This is the Healthcare Marketplace Specialization, Healthcare Marketplace Overview. My name is Steph Parente and this is Module 3.2.2, Early US Private and Health Insurance. So we think about Private Insurance, there's really two early models, first one being Fee-for-Service Insurance, which is what most of Americans have experienced from the very beginning. It actually starts at Baylor University, as a program that Baylor, in Texas, designed for its employees. The actual name, Blue Cross, Blue Shield, does not occur until the mid-1930s, and actually originates from Minnesota as the brand name. So Blue Cross is known for its hospital insurance. And Blue Shield is known for its physician insurance. Now, the way these things would work in terms of Fee-for-Service is that if someone gets medical care, the idea is the insurance company would pay whatever the physician is charging, or the hospital is charging, for that service. If we look at then the idea of prepaid group practice, the idea there is more akin to someone getting the care through a set of different physicians that they paid a price to. And they essentially got access to see them whenever they want to as long as they go to those doctors. And it starts actually by Kaiser Permanente and originally it's Kaiser Industries that sets this up because Kaiser Industries, located on the west coast of US. And many places throughout the world was at least the western part of the United States, was building ships. And by the places where they were building ships, were building dams. They had their own physicians in case something went wrong and since they had a lot of workers out there, they want to keep them happy, and eventually their families joined them. In the process of doing that, they realized, hey, why not just give the care to the workers? Why don't we sell it and give it back to some of the other folks that are either family members, or just actually just living in the area? And that's one of the reasons why Group Health of Puget Sound, which starts in Seattle in 1947 gets going there because it's really tied to a lot of these designs. Group Health Association starts out on the East Coast and actually takes this design from Kaiser and moves it to a different level. They later were sold to Humana as life has moved on. So, these were the two earliest forms, the idea of a Kaiser model and or a Blue Cross/Blue Shield model. Now, the idea about these different insurance models was that they, they all had different attributes. In particular, Blue Cross had several things that they always were pushing. One of them was that hospitals were going to be reimbursed on what's known as a cost-plus basis. So the idea being that if a hospital comes in and says, here's our cost, but actually thinks a little bit over, things we didn't expect. That plus would be some extra dollars that they would basically be expected to be paid. The other thing is that the policies themselves would be paid in terms of premiums in terms of community rating. What community rating would be is let's say you have a universe of 100 people. And they all consume about, say, $1 million of care. Then what that means is that if we're actually going to come up with a premium, we simply divide the 100 times the million. And actually come up with $10,000 for a premium amount and everyone is going to pay that $10,000 whether you're sick, poor or otherwise that's the idea [INAUDIBLE]. It's much easier to administrate things that way. What they could do is say, hey, that's $10,000 this year, next year it's going to be $10,000 plus 5% because that's what we see the trend to be and that was a Blue Cross design. Another one was that health insurance should cover all medical costs even routine checkups and diagnostic procedures. And this was done in a world in the 1930s, 40s, 50s, when medical care really was pretty cheap and covering all these things really didn't amount to too much in terms of the healthcare spends, so it worked out okay. And the last thing was, a pay-as-you-go policy to insurance. A lot of insurance companies, like for life insurance, you pay into over a period of time, there's premiums that come out, there's sometimes parts that are actually stored as a savings vehicle. For health insurance, what was done was premiums go in and they get paid out, every single year. And so by doing that type of design, it meant that sometimes there might be some spending cycles that you don't necessarily expect. And you're basically paying on basis of what experience the entire community is seeing over a period of time. And it's just a simpler way to operate, these things were done, in part, because Blue Cross really started from Baylor University and it was a different type of insurance. It wasn't a traditional insurance policy like you'd see from other sect. So the idea of hospitals being essentially paid on a cost-plus basis, the thought was that the hospitals were going to pay about 40% of what it would typically cost. So if there's anything beyond that, essentially people would get paid more for that. Now, the interesting thing about this cost-plus world is that Blue Cross did it. But as we described earlier, Medicare which comes online later, really about almost 30 years later adopts Blue Cross's practices in terms of doing a cost-plus world. So as it turns out, that ended up making the health care system a bit more expensive because of this cost-plus basis. That is they didn't have a fixed fee or negotiated fee. It was just whatever the hospitals wanted was what the hospitals got and after a period of time, the hospitals started asking for a lot more. Another feature is that this notion that health insurance should cover all medical expenses. So by doing that, that meant a world where, unlike today, there are no deductibles, there is, I can spell, [LAUGH] deductibles, no copay, no co-insurance. Really, if you're sick and you have insurance, everything is covered. And so you can imagine that some people who are older who remember this world, and this world hasn't existed actually, for about 30 years. But for maybe parents or grandparents and they think about high deductibles and things today, it's a different world. And it's fine except that healthcare got a lot more expensive. It used to be that a delivery procedure might be only $50 to 100, and now it's at least 5, 6, $7,000. And so this world that the Blue Cross system created, that there would be no deductibles, no copays, no co-insurance, it was very difference than what insurance would normally represent. And then this idea of community rating. Community Rating is an interesting concept that's very easy to administer but the problem was, and it would vary, that to be fair, by what community you were in. So Seattle had a different rate, Denver had a different rate, Chicago had a different rate. Across the entire US, the problem is that there's issues that we talked about before with adverse selection that can occur. Where someone's really sick and their premium if they're really sick, if they were priced normally, could be $15,000 but the community rate is going to be $8,000. Now, if everybody sort of runs through that plan, and they're all expecting to cost far more than otherwise, the Community Rating system will this will lead to what's known as a death spiral. And the plan can't basically pay for much anymore, and then it goes out of business. That's happened a few times, but not too often, but Community Rating is a feature that, while it seems simplistic and easy to run, it actually could lead to a situation where it could encourage bad behaviors on the part of folks getting. And then this other notion of the pay as you go approach that the Blues had, was, really the concern with that was that most insurance companies have to operate with reserves in case unexpected charges occur. And so, it works okay, if everybody pools their risk in the insurance plan. But if, essentially, there are moments where a small business or individual and costs come and go at different places, you get a bad situation where your cost might be unexpected. It might go up in a much more aggressive way because maybe hospitals are billing more aggressively than before. And so this Pay-as-You-Go Approach, creates a situation where you had the potential for medical care inflation, which we did see. Healthcare inflation generally, has been going up at +1% above regular inflation for quite some time. And when healthcare only was say, a small portion of the economy say, only 2% of the economy back in the 50s, that really wasn't that big a deal and that's, say, 1952 or so. Now we get to a world where it's 18%, going on 19% in 2015. And that's of your gross domestic product then at that point, particularly when it's going up faster than inflation, becomes much more expensive to have this Pay-as-You-Go Approach. This concludes our overview of early private insurance models.
