Cost containment principles

Traditional Insurance Cost Containment

With traditional insurance, cost containment comes in the form of coinsurance, copayments and deductibles. These terms can often be confusing to the patient as well as the Case Manager. To clarify, a copayment is a set amount the patient pays each time a specific service is rendered. Examples are a $20 copayment with each doctor office visit or a $15 copayment for a prescription refill. Each time a patient goes to the doctor or has a prescription refilled, they will be charged this amount, regardless of if their deductible has been met or not.

The deductible and coinsurance work together. The deductible is a specific amount of money the patient must pay in covered expenses, before the insurance company begins paying.  Once the deductible has been paid, the coinsurance kicks in with the insurance company and the patient splitting the remaining costs. For example if a patient had a procedure that cost $5,000 and had a $500 deductible and 80%/20% copayment, the patient would be responsible for the $500 deductible, after that the insurance company would pay 80% of the remaining $4,500 ($3,600) and the patient would pay 20% ($900). The patient would be responsible for $1,400 in total, the $500 Deductible and the $900 copayment.

Managed Care Cost Containment

In managed care, medical services are coordinated by the insurance company to decrease health care costs.  The two main types are Preferred Provider Organizations (PPO’s) and Health Maintenance Organizations (HMO’s).

PPO’s contain cost by negotiating discounts for services with hospitals and physicians as a condition for being included in the organization. Receiving a discount allows the PPO to reduce health insurance premiums and health care expenditures. In turn, the patient receives a greater percentage of cost covered by the insurance company if they stay with providers that are in the PPO. The patient may choose a provider that is not in the PPO, but will pay a higher out of pocket amount.HMO’s provide health care services to members for a set yearly fee per member. Providing too much or too costly care, could cause them to lose money. Preventative care is encouraged with this type of structure, in an attempt to avoid more costly corrective care. HMO’s often have a Primary Care Provider (PCP) that acts as a gatekeeper. The gatekeeper role is to provide medical and preventative care and to coordinate care that is outside of their scope of practice.

Medicare and DRG Cost Containment

Instead of paying all costs related to a patient’s treatment during their hospital stay, Medicare implemented the diagnosis related group (DRG) system. The DRG system is a fixed payment, based on the cost of treating the patient’s diagnosis. This predetermined amount will be paid regardless of the actual cost of treating the patient. This is a huge incentive for hospitals to decrease costs. 


Below is a list of key definitions from The Commission for Case Management Certification website.

Coinsurance– A type of cost sharing in which the insured person pays or shares part of the medical bill, usually according to a fixed percentage.

Copayment: A supplemental cost-sharing arrangement between the member and the insurer in which the member pays a specific charge for a specified service. Copayments may be flat or variable amounts per unit of service and may be for such things as physician office visits, prescriptions, or hospital services. The payment is incurred at the time of service.

Deductible_ a specific amount of money the insured person must pay before the insurer’s payments for covered healthcare services begin under a medical insurance plan. 

Preferred Provider Organization (PPO): A program in which contracts are established with providers of medical care. Providers under a PPO contract are referred to as preferred providers. Usually the benefit contract provides significantly better benefits for services received from preferred providers, thus encouraging members to use these providers. Covered persons are generally allowed benefits for nonparticipating provider services, usually on an indemnity basis with significant copayments.

Health Maintenance Organization (HMO): An organization that provides or arranges for coverage of designated health services needed by plan members for a fixed prepaid premium. There are four basic models of HMOs: group model, individual practice association (IPA), network model, and staff model. Under the Federal HMO Act an organization must possess the following to call itself an HMO: (1) an organized system for providing healthcare in a geographical area, (2) an agreed-on set of basic and supplemental health maintenance and treatment services, and (3) a voluntarily enrolled group of people.

Diagnosis-Related Group (DRG): A patient classification scheme that provides a means of relating the type of patient a hospital treats to the costs incurred by the hospital. DRGs demonstrate groups of patients using similar resource consumption and length of stay. It also is known as a statistical system of classifying any inpatient stay into groups for the purposes of payment. DRGs may be primary or secondary; an outlier classification also exists. This is the form of reimbursement that the CMS uses to pay hospitals for Medicare and Medicaid recipients. Also used by a few states for all payers and by many private health plans (usually non-HMO) for contracting purposes.