisions of health
care plans along with other major
insurance, retirement, and paid leave
benefit plans. Ensuring the reliabil-
ity of data and capturing the rapidly
changing circumstances surrounding
health care meant benefits survey
questions needed to be revised.
Furthermore, the survey’s analytic
procedures required revision to
ensure that plans and the methods
used to finance them are correctly
classified. As former Commissioner

John J. Kane is an economist in the Division
of Compensation Data Estimation, Bureau of La-
bor Statistics. Allan P. Blostin and Jordan N.
‘Pfuntner are economists in the Division of Com-
pensation Data Analysis and Planning. Telephone
(202) 606-6248.

of Labor Statistics Janet Norwood
observed several years ago in
predicting the difficulties in measur-
ing employee benefits:

Quality management will

have to be outwardly, as well as

inwardly, directed. When the

specifications themselves are in
flux, it will not be enough to
ensure that the system is

working according to specifica-

tions. More and more resources

will have to be devoted to
monitoring developments in the
field. Survey measuring
instruments and computer
systems will have to be fre-
quently retooled to keep current.

To keep pace, survey designers

will have to prospect for

themselves as well as for data
users?

And, since former Commissioner
Norwood made that statement
almost 10 years ago, EBS has
expanded the survey to publish data

3 Compensation and Working Conditions September 1996

on part-time workers, State and local
governments, and small private
establishments, as well as augment-
ing the survey to better capture data
on changing benefits.

This article traces developments
in plan delivery and reimbursement
methods, discusses the changes the
survey has undergone to keep up-to-
date with the changing structure of
employer-provided health care, and
concludes with an evaluation of the
survey’s current classification system
for health care plans.*

Basic types of health care
plans

One way of viewing health care
plans is to examine how health care
claims are reimbursed. Two key
questions are: Do plan subscribers
have to pay part of the cost of plan
services; and, if so, how are these
payments determined? Increasingly,



Medical Savings Accounts: A New Cost Containment Strategy?

Continued emphasis on health benefits cost management will undoubtedly result in innovative strategies.
Among them, medical savings accounts (MSA's) are a much discussed mechanism to lower health care costs
and to satisfy diverse employee needs. MSA's combine catastrophic insurance coverage (provided by
employers) with high annual deductibles. For example, each employee is responsible for the first $1,500 or
$2,000 of individual medical expenses, and $3,000 of family medical expenses. Employers then purchase
catastrophic insurance protection for the expenses above these amounts. As medical expenses are incurred,
individual employees have a fund to which they contribute and from which they withdraw. Employers
contribute some of their insurance premium savings to each employee’s account. Under current law, the
contributions are usually made from after-tax money and any unused portions can be withdrawn or rolled
over at the end of the year.

Supporters of MSA’s claim that they produce better consumers of health care services by pressing service
providers to compete on the basis of price. The result will be lower prices for all medical care consumers,
not just for those with MSA’s.

Detractors of MSA’s claim that the cost savings are unproved. Moreover, critics believe that the high
deductible would be particularly attractive to the healthy and wealthy. Those who could most afford to do so
could save as long as they did not need to use their deductible, and thus the cost to the healthy with cata-
strophic coverage would be reduced. Such adverse selection would result in “bad” risks (the poor and the
chronically sick) increasingly bearing the burden of the additional costs associated with their medical care."*

A bill currently before Congress, H.R. 1818, the “Family Medical Savings and Investment Act, ” would
permit individuals to set up tax-favored MSA’s. To participate, individuals must be covered by a cata-
strophic health plan with an annual deductible of at least $1,800 per individual and $3,600 per family.
These numbers would be indexed for inflation. Individuals, or their employers, could contribute an amount
up to the deductible, but no more than $2,500 (or $5,000 for family). Contributions to the MSA’s would not
be taxed but any investment earnings would be taxable. Also, any unused funds in the MSA’s would remain
the property of the individual." Once again, the idea is that if employees were using their own money, they
would be more cost-conscious in their use of health services. With tax-favored MSA’s, they would be more
likely to accept higher deductibles as well. Nevertheless, there remains concern that the emphasis of MSA’s
on catastrophic coverage could actually increase health care costs due to the resulting de-emphasis on
preventive services.'*

Newer managed care and managed cost strategies will require an ongoing examination of the EBS
classification structure and of the presentation of survey data. Additional ways of presenting medical care
benefits will be both informative and necessary.

9 Compensation and Working Conditions September 1996



the answers to these questions
depend on whether plan participants
have unrestricted choice among
health service providers, or must use
designated providers, Several major
types of plans can be identified,
depending upon the answers to these
questions.

Fee-for-service (FFS) plans
reimburse participants or providers
for covered charges after they are
incurred. Although participants in
these plans are generally free to
choose their own health care
providers, benefits are rarely covered
without limitations. Typically, there
are limits such as deductibles and
coinsurance payments that apply to
most, if not all, services. A deduct-
ible is a payment required of plan
participants before their benefits
commence; today, deductibles of
$100, $200, and $250 are common.
Coinsurance refers to the percent
that the plan pays for covered
services, compared to the percent
that the plan participant must pay.
FFS plans frequently pay 80 percent
of expenses with the remaining 20
percent paid by the participant.

Preferred provider organizations
(PPO’s) are special types of FFS plans
that have networks of health care
providers. Although participants can
still venture outside the network for
health care, they pay a greater share of
the costs than if they seek care from
the network providers. In a typical
case, a plan will pay 90 percent for
covered expenses for a network
doctor, compared to 80 percent if a
Participant goes outside the network.

Health maintenance organizations
(HMO’s) constrain the choices
among service providers further.
Usually, participants are required to
receive care from the health provid-
ers that contract with the HMO’s, or
they will not be reimbursed. HMO’s
offer specified health care services
for a prepaid fee, and most medical
services are either covered in full
without limitations or require
patients to make only a small
copayment. For example, a patient
may make $5 or $10 copayments for

Table 1. Percent of full-time participants of HMO's by type, medium and large private

establishments, selected years, 1988-83

Type of model 1988, 1988. 1991 1983,
100 100 100 100

Kf ww 4 a“

55 53 43 §2

7 4 8 7

Table 2. Percent of full-time participants by type of health care plan, medium and large.
Private establishments, selected years, 1979-93

Type of plan —_|ta79 | 1980| 1981| 1922| 1983/ 1984| 1985) 1986] 1988| 1999| 1991 |1998
Total, all types 100 | 100 | 100| 100 | 100 | 100 | 100] 100] 100 | 100 |100 {100
Fee-tor-service | 98{ 97{ 96] 95/ 96| 95| 92| a6| 74| 74) 67 | 50
Health

maintenance

organization 2] 2} 3! 4} 3] s| 7| 13] 19| 17] 47 | 23
Pretorred prov.

Gerorganizatiol} -| -| -| -| -| -| -| 4] 7] 10] 16 | 26
Other ©} t] tot} 4} M) 1, BY] OB] BLA] 4
"Data not tabulated until 1986 survey. ? Legs than 0.5 percent.

each visit to the physician’s office.
Because HMO’s both finance and
provide health services, they
emphasize preventive care to their
participants.

The two most common types of
HMO’s are the group model and the
independent practice association
(IPA). In the group model, the HMO
contracts with a single independent
group to provide care in a central
location. In an IPA, the HMO
contracts with physicians in private
practices to provide care.

There are three other HMO
models: Staff, network, and mixed.
The difference between the staff and
group models is that in the staff
model the HMO directly employs
the physician group. In the network
model, an HMO contracts with two
or more group practices to provide
health services in a central location.
When an HMO uses a combination
of these models, it is referred to as a
mixed model. The large majority of
HMO participants are in either
group/staff or IPA-model HMO’s.
(See table 1.)

When the Employee Benefits
Survey was first conducted in 1979,

Virtually all plan participants were
enrolled in FFS plans, with a small
minority subscribing to HMO’s.
(See table 2.) PPO’s were so rare
that they were not even tabulated,
The early surveys were only able to
publish data on the provisions of
FFS plans, because the number of
employees enrolled in HMO plans
was insufficient to support valid
survey tabulations. By 1993, the
most recent year for which data on
medium and large private establish-
ments are available, HMO’s and
PPO’s accounted for as many health
plan participants as FFS plans, In
the 15 years covered by the survey,
participation in HMO’s rose from 2
Percent to 23 percent, while FFS
Participation fell by nearly half, from
98 percent to 50 percent. PPO’s
were first surveyed in 1986 and
accounted for 1 percent of health
plan participants; by 1993, PPO
enrollment accounted for 26 percent.
These trends are illustrated in chart 1,
A similar picture emerges in
small private establishments, though
survey data are limited to 1990,
1992, and 1994. In 1990, fee-for-
service plans enrolled 74 percent of

Compensation and Working Conditions September 1996 4


Table 3: Percent of full-time participants, by type of health care plan, State and local

governments, selected years, 1987-94

‘Type of plan 1987 1990 1992 1994
Total, all types... 100 100 100 100
Fee-for-service &7 61 43 3
24 22 a7 x”
7 7 2 20
2 () 1 2
‘Less than 0.5 percent.
full-time health plan participants in Managed care has led employers to
small establishments, with PPO’s move toward health care plans that
(13 percent) and HMO’s (14 percent) _ will enable them to provide their

splitting the remainder. By 1992,
PPO’s gained 5 percentage points at
the expense of FFS plans, while
HMO participation held steady. In
1994, the last time these establish-
ments were surveyed, FFS participa-
tion declined to 55 percent of the
total, while PPO participation
increased to 24 percent and HMO’s
to 19 percent.

Alternatives to FFS plans account
for the majority of full-time employ-
ees participating in health care plans
in State and local governments.
These alternative plans together
included 1 in 3 health care partici-
pants in 1987; by 1994, these plans
covered 5 in 8. (See table 3.) Most
of the growth came in PPO’s at the
expense of FFS plans.

The shift to HMO’s and PPO’s
from FFS plans is due, at least
partially, to the rapid increase in
health care costs. With employers
treating health care services like
other commodities subject to
stringent cost-benefit analysis, new
strategies for controlling medical
care cost increases have emerged.
The implementation of health plans
that emphasize managed care has
been a major response to this health
care cost escalation.

Managed care refers to the practice
of ensuring that services rendered to
participants are medically necessary
and are provided in the most appro-
priate health care setting. Some basic
features of managed care programs
include preadmission certification for
hospitalization, preadmission testing,
and second surgical opinions.

employees with adequate care at lower
costs. Traditional FFS plans were
slower to embrace managed care
features than either HMO’s or PPO’s.
By virtue of their design, which
Testricts the subscriber's choice
among service providers, HMO and
PPO plans manage care by directing
participants to specific providers or
services.

In the last few years, new types of
health care plan designs have
emerged. To a large degree, these
new types are refinements, combina-
tions, or hybrids of the three basic
types. Among the fee arrangements
that have been introduced to manage
costs better are: Exclusive provider
organizations, point-of-service
HMO’s, and physician hospital
organizations.

Exclusive provider organizations
(included in the “other” category in

tables 2 and 3) are types of FFS
plans that require participants to
receive health care services from a
network provider; if not, they are not
reimbursed for any care. They are
not prepaid plans. The 1993 EBS
results from medium and large
private establishments indicate that
exclusive provider organizations
cover only 1 percent of medical plan
participants.

Point-of-service HMO’s (included
with HMO’s in tables 2 and 3)
combine characteristics of both
PPO’s and HMO’s. Like HMO
plans, they are prepaid and use a
network of contracted providers.
Most benefits received from network
providers are covered in full.
However, like PPO’s, participants
can seck care outside the network
but receive a less generous reim-
bursement. Also, the enrollee is
subject to such limits as deductibles
and coinsurance requirements when
non-network providers render
services, Ordinarily, point-of-service
HMO’s cover a full array of preven-
tive services. One-tenth of HMO
participants in 1993 were in plans
with a point-of-service feature.

Physician hospital organizations
(included in the “other” category in
table 2) are formal partnerships
between physicians and hospitals
that offer complete health care
coverage.’ By joining forces with

Percent of participants

Chart 1. Trends in health care plan types, medium and
large private establishments, 1979-93

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Fee for servico

> eee

~~
_—

HMO

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neil

—+ an L 4

PPO

0.
1

979 «1982 1985 «1986

1988 1989 ©1991

5 Compensation and Working Conditions September 1996