A payor, also known as health plan and/or insurer, is an entity (either private or public) that covers the risk of a person incurring medical expenses.

The Different Types of Payors

Public payors are funded by the government…

• The Centers for Medicare & Medicaid Services (CMS) is the government organization that handles all things Medicare and Medicaid.

Medicare provides government-funded healthcare for individuals over 65 and those who are disabled where rules are set nationally.

• Medicare Part A covers inpatient care. Medicare Part B covers outpatient care. Medicare Part C is medicare advantage, a capitated program for providing Medicare benefits by paying a private-sector health insurer a fixed payment for an enrollee. Medicare Part D covers prescription drug coverage.
• Medicare vs Medicare Advantage:
  • Traditional Medicare gets you Medicare Part A and Part B.
    • It doesn't automatically come with Medicare Part D but an individual can sign up for it. This addition was not allowed before the Medicare Modernization Act.
  • Medicare Advantage (also known as Part C) gets you Medicare Part A and B and sometimes dental coverage, vision coverage, hearing coverage, and Part D.
    • Medicare Advantage now accounts for 45% of Medicare enrollees. Lots of innovation in startups is happening here.
      • “Plans like Medicare Advantage because MA generates the highest margins of any insurance product when run well, and it is growing faster than commercial insurance.” - Duncan Reece
    • There are some downsides though…

      • Patients need to see a primary care physician first before seeing a specialist with a narrow network.

        <aside> 💡 “This is true for any insurance product that features a narrow network (Employer, Medicaid, Medicare, ACA, etc). The downsides for patients for MA are well documented by balanced overviews written during open enrollment. Often the complaints, in order are 1) not all doctors are in the network, 2) the plan can feature rules like prior authorization, and 3) for certain patients who can afford supplemental insurance and who have complex health needs, traditional medicare may offer more coverage and lower out of pocket costs.” - Duncan Reece, ex-Iora Health, Mindstrong

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      • There is a 1-5 star rating system for various privately operated MA plans based on consumer experience, outcomes, etc. If a plan has a high rating, they are given more money.

      • To prevent plans from "cherry-picking" less sick individuals so that they get a higher star rating, MA gives plans more money for taking on unhealthier patients (this is called risk adjustment). Companies are now starting to make patients seem more sick than they actually are to get more money.

  • Learn more on AhealthcareZ here.

Medicaid is government-funded healthcare for eligible, low-income adults, children, pregnant women, elderly adults, and people with disabilities. It is administered by states based on federal rules and funded by both states and the federal government. Nearly 90 million Americans are on Medicaid - more than any other payor.

• Traditional Medicaid is run by the federal government, and each state determines eligibility. It is managed at the federal level but states administer each program.
• Managed Medicaid is run by private plans that contract with state Medicaid agencies and managed care organizations (MCOs). They cover ~69% of Medicaid enrollment.

Individual market 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. This type of insurance is also known as non-group health insurance.

The five biggest private health plans have an acronym, BUCAH which includes BlueCross BlueShield Association (BCBS), UnitedHealthcare (which owns Optum, Cigna, Aetna, and Elevance.

Different Payment Models

Fee for Service (FFS) is when payors reimburse providers each time that they see a patient, but also for each individual service provided - sometimes more than one per visit and sometimes not involving a visit. The criticism of FFS is that it can incentivizes providers to provide as many services as possible.

<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/beaed79a-fad4-4557-8ea6-f9d3083be297/1644530923527.jpeg" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/beaed79a-fad4-4557-8ea6-f9d3083be297/1644530923527.jpeg" width="40px" /> “It's true that payers reimburse providers every time they see a patient. I apologize for getting into some semantics here, but I think could be important to be more explicit about how the amount a provider gets reimbursed depends on the codes/procedures/tests they bill (e.g. using HCPCS) over the course of a visit. so more / more complex billing codes --> higher reimbursements (and that's a messed up incentive, esp when patients might not need the care that they're billed for [which is called upcoding])” - Krish Maypole, firsthand

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Value-Based Payment is a “healthcare delivery model in which providers, including hospitals and physicians, are paid based on patient health outcomes.” - NEJM

• The argument for value-based payment is that it can incentivize the right amount of care relative to FFS but is more time-consuming and complicated to implement.
• There are a variety of ways to structure value-based payment contracts. Providers can be compensated if things go well (upside risk) but also penalized if things go wrong (downside risk).

<aside> ❤️‍🩹 “In fact, most VBC arrangements aren’t based primarily on outcomes. ****Instead, providers are given a monthly payment to care for a population. Typically there are some quality or outcomes metrics, but the primary distinction from FFS is a set pre-payment each month. This was hugely important during the early months of the pandemic, when physician groups paid FFS got creamed (because they weren’t delivering many services) while those primarily paid through VBC arrangements did extremely well (because they received all their contracted revenues but had limited costs).” - Mark Zitter

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• There are some complications though…
  • Only 6% of total commercial dollars as of 2017 came from value-based payment models. Still, by 2020 60% of physician payments had some form of quality and value components.
  • Payors use "benchmark" metrics to see how patients have improved. This structure incentivizes companies to set low benchmarks.
  • Keeping track of patient outcomes is difficult because correlation does not equal causation and patients often switch employers/payers/providers.
  • Similar to Medicare Advantage, plans are incentivized to take on sicker patients (risk adjustment) and companies make their patients look sicker than they actually are.
  • Learn more from Nikhil about the issues with value-based care here.