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The historic payment system for reimbursing hospitals both by insurers and by Medicare

has been Retrospective Cost Based Reimbursement(RCBR). This system of reimbursement

encourages hospitals to over charge in order to cover the costs of the uninsured who utilize the

hospital. Charges have continued to rise year after year eventually putting the employers at a point

where they could no longer afford the payments.

For physician reimbursements, both insurers and Medicare employed the Usual and

Customary(U+C) approach to reimbursement. This practice, which averaged the charges for a

procedure in a region, also encourages doctors to over-charge in order to raise the average amount

paid to them for a procedure. These two systems, RCBR and U+C eventually started to suck too

much money out of the insurers, employers, and the Medicare/Social Security trust fund so that

interventions were deemed necessary.

Perhaps the biggest intervention adopted by the private sector to reduce medical service

costs was the trend toward businesses self-insuring. By doing so, they avoided state-mandated

benefits that were required if they hired a third-party insurer. In addition, the money was now paid

to claims as they arose rather than prospectively so income could be earned on this capital as it sat

in the bank.

Other intervention to reduce medical service costs mainly involved private insurers as it

was difficult for small businesses to self-insure because of low-capitol. Underwriting was a typical

practice of insurance companies; that is, excluding some employees from coverage if they have

preexisting conditions or if they are employed in ³high-risk² areas. Payment caps are were also

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