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I'm here with Professor Lawrence Baker at Stanford Medical School

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and what we're going to talk about now is the overview of the healthcare system-

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-What is the healthcare system?

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Yeah, and who's in it?

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-And who's in it, and what are they doing?

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I think I can give a go at it. And then correct me, expose my ignorance.

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So clearly, you have your providers, those would be your doctors and nurses and all the rest.

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-Hospitals, and pharmacies, all kinds of people . . .

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Okay, so, everyone who is providing healthcare. So that's right over there.

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So that's hospitals, doctors, pharmacies, all the rest.

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And then, they are providing healthcare to someone.

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So those would be the patients. We did that in another color.

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Call 'em patients yes, sometimes you get details like

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people become patients after they need healthcare.

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But some people just have a question, they aren't really patients.

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They're just asking.

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Okay well, what do you call them then?

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Call them the "population."

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Population?

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So just the population of the world, or the country or whatever? People.

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And then, on the other hand now, someone has to pay for this.

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Someone has to pay for this.

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And so for the most part, this is insurers.

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Yep, insurance companies. In the old days - like if you go back a hundred years -

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we didn't really have insurance. We had patients and providers,

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and patients would, if they had a question, they had a concern,

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they would go to the provider, they'd make some deal, pay him some money,

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do some service for them, and work it out.

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We got insurance companies really only in the last hundred years,

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maybe really starting in the US in maybe 1930, 1940

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they started to become popular. So that's kind of a new renovation.

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And those three things work together.

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And the general term - and this is a word I've seen a lot -

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it's sometimes a little confusing, because it's very close to "payER,"

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You hear, it's kind of like, "payORS."

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That would be including, that's anyone who's paying for the service.

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Yes.

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And insurance companies would be included there.

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Right. So we have - we call them payors, sometimes we call them health plans,

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because they arrange for some of the care that people get.

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You know, payors could be private companies, private insurance companies,

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or they could be government payors,

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government insurance companies like Medicare.

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And the insurance companies themselves, they're not doing this,

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you know, just out of the goodness of their hearts.

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Someone is paying them.

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Right.

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And for the most part, in the United States, it tends to be employers.

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Right. So we've made another arrow on your diagram here.

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That would be from the population, or maybe from the patients,

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to the insurance companies, that provides the money

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for the insurance companies to use to pay for the providers.

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So patients might buy an insurance company, or buy an insurance company...

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Buy an insurance policy! [chuckling]

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Patients might buy their own policy, go buy an insurance policy,

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pay them a premium directly, the insurance company collects that money.

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Or, for most people, they work for an employer.

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The employer makes the arrangement to buy that insurance,

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and then implicitly charges the population, the patients, for that,

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maybe directly by having them contribute some of their salary;

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maybe implicitly, by just reducing the amount of cash they give them every month

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and instead giving them this insurance policy.

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I see.

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So, people do that. And the other piece that's floating around in here

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is that in some cases, the population pays taxes to the government -

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Oh right, right.

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- that then functions essentially as an insurer like the Medicare program,

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where there's insurance provided to people, it's paid for by taxes.

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So there's different funds flows going around here, but always money going

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from patients to insurers, through employers, through taxes, by direct payments.

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Those insurers collecting the money, and then paying for a bunch of the care

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that's provided by the providers. That's the basic arrangement.

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There's one more tiny piece, which is,

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at some times, the patients pay the doctors or the hospitals directly.

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You know, you go, you have a $20 copayment.

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And so there's a small payment that goes back and forth.

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Right. Your copay is kind of there, just so that,

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it kind of makes insurance company feel good that you're not just using it willy-nilly.

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That you have to pay your, you know, whatever, ten dollars, or fifty dollars.

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Absolutely. So, insurers know that once they start paying the providers for the care

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and the patient has it totally free, people might use stuff that,

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you know, might be worth a little tiny bit,

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but it costs a lot for everybody to pay for.

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So if you put a copayment on there, it makes people think twice

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about using things that they don't really need.

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Right, that makes complete sense.

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And then within this ecosystem we hear a lot about HMOs,

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that - in my perception - is a combination of the insurance company

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and the provider. It's kind of in one package.

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Right. So, over time, the US has had different kinds of insurers out there.

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In the private market especially, there's been a lot

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of innovation in the last 30, 40 years, in types of insurers that are out there.

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So we have different insurers that have behaved in different ways

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as we've gone through those evolutionary cycles.

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So one version of that is what we call an HMO,

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a Health Maintenance Organization, and that's really just jargon;

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you have to dig into it to figure out what it means.

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But in a lot of cases what that is is a company that's acting as insurance;

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so you pay a premium to them if you're a patient, or a person . . .

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and you buy some coverage, and then they'll cover your care;

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but they'll do that by trying to integrate themselves with the providers.

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And so, the organizations either are integrated

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because the HMO hires doctors directly,

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or maybe owns the hospitals, like Kaiser Permanente, for example;

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or on some cases, it's a contractual relationship. It's not exactly the same . . .

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Oh right. So not all of it is tightly linked to, like a Kaiser,

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where it's like you go to this building that says "Kaiser" on it,

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and that's where your doctor is.

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It could be doctors just have their practices,

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but they're tightly linked with a - I think I saw what, Blue Shield? or one of those.

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Yeah, Blue Shield, or Aetna, or Cigna, some of these different companies.

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And you can start to dig into the details, and every one will be a little bit different from the other.

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But they're contractual relationships.

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And the difference - and I think this is something everyone faces

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when they, you know, sign up with insurance with their employer -

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I had to do it recently - is, you know, they always say,

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you have to pick HMO versus PPO, and they're within the same policy;

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and so my perception is, HMO is - they - you have a set list of doctors,

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that they probably pre-negotiated pricing with.

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Yeah. So, the difference between HMOs and PPOs gets a little bit into the . . .

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OK, I don't want to get too far into the weeds . . .

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. . . But, we can sort of think about it

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in the way that you're talking about it.

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So, an HMO will have a list of doctors that you're supposed to see,

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and you'll have to go see doctors on that list.

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In a stereotypical one, if you don't see the doctors on that list,

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the insurance company's not gonna pay for your care.

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You're gonna pay yourself. And in a stereotypical HMO,

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there's gonna be a fairly tight management

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between the insurance company and the doctors about what's gonna be done,

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what's allowable, and so on.

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And in the most tightly linked case, they'll be like, the same . . .

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the doctor will be employed by the company.

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Right, that's like -

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-Right, Kaiser. As you kind of think about it as a spectrum.

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If you move a little bit away from that to a PPO,

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what's happening in PPOs is you're still gonna get a list;

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so you're gonna be encouraged to see those doctors,

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but maybe there'll be a little more flexibility.

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Like, if you decided not to see someone on the list,

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the plan would still pay some amount,

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maybe not as much as they would if you saw someone on the list,

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but something; whereas in an HMO, maybe nothing.

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And the plan will probably work a little less hard

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at managing what those doctors are doing,

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to try and limit access to, say, high-cost services.

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HMO will tend to work harder, PPO tends to work a little less hard.

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So, it's a little bit of a spectrum.

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You're kind of moving from more managed and more concentrated to a little less managed.

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But still more so than the system we had, say, in the 50s or 60s,

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where anybody went to any doctor and any doctor did whatever they wanted,

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and the insurance company just paid the bill;

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and there was no integration. So, it's a little bit of a . . .

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So that's the main motivation why insurance companies are trying to get

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kind of more integrated with the providers,

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is because just like you said, in the 50s and 60s,

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you have the provider providing a service,

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and obviously the patient would like the service,

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and then you have a third party paying for it.

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And so there's no check on, you know,

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the person deciding on the service and the person getting it says,

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"Yeah! Let's get more service!" And someone else is . . . Right.

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That's just, we've created a big issue.

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Insurance companies are kind of an interesting thing in the health policy world.

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Because we have to have them.

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We have to have them to manage the risk associated with getting sick.

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You can get sick today and get a huge bill.

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And so, we can't leave people on their own for that;

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we gotta have insurance companies.

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But as soon as you create insurance companies,

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and I can have implicitly all my neighbors pay for the health care that I want,

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then I might start using things that turn out to be inefficient;

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and so, you gotta have them, insurance companies,

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but you gotta manage what happens when you have them also;

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and so that's the integration between providers,

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or copayments and utilization review;

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and all these things are basically attempts by insurance companies

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to try and manage what economists would call the "moral hazard,"

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using additional services that you don't necessarily need,

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because everybody else is gonna pay for it for you.