Order Code RL32237
CRS Report for Congress
Received through the CRS Web
Health Insurance: A Primer
Updated January 17, 2006
Bernadette Fernandez
Analyst in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

Health Insurance: A Primer
Summary
People buy insurance to protect themselves against the possibility of financial
loss in the future. Such losses may be due to a motor vehicle collision, natural
disaster, or other circumstance. For patients, financial losses may result from the use
of health care services. Health insurance then provides protection against the
possibility of financial loss due to health care use. In addition, since people do not
know ahead of time exactly what their health care expenses will be, paying for health
insurance on a regular basis helps smooth out their out-of-pocket spending.
While health insurance continues to be mostly a private enterprise in this
country, government plays an increasingly significant role. Especially during the
latter half of the 20th century, the government both initiated and responded to
dynamics in medicine, the economy, and the workplace through legislation and
public policies. For example, the Internal Revenue System clarified that employer
contributions to employee health benefits are exempt from taxation, which
encouraged the growth of employment-based health coverage. Given the frequent
introduction of legislation aimed at modifying or building on the current health
insurance system, understanding the potential impact of such proposals requires a
working knowledge of how health insurance is designed, provided, purchased, and
regulated. This report provides background information about these topics.
Individuals and families without health coverage are more likely than those with
coverage to forgo needed health care, which often leads to worse health outcomes
and the need for expensive medical treatment. Since uninsured persons are more
likely to be poor than insured persons, the uninsured are less able to afford the health
care they need. Uninsurance can lead to health care access problems for
communities, such as overcrowding in emergency rooms. Taxpayers and the nation
as a whole are affected through increased taxes and health care prices to cover the
uncompensated care expenses of uninsured persons.
Americans obtain health insurance in different settings and through a variety of
methods. People may get health coverage through the private sector, or from a
publicly funded program. Consumers may purchase health insurance on their own,
as part of an employee group, or through a trade or professional association.
However, nearly 46 million Americans did not have health coverage for the entire
year of 2004.
Health insurance benefits are delivered and financed under different systems.
The factors that distinguish one delivery system from another are many, including
how health care is financed, how much access to providers and services is controlled,
and how much authority the enrollee has to design her/his health plan. To illustrate,
managed care is characterized by predetermined restrictions on accessing services
and providers, whereas individual decision-making regarding use of health benefits
is a hallmark of consumer driven health care. As economic conditions change, a
specific delivery system may gain or lose the interest of affected parties.
This report will be updated periodically.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
What Is Health Insurance? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Definitions and Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Uneven Distribution of Health Care Expenses . . . . . . . . . . . . . . . . . . . 2
Risk Pool and Rate Setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Pool Composition and Adverse Selection . . . . . . . . . . . . . . . . . . . 3
Group Market, Nongroup Market, and Medical Underwriting . . . . . . . 4
Fully-Insured vs. Self-Insured Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Self-only vs. Family Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Administrative Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Tax Preference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Health Insurance Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Responsibility of the States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Key Federal Statutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Health Insurance Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Why Is Health Insurance Considered Important? . . . . . . . . . . . . . . . . . . . . . . . . . 8
Where Do People Get Health Insurance? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Employer-Sponsored Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Disadvantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Large vs. Small Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Public Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Medicaid and the State Children’s Health Insurance Program
(SCHIP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Individual Health Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
State High Risk Pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
The Uninsured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
How Are Health Benefits Delivered And Financed? . . . . . . . . . . . . . . . . . . . . . . 16
Indemnity (Traditional) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Managed Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Consumer Driven Health Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
List of Tables
Table 1. Health Insurance Coverage by Type of Insurance, 2004 . . . . . . . . . . . 10

Health Insurance: A Primer
Introduction
Health insurance dominates many state and federal health care discussions. As
health insurance coverage evolved from an uncommon benefit to a routine one,
government’s role in subsidizing and regulating that coverage also changed.
Although health insurance continues to be mostly a private enterprise in this country,
public entities play an increasingly significant role.
Government’s involvement in health coverage expanded dramatically in the
latter half of the 20th century.
! A long-standing rule issued by the Internal Revenue Service (IRS)
stated that an employer’s contributions to employment-based health
insurance could not be included in an employee’s gross income for
tax purposes (Internal Revenue Code, Section 106). This ruling
helped spur the growth of employer-sponsored health benefits. The
IRS also stated separately that employers could deduct such
contributions as part of business expenses.
! Advances in medicine led to escalating consumer demand for newer,
better treatments. At the same time, the cost of some treatments
increased, which was especially problematic for certain groups of
consumers who lacked health coverage. This led to government
efforts to assist health care consumers in paying for medical services
through social insurance programs.1
! More and more employees began to work for more than one
employer over their lifetimes. Government was called on to address
a problem many workers faced: keeping health coverage as workers
moved from job to job.
Given the frequent introduction of legislation aimed at modifying or building
on the current health insurance system, understanding the potential impact of such
proposals requires a working knowledge of how health insurance is designed,
provided, purchased, and regulated. This report provides background information
about these topics.
1 Publicly funded health programs generally either provide funding for direct medical
services or assist consumers in paying for health care. The latter are included in a broad
category of programs based on “social insurance” principles. Social insurance refers to
publicly funded insurance programs that are statutorily mandated for certain groups of
people, such as low-income individuals.

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What Is Health Insurance?
Definitions and Principles
People buy insurance to protect themselves against the possibility of financial
loss in the future. Such losses may be due to a motor vehicle collision, natural
disaster, or other circumstance. For patients, financial losses may result from the use
of health care services. Health insurance then provides protection against the
possibility of financial loss due to health care use. In addition, since people do not
know ahead of time exactly what their health care expenses will be, paying for health
insurance on a regular basis helps smooth out their out-of-pocket spending.
The concept underlying insurance is “risk;” i.e., the likelihood and magnitude
of financial loss. In any type of insurance arrangement, all parties seek to minimize
their own risk. In health insurance, consumers and insurers approach the
management of insurance risk differently. From the consumer’s point of view, a
person (or family) buys health insurance for protection against financial losses
resulting from the future use of medical care. From the insurer’s point of view, it
employs a variety of methods to minimize the risk it takes on when providing health
coverage to consumers, to assure that it operates a profitable business. One method
is to cover only those expenses arising from a pre-defined set of services (generally
called “covered” services). Another method for limiting risk is to encourage
healthier people to obtain health coverage, presumably because healthier people
would not need as many medical services as sicker people, leading to fewer claims
that the insurer would have to cover.
While the methods employed by an insurer differ from those of a consumer,
each has the same goal: to minimize risk in an uncertain future. It is this uncertainty
of the future and risk of financial loss which form the context for insurance, and the
strategies to make financial loss more predictable and manageable which drive
insurance arrangements.
Uneven Distribution of Health Care Expenses. In health care, a
minority of consumers are responsible for a majority of expenses. According to a
longitudinal study conducted by the Agency for Healthcare Research and Quality, 5%
of the population accounted for about half of all health expenditures in 2002, and
10% of the population accounted for around two-thirds of expenditures in the same
year.2 Given the unevenness of health care spending and the improbability of
identifying all of the highest spenders before they use medical services, insurers
employ various strategies in order to minimize the risk they take on.
Risk Pool and Rate Setting. A function of insurance is to spread risk across
a group of people. This is achieved in health insurance when people contribute to a
common pool (“risk pool”) an amount at least equal to the expected cost resulting
from use of covered services by the group as a whole. In this way, the actual costs
2 William W. Yu and Trena M. Ezzati-Rice, “Concentration of Health Care Expenditures
in the U.S. Civilian Noninstitutionalized Population,” AHRQ Statistical Brief #81, May
2005, at [http://www.meps.ahrq.gov/papers/st81/stat81.pdf].

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of health services used by a few people are spread over the entire group. This is the
reason why insuring larger groups is considered less risky — the more individuals
participating in a risk pool, the less likely that the serious medical experiences of one
or a few persons will result in catastrophic financial loss for the entire pool.
An insurer calculates and charges a rate (i.e., a “premium”) in order to finance
the health coverage it provides. The premium reflects several factors, including the
expected cost of claims for health care use in a year, administrative expenses
associated with running the plan, and a profit margin. If the insurer accurately
estimates future costs and sets appropriate premium levels, then that risk pool has
reached equilibrium where premiums paid by healthy persons in the risk pool help
subsidize the higher-than-average costs of less-healthy persons in the pool.
Risk Pool Composition and Adverse Selection. As noted above, one
of the ways insurers attempt to make future costs more predictable is by spreading
the risk of a few high-cost individuals across many people. But the number of people
in a risk pool is not the only significant factor. Equally as important, if not more so,
is the composition of the group.
A consumer’s decision to obtain health coverage is based on a variety of factors,
such as individual health status, estimated need for future medical care, and
disposable income. Consumers with different health conditions, as well as varying
degrees of comfort towards risk-taking, will differ on whether they consider health
insurance necessary. This is a circumstance that insurers will consider when
estimating their expenses to cover future health care use. With this in mind, insurers
generally will vary the premiums they charge and the health services they cover
(subject to state and federal statues) in order to attract various segments of the
population. This flexibility in rate setting and benefit determination is particularly
important in a competitive insurance market where insurers try to provide the most
attractive rates to increase their market share.
However, some risk pools do attract a disproportionate share of unhealthy
individuals. In part, this is because individuals generally know more about their own
health conditions than anyone else, including an insurer. Therefore, health care
consumers have an advantage over insurers in terms of knowing the kind and amount
of health services they will use, at least in the short- to mid-term. This “information
asymmetry” between what consumers know compared to what insurers know gives
consumers an advantage when looking for health coverage that will meet their future
demand for health care. For example, if a consumer plans on obtaining orthodontic
care in the near future, that consumer will look for a health plan with generous dental
benefits. Information asymmetry is another source of uncertainty that insurers take
into account when developing and pricing insurance products.
When a disproportionate share of unhealthy people make up a risk pool, a
phenomenon known as “adverse selection,” the cost for each person in the pool rises.
The higher costs may encourage the departure of healthier members from the group,
and discourage the entrance of other healthy people, since healthier people may be
able to find cheaper coverage elsewhere or decide that coverage is too costly and
become uninsured. In either situation, it leaves an even less healthy group of people
in the risk pool, which again causes the cost to rise for the remaining participants.

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If there is no change in this dynamic, the group may experience a “death spiral” as
it suffers substantial adverse selection leading to an increasingly expensive risk pool
and possibly dissolution of the pool altogether. Therefore, despite the consumer’s
information advantage, it does not guarantee access to affordable and adequate health
coverage.
Group Market, Nongroup Market, and Medical Underwriting. Health
insurance can be provided to groups of people that are drawn together by an employer
or other organization, such as a trade union. Such groups are generally formed for
some purpose other than obtaining insurance, like employment. When insurance is
provided to a group, it is referred to as “group coverage” or “group insurance.” In
the group market, the entity that purchases health insurance on behalf of a group is
referred to as the plan “sponsor.”
Consumers who are not associated with a group can obtain health coverage by
purchasing it directly from an insurer in the individual (or nongroup) insurance
market. Insurance carriers in the nongroup market conduct an exhaustive analysis
of each applicant’s insurability. An applicant usually must provide the insurer with
an extensive medical history and often undergo a physical exam. This information
is used by carriers to assess the potential medical claims for each person by
comparing characteristics of the applicant to the loss experience of others with
similar characteristics. Once such an evaluation has been conducted, the carrier
decides whether or not to provide health coverage and determines the terms for
coverage. This evaluation and determination process is referred to as “medical
underwriting.”
Medical underwriting is standard practice in the individual insurance market,
though a carrier’s ability to reject applicants or vary the terms of coverage are
restricted to some degree by federal and state requirements. In the group health
insurance market, insurers forgo underwriting in the traditional sense; i.e., reviewing
each person’s demographics and medical history. Instead, an insurer looks at the
characteristics of the collective group, such as its claims history, group
demographics, and geographic location. The insurer then charges a premium based
on the analysis of the group’s characteristics. There are exceptions to this for very
small groups. For example, when a firm with only a handful of employees applies
for health coverage, the insurer may choose to review the health conditions of each
person in order to establish a premium for the entire group. Or, the insurer may
charge a larger premium due to the larger risk attributed to smaller groups, if
permitted under law.3
Fully Insured vs. Self-Insured Plans. A common distinction made
between types of health insurance products is whether they are fully insured or self-
insured. A fully insured health plan is one in which the plan sponsor purchases
health coverage from a state-licensed insurer (also referred to as an insurance carrier).
The carrier assumes the risk of providing health benefits to the sponsor’s enrolled
3 G. Claxton, “How Private Insurance Works: A Primer,” Kaiser Family Foundation (KFF)
website, Apr. 2002, at [http://www.kff.org/insurance/loader.cfm?url=/commonspot/
security/getfile.cfm&PageID=14053].

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members. In contrast, organizations who self insure (or self fund) do not purchase
health coverage from state-licensed insurers. Self-insured plans refer to health
coverage that is provided directly by the organization seeking coverage for its
members (e.g., a firm providing health benefits to its employees). Such organizations
directly take on the risk for covering medical expenses, and such plans are not subject
to state insurance regulations. In a sense, a large employer that self funds employee
health benefits acts as both sponsor and insurer for that coverage. Firms that self
fund typically contract with third-party administrators (TPAs) to handle
administrative duties such as member services, premium collection, and utilization
review. TPAs do not underwrite insurance risk.
Self-only vs. Family Coverage. Another common distinction made in
health insurance is whether the policy covers one person or a family. Under self-only
coverage, the holder of the insurance policy is the only person insured. (Self-only
coverage is also called individual coverage. Individual coverage in this sense should
not be confused with health coverage from the individual insurance market — see
discussion above.) Family coverage applies to the policyholder, her/his spouse, and
children.4 Self-only and family policies may differ from each other in terms of the
services they cover and the cost-sharing they impose.
Administrative Expenses. Costs for administrative functions encompass
a wide range of operational activities. Administrative expenses include costs
associated with contracting with providers, sales and marketing, enrollment and
billing, customer service, utilization review, case management, and other functions.
Because of economies of scale, administrative expenses in the group market are a
smaller portion of overall costs, compared to those in the nongroup market.5
Tax Preference
Unlike most industrialized countries, the United States does not guarantee health
coverage to all of its citizens. Instead, it relies on a patchwork approach that
combines private and public means for providing health insurance and health care.
One of the key pieces of this approach encouraged the growth of employment-based
health coverage via the tax code.
Section 106 of the Internal Revenue Code states that employer contributions to
employment-based health insurance are not included in workers’ gross incomes for
tax purposes. This tax preference encourages workers to sign up for (“take-up”)
health coverage within the work setting. A separate ruling by the Internal Revenue
Service clarified that such employer contributions are business expenses and,
therefore, deductible from employers’ taxable income. Both parties benefit:
employers use health insurance coverage as a means to recruit and retain workers,
while workers typically get access to more services at better rates (see discussion
4 Policies vary on the requirements children must meet (e.g., age, martial status, etc.) in
order to become eligible for or stay on a family policy.
5 Given that insurers monitor administrative costs as part of managing their businesses, such
information is considered proprietary. Therefore, there are no reliable estimates of the
portion of insurers’ expenses attributable to administrative functions.

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below). However, workers generally receive reduced wages to compensate for richer
benefits.
The tax exclusion of health benefits is one of the primary reasons why health
insurance coverage is provided mainly through the workplace in the United States.
Approximately two out of three nonelderly (under 65) Americans have employer-
sponsored insurance. Moreover, of nonelderly persons with private health coverage,
approximately nine out of 10 obtain it through the workplace.6
Health Insurance Regulation
Health insurance regulation addresses a wide variety of issues: the benefits that
must be offered, the individuals to whom the insurance is made available, and the
responsibilities insurers have to plan enrollees, to name a few. One of the most
contentious issues regarding health insurance regulation is whether it is the
responsibility of individual states or the federal government. This distinction is
important because federal and state laws governing health plans differ on issues such
as patient compensation in courts, consumer access to care, and mandated coverage
for certain benefits.
Responsibility of the States. The regulation of insurance traditionally has
been a state responsibility, as clarified by the 1945 McCarran-Ferguson Act.
However, overlapping federal requirements complicate the matter with respect to
health insurance. Individual states have established standards and regulations
overseeing the “business of insurance,” including requirements related to the
finances, management, and business practices of an insurer. For example, all states
have laws that require state-licensed insurance carriers to offer coverage for specified
health care services (known as “mandated benefits”). Because fully insured plans are
subject to state-established requirements, those plans must offer those mandated
benefits. On the other hand, self-insured plans are not subject to state insurance
regulations so they are exempt from such requirements.
Key Federal Statutes. Regardless of whether health plans are fully-insured
or self-funded, they all are subject to a number of federal laws. Two of these federal
laws, the Employee Retirement Income Security Act of 1974 (ERISA, P.L. 93-406)
and the Health Insurance Portability and Accountability Act of 1996 (HIPAA, P.L.
104-191), have significant impact on how health insurance is provided.
ERISA outlines minimum federal standards for private-sector employer-
sponsored benefits. (Public employee benefits and plans sponsored by churches are
exempt from ERISA). Passed in response to abuses in the private pension system,
the act was developed with a focus on pensions but the law applies to a long list of
“welfare benefits” including health insurance. The act requires that funds be handled
prudently and in the best interest of beneficiaries, participants be informed of their
rights, and there be adequate disclosure of a plan’s financial activities. ERISA
6 Paul Fronstin, “Sources of Health Insurance and Characteristics of the Uninsured: Analysis
of the March 2005 Current Population Survey,” EBRI Issue Brief No. 287, Nov. 2005, at
[http://www.ebri.org/pdf/EBRI_IB_11-2005.pdf].

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preempts state laws for issues that “relate to” employee benefit plans. (In other
words, the federal law overrides state laws affecting private-sector employee
benefits). This portion of ERISA was designed to ensure that plans would be subject
to the same benefit laws across all states, partly in consideration of firms that operate
in multiple states. However, laws still apply for issues which involve the “business
of insurance.” The delineation of issues attributable to the phrases “relate to” and
“business of insurance” is not clear, and have led to longstanding debates and active
litigation over the scope of ERISA preemption.7
The core motivation behind the Health Insurance Portability and Accountability
Act of 1996 (HIPAA) is to address the concern that insured persons have about
losing their coverage if they switch jobs or change health plans (“portability” of
health coverage). The act’s health insurance provisions established federal
requirements on private and public employer-sponsored health plans and insurers.
It ensures the availability and renewability of coverage for certain employees and
other persons under specified circumstances. HIPAA limits the amount of time that
coverage for pre-existing medical conditions can be excluded, and prohibits
discrimination on the basis of health status-related factors. The act also includes tax
provisions designed to encourage the expansion of health coverage through several
mechanisms, such as a demonstration project for tax-advantaged medical savings
accounts and a graduated increase of the portion of premiums self-employed persons
may deduct from their federal income tax calculations. Another set of HIPAA
provisions addresses the electronic transmission of health information and the
privacy of personally identifiable medical information (administrative simplification
and privacy provisions, respectively).8
Health Insurance Premiums
The most-current data on employer benefits found that the average annual
premium for self-only coverage was $4,024 in 2005. The average premium for a
family of four was $10,880.9 Together, these premiums represent a 9.2% increase in
the cost for employer health benefits compared to last year’s premiums.10 While this
signals a reprieve from double-digit increases in recent years, the premium growth
rate nonetheless outpaces both wage gains and the growth in prices for all goods and
7 For more information about ERISA, see CRS Report RS20315, ERISA Regulation of
Health Plans: Fact Sheet
, by Hinda Chaikind.
8 For more information about HIPAA, see CRS Report RL31634, The Health Insurance
Portability and Accountability Act (HIPAA) of 1996: Overview and Guidance on Frequently
Asked Questions
, by Hinda Chaikind, Jean Hearne, Bob Lyke, and Stephen Redhead.
9 The Kaiser Family Foundation and Health Research and Educational Trust, Employer
Health Benefits 2005 Annual Survey
, at [http://www.kff.org/insurance/7315/index.cfm].
These averages include both the employer and employee shares of the premium.
10 Other sources of health insurance premiums show comparable trends. For example, see
Mercer press release, “Health benefit cost slows for a third year, rising just 6.1% in 2005,”
Nov. 2005, at [http://www.mercerhr.com/pressrelease/details.jhtml?idContent=1202305].

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services. For 2005, the growth rate for health insurance premiums was more than
twice as much as the growth rates for either overall inflation or workers’ earnings.11
Why Is Health Insurance Considered Important?
While health insurance coverage is not necessary to obtain health care, it is a
useful mechanism for accessing services in an environment of increasingly expensive
health care. As health care costs rise — typically outstripping the change in wages
— more people need greater assistance with covering medical expenses. Health
insurance provides some measure of protection for consumers, especially those who
have limited means or greater-than-average need for medical care.
Health insurance is considered important also because of the well-documented,
far-reaching consequences of uninsurance. For instance, uninsured persons are more
likely to forgo needed health care than people with health coverage. This includes
forgoing services for preventable or chronic conditions which often leads to worse
health outcomes.12 Uninsured persons also are less likely to have a “usual source of
care;” i.e., a person or place identified as the source to which the patient usually goes
for health services or medical advice (not including emergency rooms). Having a
usual source is important because people who establish ongoing relationships with
health care providers or facilities are more likely to access preventive health services
and have regular visits with a physician, compared with individuals without a usual
source.13 Therefore, to the extent that health insurance coverage facilitates access to
medical services, people without coverage face substantial barriers in the pursuit of
the health care they need. For 2002-03, about 9% of nonelderly adults with private
health insurance identified no usual source of care, compared with almost 47% of
nonelderly uninsured adults who reported no usual source.14
The negative consequences of uninsurance extends beyond the persons directly
involved. The Institute of Medicine found that the insurance status of parents affects
the amount of health care their children receive.15 In locations with crowded
emergency rooms, rising uninsurance rates can exacerbate that problem, since
uninsured persons have fewer places from which they can get medical services
compared to people with health coverage. Overcrowding in emergency departments,
11 Sloan Work and Family Research Network, “Increases in Health Insurance Premiums
Compared to Other Indicators, 1988-2005,” The Network News, Oct. 2005, vol. 7 no. 10, at
[http://wfnetwork.bc.edu/The_Network_News/16/The_Network_News_Graphic16.pdf].
12 Kaiser Commission on Medicaid and the Uninsured, “The Uninsured and Their Access
to Health Care,” Nov. 2005 at [http://www.kff.org/uninsured/loader.cfm?url=/commonspot/
security/getfile.cfm&PageID=29284].
13 J.E. DeVoe, et al., “Receipt of Preventive Care Among Adults: Insurance Status and Usual
Source of Care,” American Journal of Public Health, May 2003.
14 National Center for Health Statistics, Health, United States, 2005, Table 82, at
[http://www.cdc.gov/nchs/data/hus/hus05.pdf#summary].
15 Institute of Medicine, Committee on the Consequences of Uninsurance, Coverage
Matters: Insurance and Health Care
, 2001.

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in turn, leads to longer waits for all patients seeking emergency care. Moreover,
many uninsured persons forgo preventive health care and end up developing more
serious conditions requiring complex, expensive medical services. Since health
coverage is positively related to income, uninsured persons are less likely to be able
to afford this level of care. In cases where patients are unable to cover the costs
associated with receiving health services, the facilities that provided those services
must take it as a financial loss (i.e., uncompensated care). These losses can be
staggering. For example, one study estimated that health care providers would
provide nearly $41 billion worth of uncompensated care to the uninsured in 2004.16
Ultimately, though, the costs for caring for the uninsured are “passed down to
all taxpayers and consumers of health care in the form of higher taxes and higher
prices for services and insurance.”17 Taxpayers are affected because the federal
government makes payments to hospitals — for patients enrolled in certain programs
— which take into account the share of poor people treated. The assumption is that
facilities that treat a larger proportion of poor people have a greater problem with
uninsurance and uncompensated care. The federal government also provides grants
to many health centers and other facilities that serve poor communities. In addition,
states and localities fund local health programs, public hospitals, and clinics —
facilities that generally serve an uninsured or medically underserved population.
Health care consumers are affected by uninsurance because in order for physician
practices and hospitals to survive financially they have to make-up the losses they
sustain. Hospitals and physicians may raise rates for certain services or discontinue
unprofitable programs in order to recoup those losses, thereby affecting consumers’
pocketbooks and access to services. Uninsurance, then, has negative health and
financial consequences for uninsured persons, their families, communities, and the
nation as a whole.
Where Do People Get Health Insurance?
Americans obtain health insurance in different settings and through a variety of
methods (see Table 1). People may get it through the private sector, or from a
publicly funded social insurance program. Consumers may purchase health coverage
on their own, as part of an employee group, or through a trade or professional
association. A small minority of employees get health insurance at no up-front cost
because their employer pays the total premium (both the employee and employer
shares of the premium). However, nearly 46 million Americans did not have health
insurance coverage for the entire year of 2004; that is, 15.7% of the total population
were uninsured.
16 J. Hadley and J. Holahan, “The Cost of Care for the Uninsured: What Do We Spend,
Who Pays, and What Would Full Coverage Add to Medical Spending?,” Issue Update,
2004, at [http://www.kff.org/uninsured/7084.cfm].
17 Institute of Medicine, Committee on the Consequences of Uninsurance, A Shared Destiny,
2003, p 122.

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Table 1. Health Insurance Coverage by Type of Insurance, 2004
Population
Coverage
(Millions)
Distribution
Total population
291.2
-
Employment Based
174.2
59.8%
Nongroup
27.0
9.3%
Medicare
39.7
13.7%
Medicaid/SCHIP/State Programs
37.5
12.9%
Military/Veterans Coverage
10.7
3.7%
No Health Insurance
45.8
15.7%
Source: U.S. Census Bureau, Current Population Survey, 2005 Annual Social and Economic
Supplement, Table HI05.
Note: Columns do not add to totals because persons may receive insurance coverage from more than
one source.
Note: The most-recent national data on health insurance coverage is for 2004.
Employer-Sponsored Insurance
Even though examples of health insurance in this country stretch back more than
200 years, most Americans did not have health coverage until the latter half of the
20th century.18 The demand for more workers during World War II and a wage freeze
imposed by the National War Labor Board generated great interest in employer-
sponsored insurance (ESI) as a worker recruitment and retention tool.19 Buoyed by
legislation and court rulings declaring the tax exemption of fringe benefits, and
support from unions for work-based coverage, health insurance became a pervasive
employment benefit.
In employer-sponsored insurance, risk pools may be comprised of active
workers, dependents, and retirees. Insurers use a number of strategies to increase the
likelihood that each risk pool includes a good proportion of healthy individuals, thus
avoiding adverse selection. For instance, insurers may restrict employees’
opportunities to take-up health coverage or switch health plans by designating a
specific time frame each year for such activities (“open enrollment period”). This
strategy decreases the likelihood that people will “game” the system by taking up
coverage only when they plan on using health services (e.g., for pregnancy and birth),
and dropping coverage when they no longer plan to access care. Insurers also may
require the employer to enroll a certain proportion of the firm’s eligible population.
18 See timeline from Employee Benefit Research Institute’s “History of Health Insurance
Benefits,” Mar. 2002, at [http://www.ebri.org/publications/facts/james/dis_0302fact.cfm].
19 Health Insurance Association of America, Fundamentals of Health Insurance, 1997.

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Assuming that the eligible population consists of a good percentage of healthy
people, requiring a certain proportion of all eligibles to enroll leads to an enrollee
population which contains at least some healthy people. Employers also use
strategies to encourage insurance take-up by healthy people. For example, employers
usually pay part (or, in very few instances, all) of the total premium. This practice
makes health coverage a more attractive benefit, even to those who do not plan to use
medical services on a regular basis.
Advantages. ESI plans retain enrollees better than the individual health
insurance market. As previously mentioned, health benefits provided at the
workplace are exempt from income and employment taxes, encouraging the growth
and continuity of employer-sponsored health insurance. Large risk pools with a good
proportion of healthy enrollees tend to be more stable than small pools or those with
a higher proportion of unhealthy enrollees. Given the strategies discussed above to
discourage adverse selection, insurers assume that ESI pools — particularly large,
diverse ones — are relatively stable. Generally, this translates into less volatile costs
and better overall rates in the group market compared to the nongroup market. Also,
large ESI groups can use their size to negotiate for better benefits and lower cost-
sharing, in contrast to individual applicants in the nongroup market. Plan sponsors
negotiate and interact with insurers on behalf of all of their insured members, unlike
in the individual market where each consumer must deal with the insurance carrier
directly in order to apply for and purchase coverage. In addition, there are economies
of scale for enrollees in the group market compared to the nongroup market for
administrative functions such as sales, billing, and customer service. For these
reasons, workers and their families benefit from receiving coverage through the
workplace. For plan sponsors, the main advantage is to use health benefits for
recruitment and retention of workers. This is particularly appealing in a growing
economy — such as during most of the 1990s — when there may be high demand for
workers.
Disadvantages. While there are many advantages to obtaining ESI coverage,
there are challenges as well. From the vantage point of the enrollee, one of the
biggest disadvantages is the general lack of portability. Because ESI coverage is tied
to the job and not the person, any change in employment (such as going from full-
time to part-time status, or changing jobs) may alter the health care providers or
services to which the worker has access, or disrupt health coverage altogether. Also,
in firms that offer health coverage, there is a trade off made between wages and
benefits. For workers who do not take up health insurance from those firms, they end
up accepting lower wages for a set of benefits they do not use. From the perspective
of the sponsor, an underlying challenge is the lack of enrollee awareness of the true
costs of health care. Because the sponsor contributes to the cost of the premium,
enrollees do not bear the full cost of obtaining health coverage. Also, enrollees
generally do not have to cover the entire cost of the services they use, since sponsors
negotiate for lower rates and better cost-sharing arrangements from insurers.
Consumers enrolled in managed care plans particularly are shielded from health
care’s true costs. Some observers contend that this lack of cost awareness gives little
incentive to consumers to utilize medical services prudently, which leads to greater
use of services and greater overall health care expenditures. In addition, sponsors’
efforts to constrain their health care spending — by increasing the employee share
of the premium or cost-sharing — are made even more difficult to justify or

CRS-12
implement. Finally, from the perspective of the federal budget, the tax exclusion of
employer-sponsored health insurance represents a lost source for Treasury funds.
Large vs. Small Groups. The group insurance market often is thought of
as consisting of large and small groups. The underlying reason for this distinction
is rooted in the inverse relationship between insurance risk and group size; i.e., the
risk associated with a group grows as the size of the group shrinks. This concept
affects employers’ offers of health benefits. For instance, a very large employer often
is able to offer multiple health plan options to its members (e.g., the Federal
Employee Health Benefit Program (FEHBP)). A large business can leverage its size
to get a more comprehensive set of benefits. In contrast, small employers are less
able to provide health coverage at all because of the greater risk associated with small
groups. Even when small employers do offer coverage, the benefits are often limited.
Small employers also are much less likely to self-fund health coverage, since there
is a smaller pool for spreading risk and protecting against catastrophic loss.
Furthermore, such entities generally do not have the necessary administrative
capacity to negotiate with multiple provider groups and handle all the day-to-day
operational functions. It is conditions such as these which prompt legislators to
develop proposals for expanding small group participation in health insurance; for
example, by establishing association health plans, and opening up FEHBP to the
small group market.
Association health plans are just one example among the spectrum of entities
which bring groups of people together for the purpose of buying health insurance.
These entities include trade and professional associations that offer health coverage
to their members (“association-sponsored plans”), and small firms that band together
to purchase coverage as a group (“health insurance purchasing cooperatives”). The
premise behind pooling arrangements is to decrease the administrative burden on and
increase the negotiating capacity of participants who cannot afford to offer or
purchase coverage on their own. Around one-third of small firms buy health
coverage through some type of purchasing pool.20
Public Programs
While most Americans with health insurance obtain it through the private-
sector, tens of millions of people get their health care covered through public
programs. Below are descriptions of selected federal and state programs which
provide payments on behalf of many persons who, due to low incomes or high health
care expenses, could not afford health care otherwise.
Medicare. The Medicare program was established in 1965, and is a federal
program for persons age 65 and older and certain persons with disabilities. Medicare
consists of four parts: Part A, Hospital Insurance; Part B, Supplementary Medical
Insurance; Part C, Medicare Advantage (replaced the Medicare+Choice program with
the passage of the Medicare, Prescription Drug, and Modernization Act of 2003
(MMA, P.L. 108-173); and Part D, the new prescription drug benefit also added by
20 For additional information, see CRS Report RL31963, Association Health Plans:
Legislation in the 109th Congress
, by Jean Hearne.

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MMA. The Medicare program provides coverage for a wide range of medical
services, such as care provided in hospitals and skilled nursing facilities, hospice
care, home health care, physician services, physical and occupational therapy,
outpatient prescription drug benefits, and other services. Since its creation in the
mid-1960s, Medicare has provided health coverage to tens of millions of American.
In 2004, the program had approximately 40 million enrollees. Medicare has been so
successful in covering the elderly that the problem of uninsurance usually is
described in terms of the under-65 population.
Medicaid and the State Children’s Health Insurance Program
(SCHIP). Medicaid is the main health insurance program for low-income
Americans. It is a means-tested program, and applicants must meet financial and
other criteria in order to be eligible for program services. Everyone who meets the
eligibility criteria is entitled to Medicaid benefits available in their state of residence.
Medicaid provides coverage for health care and long-term-care services to certain
adults (generally parents and pregnant women), children, the elderly, and persons
with disabilities. It is jointly funded by federal and state governments, and is
administered by the states within federally set guidelines. State Medicaid programs
provide a comprehensive set of services, reflecting its diverse enrollee population.
These programs must provide a set of federally specified benefits, such as hospital
services (both inpatient and outpatient), physician services, nursing home care for
ages 21 and over, home health care for those entitled to services from nursing
facilities, and certain services for children. States may also cover additional optional
services. Some states have used waiver authority under Medicaid to extend coverage
to uninsured persons who do not meet the program’s categorical (childless adult with
no disability) and/or financial tests.21
The State Children’s Health Insurance Program was established in 1997 to allow
states to cover uninsured low-income children whi are ineligible for Medicaid. In
designing their programs, states can choose among three options: expand Medicaid,
create a new “separate state” insurance program, or devise a combination of both
approaches. States that choose to expand Medicaid to SCHIP eligibles must provide
the full range of mandatory Medicaid benefits, as well as all optional services
specified in their state Medicaid plans. States that establish SCHIP programs that are
separate from Medicaid choose one of three benefit options. All 50 states, the
District of Columbia, and five territories have established some type of SCHIP
program. SCHIP’s eligibility rules target uninsured children under 19 years of age
whose families’ incomes are above Medicaid eligibility levels. States may raise the
upper income level for low-income children up to 200% of the federal poverty level,
or higher under certain circumstances.22
21 For additional information about Medicaid, see CRS Report RL33202, Medicaid: A
Primer
, by Elicia Herz.
22 For additional information about SCHIP, see CRS Report RL30473, State Children’s
Health Insurance Program (SCHIP): A Brief Overview
, by Elicia J. Herz, Bernadette
Fernandez and Chris L. Peterson.

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Individual Health Insurance
The individual insurance (“nongroup”) market is often referred to as a “residual”
market. The reason being is this market provides coverage to persons who cannot
obtain health insurance through the workplace and do not qualify for public programs
such as Medicare, Medicaid, or SCHIP. Consequently, the enrollee population for
this private health insurance market is small.
The residual nature of the nongroup market is evident in the demographic make-
up of those who purchase coverage from it. The market is over-represented by the
near elderly (55-64 years old); a group that has relatively weak attachments to the
workplace. The individual market disproportionately consists of part-time workers,
part-year workers, and the self-employed, groups unlikely to have access to ESI
coverage.23 Also, some people use the nongroup market as a temporary source of
coverage, such as those in-between jobs or early retirees who are not yet eligible for
Medicare.
Applicants to the individual insurance market must go through robust
underwriting. Insurance carriers in most states conduct an exhaustive analysis of
each applicant’s insurability. An applicant usually must provide her/his medical
history, and often undergo a physical exam. This information is used by carriers to
assess the potential medical claims for each person. Federal and state requirements
restrict somewhat insurers’ ability to reject applications or design coverage based on
health factors (such as benefit exclusions for certain pre-existing health conditions).
Nonetheless, some applicants are rejected from the nongroup market altogether, and
others who are approved may receive limited benefits or are charged premiums that
are higher than those in the group market for similar coverage.24 Rigorous
underwriting results in an enrollee population that is fairly healthy (three out of four
enrollees report that their health is excellent or very good25), thereby excluding
persons with moderate to severe health problems from the private nongroup
insurance market.
State High Risk Pools
A majority of states have established high risk health insurance pools. These
programs target individuals who cannot obtain or afford health insurance in the
private market, primarily because of pre-existing health conditions. If such
individuals are not eligible for public programs (e.g., their incomes may exceed the
financial eligibility requirements), they have very few options for obtaining care. In
general, high risk pools tend to be small and enroll a small percentage of the
uninsured. As of December 2004, 33 states had high risk pools with participation of
23 D. J. Chollet, “Consumers, Insurers, and Market Behavior,” Journal of Health Politics,
Policy and Law
, Feb. 2000.
24 M. V. Pauly and A.M. Percy, “Cost and Performance: A Comparison of the Individual and
Group Health Insurance Markets,” Journal of Health Politics, Policy and Law, Feb. 2000.
25 General Accounting Office, “Private Health Insurance: Millions Relying on Individual
Market Face Cost and Coverage Trade-Offs,” Nov. 1996.

CRS-15
182,381 enrollees.26 While health benefits vary across states and plans, they
generally reflect coverage that is available in the private insurance market, with
required cost-sharing for enrollees. The majority of high risk pools cap premiums
between 125% to 200% of market rates, and pools often are subsidized through
assessments imposed on insurance companies, general revenue, or other funding
mechanisms.27
The Uninsured
Despite the multiple private and public sources of health insurance, millions of
Americans are without health coverage. In 2004, nearly 46 million people were
without health insurance coverage for the entire year. For the vast majority of the
uninsured, they lack coverage because they cannot access coverage (e.g., their
employer does not offer health insurance as an employment benefit) or they cannot
afford it.
Uninsurance is characterized as a problem of the under-65 population, given the
near-universal coverage of seniors through Medicare. The nonelderly uninsured
population differs from the insured population on a number of key demographic
factors. One of the most striking characteristic of persons who lack coverage is that
a significant proportion are in low-income families. For instance, among all
uninsured persons under age 65, more than half were in poor or near poor families
in 2004.28 Moreover, among nonelderly persons who are poor, almost 34% lacked
health coverage. This contrasts with nonelderly individuals with incomes at or above
200% of the poverty level. For these persons, only 12% had no health insurance.29
A defining characteristic of the nonelderly uninsured population is that over
80% are persons with ties to the paid labor force, or dependents of such persons.
Even more surprising is that nearly 55% of the nonelderly uninsured were workers
with full-time, full-year status, or the dependents of those workers. While such
findings may be counter-intuitive, there are multiple reasons why employed persons
and their families may lack health coverage. For example, a worker may be offered
health insurance by his/her employer, but declines it because he/she thinks it is too
expensive. An employee may work for a small firm which is less likely than a large
firm to offer health insurance as a benefit. A low-wage employee, even working full
time, is less likely to be offered health insurance at work and less likely to be able to
afford it than higher-wage workers in the same firm. Finally, a healthy worker may
26 States with high risk pools: AL, AK, AR, CA, CO, CT, FL, ID, IL, IN, IA, KS, KY, LA,
MD, MN, MS, MO, MT, NE, NH, NM, ND, OK, OR, SC, SD, TX, UT, WA, WI, WV and
WY.
27 For additional information about state high risk pools, see CRS Report RL31745, Health
Insurance: State High Risk Pools
, by Bernadette Fernandez and Julie Stone.
28 The poverty level for a family of four was an annual income of $19,307 (weighted
average) in 2004, at [http://www.census.gov/hhes/www/poverty/threshld/thresh04.html].
29 For additional information about health insurance coverage, see CRS Report 96-891 EPW,
Health Insurance Coverage: Characteristics of the Insured and Uninsured Populations in
2004
, by Chris L. Peterson.

CRS-16
be willing to take on the risk of being uninsured and choose not to purchase
insurance at all. So despite the dominance of employer-sponsored health insurance,
the dynamics of work, insurance risk, and financial resources intersect to impede the
coverage of all workers and their families.
The problem of the uninsured is a paramount health care concern to many
policymakers and legislators. One of the topics of ongoing debate is the overall
number of uninsured and the direction of the uninsurance rate. These issues have
generated some controversy over dueling analyses which show slightly different (and
sometimes, moderately different) findings. But despite the forceful discussions
regarding trends in uninsurance, the year-to-year changes in the uninsurance rate
actually are small. For example, from 1987-2004, the change in the uninsurance rate
has been less than 1% from year to year.30 Nonetheless, tens of millions of
Americans were without coverage during that time period. Such circumstances beg
the questions: why does pervasive uninsurance persist (even during the robust
economy of the mid-1990s), and what are the implications for legislation and public
policies to expand health coverage?
How Are Health Benefits Delivered And Financed?
Given the complexity of the health care system overall, it is no surprise that
health benefits are delivered and financed through different arrangements. Those
arrangements vary due to numerous factors such as: how health care is financed,
how much access to providers and services are controlled, and how much authority
the enrollee has to design her/his health plan. While delivery systems may share
certain characteristics, general distinctions can be made based on payment, access,
and other critical variables.
Indemnity (Traditional) Insurance
Under indemnity insurance, the insured person decides when and from whom
to seek health services. If the services the enrollee receives are covered under his/her
insurance, the enrollee or the enrollee’s provider files a claim with the insurer. Thus,
insurers make payments retrospectively (i.e., after the health services have been
rendered), up to the maximum amounts specified for each covered service. In this
model of health care delivery, the financing of health services and the obtaining of
those services are kept separate.
This bifurcated arrangement was unquestioned for a time. But as medical costs
began to rise, sometimes faster than other sectors of the national economy, many
observers criticized this delivery model as contributing to increasing expenses.
Because providers were compensated on a fee-for-service basis, some argued that
providers were not given incentives to provide efficient health care. In fact, some
critics accused health care practitioners and institutions of providing an over-
abundance of health care in order to generate greater revenue. By the early 1970s,
30 Data available at [http://www.census.gov/hhes/www/hlthins/historic/hihistt1.html].

CRS-17
legislators, analysts, and others expressed considerable interest in alternative models,
such as managed care models, with cost control as a key feature.
Managed Care
While managed care means different things to different people, several key
characteristics set it apart from traditional (indemnity) insurance. One of the main
differences is that the service delivery and financing functions are integrated under
managed care. Managed care organizations (MCOs) employ various techniques to
control costs and manage health service use prospectively. Among those techniques
are restricting enrollee access to certain providers (“in-network” providers); requiring
primary-care-physician approval for access to specialty care (“gatekeeping”);
coordinating care for persons with certain conditions (“disease management” or “case
management”); and requiring prior authorization for routine hospital inpatient care
(“pre-certification”). MCOs may offer different types of health plans that vary in the
degree to which cost and medical decision-making is controlled. As a consequence,
enrollee cost-sharing also varies. Generally, the more tightly managed a plan is, the
less the premium charged. Other distinguishing features of the managed care
approach include an emphasis on preventive health care and implementation of
quality assurance processes.
Managed care was touted as the antidote to rapidly rising health care costs.
Starting with the passage of federal legislation in the 1970s which supported the
growth of managed care (specifically in the form of health maintenance organizations
(HMOs)), the number of MCOs grew quickly. Increased market competition among
these organizations led to decreases in premiums, in order to gain market share. With
high medical inflation in the 1980s and early 1990s, enrollees flocked to these less-
costly managed care plans. By the mid-1990s, more insured workers were enrolled
in HMOs than any other health plan type, and health insurance premiums had
stabilized.
But in the latter half of the 1990s, a “backlash” of sorts against managed care
grew.31 Some enrollees had grown weary of provider and service restrictions. Many
MCOs that had increased market share through artificially-low premiums began to
raise them in order to increase revenue.32 Consumers and others accused the
managed care industry of caring more about controlling costs than providing health
care. Some providers resented the role managed care played in medical decision-
making. Many enrollees began to leave HMOs. The industry responded by
developing insurance products that were less-tightly managed, but more costly.
Some traditional HMOs widened their provider networks and eliminated the
gatekeeping function, while employers began to offer plan types that were less tightly
managed, such as preferred provider organizations (PPOs). In fact, by the end of the
31 Richard Kronick, “Waiting for Godot: Wishes and Worries in Managed Care, “ Journal
of Health Politics, Policy and Law
, vol. 24, no. 5 (Oct. 1999), pp. 1099-1106.
32 Jon Gabel, et al., “Job-Based Health Insurance in 2001: Inflation Hits Double Digits,
Managed Care Retreats,” Health Affairs, vol. 20, no. 5 (Sept./Oct. 2001), pp. 180-186.

CRS-18
1990s, more people with work-based health coverage were enrolled in PPOs than in
HMOs.33
As the influence of managed care waned and health care costs began to rise at
an increasing pace during the late 1990s, the impact on consumers began to be felt.
For example, in the employment setting, employers absorbed the extra costs at first
in order to recruit and retain workers during the booming economy of the mid to late
1990s.34 But as the economy soured, employers began to pass these expenses along
to enrollees in the form of greater cost-sharing.35
Consumer Driven Health Care
By the end of the 1990s, large increases in health costs again became
commonplace. With the belief by some observers that the age of managed care was
over, they began to search for alternatives. Consumer driven (or consumer-directed)
health care have been offered as one such option.
Consumer driven health care refers to a broad spectrum of approaches that give
incentives to consumers to control their use of health services and/or ration their own
health benefits. In the workplace, at one extreme employers may choose to provide
an array of insurance products from which workers can choose, while at the other end
an employer could increase wages but not offer any health coverage allowing workers
to decide how to spend that extra money to meet their health care needs. Within
those two endpoints, the consumer directed approach varies in the degree to which
consumers are responsible for health care decision-making.36
For example, one health benefits option that is at the heart of discussions about
consumer driven care is the health savings account (HSA). Under this approach, the
consumer is responsible for management of the account. HSAs are investment
accounts in which contributions earn interest tax free. Consumers, their employers,
or both may make contributions to HSAs. Consumers withdraw funds on a tax-free
basis to cover medical expenses not covered by health insurance. Unused
contributions roll over to the next year. HSAs must be paired with high-deductible
health plans. If the HSA funds are exhausted and the deductible level has not been
reached, the consumer is responsible for covering that gap. Once the consumer’s
spending reaches the deductible level, then coverage from the high-deductible plan
takes effect. HSAs received a legislative boost when they were authorized in
33 American Association of Health Plans, “Health Plans and Employer-Sponsored Plans,”
Oct. 1999. Available at [http://www.ahip.org/content/default.aspx?bc=41|331|366].
34 Jon B. Christianson and Sally Trude, “Managing Costs, Managing Benefits: Employer
Decisions in Local Health Care Markets,” Health Services Research, pt. II, vol. 38, no. 1,
(Feb. 2003), pp. 357-373.
35 Jon Gabel, et al., “Job-Based Health Benefits in 2002: Some Important Trends,” Health
Affairs
, vol. 21, no. 5 (Sept./Oct. 2002), pp. 143-151.
36 P. Fronstin, ed., Employee Benefit Research Institute, Consumer-Driven Health Benefits:
A Continuing Evolution?
, 2002.

CRS-19
November 2003 by the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (P.L. 108-173).37
While consumer driven health care can take on many forms, the premise
common to all of the approaches is that by making enrollees more responsible for
their own health care, it creates incentives for people to use services prudently. The
expectation is that greater cost-consciousness on the part of consumers will result in
lower overall health costs. In essence, the service and cost control functions
administered by MCOs and providers under managed care shifts to enrollees under
the consumer driven health care scenario.
Proponents of consumer directed plans assert the merit in having people take
increased responsibility for their own health care use and expenses. They predict that
this approach will lead to better-informed consumers, more appropriate use of health
services, and lower overall spending on health care. Opponents express concern that
this approach does not recognize the possible range of health conditions in an
enrolled population. They argue that these plans benefit the young and healthy who
use relatively few services, and, therefore, would not need to expend a great deal of
time and energy making these health care decisions. However, these plans impose
a greater burden on individuals with moderate to severe health conditions because of
their greater-than-average use of medical services.
37 For more information about HSAs, see CRS Report RL32467, Health Savings Accounts,
by Bob Lyke, Chris Peterson, and Neela Renade.