How Does Commercial Health Insurance Work?

Put plainly, commercial health insurance is any healthcare policy that is not administered or provided by a government program. Most commercial health insurers are publicly traded companies that operate to generate a profit for shareholders. Some commercial health insurers are non-profit organizations. The Blue Cross Blue Shield Association, for instance, has member organizations that operate for profit, while in some states the local Blue Cross Blue Shield plan is a non-profit entity.

This article does not describe every possible policy, but it does provide a broad overview of the field. Commercial insurers must meet the requirements of the state insurance agency in which they conduct business. Additionally, each state has different legislation that dictates what services commercial policies are mandated to cover, how they reimburse patients and providers, and what fiscal reserves they need to keep on hand to meet their obligations to beneficiaries. Within these guidelines, commercial healthcare payers are allowed to offer whatever services they fell will make their plans more attractive to potential customers.

Most people purchase their health insurance through their employer. Employers contract with commercial insurers to provide healthcare benefits to their employees to retain employees, to make the workplace more attractive to job applicants, and for tax savings realized for non-monetary workplace benefits. Because employers can offer a larger number of premium-paying customers to insurers, the rates charged per beneficiary is less than if a person were to purchase health insurance on his or her own. The economy of scale that employers offer insurers makes it worthwhile for insurers to offer a bulk discount. These are known as group plans, rather than individual plans. Individuals who are self-employed or who opt to otherwise purchase health insurance on their own, pay more than people who participate in a group plan.

How Does Commercial Health Insurance Work?

Professional medical billers who submit claims to commercial healthcare plans are already familiar with the basics of how claims are arranged and services are reported for reimbursement. The terms are similar to the process used to submit claims to government healthcare programs. The Centers for Medicare and Medicaid Services (CMS) devises payment and coding methodologies to manage the national healthcare reimbursement system. Medicare Part A covers inpatient services that patients receive, while Medicare Part B covers outpatient services. While the reimbursement policies of these programs differ, they are comprehensive, and many commercial insurers employ them in their own proprietary contracts with healthcare providers and beneficiaries.

All healthcare claims are submitted to third-party payers in industry-standard medical code. The definitions and uses of codes are guided by various professional bodies, such as the American Medical Association, and the American Hospital Association, as well as CMS. Private insurers are free to develop their own interpretations of procedure codes, and combinations that they feel should not be reported together. A commercial insurer’s interpretations are published in their own proprietary manuals that are available to healthcare providers who contract to provide services to the insurer’s patients.

Additionally, private health insurance policies can publish medical policies to guide contracted providers in how certain services should be delivered, and in which situations. When the definitions of procedure codes are made available to the industry, the procedures are not generally tied to specific conditions. Private insurers may rule that some procedures are not medically necessary when reported with a set of diagnosis codes. Likewise, they can rule that a procedure is experimental, or that is does not provide a proven medical benefit. Based on these policy determinations, some services may be contractually non-covered.

Healthcare providers are not forbidden to perform non-covered services, that is left up to their professional judgement. According to the terms of their contracts with private payers, healthcare providers are not allowed to receive reimbursement for these procedures. Some policies prevent providers from billing patients for the non-covered services, while others may require that the patient sign an informed consent that he or she will be responsible for the charges, prior to receiving services.

How Commercial Healthcare Plans Pay for Medically Necessary Services

Commercial third-party payers pay for services according to a regularly updated fee schedule. In the outpatient setting, each code is assigned a fee that is considered reasonable and customary for the service in a given geographic area. Inpatient services are generally paid to hospitals based on the condition for which the patient was admitted.

Most fee schedules in the United States are determined through the Resource-Based Relative Value Scale (RBRVS), which is an algorithm that considers the average expense of various factors involved in delivering healthcare. The definitions of codes are examined and compared to the average cost involved. RBRVS considers the physician work involved in providing the service, the overhead expense, and the malpractice liability.

Healthcare providers are paid according to the established fee schedule or their actual charges, whichever is less. If a provider’s charges exceed the reimbursement set by the fee schedule, they adjust the claim, and write off the excess charges as determined by the fee schedule. For this reason, patients who are covered by health insurance, whether commercial or a government program, utilize routine services and care at a greater rate than people without insurance. When providers contract with a commercial health plan, they agree to treat the patients covered by that plan at a wholesale rate, rather than the retail rate that uninsured patients pay.

Types of Commercial Health Insurance

Most commercial healthcare insurance policies are structured around a Health Maintenance Organization model (HMO), or as a Preferred Provider Organization (PPO). Currently, most insurers pay according to a fee-for-service method that reimburses providers for delivered services regardless of outcome. While there are indications that the industry may move in another direction, this currently remains the dominant standard. CMS and some larger commercial health insurance carriers have developed special codes to indicate the quality of care being delivered, based on documentation in the patient’s medical record, in order to track treatment protocols and outcomes. When these codes are reported consistently, providers may be entitled to additional payments if they meet pre-determined reporting thresholds.

An HMO uses primary care providers (PCPs) as gatekeepers who coordinate care with specialty healthcare providers. A PCP evaluates a patient and determines the appropriate plan of care, making a referral to a specialist, or ordering additional tests to determine the severity of a condition, and how it may best be treated. The HMO model of healthcare delivery is designed to provide optimal treatment as prescribed by a professional.

A PPO plan allows patients to see any healthcare provider within a commercial plans’ network of contracted providers without coordination by a PCP. While most specialty services in an HMO plan require referrals and prior authorization before specialty services are delivered, PPO plans leave more discretion to the patient to decide the course of his or her treatment. Because of the freedom granted in a PPO plan, these policies are usually more expensive for basic coverage than an HMO plan.

There are also catastrophic care policies that only cover inpatient stays, or which cover outpatient services only after a patient meets a high out-of-pocket deductible. There are also commercial healthcare plans that are designed to only cover specific conditions, such as cancer insurance.

No matter what kind of commercial healthcare plan a patient belongs to, professional medical billers are familiar with the terms of their contractual obligations, how to submit claims to particular payers, what services are covered, and what the patient’s ultimate financial obligation will be after services are received.