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80% Reimbursement: A Straightforward Model For Pet Health Insurance


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Pets Best Insurance

In an 80:20 insurance plan, the insurance carrier reimburses 80 percent of eligible veterinary costs to the insured client after the deductible.  The client is responsible for his 20 percent co-payment and deductible. There may also be per-incident, annual and lifetime limits, and the client is responsible for payment if these are exceeded. 

An 80:20 plan provides all parties with easy to understand rules regarding how much is being covered by the insurance provider.

Only then can insured pet owners adequately plan and make prudent decisions regarding pet care based on their current financial situation.  This simple approach avoids surprises on reimbursement to the client and the care giver supplying the veterinary services. 

“Out of pocket” payments by the insured, in the form of the deductible, co-payment and over-policy limits, is necessary and vital to the entire process.  Otherwise, the insured would not care about cost.  A financial involvement by the insured is critically beneficial to curbing the amount and cost of services. The insured becomes a partner in the financial transaction.  If, as with some human HMOs, the doctor or hospital bills the HMO provider and the patient has little or no out-of-pocket expense, there is little or no concern for the cost of care or amount of services.  A co-insurance plan works for all parties.

Concerns and Predictions

There has been discussion and concern by some parties that 80 percent  reimbursement to pet owners for veterinary care is not a financially sound practice and that, further, over time such a model will fail.

Critics have voiced three concerns; first, that an 80:20 reimbursement will cause cost to rise due to increased veterinary fees and greater utilization. Second, that rates and claim cost cannot be predicted with any accuracy due to constantly escalating utilization and fees. And third, an 80:20 reimbursement will lead to financial collapse or at least bad results for the insurance company (underwriter), resulting in pulling out of the market or insolvency. 

While every insurance company must address these concerns, the value of 80:20 reimbursements for the insured far outweigh the risk for the insurance provider.  Predictability of insurance reimbursements is also essential for greater consumer acceptance. Pet insurance that pays based on 80:20 or a similar model is a straightforward, easy to understand value proposition. Any concerns are easily mitigated through premium adjustments, deductibles, per-incident limits and other policy provisions as history has demonstrated.

EXPERIENCE

Pet health insurance experience with an 80:20 co-insurance contribution by the insured client has been in effect for more than 10 years.  Two pet health insurance providers have been offering this concept since 1996 and 1997.  They have managed their claims experience satisfactorily and both report favorable loss experiences.  Virtually all the newer providers that entered the market beginning in 2005 use the 80:20 concept or some variation, such as 70:30; 90:10 and even 100 percent reimbursement of usual and reasonable cost or simply a percentage of actual veterinary charges. 

In all instances, the carriers, the ultimate risk takers, had actuaries establish their rates based on one or more of the models above and individual policy provisions. In the case of Pets Best Insurance most recently, an Aetna team of actuaries utilized our past experience and trends in pet owner expenditures to project rates for an 80 percent payout after the deductible of actual individual veterinary charges.

Although this author would question the validity of 90:10 and 100 percent  coverage as getting away from the principle of everyone “having skin in the game,” these, too, may prove viable. Certainly lower deductibles and less co-insurance by the insured is more volatile and risky in terms of setting rates.  There is also nothing wrong with 70:30 or even a 50:50 plan if a lower premium is associated with these options. At least it is transparent, that for less premium the insurance company will pay 70 percent or 50 percent and the insured is responsible for the remainder.

Experience and actuaries have borne out that the concept of 80:20 is viable with adequate rates and safeguards built into the policy. Certainly it adds greater leverage for the pet owner in seeking care for their pet. 


Pet health insurance will bring much more revenue to veterinary medicine, because insured pet owners wanting to utilize the coverage they paid for and the leverage the insurance provides will accept more sophisticated and in-depth care for their pet instead of ignoring it or euthanizing a pet due to cost.


Why the Model Works

First, the complexity of treating an ill or severely injured pet is immense. It is unrealistic that a fixed amount for a diagnosis can be equitable. For one thing, not all pets respond the same. There can be many complicating factors that delay or hinder response to treatments. A fixed dollar amount for repairing a fender on a specific model of car is reasonable. A fixed dollar amount for a complicated fracture, an Addison’s, diabetic or cancer case is unreasonable and not practical. 

A fee or benefit schedule can and often does penalize the insured for receiving the best care for a pet. It also damages the client-doctor relationship if the fixed fee is less than the doctor’s fees. Insurance reimbursements far less than the charges incurred send the wrong message:  Low reimbursements indicates the doctor must have charged too much, otherwise why the discrepancy?  In fact a host of circumstances can lead to different costs for the same disease in different pets.

Second, the cost of delivering veterinary care varies widely due to a host of circumstances beyond geography, urban versus rural location or empirical versus diagnostic medicine. Veterinary practices have different overhead costs, different labor costs, different approaches to hospital care and to diagnosing and treatment. Quality of care can vary widely and pet owner acceptance of care varies greatly.

The 80:20 model allows that given the insured is willing to pay their co-payment and deductible, financial decisions are best left with the pet owner and the treating veterinarian. Third-party financial restrictions on care or the diagnostics that can be utilized diminish the value and benefits of insurance.

Third, the amount of care pets receive on the whole is deficient because most pet owners cannot afford or not prepared financially for the unexpected.  Over-utilization of pet care is simply not a factor in veterinary medicine.  Should it occur, methods can be implemented in addition to co-payments such as per-incident limits, greater co-payments, higher deductibles and rate increases to compensate.

Fourth, providing insurance is about predicting cost as much as it is about simply tabulating prior experience. Predicting and setting rates by actuaries is standard procedure for insurance companies. Trends are studied to predict and set fair rates so that the insured is paying the proper premium.  Anyone can simply follow previous experience to set rates, but the real art and risk are in predicting trends and meeting the insured’s expectations. 

Combining product design with actuarial review is a tried and proven concept.

Fifth, the insured ultimately bears all the cost and determines value. The owners are the beneficiaries of the benefits of insurance, such as the ability to budget and leverage a smaller co-payment and deductible for greater care than otherwise affordable. The pet’s value and the benefits of insurance will dictate in the free market what system pet owners prefer.

An 80 percent reimbursement favorably affects the care that pet owners can afford.  Without insurance, fewer pet owners will have the necessary discretionary income for pet care, especially as the pet bond drives more utilization for more pets. 

Pet health insurance will bring much more revenue to veterinary medicine, because insured pet owners wanting to utilize the coverage they paid for and the leverage the insurance provides will accept more sophisticated and in-depth care for their pet instead of ignoring it or euthanizing a pet due to cost.

Five Times Leverage

Insurance is designed to provide for care that is not otherwise affordable.  The insured pet owner pays an affordable monthly premium and in return receives covered benefits for their pet’s future medical accidents or illnesses. At Pets Best, we have found that pet insurance increases the amount that can be spent for a pet’s medical care by nearly five times when they are reimbursed at 80 percent. 

For instance; if $1,000 is the absolute limit a client would pay out of pocket for their pet’s medical care, with pet insurance that same $1,000 is now leveraged to $4,600 when a $100 deductible applies. 

Example:  $4,600 billed for pet care, less $100 deductible and 20 percent co-payment; client pays $1000 and insurance company pays $3,600.

Suddenly, by paying a budgetable insurance premium each month, that client limit of $1,000 is now $4,600 for the pet.  An 80:20 pet insurance plan leverages a client’s expenditures nearly five times and is still within their upper limit or comfort level for an unexpected pet expense.  This is the mechanism that will bring more dollars into the care of pets, just as credit cards did many years ago.

Clients who receive less than 80 percent may feel that the veterinarian overcharged for services. Certainly they may be out of pocket more than they expected and thus have a negative feeling toward the veterinary care provider or the insurance company.  Neither situation is good. Yet, with a flat 80 percent reimbursement, all parties can plan, since it is straightforward and simple to understand how much will be reimbursed. It is unfair for veterinarians to be asked to reduce their cost, care they provide or their standards of practice. It is also unfair to demand the owner limit the scope of care, if she is willing to pay her share with a deductible and co-payment. 

The burden should be borne by the insurance company to predict and set proper rates. Third parties should not place the burden on the doctors, their staff or the client to negotiate to a lesser amount of care, because the insurance is insufficient.

After 28 years in the pet health insurance field, I can state that with actuaries, adequate rates, deductibles, co-payments and limits per incident or annually, the 80:20 plan is not flawed. Financially, it is much better for veterinary medicine in providing freedom of choice to clients on the amount and quality of care they want for their pets.

Dr. Stephens is president and founder of Pets Best Insurance of Boise, Idaho. Pets Best uses the 80:20 model.

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