In the past decade, the health insurance marketplace has changed dramatically. Indemninity, insurance provided an almost unrestricted choice of physicians and hospitals. It has been replaced by managed care. Journalists reporting the rapidly changing managed care stog cannot do it justice unless they understand how to cover health care plans as businesses. In this NewsBackgrounder, James Bentley of The American Hospital Association outlines the main points of a seminar he gave at a FACS conference on managed care. The opinions expressed do not necessarily represent those o FACS or the American Hospital Association.
Managed care insurance is a highly competitive business. Developed in substantial part to limit the rate of increase in traditional insurance and health care spending, managed care plans have had to chase the twin goals of providing lower premiums and remaining profitable.
Managed care plans come in a variety of organizational forms and a broad range financial arrangements. These comments are intended to help health and business writers think about bow to report on the business side of managed care.
Managed Care Revenue
Revenues for managed care organizations are primarily of two types: premium revenue and investment income. The plan's premium may be thought of as the sum of three components:
Medical Service Use--The amount of premium the plan expects to spend providing personal medical services to its enrollees. Medical service use is usually established by professional actuaries using historical information about the health care use patterns and needs of the insured population, and judgments about expected trends.
The Risk Corridor--Utilization patterns, medical technology, and enrollment patterns are all subject to change. The risk corridor is the amount added, as a hedge against errors in the actuarial estimates, to the expected medical service use.
The Administrative Load--All health plans incur expenses beyond medical services purchased for enrollees. The Administrative Load is designed to provide the revenues necessary for marketing, enrollment, contract management, administration, taxes, and profits.
These three premium components are combined to provide the premium base for the plan. Important premium decisions remain, as specific premiums must be set for enrollees by family composition (e.g., single, couple, single parent with child, and family), by age if allowed, and for other factors (e.g., disability or preexisting conditions),
In addition to its premium revenue, health plans also may obtain significant revenue from investment income. They earn some of this income on the reserves the plan maintains to protect against errors in the actuarial estimates for premiums. Plans may earn additional income by investing the "float" between the time premiums are received and claims for medical care are paid. While investment income may enable a plan to be profitable despite unexpectedly high claims, experts generally do not feel it is healthy for a health plan to become dependent upon its investment income because of the inability to assure investment results.
Managed Care Expenses
All health plans incur three expenses and anticipate profit that must be funded from the revenue stream.
First, before insuring its first customer, the plan must establish its capital base, including mandatory insurance reserves. The reserves help assure that the plan remains solvent through both good and bad times. The plan may deposit some of the reserves with state insurance regulators and retain some as a cushion for unexpected claims. As enrollment grows, the plan generally increases its reserves in recognition of its increasing population. Where a plan provides medical services directly to enrollees through its facilities and staff rather than via claims paid to "external" providers, reserves may be smaller. The …