A payer (aka payor, health plan, health insurer) is an entity that covers the risk of an individual incurring medical expenses. The individual (aka patient or beneficiary), along with oftentimes their employer, pays monthly premiums to the payer with the expectation that major medical costs down the line will be covered.

Distribution of US patients by health insurer, in rough numbers, 2023

Medicare

Medicaid

Health Plan Org Structure

Health Insurance Across the Globe

Duals

The Exchange

Why we have health insurance

Many people question the need for health insurance. Millions barely interact with the healthcare system and pay upwards of $10K a year, most of which is deducted from their paycheck. In this way, the system relies on healthy people contributing and covering the costs for those who need care - and ensures that when healthy people eventually need care, they won't be left without support.

At the highest level, it makes sense to have insurance protect against the “common hazards of life.” With and without a health insurance system, Americans have provided essential medical care to those unable to afford it, driven by our natural impulse to help those in need. The first hospitals were created because “there was no other option. Fellow creatures could not be allowed to die in the streets.” Today, the federal government reimburses hospitals for providing mandatory emergency healthcare services to certain uninsured, undocumented immigrants. In total, we spend over $40 billion a year on health care for the uninsured. Without broad coverage, individuals who forgo buying insurance while they are healthy might rely on “charity care” when they become sick, and the system will not be able to support itself. The book We’ve Got You Covered and many others argue for mandatory health insurance to solve this problem: “if we are inevitably going to respond when people face acute health problems without the resources to address them, it is better to formalize—and fund—those commitments up front.” In other words, by Edwin Chadwick:

“Once it becomes the recognized duty of the public to provide for the extreme needs of sickness irrespective of whether the individuals could and ought to have made provision themselves it seems an obvious corollary to compel them to insure (or otherwise provide) against those common hazards of life [otherwise] they would become a charge of the public.”

The different types of payers

Public payers are funded by the government and taxpayers and administered by the Centers for Medicare & Medicaid Services (CMS). Roughly 150M Americans have government funded insurance.

• Medicare funds healthcare for individuals over 65 (and those disabled / with end-stage renal disease). The program is run by the federal government, and rules are set nationally. ~60M Americans are on Medicare (Roughly 50% in Traditional Medicare and 50% in Medicare Advantage).
  • Medicare Part A covers inpatient care (i.e., hospital stays). Medicare Part B covers outpatient care (i.e., primary care visits, specialist visits, etc.). Medicare Part C, also known as Medicare Advantage, is an alternative to Traditional Medicare. Medicare Part D covers prescription drugs.
  • In Traditional Medicare (aka Medicare fee-for-service), providers are paid by the government, for each service they perform (i.e., fee-for-service). This plan gets you Parts A and B but doesn't come with Medicare Part D (you can sign up for this drug benefit separately).
    • Traditional Medicare patients can also be a part of an Accountable Care Organization (ACO), a shared savings program with Traditional Medicare. While providers often still receive fees for their service (i.e., category 1 in the APM framework), they become eligible for shared savings if their performance year costs fall below the benchmark (category 3).
  • Medicare Advantage (MA) is run by private entities, with the four major payers covering 70% of individuals with an MA plan. The federal government pays these private payers a capitated amount each year based on expected costs, and the payer contracts with a network of providers to deliver care. These contracts can be fee-for-service, shared savings or capitation (category 4).
    • This plan gets you Medicare Parts A and B; sometimes dental coverage, vision coverage, hearing coverage, and Part D. Premiums are typically lower in this program, but networks are more limited (i.e., you aren’t covered by as many providers as Traditional Medicare).
• Medicaid is health insurance for eligible, low-income adults, children, pregnant women, and people with disabilities. This program is administered by states, based on federal guardrails, and funded by both states and the federal government.
  • Traditional Medicaid (or Medicaid fee-for-service) is operated by state Medicaid agencies, who pay providers for each service they perform (fee-for-service).
  • Managed Medicaid is run by private Managed Care Organizations (MCOs) who contract with state Medicaid agencies to act as the insurance company and receive a capitated payment. Similar to MA, MCOs contract with a network of providers to deliver care.
• The Exchange (aka Marketplace, Obamacare) is a federal and state-run program established by the Affordable Care Act (ACA) to help individuals and small employers purchase health insurance. The program offers coverage to those who do not qualify for Medicare or Medicaid and do not have employer-provided insurance. Some states run their own marketplaces, while others use the federal platform (HealthCare.gov).
• Dually-eligible beneficiaries (Duals) are eligible for both Medicare and Medicaid due to low income, disability, and/or age. Duals receive Medicare for primary coverage and Medicaid for supplemental benefits like long-term care, dental, and copayment assistance.
  • Coordination between the two programs can be challenging, and the government is trying to get these two plans to coordinate with each other more.

Private payers (aka commercial insurance) fund health insurance separately from the government and typically partner with patients’ employers. H

• Group coverage is when the insurance company covers a group of individuals (typically a company).
  • Fully insured health plans are those where employers pay a fixed premium to a health insurance company to cover their employees’ healthcare costs. The insurer assumes the financial risk and manages claims, while employees may contribute through premiums, copays, or deductibles. Therefore, it is less risky for employers but more expensive.
    • No matter how sick employees get, employers pay the same.
    • The health plan or a Third-Party Administrator (TPA) handles the administrative items and assumes the risk, for which it charges a premium. That’s why fully insured is a much more expensive option for the employer.
  • Self-funded (aka self-insurance plans or administrative services only (ASO)) ****is when employers pay a health plan for administrative purposes but cover the actual claims payments themselves.
    • The employer is taking on more risk because the more its employees get sick, the more they will be paying.
    • Most large employers are self-funded because it’s less expensive and they can spread the risk over their population.
    • Stop-loss insurance is coverage that protects the company by limiting its financial liability, ensuring they are only responsible for payments up to a certain threshold. Anything above that amount is paid in full by the insurance company.
• Individual health insurance (aka non-group health insurance) refers to health insurance policies that are purchased by individuals or families directly from a health insurance company, rather than through an employer or a government program.

How patients and payers pay providers

The medical billing is the process by which money flows between patients, doctors, and payors. This section provides a simplified description of the process.

From a patient's perspective...