Jessica Ghotra

Chapter 3 questions

1. Why does the delivery of healthcare services not follow the general business model of
consumer purchasing in a competitive environment?
Choices for a particular service are usually limited to a few individuals or organizations and judging
the quality among the competition among providers is difficult. The decision on which provider to use
is typically not made by the consumer, but rather by a physician or some other clinician.
3.1 pg. 57
2. Insurance typically has four distinct characteristics. What are they?
 Pooling of losses: The losses are pooled across a million individuals
 Payments only for random losses: The losses on each individual are random
(unpredictable)
 Risk Transfer: The risk of loss is passed to the insurance company
 Indemnification: The insurance company pays for any losses
3.2 pg. 59
3. What is meant by "pooling of losses"?
The pooling, or sharing, of losses is the basis of insurance. Pooling means that the losses are spread
over a large group of individuals, called a pool, so that each individual realizes the average loss of the
pool rather than the actual loss incurred.
3.2 pg. 58
4. How did the ACA's individual mandate to purchase insurance relate to the concept of
"pooling of losses"?
The ACA's individual mandate required people to purchase health insurance, ensuring that both
healthy and sick individuals contributed to the insurance pool. This "pooling of losses" helped spread
risk across a larger group, stabilizing premiums and preventing adverse selection.
3.2 pg. 59
5. Why do you think that "payment only for random losses" would be a key characteristic of
insurance?
A random loss is unforeseen and unexpected and occurs as a result of chance. Insurance is based on
the premise that payments are made only for losses that are random.
3.2 pg. 59
6. Why is "risk transfer" a key characteristic of insurance?
Risk transfer is the passing of a risk from the insured to the insurer, which typically is in a better
financial position to bear the risk rather than the insured because of the law of large numbers.
3.2 pg. 59
7. What is "indemnification"?
Indemnification for losses is the reimbursement to the insured if a loss occurs. In the context of health
insurance, indemnification occurs when the insurer pays, in whole or in part, the insured or the
provider for the expenses related to an insured's illness or injury.
3.2 pg. 59
8. What is adverse selection? Which key characteristic of insurance does it violate and why is
this the case?
Adverse selection occurs because individual and business that are more likely to have claims are more
inclined to purchase insurance than are those less likely to have claims. This violates the key
characteristic of pooling of losses because if only those that are sick and utilizing health insurance,
then the cost of insurance will increase for everyone.
3.2 pg.60
9. How do insurers mitigate the problem of adverse selection?
Health insurers attempt to control adverse selection by instituting underwriting provisions. An
example of this is smokers being charged a higher premium than nonsmokers.
3.2 pg. 60
 10. Ethically speaking, what is your opinion of "underwriting provisions"?
I think underwriting provisions are a good way to promote healthier habits for those that are
purchasing insurance.
11. How did the Affordable Care Act interfere with underwriting provisions?
The ACA prohibits the use of preexisting conditions and gender to set premiums, along with limits
based on age.
3.2 pg. 60
12. Which key characteristic of insurance is violated if underwriting provisions are not allowed?
The ACA prohibits using pre-existing conditions and genders to set premiums along with limits based
on age.
3.2 pg. 60
13. What is the purpose of the Health Insurance Portability and Accountability Act (HIPAA)?
What are its key provisions?
Because insurers tend to avoid paying large predictable claims, the US Congress passed HIPPA.
HIPPA set national standards, which could be modified within limits by the states, regarding what
provisions could be included in health insurance policies.
3.2 pg. 60
14. Under the Affordable Care Act (ACA), preexisting condition clauses were banned for health
plans after 2014. How do you think this affected healthcare premiums?
I think this may have caused healthcare premiums to increase so that health insurance companies
could protect itself from many insurers getting costly services.
3.2 pg. 61
15. How does adverse selection create a "vicious circle" in regard to healthcare cost and the
number of uninsured people?
Adverse selection raises premiums as healthier people opt out, making insurance costly and increasing
the uninsured, creating a vicious cycle.
3.2 pg. 62
16. What is moral hazard? Which key characteristic of insurance does it violate and why is this
the case?
Moral hazard is the risk to an insurer that excess healthcare services are being consumed because
individuals do not bear the full cost of the services provided. This violates pooling of losses because
unnecessary services are being provided when they could have been passed on to someone who
actually needs those funds.
3.2 pg. 62
17. Give an example of "moral hazard" in healthcare.
A patient may be quick to agree to an expensive test, even though that test is not medically necessary,
because most of the cost is covered by insurance.
3.2 pg. 62
18. How do insurers mitigate the problem of moral hazard?
Insurers protect themselves from moral hazard claims by paying less than the full amount of
healthcare costs. Forcing insured individuals to bear some of the cost lessens their tendency to
consume unneeded services or engage in unhealthy behaviors.
3.2 pg. 63
19. Insurance deductibles may help to mitigate the problem of moral hazard, but what other
purpose do they serve for the insurer?
The primary purpose is to eliminate the need for an insurer to pay a small claim, if that is the only
healthcare expense for the year. In such cases, the administrative cost of processing the claim may be
larger than the amount of the claim itself.
3.2 pg. 63
 20. What benefits do copayments and coinsurance provide in terms of lowering healthcare costs?
Copayments and coinsurance payments discourage overutilization of healthcare services and reduces
insurance benefits by being forced to pay some of the costs, insured individuals will presumably seek
fewer and more cost-effective treatments and embrace a healthier lifestyle than they would otherwise.
3.2 pg. 63
21. What is an "out-of-pocket maximum"?
The insurer pays all covered costs, including coinsurance, after the insured individual pays a certain
amount of costs
3.2 pg. 63
22. What is a "high-deductible health plan? Explain how it works.
A type of health insurance that requires higher deductibles than traditional. Plans but allows insured
individuals to set up tax-advantages savings accounts to pay those deductibles.
3.2 pg. 64
23. How does a "high-deductible health plan" help to lower healthcare costs?
Lower premium but higher annual deductible
3.2 pg. 64
24. How does a "high-deductible health plan" benefit the individual?
Allows individuals to set up savings accounts for the sole purpose of paying healthcare cost. These
contributions are tax deductible and can roll over from year to year.
3.2 pg. 64
25. What are the different types of private insurers?
Blue cross blue shield, commercial insurers and self-insurers
3.3 pg. 65
26. Briefly, what are the origins and purpose of Medicare?
Began in 1965 as a modest program to be jointly funded and operated by the states and the federal
government. The goal was to provide a medical safety net for low income mothers and children and
for the elderly, blind, and disabled individuals who receive benefits from the supplemental security
income program.
3.3 pg. 68
27. What is Medicaid, and how is it administered?
Joint federal-state health insurance program that primarily covers low-income individuals and
families. The federal government funds about half of the costs of the program, while the states fund
the remainder. Although general guidelines are established by CMS, the program is administered by
the individual states. Thus, each state, if it follows basic federal guidelines, can set its own rules
regarding eligibility, benefits, and provider payments.
3.3 pg. 68
28. What is meant by the term managed care organization (MCO)?
Combines the provision of healthcare services and the insurance function into a single entity
3.4 pg. 69
29. What are two different types of MCOs?
Health Maintenance Organizations (HMOs): based on the premise that the traditional insurer-provider
relationship creates incentives that reward providers for treating patients' illnesses while offering little
incentive for providing prevention and rehabilitation services
Preferred Provider Organizations (PPOs): do not mandate that beneficiaries use specific providers,
although financial incentives encourage members to use providers that are a part of the PPO's
preferred provider panel.
3.4 pg. 69
30. What is the major difference between fee-for-service reimbursement and capitation?
Fee for service reimbursement is when Health service orgs are paid based on how many services they
provide. The greater number of services provided the greater reimbursements are given. Capitation is
when health service organizations are paid a fixed amount per patient, regardless of how many
services are provided. (3.5 pg 71/77)
 31. Briefly explain the following fee-for-service payment methods: (pgs 72-77)
 Cost-based reimbursement
o Providers are reimbursed for the actual costs incurred in delivering
healthcare services
 Charge-based reimbursement and discounted charges
o Providers bill based on their set charges, but insurers often negotiate
discounts off these standard rates.
 Per-procedure reimbursement
o Providers receive a fixed payment for each specific procedure performed,
 Per-diagnosis reimbursement
o Payment is based on the patient’s diagnosis, with a predetermined amount
allocated
 Per diem reimbursement
o A fixed daily rate is paid to cover all services provided to a patient within a
single day.
 Bundled payment
o A single payment is made for a group of related services provided over a
specific period, encouraging cost efficiency
32. What is pay-for-performance reimbursement?
Pay-for-performance (P4P) reimbursement is a healthcare payment model that rewards providers
based on the quality, efficiency, and outcomes of the care they deliver rather than the volume of
services. (pg. 75/76)

33. What provider incentives are created under (a) cost-based reimbursement, (b) prospective
payment, and (c) capitation? (pg. 72-74)
Cost-based reimbursement: Providers are incentivized to increase service utilization and costs since
they are reimbursed for actual expenses incurred.

Prospective payment: Providers are encouraged to control costs and increase efficiency because
payments are predetermined and fixed regardless of actual expenses.

 Capitation: Providers are motivated to reduce costs and service utilization, as they receive a
fixed amount per patient regardless of the number of services provided.

34. Which of the three payment methods listed in the question above carries the least risk for
providers? The most risk? Explain your answer. (pg. 82)
 Least risk: Cost-based reimbursement carries the least risk for providers because they are
reimbursed for the actual costs incurred, ensuring they do not lose money regardless of
service utilization.
 Most risk: Capitation carries the most risk because providers receive a fixed payment per
patient and must cover all necessary services, meaning higher-than-expected costs or service
utilization can lead to financial losses.
35. Briefly describe the coding system used in hospitals (ICD codes) and medical practices (CPT
and
HCPCS codes).
ICD codes are used internationally to record and specify diseases. CPT codes are used to specify
medical treatments and create a uniform langue to describe medical procedures. HCPCS codes are an
enhanced set of codes with include additional information for Medicare and Medicaid such as non-
physician services. (pg. 84)
 36. What is the link between coding and reimbursement?
For most fee-for service reimbursements the patient’s diagnosis is put into coded numbers that can be
universally recognized. You need to be able to code diagnoses properly to ensure the correct
reimbursement is granted. (pg.84)
37. What is an "accountable care organization" and what are its goals? Is it working as intended?
An ACO integrates local physicians with other members of the healthcare community and reward
them for controlling costs and improving quality. The goal is improving quality and improve care to
quality targets set by Medicare. It shows potential but has to overcome the legal and managerial
hurdles for it to work successfully. (pg. 86)
38. What is the "medical home model" and what are its key characteristics?
The Medical home model is a team based model of care led by a personal physician who works with
other healthcare professionals to provide continual integrated care through a patient’s lifetime.
Key characteristics include Personal physician, whole person orientation, coordination and integration,
quality and safety, enhanced access, payment and methodologies. (pg 87)