Types of Organizations that Provide Private Health Coverage
Private health coverage is provided primarily by two different types of entities:
state-licensed health insuring organizations and self-funded employee health benefit
plans.
State-Licensed Health Insuring Organizations
State-licensed health insuring organizations, as the name implies, are organized
and regulated under state law, although federal law adds additional standards and in
some cases supercedes state authority. There are three primary types of statelicensed
health insuring organizations:
Commercial health insurers. Commercial health insurers (sometimes called
indemnity insurers) are generally organized as stock companies (owned by
stockholders) or as mutual insurance companies (owned by their policyholders).
A prominent example is Aetna, a stock company.
Blue Cross and Blue Shield Plans. Historically, many of these plans were
organized as not-for-profit organizations under special state laws by state
hospital (Blue Cross) and state medical (Blue Shield) associations. These laws
differed significantly across states, sometimes imposing special obligations or
regulatory requirements on Blue Cross and Blue Shield plans (e.g., to insure all
applicants) and sometimes providing financial advantages such as favorable tax
status. Today, some Blue Cross and Blue Shield plans continue to operate under
special state laws; others are organized as commercial health insurers. Blue
Cross and Blue Shield plans operate and are regulated in a similar manner to
commercial insurers, although in a few states Blue Cross and Blue Shield plans
continue to have special requirements to accept applicants for health insurance
on a more lenient basis than is applied to other types of insurers.
Health Maintenance Organizations (HMOs). HMOs usually are licensed
under special state laws that recognize that they tightly integrate health
insurance with the provision of health care. HMOs operate as insurers (meaning
they spread health care costs across the people enrolled in the HMO) and as
health care providers (meaning they directly provide or arrange for the necessary
health care for their enrollees). In many states, HMO regulation is shared by
agencies that oversee insurance and agencies that oversee heath care
providers.iii Prominent examples of state licensed HMOs include Kaiser
Permanente and Harvard Pilgrim.
Although states tend to separately license each of these types of entities, it is
quite common for several different health insuring organizations to operate together
under a common corporate identity. For example, an HMO may have one or more
subsidiaries that are separately licensed as commercial health insurers, and may offer
its group customers coverage packages that permit members to choose between the
different types of coverage.
Self-Funded Employee Health Benefit Plans
Self-funded employee health benefit plans operate under federal law and are
health benefit arrangements sponsored by employers, employee organizations, or a
combination of the two. Under a self-funded arrangement, the plan sponsor retains the
responsibility to pay directly for health care services of the plan’s participants. In most
cases, the sponsors of self-funded health plans contract with one or more third parties
to administer the plans. These contracts are sometimes with entities that specialize in
administering benefit plans, called third-party administrators. In other cases, sponsors
contract with health insurers or HMOs for administrative services. The administering
entity usually will manage the health benefits in the same way as a health insurer or
HMO, but will pay for the cost of medical care with funds provided by the sponsor (i.e.,
no premium is paid).
How Does Managed Care Fit In?
Under managed care, health coverage providers seek to influence the treatment
decisions of health care providers through a variety of techniques, including financial
incentives, development of treatment protocols, prior authorization of certain services,
and dissemination of information on provider practice relative to norms or best
practices.
As managed care has become increasingly prevalent, the distinctions between
different types of heath coverage providers are shrinking. Commercial health insurers
now offer coverage through networks of providers and may establish financial
incentives similar to those traditionally used by HMOs. At the same time, HMOs have
developed products, called point-of-service products, that permit covered people to
elect to receive care outside of the HMO network, typically with higher cost sharing.
Although it remains true that HMOs generally are the most tightly managed
arrangements and most tightly integrate insurance and the delivery of care, virtually all
private health coverage now involves some aspect of managed care.
What is a Preferred Provider Organization?
It is common for people to believe that they are covered by a preferred provider
organization (PPO), but these entities generally do not actually provide health coverage.
Rather, PPOs are networks composed of physicians and other health care providers that
agree to provide services at discounted rates and/or pursuant to certain utilization
protocols to people enrolled in health coverage offered by a health coverage provider.
Typically enrollees in such an arrangement are given financial incentives – such as
lower copayments -- to use network providers.
In some cases, PPOs are freestanding networks of health care providers that
contract with a number of different health coverage providers to act as the health
coverage provider’s network in a particular area. In other cases, a health coverage
provider may establish its own PPO network of health care providers in a particular
area. Although some states have raised concerns about the level of insurance risk
assumed by PPOs under some of their arrangements with health coverage entities,
PPOs generally are not treated as health coverage providers in most states.