Insurance Primer

A formulary is a list of which prescription medications covered and what the coverage level is. The name formulary comes from the old pharmacist guide for how to mix compounds.  Better names for insurance formularies would be simply the drug list or drug coverage list.

Most insurance policies use a multi-level or tiered formulary.  The first tier is the lowest cost generic drugs.  These are the least expensive drugs, and insurance companies often offer incentives to using Tier 1 generics with a lower copay (the percentage that you pay).

Going up the price scale, the mid-level tiers are usually brand name drugs that are higher cost and often have a higher co-pay.  These are often called preferred medications.  And at the top of the scale are the non-preferred brand name drugs that carry a still higher co-pay.  This 3-level formulary was standard in the past.  Many companies are now adding sub-categories to build 5 and 6 level (or more) formularies.

Most insurance companies contract with a Pharmacy Benefit Manager (PBM) to negotiate prices with drug manufacturers and create their formulary.  As of this writing, just 3 PBMs administer prescription benefits for over 3/4 of the insured in the USA which gives them bargaining power.   One PBN might strike a deal for better pricing with one manufacturer and feature their products while another PBN might favor a competitor.

Of course, insurance companies want you to use the least expensive drug available while drug companies push their most profitable lines through heavy advertising and sales reps.  And doctors are stuck in the middle.

Insurance companies and PBMs often use a step action table or step action therapy requirement that doctors try the least expensive medications first.  It’s a good idea in theory as lower cost medications are often as effective as the newer, more expensive, ones.  Unfortunately, it annoys doctors and often puts you in the middle.

Insurance Plans – What is Covered

What is covered by insurance plans might seem like a simple question but there isn’t an easy answer. Every plan is different, and the reasons might surprise you.

For individual plans, or plans that you buy yourself, the what is covered is determined by the group or company that you buy it from. Most plans cover all of the basics with varying levels of deductibles and co-pays, but there are some plans that cut corners to save money and may leave you uncovered (for example, a plan that excluded pregnancy or cancer coverage). Be sure to check the coverage before you purchase an individual plan.

For group plans that you get at work, especially with larger companies, what is covered is probably determined by your employer rather than the insurance company. In fact, many large companies are Self Insured, and just contract with an insurance company to do the paperwork and negotiate fees.

What is Covered in the ACA

All private plans are required to cover a set of essential benefits as part of the Affordable Care Act.  Some insurance plans that you get from work may not cover all of these yet.  The benefits are:

• Ambulatory patient services (outpatient care you get without being admitted to a hospital)
• Emergency services
• Hospitalization (such as surgery)
• Pregnancy, maternity, and newborn care (care before and after your baby is born)
• Mental health and substance use disorder services, including behavioral health treatment (this includes counseling and psychotherapy)
• Prescription drugs
• Rehabilitative and habilitative services and devices (services and devices to help people with injuries, disabilities, or chronic conditions gain or recover mental and physical skills)
• Laboratory services
• Preventive and wellness services and chronic disease management
• Pediatric services, including oral and vision care

So suppose that you go to the doctor to get a tattoo removed and the insurance company from your job at MegaCompany Inc. tells you that it won’t pay the bill because it’s not covered. The underlying reason is probably because MegaCompany decided not to cover tattoo removal.

It’s possible to buy insurance that covers everything, and the insurance companies would probably love to sell it, but the cost would be enormous.

Health Savings Accounts – Health Spending Accounts

Insurance companies have blended  high deductible health plans with savings accounts to create a category known as Consumer Driven Healthcare.  The idea is that, with the high deductible, you’ll be more careful as you are spending your own money and keep medical costs down.  Then, once you have reached your  deductible, your spending or saving account can be used to pay for copays or coinsurance.

Federal tax laws allow some plans to set up accounts that allow you to pay for health costs with pretax money, meaning the contributions to the Savings Accounts or Spending Accounts are deducted from your paycheck before federal and Social Security taxes are withheld (sometimes state taxes too). These plans have some limits and requirements, but are generally a good deal. Some common types are:

Flexible Spending Account (FSA): a pre tax account where unspent balances may not be rolled over, other than for a limited grace period after each plan year.

Health Reimbursement Arrangement (HRA): an employer funded pre-tax account where unspent balances may roll over from year to year. Typically offered in combination with high deductible plans.

Health Savings Account (HSA): a pre tax savings account funded by employer or employee that may roll over from year to year and must be offered in combination with high deductible plans.

So if I go to the doctor for a boo-boo, and the bill is $100, and I haven’t met my deductible yet, and I have to pay the whole $100 myself:

• It might take $140 or so before taxes for me to take home the $100 that I need to pay the doctor after the federal, state, and social security taxes are deducted.
• Or it can take only $100 if I use a health savings account that lets me pay health bills with money before it is taxed.

Types of Policies

There are two major types of Health Insurance Policies, Fee for Service and Managed Care.

Fee for Service

Fee For Service is sometimes known as Traditional or Indemnity insurance

and, as the name implies, pays a set amount (fee) for each type of claim (service). This amount is called the Reasonable and Customary charge and is the prevailing cost of a medical service in a geographic area, but not always exactly what your doctor charges.

Additionally, these policies commonly pay only a percentage of the total bill, the most common is 80%, which leaves 20% for you to pay. So if you go to the doctor for a boo-boo, and the Reasonable and Customary charge is $100, the insurer will pay $80. If your doctor billed you for $100, you will pay $20, but if your doctor billed you for $110, you will pay $30.

Managed Care

Managed Care plans are known under many different names, most common are Health Maintenance Organizations (HMO), Preferred Provider Organizations (PPO), and Point of Service plans (POS). Almost all of these plans use managed care techniques to keep costs down and provide appropriate care. Doctors and facilities are often contracted to provide services at a discounted rate, and they may be required to follow set guidelines and procedures.

In a typical HMO, if you go to the doctor for a boo-boo, no matter how minor or serious it is, you will have to pay only the copayment amount. There are many variations of these plans and each insurance company may have their own plan names. We’ll discuss more about the differences in coming pages.

Prescription Insurance

Prescription insurance, often referred to as a prescription drug plan, is an insurance policy that covers all or part of the cost of prescription medications. These are available separately or sometimes included as part of a health benefit package. Prescription coverage is also available for those who qualify through the Medicare Prescription Plan.

Prescription coverage has been the fastest growing cost in healthcare.  Some new drugs do wonders but have exorbitant prices.  It’s not unusual for a prescription to cost $10, $100, or even $1000 a day.

Most plans include a Formulary, or list of approved drugs. In some plans, only drugs on the Formulary list will be covered (known as a Closed Formulary). Other plans might cover non-formulary drugs only with precertification, or at a lower rate.

Many prescription insurance plans now include a tiered formulary, with some drugs, usually the lower cost generics, having the lowest copayment/coinsurance amount, and additional tiers at higher copayment/coinsurance amounts.  In many cases, the lower cost generics do the job as well as it’s higher price brand name and insurance companies will encourage you to use the lower cost one by charging you a lot less.  Unfortunately, most newer drugs will not have a generic equivalent and can be expensive.

There have been a lot of ads on TV lately for prescription drug discount cards. Don’t confuse these with insurance. While they are better than nothing, and might give you a price break on some well know prescriptions, they’re not insurance and don’t pay any part of the bill. In fact, most receive payments from some drug companies for your purchases.

There have also been adds on TV lately for free or subsidized drug programs from some of the major manufacturers. Most have income guidelines and are worth investigating if you qualify.

Most insurance plans have “in network” pharmacies for prescription insurance that are contracted to provide lower prices.  Check your plan to find the lowest cost pharmacies.  Many also offer mail order pharmacies with additional discounts over the pharmacies.

Don’t be taken in by ads from Canadian (most aren’t really Canadian) or offshore pharmacies.  It’s actually illegal to have prescription drugs mailed to you but that’s not the biggest problem.  Most of these pharmacies mail drugs from countries that have little or no regulation and at best may be counterfeit, altered, or outdated.  There have been many instances of harmful or even addictive drug substitutions.  Don’t even think about using this type of mail order dealers.  It’s too dangerous.

Medicare Prescription Part D

Medicare Prescription, officially called Medicare Part D is a federal program to partially cover the costs of prescription drugs for Medicare beneficiaries. It is relatively new, just started in 2006, and very controversial. There are two aspects of Part D that are confusing to a lot of people.

First, Medicare Prescription Part D is partially paid by the US government, but it is offered only through private insurance companies. Just like competing stores, each of these companies has put together different packages. Some offer more or less coverage, and may have different prices for different brands of drugs. They also may treat the Donut Hole different.

Donut Hole certainly isn’t a medical term. It refers to Medicare Prescription’s standard drug coverage. Most plans start with some coverage after a $250 deductible, typically 75% is covered and you pay 25%. Once your annual costs reach $2250, you pay all of the prescription cost until approximately $5100 when the catastrophic coverage takes over and pays most of the costs.

Only a politician could think of something as confusing as this, but the bottom line is that it’s better than nothing and substantially reduces the bills of many people. Because of the government subsidy, this coverage is a good idea for anyone who is eligible and doesn’t have private prescription insurance. Even if your current prescription costs are low, keep in mind that a chemotherapy prescription can easily top $100,000.

All of this makes choosing a plan appear to be complicated. Companies offer different plans in different areas, so use one of the online guides or comparison tools. Look for a combination of price and service. Also check out their Formulary (which drugs are covered), and, if you don’t mind paying a bit more, look at some of the companies that fill the Donut Hole by covering prescriptions that Medicare doesn’t.

Medicare

Medicare is a health insurance program administered by the United States government, covering people who are either age 65 and over or who meet other special criteria. It is funded by a payroll tax that is split between the employer and employee, or by the self-employment tax.

There are four major parts to Medicare:

• Part A covers hospitals stays and, in some cases, nursing homes.
• Part B is medical insurance and covers some services not included in Part A. Part B is optional and carries an extra charge.
• Part C includes the Medicare Advantage Plans, sometimes called Medicare +Choice or just Part C. It allows the option to receive their benefits through private health insurance plans, instead of through the original Medicare plan (Parts A and B)
• Part D is the Prescription Drug Plan (PDP). Anyone with Part A or B is eligible to purchase Part D from a private health insurance company. It may also be combined with a Medicare Advantage plan with prescription drug coverage (MA-PD).

It’s important to note that Medicare only pays a portion of your bills.  There can still be substantial out of pocket costs and deductibles.  There is no charge for Part A.  The cost for Part B varies depending on your income.  As with most government programs, there are a lot of ins and outs, and our Congress sometimes plays politics. The full details are available at the Federal website.

Medicare Advantage Plans (Part C) have been rapidly expanding.  They are offered by insurance companies and provide additional benefits on top of Parts A and B.  Prices vary with providers, location, and coverage.  There are several with no premium.  Higher premium plans may cover more of your deductibles and co-pays, and some offer extra benefits.  Many also include Part D prescriptions. Some also include health club, hearing, vision, and dental benefits.

Some insurance companies also offer plans called Medigap.  These aren’t true Advantage plans, they just piggyback on standard Medicare and reimburse you for some of your deductibles and copays.

Medicaid

Medicaid is a health insurance program for individuals and families with low incomes and resources. It is managed by the states, but the cost is shared between your state and the federal government.  Medicaid provides health care services for low-income parents, children, seniors, and people with disabilities.  It is the largest source of funding for medical and health-related services for people with limited income.

Even though the name sounds similar, Medicaid is substantially different from Medicare. Medicare is funded entirely at the federal level and is paid for through payroll deductions.  Medicaid is a social welfare program with both state and federal funding. Medicare is available to all based on age or disability, and Medicaid’s availability is based on financial need. It is possible to be enrolled in both (Dual Eligible).

Medicaid has been in the news quite a bit lately as it’s the source of the premium subsidies that are offered through the Affordable Care Act (Obamacare).  Many states have embraced the program as the federal government pays 90% or more of the cost, but there is a sizable number that limit or refuse to offer Medicaid for political reasons.

Many states have contracted insurance companies to administer Medicaid rather than having to handle bill processing themselves.  It’s probably a good idea as it’s a complex process.  And most states have their own names for their programs.

What is Managed Care

Insurance companies have developed hundreds of different plans, all with different names, but most fall into 3 major managed care categories. They are Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), and Point Of Service (POS) plans.

All of these plans typically offer financial incentives for patients to use the providers who belong to the plan.  They call it incentives, everyone else calls it managed care.  The providers are contracted and considered part of the network. HMOs are generally the lowest cost but typically require you to use only participating providers (providers that are part of the network). Exceptions are usually made for emergencies, but all other services and specialists need to be routed through your Primary Care Physician (PCP) . Primary Care Physicians may be family practice doctors, internists, pediatricians, or other types of doctors. The Primary Care Physician is responsible for referring you to specialists when needed. While most of these specialists will be participating providers in the HMO, there are circumstances in which patients enrolled in an HMO may be referred to providers outside the HMO network and still receive coverage.

A Preferred Provider Organization (PPO) generally does not have a copay and instead offers a deductible and a coinsurance feature. They often have the lowest premium, but after deductible and coinsurance may cost more or less.  You need to pay the deductible before any benefits are covered. Then, after the deductible, coinsurance kicks in. So if the PPO plan has a 80% coinsurance and $1,000 deductible, you will pay all of the allowed provider fee up to $1,000.  Then, the insurance will pay 80% of you will pay the remaining 20%.

A POS plan mixes some of the best features from both HMOs and PPOs.  The Point of Service name refers to the fact that you don’t need too make a decision on doctors until they are needed (the point of service), and you can generally choose any provider in the network.  Out of network providers are generally covered also but at a much lower rate, and since they aren’t under contract, may bill more too.  POS plans are becoming more popular because they offer more flexibility and freedom of choice.

Most policies fall into these three overall groups but there are an alphabet soup of other organizations and methods.  Read the plan documentation closely.

HIPAA Health Insurance Portability and Accountability Act

HIPAA stands for the Health Insurance Portability and Accountability Act (HIPAA) and was enacted by the U.S. Congress in 1996. HIPAA has 2 main parts, one which protects health insurance coverage for workers and their families when they change or lose their job, and a second part that requires the establishment of national standards for electronic health care transactions and national identifiers for providers, health insurance plans, and employers.

The most visible part is the Privacy Act. This part of HIPAA controls who has access to your medical records and billing, they call this Private Health Information (PHI). The good part is that it goes a long way to protect your privacy and limits the people that can discuss your health or your bill.

So now, under HIPAA, if you’re in the hospital, and a friend calls to ask how you are doing, the hospital cannot give out that information without your permission. It also means that your boss can’t call your doctor to see if you really were sick when you called in last week.

Medical providers aren’t always happy with HIPAA because it creates a lot of paperwork and holds them responsible for maintaining your privacy.  They need written permission to share your medical and billing information with other doctors and even insurance companies.  Most will ask you to update an information release form yearly.  It’s one of those papers that you will be asked to sign.

Another part of HIPAA is the standardizing of codes.  Each medical diagnosis or procedure has been assigned a unique code from a table called ICD-10 (International Classification of Diseases 10th edition).  It’s very complex as each code is specific to a disease, disorder, or condition.  Most doctor’s offices need to have a billing specialist to determine the correct code, and incorrect codes can delay bill payments.

Everyone hates the HIPAA paperwork, but it’s a necessary evil.  It protects your privacy and limits who can see your records.  Remember that your medical records contain all of the information that an identity thief needs to rip you off, so it’s a good thing.  And it gives you control over who has access.