School is in session

OK class, let's sit down and get ready for our next lesson. Today we're going to talk about health insurance. Just for fun, we're going to pretend that we're starting our very own health insurance company (also called a health plan, or in some cases, a "payer"). We're going to name our company "Very Own Health Plan" or VOHP. Is everyone excited?? Great, let's get started.

There are several things VOHP has to do before we can open for business. First, we've got to get some doctors and other health care providers to agree to give services to the people that buy our insurance. We're going to call them our "provider network." Then we've got to find some places where these providers can take you if you get sick, like hospitals, clinics and minor surgical centers. We'll call these places our "facility network." Because these providers and facilities expect VOHP is going to send them a lot of new customers, they're going to give us big discounts on their standard prices. We'll put those prices (called a "fee schedule") into a contract, and we'll make the providers and facilities sign it. This way we'll be sure to know how much to pay them, and they know how to act properly with our customers.

Next, we've got to get ready to sell our health insurance. Because we're really not that great at selling yet, we're going to work with some other people that will sell our insurance for us. They're called "brokers," and it's their job to help companies buying insurance figure out which plan is best for them. Sometimes this is complicated. We'll have to tell these employers about our networks, and how geographically close/far they are to their employees, and whether or not switching health plans will cause a lot of employees to go to different doctors. To compete with other insurance companies, we'll have to prove to the employer that we can make their lives a lot easier with cool services like a 24-Nurse Line, online access to their records, fast, courteous customer service and even an online database of health conditions so they can look up information about their aches and pains. We'll call all of these things "differentiators" that we use to set ourselves apart for our competition.

Last, we need to be ready to manage paying the providers and facilities for the care they provide to our clients. People get sick a lot. We'll need to set up a database of our providers and facilities and the prices we've agreed to pay them so we don't pay the wrong people or worse, pay too much. It's no big deal if we forget to pay, because someone will eventually remind us. We're also going to have to figure out how to keep all this data up-to-date, because those silly doctors are always moving and changing their names and dying. Dead doctors are the worst because sometimes really unscrupulous people figure out we don't know they're dead and submit fake claims to us. And sadly, we'll keep paying them until we know otherwise. So, these systems are really important, because if we can pay a claim automatically, and detect fraud easily, it'll save us a lot of money. And that's a good thing.

Now for purposes of this class, we're not going to go into much more detail. We've actually skipped a BUNCH of stuff we have to do to be in business. Things like HIPAA privacy and security compliance, accreditation, Medicare/Medicaid reimbursement, federal/state-mandated reporting, pharmacy formularies, credentialing, peer review, etc. This health insurance stuff can be HARD sometimes.

OK, so let's open for business! Everyone still awake? Someone please wake up SLP on the back row.

Now that we're open, we've got to make money. If we offer great services, have a lot of doctors in our network and have low PMPM prices, the brokers will sell a LOT of insurance for us. This is good, because every company that signs up is going to pay us a per member, per month (PMPM) fee for all of their employees. This is our revenue. In return, we're going to have to provide several services:

1) A network of providers and facilities with reduced rates
2) A guarantee to pay portions of certain types of care under certain conditions
3) Certain prescription medications for certain conditions
4) Administrative services (i.e., claims processing, service differentiators, etc.).

These are our expenses. To be profitable, VOHP has to make sure we take in more revenue than we spend on the above four things. Here's where it gets tricky. The revenue we take in is FIXED, but any one of our client's employees can get sick at any time. So there's a chance that we may have to spend a LOT more than we make. We'll call that "risk." The way we're going to make sure we stay afloat is by trying to predict this risk the best we can.

We'll accomplish this by hiring an outside firm with super-smart geeks with super-fast computers and green-shaded visors (also called actuaries) that use mathematical probability to predict, with great precision, how often people from any demographic group are likely to stub their toe, have a heart attack, need chemotherapy, have a kidney stone, etc. They'll do this by studying data from millions and millions of previously submitted health care claims. Based on what they tell us, we'll set our PMPM price accordingly. So by managing risk and keeping our expenses low, we can make healthcare affordable, amass huge sums of money and always show positive growth (people get sick, even in recessions). Ta Da!

So I know this was boring, but I hope you liked the class. I just wanted to have a diversion from the ordinary ramblings, and god knows you needed to give your brain a break from reading about people's dogs and what time they pee in the morning. Maybe one day I'll tell you about the trends going on in health care right now that will soon make you go broke. Woo hoo!

Class dismissed. And hey... who took my apple?