Tracking the Shift in Health Insurance from Conventional Coverage to High Deductible Plans

Over the past 30 years, health plans have changed from primarily conventional health care coverage to alternatives such as health maintenance organizations (HMOs) and, most recently, high deductible health plans (HDHPs). Choosing the right plan for you and your family can be very confusing. I’d like to walk through the similarities and differences in these plans and examine the prevalence of each as seen over the past 3 decades.

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Conventional Medical Insurance Coverage

Also known as a traditional insurance plan, conventional insurance coverage operates on a fee-for-service (FFS) structure. It provides basic coverage for doctor visits, hospitalization, surgery, and other medical expenses in an 80/20 split. The insurance covers 80% of the bill while the patient is responsible for the remainder.

Deductibles, the amount you are responsible to pay before insurance begins to pay, are usually in the range of $250 for an individual but can be as high as $10,000. The higher the deductible, the lower the premium.

Most plans include an annual maximum out-of-pocket amount; however, they also have a lifetime cap. In other words, once your bills reach a certain amount—usually $1 million or higher—the insurance company just won’t pay anymore.

These plans are said to focus on treating health issues rather than preventing them, therefore, they often do not cover “well” visits or annual physicals.

HMOs

HMOs became more popular following the HMO Act of 1973, which was signed into law by President Richard Nixon to provide federal funding for qualified HMOs. It provided financial risk-sharing for health care providers, introduced programs to integrate administrative claims, provided incentives for wellness programs or preventative care, and definitively defined coverage benefits and rules for member access.

HMOs provide health insurance coverage for a monthly or annual fee. An HMO limits member coverage to medical care provided through a network of physicians and other health care providers who are under contract to the HMO. These contracts allow for premiums to be lower than for conventional health insurance because providers have the advantage of having patients directed to them.

In addition to low premiums, there are typically low or zero deductibles with an HMO. Instead, the organization charges a co-pay for each office visit, test, or prescription. Co-pays in HMOs are typically low, for example $5 to $20, per service.

Out-of-pocket expenses are usually minimal, which makes HMO plans affordable for families and employers. HMOs require a primary care physician (PCP) to manage care, who are considered “gatekeepers” and must provide a referral before you can see a specialist.

Preferred Provider Organizations (PPO)

PPOs provide a lower rate and feature a network of doctors and hospitals that are recommended. However, PPOs do not limit you from seeing physicians outside of the PPO network. Most PPO plans cover at least some of the bill for an out-of-network provider, but you will likely pay more for the care at out-of-network providers than at in-network providers.

PPO plans do not require patients to get a referral from a PCP to see a specialist. They allow you to skip your PCP and go straight to a specialist, such as a cardiologist or endocrinologist. If a patient needs to see a specialist, they can make an appointment with them directly without a referral.

They typically have more expensive monthly rates than other types of health plans due to the freedom to see both in- and out-of-network doctors.

Point-of-Service (POS)

A POS plan requires individuals to choose an in-network PCP and get referrals from that physician if they want to see a specialist. They also provide coverage for out-of-network services; however, you will have to pay more than if you used in-network services.

POS plans require the policyholder to make co-payments, but in-network co-payments are often just $10 to $25 per appointment. They also do not have deductibles for in-network services.

POS plans often cost less than other policies but savings may be limited to visits with in-network providers.

POS plans offer nationwide coverage, which benefits patients who travel frequently. A disadvantage is that out-of-network deductibles tend to be high for POS plans. When a deductible is high, it means patients who use out-of-network services will pay the full cost of care out of pocket until they reach the plan’s deductible.

HDHPs

An HDHP is a health insurance plan with a high minimum deductible for medical expenses. Once an individual has paid that portion of a claim, the insurance company will cover the other portion as specified in the contract. An HDHP usually has a higher annual deductible than a typical health plan, and its minimum deductible varies by year.

The higher deductible also lowers insurance premiums, making health coverage more affordable. HDHPs have an annual catastrophic limit on out-of-pocket expenses for covered services from in-network providers. Once you have reached this limit, your plan will pay 100% of your expenses for in-network care.

With an HDHP, you can qualify for a tax-advantaged health savings account (HSA). You contribute funds to an HSA to be used for medical costs that HDHPs don’t cover. These funds are not subject to federal income taxes at the time of the deposit.

Usage Trends

Most employers or plan sponsors will offer colleagues a choice between 2 or more of these types of plans. In 1988, 73% of covered workers chose a conventional health plan with the remaining enrolled in an HMO or PPO. Around 1999, the number of covered workers with conventional health coverage would drop dramatically to only 10%, the remaining workers would choose an HMO, PPO, or a POS. By 2009, the conventional fee-for-service health plan would become nearly extinct.

The PPO would make up the majority choice of covered workers since 1999, however, it is declining year over year. Around 2006, the HDHP would be developed and grew in use year over year, some of which is related to plan sponsors offering the HDHP as the only choice (Figure).

About the Author

Nicole Kruczek earned her BS in Pharmacy degree from Temple University and is currently enrolled in the Masters of Pharmacy Business Administration (MPBA) program at the University of Pittsburgh, a 12-month, executive-style graduate education program designed for working professionals striving to be tomorrow’s leaders in the business of medicines. She has spent the last two decades in management roles in various pharmacy operations in long-term care, specialty, and PBM.