Chapter 1 - History of Insurance y History of Group Medical Coverage y History of Group Medical Insurance Coverage in the United States

y Times of Transition Chapter 2 -Basic Group Health Insurance y Traditional Indemnity Plans y Coordination of Benefits y Order Of Benefit Determination Chapter 3 - Managed Care y Utilization Control y Large Case Management y Pre-certification y Utilization Review y Disease Management y Demand Management y Provider Networks y Health Maintenance Organizations y Pharmacy Benefit Management Programs y Plan Design Chapter 4 - Payer y Types of Payers y Payer Differences y Third Party Administrator y What is COBRA? y Flexible Spending Accounts Chapter 5 Risk y Fully Insured Plans y Self Insured Plans y Stop Loss Coverage Chapter 6 - Plan Document y Summary Plan Description y Eligibility and Enrollment y Contributory vs. Noncontributory Status y Effective Date of Coverage y Enrollment Cards y Termination of Benefits y Subrogation/Right To Recovery Chapter 7 - Legislation y ERISA (Employee Retirement Income Security Act) y Health Insurance Portability and Accountability Act of 1996 HIPAA y Medicare Acronyms Glossary Appendices

CHAPTER 1 - History of Insurance y y History of Group Medical Coverage y People have been coming together as a group for Medical coverage since the y Artisans of imperial Rome y Craft guilds in medieval Europe y Mutual aid systems in Great Britain In 1883, the first national compulsory health insurance law was passed in Germany. Today there are more than sixty nations that have some form of compulsory government insurance program. The USA does not have a true nationalized health plan. History of Group Medical Insurance Coverage in the United States 1798 Marine Hospital Act To give direct medical care to seaman funded by the Federal Government. 1858 - Florence Nightingale evaluated the quality of hospital care using mortality rates. 1910 - American College of Surgeons developed a Hospital standardization program to evaluate and recognize medical schools 1910 - Abraham Flexner created the Flexner Reports which summarized medical education in the United States 1911 - "Montgomery Ward" The first employer based program that provided weekly benefits for unabled workers (disability). 1916 - Ernest A. Codman published A Study of Hospital Efficiency advocates tracking end results of hospital patients after discharge. 1917 Washington State doctors contracted with mining and Timber companies. First Medical Service Bureau 1917 "Mayo Clinic" First multi-specialty group practice efficiencies of group practice 1920s Hospitals in Illinois, Iowa, Massachusetts and Vermont offered hospital expense benefits based on an individual basis.

1929 The first group prepayment plan was started by Baylor University Hospital for 1500 schoolteachers. The plan covered twenty-one days of semi-private room, board and hospital extra in any one year. This was the first Blue Cross plan and was for hospitalization benefits only. 1929 First prepaid group practice forerunner to HMO. During the depression, everyone saved or held onto every possible item they could. They did not know what they may or may not have. They were struggling just to live their daily lives. 1930 National Institutes of Health (NIH) informally started in 1887 administrative center for research conducted by U.S. Public Health Service.

1933 Blue Shield developed a group medical expense benefit for physician treatment Later this became BCBS. 1934 General Tire & Rubber Company had the Equitable Life Assurance Society of the United States add group health expense coverage to existing group life coverage. 1934 Occidental Life of California added hospital expense benefits to an existing shortterm disability income policy for a large chain of grocery stores. 1935 Social Security Act established retirement benefits for older Americans. 1938 Kaiser was formed all doctors were employed by Kaiser. 1943 Blue Cross introduced group medical surgical benefits. During WWII wage freezes caused employers to compete with benefits. One of the benefits they could offer was health care benefits. Benefits were declared tax deductible. 1946 Hospital Survey and Construction Act (Hill Burton Act) - Authorized grants to states for surveying hospitals and public health centers and for planning construction of additional facilities Grants could assist with construction 1949 Liberty Mutual Insurance Company introduced the first major medical plan 1950s Joint Commission on Accreditation of Healthcare Organizations (JCAHO) voluntary accreditation of hospitals. 1965 Social Security Amendments Title XVIII Medicare (65 or older or disabled) Title XIX Medicaid (low income or indigent) *You can be eligible for both if you meet both requirements (even children). 1966 - Avedis Donabedian published Evaluating Quality of Medical Care Considered the Father of Quality Assurance

1972 Professional Standard Review Organization (PSRO) monitors quality and medical necessity for Medicare. 1973 Health Maintenance Organization Act (HMO) stimulated HMO development by requiring large to medium sized employers (at lease 100 or more employees) that provided health insurance to employees to offer at least one federally qualified HMO as an alternative (should one exist in the area). 1974 Employee Retirement Income Security Act (ERISA) regulation of pension & benefit plans including self-insured. 1975 Certification of Need (CON) regulatory tool to keep out duplication of services and investment in expensive equipment and construction.

1980s Peer Review Organizations (PRO) replace PSROs to monitor quality of hospitals appropriateness of admissions. 1986 Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation of health insurance. 1993 Stark II Physicians owning facilities to refer patients 1990s Joint Commission replaces quality assurance with quality assessment and improvement. 1996 Health Insurance Portability and Accountability Act (HIPAA/KennedyKassebaum) ensure access to health coverage; pre-existing condition limitation with prior coverage; electronic transfer ability for payers; medical savings accounts; Security and Privacy. Times of Transition: 1960s & 1970s Health Care practiced by individual professionals Practiced a craft or an art Some learned by apprenticeship Worked independently in a decentralized system Tailored craft to each situation No detailed data for analysis Personally accountable 1980s & 1990s Industrialization of Health Care HMOs and Managed Care Changed the way risks are allocated Changed how care is organized Changed professionals incentives In the 21st century do we still have health insurance or do we have health benefits? What is the difference?

Chapter 2 -Basic Group Health Insurance The working definition of insurance is a large group coming together to share risk. Group health insurance is a coverage usually offered by employers whose primary objective is to providing financial protection against some of the economic consequences of illness or injury. Traditional Indemnity Plans Prior to 1970s y Most common group health coverage y Freedom in choosing providers y Medical expenses were gained y Claims paid with little or no attempts to control costs y Little or no attempts to control patient behavior through plan design y Three Basic Coverages y Hospital Expenses y Surgical Expenses y Physicians Visit expenses

The role of the insurance company or payer is to evaluate charges incurred by a covered person for medical care and determine the amount that should be pay back. Covered person Based on the plans definition of eligibility, a determination must be made as to whether this person is eligible for benefits. Most plans cover employees, their spouses, and unmarried children (including stepchildren) to a usual limiting age of 19. This limiting age for children can be extended if the child is a full-time student and still dependent on the employee for support. Coverage may also be extended to a covered dependent child who reaches the limiting age and is totally disabled (incapable of selfsustaining employment by reason of mental or physical handicap). Covered provider This can be broken down into two categories individual providers and facilities. Individual providers: Individual providers would include any practitioner who is licensed and regulated by a state or federal agency and acting within the scope of his or her license. Some examples are: Doctor of Medicine (M.D.) Doctor of Osteopathy (D.O.) Doctor of Podiatry (D.P.M.) Doctor of Chiropractic (D.C.) Master of Social Work (M.S.W.) Occupational Therapist (O.T.) Optometrist (O.D.) Psychologist (Ph.D.) Facility: The most common example of a facility would be a hospital. Hospitals should be approved by the Joint Commission on Accreditation of Healthcare Organizations or the American Osteopath Association, Healthcare Facilities Accreditation Program, Medicare as a hospital. Which maintains diagnostic and therapeutic facilities for surgical and medical diagnosis and treatment of sick and injured person by or under the supervision of a staff of physicians; and provides 24 hour nursing care. Other examples of facilities: Nursing homes Birthing Centers Ambulatory Surgical Centers Mental health facilities Covered service Most plans have a provision that states all care must be medically necessary and meet the following provisions: Recommended or approved by a licensed medical practitioner or dentist Consistent with the patients condition or accepted standards of good medical and dental practice Is medically proven to be effective treatment of the condition Is not performed mainly for the convenience of the patient or provider of services Is not conducted for research purposes Is the most appropriate level of services which can be safely provided to the patient All of this criteria must be met, however, merely because a medical practitioner recommends or approves certain care does not mean that it is medically necessary. In many cases, plans will also choose to include or exclude very specific types of treatments or medical services.

Submitted amount This represents the amount charged by the provider of services. For each service performed, there is a 5-digit procedure code called a Current Procedure Terminology code (CPT). These codes are established by the American Medical Association and there are separate and distinct codes for every medical procedure performed. Ranges of codes represent different types of services such as patient evaluation, radiology, laboratory, and surgical procedures. Allowed amount The dollar amount considered by the Plan to be eligible for benefits. Deductible A deductible is a fixed dollar amount of covered expenses incurred during the calendar year that must be paid by an individual before health benefits begin. For example, if a plan has a $100 deductible and the patient incurred a $300 charge, the deductible would be the responsibility of the patient and benefits would be calculated from the remaining $200. Carry-over deductible A provision of some plans that states any covered charges incurred in the last three months of the calendar year that are applied to the deductible will be used to also satisfy the deductible of the next year. Coinsurance The percentage of the costs of medical services paid by the patient. If a plan pays covered charges at 80%, the patient must pay the remaining 20%. Looking at the example above: The charge is $300 The patient pays the $100 deductible The plan considers the remaining $200 at 80% (plan payment = $160) The patients coinsurance is the remaining 20% ($40) The amount payable by the Plan plus the patients payment will equal 100% of the covered amount.

Coinsurance limit This is often referred to as the out-of-pocket maximum. Once a persons coinsurance payments equal a specified dollar amount, the plan begins to pay covered charges at 100%. The dollar maximum is determined by each health plan. First dollar coverage A benefit that is covered at 100%, waiving the deductible. Probably the most common example of this is coverage for preventative care (routine check-ups). Internal limits These are also sometimes referred to as plan maximums. Plans may have a dollar maximum that can be paid on a specific type of benefit. An example of this would be a $1000 calendar year maximum on chiropractic care. Once the plan paid the $1000 in claims for chiropractic care, there would be no more benefits available for this type of service until the next calendar year. Any charges incurred over the plan maximum would be the responsibility of the patient. Lifetime maximum The maximum amount that will be paid by any one plan for one individuals medical expenses. If limited, this amount is usually one or two million dollars. Assignment of benefits When an insured wants the plan to pay the provider or care directly, he/she will assign the benefits of the plan to the provider. An example of a statement that would be signed by the patient is I authorize

Payment of medical benefits to the undersigned physician or supplier for the services described below. Balance billing Defined as the situation when the provider bills the patient for any amount not paid by insurance, hence the balance of the bill. Coordination of Benefits Employers lessen the financial burden of increasing medical expenses incurred by their employees, and employee's dependents, by providing group health coverage. However, if a person is covered by more than one plan of benefits, a consistent and orderly process must be followed to insure individuals do not profit from group health coverage and to avoid claim determination delays and misunderstandings. The possibility of a person profiting from an injury or illness, as a result of duplicate coverage, could occur in the following situations: both a husband and wife are employed the covered person or dependent has coverage through a professional association the covered person holds two job the covered person is retired from previous employment and again actively employed the covered person has a covered dependent child who has not reached the age limitation in the plan and is also employed if a child is involved in a divorce situation and group coverage is available through both the natural parents and the step-parents.

Coordination of Benefits:-The insurance industry developed the concept of Coordination of Benefits (COB) which is used by most group plans to minimize instances in which a person may profit from duplicate coverage and to establish uniformity in the payment of claims covered by more than one coverage. Generally, COB does not apply to individual health plans. Order Of Benefit Determination (OBD) Primary payer The Plan that has been determined to be responsible for paying benefits first with no regard to any other coverage. Secondary payer - The secondary and subsequent plans will pay the balance up to 100% of the total allowable expenses. Every Plan will determine the exact method in which COB is handled, however the information below outlines the most commonly used rules. A plan with no coordination provision pays before a plan that has a coordination provision. A plan that covers the claimant directly pays before a plan that covers the claimant as a dependent The parent with the earliest birth month and day provides primary benefits (the birthday rule) A plan which covers a claimant as dependent of a male pays before a plan which covers a claimant as a dependent of a female (the gender rule) If a priority for paying is not established by the above, the plan that has covered the claimant for the longest time pays first. Dependents of divorced parents The divorce decree takes precedence over all other rules in determining which parents plan is primary.

In the absence of a divorce decree that establishes OBD, the plan of the natural parent with custody pays first. The plan of the natural parent without custody pays as secondary. If the parents remarry (and assuming all parties have group health coverage that allows dependent coverage) the plan of the natural parent with custody is primary, the plan of the step-parent with which the child lives is secondary the plan of the natural parent without custody is the third payer, and the plan of the step-parent without custody is the last payer. Retirees that have dual coverage In the event a retiree maintains his/her health plan from their original company and then becomes employed with a new company that has group health coverage, the retiree plan is primary since it is the plan that has been in effect the longest. The proper administration of the COB provision includes the following steps: Recognition of Other Coverage Documentation of Other Coverage Information Determination of Primary/Secondary Status Determining Allowable Expense for COB purposes Processing Payment

These steps are discussed in detail in the following pages of this section.

Recognition of Other Coverage The first step in proper administration of the COB provision is recognition of other coverage. Most payers require either: completion of an annual enrollment form, or completion of an annual claim form or other coverage questionnaire. These forms request information regarding the existence of other coverage. If the forms ask whether coverage is individual or group, it should be clear that individual refers to individually issued coverage and not single coverage through another group health plan. Often other group coverage is discovered when actual claims are received. Documentation of Other Coverage Payers must review the part of the claim processing system that is set aside for documentation of the COB information. When a new claim form is received, the payer must also document the system with information on other coverage. When the other coverage relates to a dependent child, the payer must also document the COB type of the other plan: "Birthday Rule" or "Gender Rule" The type of coverage must be determined and documented. Order of Benefit Determination If the claim form or another source of information indicates the existence of other coverage, the payer must determine if the plan is primary or secondary to the other coverage. Determining Allowable Expense for COB Purposes

Once it is determined that the plan is secondary to other coverage and before a secondary payment can be made, the other plan's payment amount should be verified. The payer should request a copy of the primary payer's record of payment, or Explanation of Benefit form (EOB). The EOB should state the reason for any disallowance or reduction in benefits. Under the traditional COB provision, any expense which is allowed by either plan becomes an "allowable expense" under the plan coordinating as secondary carrier. Allowable expense means a health care service or expense, including deductibles, coinsurance or co-payments, that is covered in full or part by any of the plans covering the person. The definition of allowable expense may exclude certain types of coverage or benefits such as dental care, vision care, prescription drugs, or hearing aids. Processing Payment

If it is determined that the plan being administered is primary, the claim should be processed as though there is no other coverage. If it is determined that the plan being administered is secondary, the plan should be referenced to determine what type of COB benefit is paid, unless the claims system automatically performs the COB calculation. There are two main forms of COB secondary benefit calculation: 1. Traditional Coordination - Most often the claimant will be reimbursed for 100% of allowable charges under this method. The theory is that because plans benefit greatly from a secondary position under COB, it is fair to require secondary plans to make the covered person whole with respect to allowable expenses when there is duplicate coverage. For this reason, COB is to be administered without the preservation of deductibles, coinsurance or co-payments, and exclusions. 2. Integration of benefits allows the individual to receive as much in benefits as he or she would in the absence of the other coverage. The secondary plan will only pay its benefits to the extent they exceed the benefits of the primary plan. The end result of this approach is to give the claimant the benefits provided by the better of the two plans. COB EXAMPLES 1) Primary PPO and Secondary PPO discounts - Same discount amount Primary Charge PPO Discount Allowed Amount Paid at 80% Due form patient $200.00 20.00 180.00 144.00 36.00 Secondary Charge PPO Discount Alloowed Amount Paid at 80% Secondary paid $200.00 20.00 180.00 144.00 36.00

Patient responsibility is $0.00. 2) Primary PPO (higher PPO discount) and Secondary PPO Primary Charge $200.00 Secondary Charge $200.00

PPO Discount Allowed Amount Paid at 80% Due from patient

30.00 170.00 136.00 34.00

PPO Discount Allowed Amount Paid at 80% Secondary paid

20.00 180.00 144.00 34.00

Even though $36.00 is amount Secondary would have paid, Secondary never allows higher PPO discount than Primary. Patient responsibility is $0.00.

Chapter 3 - Managed Care After completing this chapter you will be able to:  Identify different components of managed care o Medical Management o Network of Providers o Plan Design  Recognize plan differences o HMOs o PPOs o POSs  Understand contracts and fee schedules  Identify types of Repricing Methods  Become familiar with Pharmacy Benefit Management Programs (PBMs)  Understand the differences between Disease Management and Large Case Management Managed Care Theory  Move risk from payer to provider  Provider contracts with payer for discounts, not patient  Keep members healthy instead of treating sickness only  Control the overall cost of health care Components of Managed Care Medical Management  Review and control of high cost services  Maintaining health of population  Incentives for Primary Care Network of Providers  Providers discount price of services  Payers guaranteed time frame of payment  Providers can not balance bill patients Plan Design  Steerage required between in and out of network benefits  UCR for Out of Network providers  Out of Network providers can balance bill patients Utilization Control In spite of the best efforts of Utilization Management organizations during the 1980s and 1990s, employers continued to see increases in the cost of providing health care for their employees. Highly complex patients with severe or chronic conditions requiring diverse resources were difficult for most conventional programs to manage successfully. As a result,

special units within organizations were created to address the intensive coordination and management needs of these patients. Staffed with clinicians, the primary goal is to review and control high cost services. Working with the patient, his/her family, and the medical community, they help coordinate the patients course of treatment utilizing the most cost effective methods.

Large Case Management (LCM) As more and more utilization management organizations created specialty units to manage these complex cases, the process began to be commonly referred to as Large Case Management. Large Case Management services are necessary because a small percentage of claimants are typically responsible for generating the majority of claims and therefore, receive a large portion of benefits. Consequently, efficient management of a few very high cost cases can significantly reduce claims costs, and hence, benefit the whole Plan. Studies have shown that large claims account for over 80% of medical expenditures. Large Case Management has proven to reduce paid claims substantially, when instituted early, in potentially catastrophic illnesses. Case Management intervention may include:  Arranging a transfer from the hospital to an extended care facility, nursing home, specialty facility, or home with home health care.  Arrangement for durable medical equipment, medications and professional services as indicated.  Family training and education, as well as counseling may also be part of the program. The following situations where Large Case Management can frequently affect cost savings while enhancing appropriate care. Some of these include:  Repeated in-patient admissions, excessive lengths of stay, or frequent treatment,  Potentially large dollar claims,  Chronic or progressive disease,  Opportunity to transfer a patient to a facility offering an appropriate level of care more cost effectively,  Lack of qualified care-givers in the home setting,  Multiple diagnosis,  Acute or sub-acute rehabilitation of physical, speech, or occupational therapies which exceed three months of treatment,  IV therapy or parenteral nutrition,  Severe injuries, or  Durable medical equipment needs. Pre-certification (Pre-Authorization) Pre-certification is the process of collecting information prior to inpatient admissions and performance of selected ambulatory procedures and services. The pre-certification process permits advance eligibility verification, determination of coverage, and communication with the physician and/or member. Pre-certification also

allows identifying and registers members for pre-service discharge planning and specialized programs, such as disease management, case management and prenatal programs.

The program is designed to help insure that all covered persons receive necessary and appropriate health care while avoiding unnecessary expenses. It is not designed to be the practice of medicine or to be a substitute for the medical judgment of the attending physician or other health care provider. The pre-certification process is started by a phone call from the covered person or family member, the attending physicians office, or the medical facility notifying the precertification administrator of proposed medical care. Before a covered person enters a medical facility on a non-emergency basis or receives other medical services determined by the Plan to require pre- authorization, the precertification administrator, along with the attending physician will certify the care as appropriate for Plan reimbursement. If the particular course of treatment or medical service is not certified, it means that the plan will not consider that course of treatment as appropriate for the maximum reimbursement under the Plan. Plans frequently have disincentives for failure to follow the approved course of treatments in the form or higher copays or higher coinsurance rates. For emergency admissions or emergency care, Plans generally require that the physician notify the UR administrator within 48 hours of the first business day after the admission. Utilization Review (UR) Utilization review is the process of reviewing coverage requests for initial certification:  After the service has been provided, or  When the member is no longer an inpatient or receiving the service o A review initiated while a member is hospitalized is considered a concurrent review o A review as the result of a pre-certifcation or claim denial is considered an appeal. Retrospective review includes making coverage determinations for the appropriate level of service consistent with the members needs at the time of service after confirming eligibility and the benefits available under the members benefits plan. The purpose of retrospective review is:  To analyze retrospectively any potential quality and/or utilization issues.  To initiate appropriate follow-up action, based on quality or utilization issues.  To review initial requests for certification, in anticipation of claim adjudication, made after discharge or after the provision of service.  To analyze submitted documentation to determine rationale behind failure to follow patient management utilization guidelines.

Disease Management According to some studies, in a typical group, 10 percent of the population accounts for 70 percent of the healthcare costs. Disease management programs were developed to work with patients who have specific medical conditions to prevent more acute episodes requiring hospitalization or other expensive treatments. The emphasis is on helping patients manage

their diseases, rather than treating periodic acute, and expensive, episodes. General criteria for selecting a disease to be managed might include:  High dollar volume or high velocity drug use  Potential for wide variation in treatment approach  Potential for lifestyle modification to improve outcomes  Diseases with high risk of negative outcomes Some common choices for disease management programs include asthma, cardiovascular disease, hypertension, depressive disorders, diabetes and obesity. Patient education is one of the primary goals of disease management. Much emphasis is placed on the following objectives:  Understanding the disease and teaching coping strategies.  Ensuring that the primary care physician is kept informed.  Teaching techniques of monitoring the progress of the disease and avoiding complications.  Involving the patient in support groups or organizations that provide continuing education, counseling and fellowship.  Encouraging patients to make appropriate decisions regarding their care. A Plan may choose to offer incentives to participants of the disease management program. For example, diabetic testing supplies might be furnished, at no charge to the patient, if he/she has diabetes and participates in the disease management program. 24-hour nurse line (Demand Management). One of the most expensive places to receive medical care is in the emergency room of the hospital. People seek care there either because they do not have a regular primary care physician or they are unsure if their medical condition is a true medical emergency. Some companies offer a 24-hour nurse line. Participants are given a toll free number that they can call at any time to discuss and medical condition and get an informed opinion, based on the symptoms they describe, as to how quickly and what type of medical care they should seek. Not only can avoiding the emergency room save the Plan money, but it can also save the patient a considerable amount of time. Provider Networks Plans seek to manage medical costs by contracting with a network of providers who are willing to accept lower reimbursement rates for their services. Typically, in a PPO Plan, Participants can choose any health care provider but they will have to pay additional money if they use a provider who is not part of the network.  PPO Plans became a popular managed care option for employers trying to control their health care cost without dramatically limiting their employees access to health care providers. A PPO is a plan design that is similar to an indemnity plan design. A PPO plan uses a network negotiated with physicians, hospitals, and other health care providers to contract reduced fees for medical services. In return, patients are given an incentive to use the network providers, and payment for services is usually made more quickly. The incentive for the participant to use the PPO is usually a 20% or 30% difference in the amount of

coinsurance an employee must pay for services. This difference of 20% is known as steerage.  PPOs can be owned by insurance companies, medical management organizations, business health care coalitions, hospitals, third party claims administrators, employers or various combinations of these entities.  When describing a provider that has a contract with a PPO network, that provider is often referred to as in-network or a participating provider. For instance, a Plan may reimburse 80% when a participant uses a network provider and will only reimburse 60% when a non-network provider is used. Advantage to employers  Employers can manage their health care costs while still allowing their employees flexibility in choosing their health care providers. Many employers are more comfortable offering a PPO Plan to their employees than more restrictive Managed Care Plans because patients can go outside the network and still receive benefits.  Since a fee has been negotiated with each provider in the network, the cost to the plan will be lower than if a participant uses an out-of-network health care provider, allowing the Plan to save money. Advantage to employees  When a participant goes to an out-of-network provider, he/she must pay the difference between what the provider charges and what the Plan pays for medical services. This practice of the provider billing the patient for any charges not paid by the plan is known as balance billing. With a PPO Plan, the patient will only pay the copay or the difference between the negotiated fee and the plan payment.  Usually, a participating health care provider cannot balance bill a patient for any amount that exceeds the PPO negotiated fee.  Typically, participating providers agree to file charges to the Plan for the patient.  Most often, with a PPO Plan, the patient can choose a physician, hospital, laboratory or other health care provider without first obtaining a referral from a Primary Care Physician or a medical management company. Responsibilities of a Network  Networks should have a carefully defined procedure for selecting providers to participate. In selecting the participating providers, specific documentation should be maintained regarding the Networks processes and procedures.  The Network should conduct a thorough evaluation of each hospitals ongoing quality improvement and utilization review programs. Typically, participating hospitals should be accredited by the Joint Commission on Accreditation of Health Care Providers and hospitals should be in good standing by their state licensing agency.  The physician evaluation process should include a review of each physicians credentials. The PPO should verify that each participating physician: 1. Is licensed to practice in the State of his/her practice. 2. Has received the education and training that he/she claims to have received. 3. Is Board certified in his/her specialty. 4. Has adequate malpractice insurance. 5. Has not had disciplinary action taken by the State licensing board. 6. Has staff privileges at PPO hospitals.

7. Has a record of fulfilling hospital and contract requirements.  The provider network should be extensive enough to provide all types of care that a patient might need within an acceptable distance and period of time. There should be a sufficient number of participating hospitals to cover the same geographic region as the physicians cover. Access to care within 30 miles is a commonly used standard for measuring acceptable access.  Networks should provide Plans and Plan Participants information as to the names, addresses, and phone numbers of their participating providers. This is usually in the form of a printed directory, website access, and a toll-free customer services line. It is critical that this information be accurate and up-todate at all times.  Networks should provide claims administrators with up-to-date information on provider participation, fee schedules, and hospital contracts.  If the network is providing re-pricing services, the turn-around-time should be clearly agreed upon in the contract with the payer. Contracts and fee schedules  Contracts and fee schedules represent the negotiated fee that a provider is willing to accept for a service. This negotiation takes place between the provider and the PPO network.  Fee schedules are common contracts between physicians, laboratories, durable medical equipment vendors, and other healthcare providers (usually not including hospitals) that denote a specific dollar amount that will be allowed for a specific service as billed with a procedure code. Some physicians do not accept fee schedules and negotiate for a percentage off of their billed charges.  Hospital contracts are most commonly based on a per diem rate, a case rate (flat fee for a specified type of confinement), a percentage off the billed amount, or a combination of these types of arrangements. Hospitals almost always include an outlier or stop-loss amount in their contract. Simply stated, once a confinement reaches a dollar threshold, the entire bill can revert to a percentage off from the first dollar or from a specific dollar amount.  As part of the participating providers contract, they agree to write off any amounts they bill that exceed the negotiated fee or contracted amount. i.e., the provider cannot balance bill the patient.

Repricing Methods A PPO must make the claims administrator aware of fees or contracts they have negotiated with their providers so that the claims administrator knows what amount to consider for payment on claims. There are three common types of re-pricing:  Claims are submitted directly to the PPO network that performs their own re-pricing duties. They then forward the claim and a cover sheet detailing to the claims administrator how much of the billed amount should be considered for benefits.  The PPO gives the claims administrator access to their fee schedules and contracts via the internet. The claims administrator has a person or persons whose job it is to review bills, locate the correct provider information, and indicate to the claims examiner what amount to consider for benefits. This amount is referred to as the allowed or negotiated amount.  The PPO provides the fee schedules and contracts in an electronic format that allows the claims administrator to load this information directly into their

claims system. Claims can then be repriced automatically as they are adjudicated. Examples of administrative fees Networks charge employer groups an administrative fee for the use of their network. There are two common arrangements for this.  Per employee per month is most commonly known as PEPM. The network charges the group a flat dollar amount for each employee that has access to their PPO providers. These typically run about $3.00 to $5.00 per month per employee. This is known as an access fee.  The second method is based on a percentage of savings. The employer pays a percentage of the amount billed by the provider and the amount negotiated by the network. This generally runs from 15% to 30% of the amount saved. How PPO Plan Designs effect benefits payable Below are three examples of claims that show how benefits payable differ between a PPO benefit and a non-PPO benefit. Our basic plan of benefits will be: PPO Plan Non-PPO Plan $200 deductible $400 deductible 80% coinsurance 60% coinsurance Office visits are paid with a $25 Co-pay and the deductible waived EXAMPLES PPO vs. NON-PPO A physician charges $500 for a surgical procedure. The patients calendar year deductible has not been met. PPO Plan Non-PPO plan Charge = $500 Charge = $500 Negotiate fee = $400 Minus deductible of $400 Minus deductible of $200 Balance is $100 Balance = $200 Coinsurance is 60% Coinsurance is 80% Benefits payable = $60 Benefits payable = $160 Patient responsibility = $440 Patient responsibility = $240 Write-off = $100 A physician charges $100 for an office visit. The patients calendar year deductible has been satisfied. PPO plan Non-PPO plan Charge = $100 Charge = $100 Negotiated fee = $75 Coinsurance is 60% Benefits payable = $50 Benefits payable = $60 Patient responsibility = $25 Patient responsibility = $40 A patient is confined to the hospital for 3 days. The total bill is $3000. The hospital contract is based on a $500 per diem rate. The patients calendar year deductible has been met. PPO Plan Non-PPO Charge = $3000 Charge = $3000 Allowed = $1500 ` Allowed = $3000 Coinsurance is 80% Coinsurance is 60% Benefits payable = $1200 Benefits payable = $1800

Patient responsibility = $300 Patient responsibility = $1200 Exceptions to the rule Some plans make allowances for use of a non-PPO provider so that the patient is not penalized. Most common are:  RAPs This is an acronym for radiologists, anesthesiologists, and pathologists. Since these types of providers have not real incentive to join a plan, their claims are usually paid at the higher PPO coinsurance rate if the patient uses a participating physician or facility.  If there is a medical emergency and the patient seeks treatment from the nearest healthcare provider.  If the person lives or travels outside a PPO area and does not have access to a participating provider.  If there person requires a provider of a particular specialty that is not available in the network. EXAMPLE of HOSPITAL PPO RATE SHEET Facility Name: Federal Tax ID #: Physical Address: Billing Address: Facility Effective Date: Inpatient Services Medical $1040 per diem Surgical $1040 per diem ICU/CCU $1380 per diem Telemetry $1090 per diem Bariatric Surgery $11,000 flat rate up to 5 days, then applicable per diem Maternity Normal Delivery 45% discount C-section 45% discount Tubal ligation 45% discount Boarder baby 45% discount Out patient services Outpatient surgery 30% discount Emergency room 30% discount Other Implants, prosthetics, 40% discount DME & selected pharmaceuticals Note 1: Each hospital confinement of services exceeding $60,000 of eligible charges will be compensated at the rate of seventy percent (70%) of total billed charges in lieu of any per diem or discounted reimbursement. Note 2: Inpatient per diem shall exclude implants, prosthetics, durable medical equipment and selected pharmaceuticals. Health Maintenance Organizations (HMOs) There are three basic types of HMOs:  Staff model HMOs own and operate physician-staffed health centers that offer a broad range of medical care including laboratory, s-ray, vision, and pharmacy services.  Group practice HMOs contract with medical groups to provide health service to HMO members.  Independent Practice Associations (IPAs) are HMOs that contract with individual physicians. HMOs are the most different from traditional insurance plans. They offer both advantages and potential disadvantages over other forms of health insurance. HMOs emphasize

prevention and are more likely to cover annual physicals or well child check-ups than are other insurance carriers. In addition, the HMO industry has made greater efforts to measure the quality of care provided to members. While HMOs offer advantages over traditional insurance plans, there are also potential disadvantages. HMO members must live in the HMO service area and obtain care from health care providers who are in the HMOs network. This limits choice of providers. Typically, HMO members also are required to obtain approval from their PCP before receiving care from a specialist. Members may not be able to get their HMOs to provide them elective medical services, or may face delays for those services greater than under a traditional fee-for-service plan. In addition, HMOs sometimes give physicians or other health care providers financial incentives to be more efficient managers of care. While these payment mechanisms provide an incentive to reduce unnecessary care, some people worry that these payment mechanisms also may provide incentives to withhold necessary care. In contrast, some people were concerned that traditional fee-for-service gave physicians incentives to providing unnecessary care. (HMOs) have exclusive networks of providers. If you are in an HMO it will not usually pay any part of your bill if you choose a provider outside of the HMO s network without prior authorization . HMOs do not require their members to pay a deductible although there may be a co-payment each time you receive services. Point-of-Service (POS) POS plans give members the opportunity to see providers outside the network . Members who use a provider in the HMO s network pay less than members who see providers outside the network . The HMO may still require the use of a gatekeeper to authorize innetwork services, but no referral is needed for out-of-network services. Point-of-service plans (POSs) permit members to see providers outside the network. The HMO will help pay part of the bill but will not pay as much as if you go to a provider within the network. For example, if you see a physician inside the network, the HMO will pay all of the costs except any required co-payment. If you choose to see a physician outside the network, then the HMO may only pay 70-80% of the costs. You would be responsible for paying the physician the remaining 20-30% of the costs. In addition, you may also have to meet a deductible for out-of-network services, and will usually have to pay a higher premium. Under state law, HMOs can exclude coverage for preventive services if you obtain care from a non-network provider. Fee Schedule Examples PHARMACY BENEFIT MANAGEMENT PROGRAMS (PBMS) Services that PBMs provide include on-line claims processing, drug utilization review, online management reports, formulary management, prior authorization as well as disease management programs. PBMs may offer Flexible and innovative plan design Real-time client eligibility Integrated mail and retail programs Multiple formulary benefits Personalized comprehensive reviews Reverse co-pays Customized ID cards Comprehensive Discount Vision Program Fully interactive web site Competitive pricing All-inclusive administrative fee Network customization Overview

Originally, PBMs only competed with actual drug pricing. Pricing is based on an average wholesale price (AWP). PBMs would offer drug costs as AWP + xx%. As competition became stiffer, PBMs began implementing other cost saving and value added features. The current trend of pharmaceutical expenditures will continue to increase the need for Pharmacy Benefit Managers (PBM's) and their efforts to develop innovative techniques to provide affordable prescription drug benefits within managed care. The majority of past attempts to control prescription drug costs have been focused on reducing pharmacy reimbursements. More recently, efforts have increased to reduce utilization, provide generic incentives, limit pharmacy networks, and implement more restricted formularies through cost shifting. Obviously, savings are a function of to what degree each type of program is implemented. Listed below are features implemented that have proven to have the greatest impact on reducing cost:  Generic incentive programs  Deductibles and Maximum benefit programs  Formulary management  Innovative plan designs  Advanced on-line drug utilization review (DUR) edits and processing  Formulary incentive co-pay programs Flexibility can provide a wide variety of plan designs. This flexibility will afford the client the opportunity to develop a prescription drug program specifically for their purpose and warrants. The client's signature acknowledges the acceptance of the plan features and the PBM will then begin processing the data into the system. The client may request a change in the plan features at any time. PBMs can accommodate and support a variety of benefit designs and these design features include but are not limited to the following:  Various Copay Options  Deductibles Options  Maximum Benefit Options  Retail Refill Limitation Options  Day Supply/Dose Options  Drug Inclusion/Exclusions Options  Generic Restriction Options Mail Program PBMs are able to offer clients members using maintenance medications the convenience of home delivery through mail order pharmacy. Of all prescriptions written, up to 70% are for long-term maintenance medication. Through the efficiencies of mail order services centralized mail service pharmacy, clients will benefit from mail service savings generated by lower maintenance costs, longer-term supplies and drug utilization review. Mail order pharmacy uses the most advanced and efficient technology available to dispense mail order prescriptions that result in the maximum cost savings for clients. This allows them to integrate operational, quality control, and management reporting to support the mail order pharmacy service. Quality control is of primary concern from receipt of the prescription order, through dispensing, to final mailing. Using the information supplied on the confidential patient profile order form, the possibilities of drug interaction or allergy problem are carefully evaluated. The integration of mail order with the retail pharmacy network component will provide a complete pharmacy management program. The mail order pharmacy functions similar to any retail pharmacy in the PBMs network. Drug Utilization Review is provided on all prescriptions so a complete profile of drug use can be analyzed. PBMs recommend a combined retail pharmacy network and mail order pharmacy program. Retail Program

The PBMs retail card program provides membership packets that are sent to the client for individual member distribution. This membership packet contains a directory of participating pharmacies along with other written material and the drug card(s) that members will present at a participating pharmacy. PBMs will consult with the client to determine the benefit plan design that best meets their objectives and requirements. This program integrates the point-of-sale retail card program with management systems to accomplish the objectives of the clients' needs:  Flexible plan design  Discounted drug cost  On-line claims adjudication  National provider networks  Pharmacies added to the network for member convenience  On-line Drug Utilization Review  Management reports  Two standard identification cards per family plus one standard identification card per full-time student. Features PBMs provide quality service and convenient access to clients' members. They can restrict the pharmacy network or enlarge it in selected areas to increase member access at the request of the client. As a result of rising prescription drug costs, the mail service pharmacy was developed to provide a cost-effective management solution for maintenance medications, which comprise up to 70% of all prescriptions written. Through the utilization of this convenient service, clients may substantially reduce their costs. The mail service provider like all retail pharmacies is fully integrated with the national retail pharmacy network. This allows for a common source and control of eligibility, benefit plan design, drug inclusions and exclusions, drug utilization review, prior authorization, and online edits. The pharmacy mail services program may be used in conjunction with retail pharmacy benefit programs or as a stand-alone benefit. Disease Management Most PBMs offer complete disease management programs for the client's members. These programs are designed to interface with the physician and member in an effort to educate and empower the member toward better health through appropriate treatment protocols. Drug Utilization Review A Drug Utilization Review system is a more enlightened approach to cost containment requiring control of the qualitative, as well as the quantitative and fiscal issues of drug therapy. Programs that were designed to encourage cost-effective, high quality drug therapy have relied on retrospective utilization review techniques with only limited success. The Drug Utilization Review system should efficiently identify potential drug therapy problems and notify the provider before the prescription is dispensed. This Drug Utilization Review system is designed to act as an integral component of electronic claims adjudication system. Drug Therapy Review The pharmacist will initiate the transaction by entering the patient's ID and the prescription data into the pharmacy computer terminal. If the patient is eligible, the system conducts fiscal and clinical adjudication simultaneously. Each new prescription is electronically screened against the patient's central profile. This profile consists of the patient's active medications, and, if available, allergy information and disease states. If disease states are not available, Chronic Disease Predictors can be used to construct an implied disease state profile based on the patient's medication list. The results of both components of the adjudication are collected immediately and electronically transmitted back to the pharmacist. A central record of prescription

transactions, clinical and fiscal problems, and action taken to resolve the problems are maintained in the Clinical Event file for the patient, pharmacist and prescriber. Clinical Screening Features The Drug Utilization Review system contains a full spectrum of clinical screening functions that can be performed with typical prescription claim data in the absence of a patient drug profile maybe with more advanced screening that requires a patient drug profile or a Chronic Disease Profile. Examples of types of screening are as follows:  Dose Range Check  Duplicate Therapy and Ingredients  Early Refills  Drug-Disease Contraindications  Minimum / Maximum Adult Daily Dose  Geriatric Precautions  Drug Indications  Duration of Therapy  Pediatric Dosing Cost of drug development at new high A recent study by the consulting group Bain and Company noted that only one of thirteen drugs successfully advances from testing to FDA approval. The higher dropout rates for new drugs in development have contributed to the increased cost of bringing a new drug to market. HCFA 2001 predicts #1 Seniors will spend $1.5T on Rx drugs over the next 10 years and #2 Rx expense will rise from 4.4% of personal health spending to 16% by 2010. Pharmacy Benefit Management Strategies Cost Management 1. Squeeze Manufacturers (Rebates, Tiered Copays) 2. Squeeze Distribution Channels (Retail, Mail, Internet) 3. Management Function: Outsource (PBMs) vs. Insource Utilization Management 1. Care Management Programs Disease Management 2. Cost Shifting 3. Implement systems similar to Medical Models Generic Drugs Q&A What is a generic drug? When a company receives a patent for a new drug, the government allows the manufacturer to develop and market the drug for 20 years without competition. Sometimes multiple patents can extend the period. When the patents expire, the drug becomes generic and other companies are then free to manufacture and market the generic drug. How can I be absolutely sure a generic drug is equivalent to a brand name drug? The Food & Drug Administration (FDA) regulates both generic and original brand-name drugs. The FDA reviews tests of all generic drugs to be sure they are bioequivalent/therapeutically equivalent to the original products. They look at such things as chemistry, formulation, potency, stability and purity. The FDAs approval means the generic product is recognized as equal to, and interchangeable with the original drug. Your pharmacist provides only products that have been approved by the FDA. Why do generic drugs look different from brand-name drugs? While 20-year patents cover what is in the drug, trademarks cover the appearance. Under trademark law, another company cannot use the name, color and look of the original drug. What is the advantage of a generic vs. a brand-name drug? Generic drugs cost less money. On the average, most generics are about half the price of the brand-name drug; some generics may cost up to two-thirds less than the brand-name version. Plan Design

Managed Care vs. Traditional fee-for-service plans In a traditional fee-for-service system, the insurance company pays the bills but the patient has freedom to choose the provider. In most managed care arrangements, the company limits the network of providers. Managed care organizations usually give members a financial incentive to obtain care from within the network. Cost saving features are often built into plans of benefits to encourage plan participants to seek the most cost effective health care. Some examples are: Steerage This is a common plan design (and often required by PPO networks) that pays participating providers at a higher coinsurance rate than non-participating providers. This plan design results in less out-of-pocket costs to the plan participant. Usual, Customary, and Reasonable (UCR) reimbursement limits You will also sometimes hear this referred to as Reasonable and Customary (R&C). Reimbursement limits are pre-set by statistical data that determines what reasonable fees are allowed in a geographic area for any procedure. Disincentives Many plan designs have higher copays or penalties for using a nonparticipating provider. Chapter Summary  The objectives of this chapter were to help you:  Identify the different components of managed care  Recognize the plan difference between HMOs, PPOs, and POSs  Understand how managed care programs help reduce the healthcare plans costs  Understand pre-certification and the utilization review processes  Be familiar with large case management