No term is as widely misunderstood as “third-party payment.” Most health policy people hear that expression and automatically think “insurance coverage.” “My goodness,” they think, “critics of third-party payment want to abolish all insurance! It’s not even worth talking to them.”
But this attitude is wrong. Third-Party Payment (TPP) has a specific and precise meaning. It is a form of coverage in which the payer (third party) pays a provider (second party) to deliver a service to a patient (first party).
By contrast, most forms of insurance consist of a two-party contract. The first party (the consumer) buys a policy from the second party (the insurer). When the insured incurs a “loss” the insurer pays a benefit to the insured.
Third-party payment never existed until it was created by BlueCross in the 1930s. BlueCross was actually invented by the hospitals that were concerned about their financial condition during the Depression. The prototype was launched by Baylor Hospital in Dallas in 1929, and soon replicated by other hospitals around the country. The whole movement was endorsed by the American Hospital Association (AHA) in 1932.
For many years BlueCross (and later BlueShield) insisted it was not “insurance,” but “prepaid hospital (or medical) service organizations.” They were organized, not under state insurance laws, but under special enabling legislation in the states that provided them with special tax-exempt status and immunity from many of the regulations that apply to insurance companies. For instance, they were exempt from insurance reserve requirements because their hospital members guaranteed their solvency. They were set up as not-for-profit organizations and had Boards of Directors that were controlled by their hospital members. This would have been a flagrant antitrust violation but for the “state action” doctrine, which exempts state-regulated companies from anti-trust law.
BlueCross strictly avoided insurance terminology, calling its customers “subscribers,” rather than insureds, who paid “subscription fees” rather than premiums and received “service benefits,” rather than a payment upon a loss.
Because its priority was hospital finances, it paid hospitals directly for services rather than trusting its customers to pay for the care they received.
Because of its many regulatory advantages, BlueCross quickly dominated the market for hospital financing, so other insurers learned how to replicate its third-party payment model, by using “assignment of benefits” and “participating provider” networks.
So, what difference does any of this make? It is enormous, especially in accountability and transparency
In a two-party contract there is direct accountability. I pay you for a service. I know what I paid you and what you are supposed to do. If you don’t deliver the service or do a poor job I can sue you, or yell at you, or punch you in the nose. It is between you and me, and you do not want to make me angry.
In a three-party payment system there is no accountability. I go to the doctor and he does what he wants and somebody pays him. I don’t know what he was paid or whether he did what he was supposed to do. But, importantly, the payer doesn’t know, either! The payer may know what they paid, but they don’t know what transpired between the doctor and me. The doctor doesn’t know what my arrangement is with the insurer, either. He may not even know if what I want is a covered service or not.
Nobody knows anything. And so we spend way too much time trying to figure out what we don’t know. The insurance company is very interested in what transpired, so they spend a lot of time getting the doctor to fill out forms and getting me to complete surveys. The doctor hires clerks to try to find out what is covered and for how much.
And I am simply baffled by the whole thing and annoyed about it all. I figure I can’t trust any of these jokers because none of them cares about my well-being in spite of all the money I (or my employer) shovels into their bank accounts.
There is no way this arrangement can ever be made to work well. Yet our system is fundamentally based on it. In fact, it has become so fundamental that most people cannot imagine any other way of doing it. And that is where the conversation usually stops.