First-dollar coverage: an idea whose time has passed: back in the days before most managed care, in the Middle Ages of health care, when hospital payment was still cost-based, the idea of copayments and deductibles seemed almost alien

Healthcare Financial Management, March, 2004 by Jeanne Schulte Scott

Most employment-based health care and all of Medicare were geared to the indemnity concept--that the provider would be "made whole" for providing needed services. Insured patients paid virtually nothing for covered services, and the minimal deductibles called for in many so-called "major medical" plans were hardly, a barrier to additional care.

The result, according to healthcare economists, was the over-utilization, of many services and rapidly escalating healthcare costs. To head off these seemingly uncontrolled increases in healthcare utilization, managed care--an idea that had bounced around unappreciated for a generation or two--took off like a rocket and changed the nation's concept of health "insurance." It seemed to work pretty well for a few years, but now the easy up-front savings from managing care have been wrung out of the system. Utilization and healthcare costs are on the rise again, with a vengeance.

Today, the idea of "indemnity coverage" seems almost quaint as more and more employers, consumers, and payers--particularly the federal government--grope in the dark for new methods to control the rising costs of health care. The deductibles and copayments required under most managed care plans have been "trickling up" for some time now. Multitiered health plans are replacing fixed-benefit programs. Patients are being asked to bear more of the up-front costs before their third-party health insurance kicks in.

Last year's spate of organized labor work stop-pages--from a one-day "strike" by General Electric to the continuing supermarket workers' strike on both coasts--is an indication that working Americans, particularly those who have some collective bargaining power, are not taking the issue of rising healthcare deductibles and copayments lightly. The heart and soul of each of these work actions were objections to the employer's attempt to pass more healthcare costs to employees.

Virtually all of us with employment coverage have seen our share of the costs steadily rising, both in direct premiums and in ever-increasing deductibles and copayments. These rising costs have been a bread-and-butter issue between employer and employee all across the country, with no end in sight.

In Washington, D.C., these days, the idea of "first-dollar" healthcare coverage is anathema to policy planners struggling to find ways to maintain Medicare's solvency. Medicare's abortive attempt to move most seniors to managed care through the Medicare Choice program has come up with mostly zeroes. Attempts to sharply raise the deductible and copayment schedules under Medicare have proven mostly ineffective in controlling both cost and utilization. Most seniors have simply gone out and bought themselves a MediGap policy to cover these bothersome copayments and deductibles. Seniors have simply continued their blissful use of every Medicare service available without regard to the costs in the long run or to American health care as a whole. How else can you explain the number of toenail clippings paid for by Medicare?

Under the "new and improved" Medicare's drug benefit, the issue of first-dollar coverage and copayments has become enormous. Seniors will have to pay the first $250 of their drug costs directly and $500 of the next $2,000 in drug spending. Alter that there is no benefit at all--this is called the "donut hole"--for the next $2,850. Fearful that seniors might get around the plan to curtail drug utilization, Congress simply outlawed the buying of a MediGap policy to fill in the hole. The result: a slick package of propaganda with virtually no real benefit to those who might need it the most, but a great utilization-control device to keep Medicare's prescription drug costs to a minimum.

And with this "victory" under their belts, Congressional staffers are now looking at ways to extend the prohibition to many of the other Medicare service areas currently being covered by seniors through various MediGap policies. The issue is shaping up as one that will play a role in this fall's presidential elections.

What does this increased emphasis on copayments and deductibles mean for healthcare financial managers? As a greater percentage of the cash-flow of any healthcare operation moves from "easy" third-party insurance billing to "hard" accounts-receivable management, old skills need to be revisited and updated. Financial managers need to establish broader receivables controls and be more aggressive in getting upfront payment assurances. A greater proportion of scarce resources will need to be dedicated to collecting these payments. Also, financial managers may need to reconsider some long-held beliefs about the role of third party insurance in the business of health care. As health savings accounts, also authorized under the recent Medicare law, become more prevalent, the third-party insurer may be replaced entirely in some systems by fund managers and banks.

These represent a whole new breed of players in a healthcare financial manager's life. That will take some getting used to.