chapter 10: government as health insurer health economics
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Chapter 10: Government Chapter 10: Government as Health Insureras Health Insurer
Health EconomicsHealth Economics
TopicsTopics
Coverage and Financing Current Challenges
Restraining costs Improving health
Medicaid TrendsMedicaid Trends
1972 17,606
1975 22,007
1985 21,814
1988 22,907
1989 23,511
1990 25,255
1996 36,118
1997 33,579
$ 6,300
12,242
37,508
48,710
54,500
64,859
121,685
123,552
Year# of
RecipientsTotal Cost ($m)
Medicaid Recipients, 1997Medicaid Recipients, 1997
% ofrecipients
% ofpayments
Averagepayment
Kids(<21) 45 13 $1027
Adultsw/Kids
20 10 $1809
Age 65+ 12 30 $9477
Other 23 47 $8433
Medicaid FinancingMedicaid Financing
Joint financing by federal and state governments
States w/ lowest per capita income receive larger federal subsidies CA, NY receive close to 50% federal
funding. MS, WV receive 70.09, 73.67% federal
funding respectively.
States have wide latitude in setting eligibility and medical benefits. Access and costs vary by state.
Minimum requirements for federal matching funds: Must cover Temporary Assistance for
Needy Families (TANF) and Supplemental Security Income (SSI) beneficiaries.
Must provide inpatient and outpatient hospital services, and physician services.
Medicaid & the Nursing Home MarketMedicaid & the Nursing Home Market Individuals who meet certain low-
income and disability requirements qualify for nursing home care covered by Medicaid.
Medicaid reimburses nursing homes on a fixed price basis (e.g. price per day).
Medicaid & the Nursing Home MarketMedicaid & the Nursing Home Market How can the Medicaid program set
prices in order to insure adequate access, but also restrain costs?
Keep in mind that nursing homes can choose to serve private pay or Medicaid patients.
Medicaid & the Nursing Home MarketMedicaid & the Nursing Home Market We assume that most nursing homes
have a local monopoly. i.e. Most nursing homes face a downward
sloping demand curve.
A nursing home with monopoly power which serves only private-pay patients will set price where MR=MC.
Medicaid & Nursing HomesMedicaid & Nursing Homes
$
NH patient days
ATC
MC
DemandMR
Q0
P0
Medicaid & the Nursing Home MarketMedicaid & the Nursing Home Market Now, assume instead that there are no
private patients, and the gov’t must set a reimbursement level for care provided to Medicaid patients.
If the gov’t wants care provided at the lowest possible cost per day, it will choose a price equal to the minimum of the average total cost curve.
Medicaid & Nursing HomesMedicaid & Nursing Homes
$
NH patient days
ATC
MC
DemandMR
Q3
PMMRM
Medicaid & the Nursing Home MarketMedicaid & the Nursing Home Market Now, consider the graph when a
nursing home can serve private pay patients and/or Medicaid patients.
The demand curve for private pay patients indicates that some are willing to pay more than PM for nursing home care.
Medicaid & Nursing HomesMedicaid & Nursing Homes
$
NH patient days
ATC
MC
DemandMR
Q3
PMMRM
The nursing home will now view its MR curve as the line ABMRM
A
B
Medicaid & the Nursing Home MarketMedicaid & the Nursing Home Market For all private pay patients “up to” point
B on the MR curve, the nursing home knows that its MR will be greater than the Medicaid reimbursement rate.
Thus, for private pay patients, the nursing home no longer prices at MR=MC. Instead, it serves the number of private pay patients “at” point B.
Medicaid & Nursing HomesMedicaid & Nursing Homes
$
NH patient days
ATC
MC
DemandMR
Q3
PMMRM
The nursing home will care for Q1 private pay patients and Q3-Q1 Medicaid patients.
A
B
Q1
P0
Medicaid & the Nursing Home MarketMedicaid & the Nursing Home Market Policy challenge: Medicaid can increase
access to nursing homes by raising PM. However, raising the reimbursement rate
will lead to higher expenditures.
Some patients who might have been willing to pay out-of-pocket without Medicaid now may get Medicaid coverage. Gov’t attempts to subsidize care for low-
income individuals can lead to “crowd-out” of private care.
Does Medicaid “work?”Does Medicaid “work?”
In late 1980’s, income ceilings for Medicaid coverage were raised. Pregnancy care for women with incomes
<133% of poverty. Children <6 covered if family income
<133% of poverty. Children <9 covered if family income
<100% of poverty.
Did health insurance coverage for the poor increase, or did it “crowd out” private insurance? Some low income people may have
dropped private insurance to go on Medicaid.
Did health status among the poor improve?
1987-1992: Medicaid coverage of children rose (15%21%), but private insurance coverage fell (77%69%). But private insurance may have fallen for
other reasons (e.g. 1990-91 recession).
States could increase eligibility beyond federal minimums.
Compare increases in Medicaid coverage and falls in private insurance across states.
ResultsResults
The Medicaid expansion increased coverage for 1.5 million children But decreased private insurance by .6 million. Similar results for women of childbearing age.
The expansions lowered infant mortality by 8.5%; child mortality by 5.1%. Cost per life saved: $1-1.6m.
Was the expansion worth it?Was the expansion worth it?
Should Medicaid be “better targeted?” Could we have gotten the same result
cheaper?
Current challenges to MedicaidCurrent challenges to Medicaid
Rising Medicaid costs have strained state budgets during recessions. Problematic, because most state
governments required by law to balance their budgets.
Many states have made Medicaid program changes.
1) Modest reductions in funding Lower physician, nursing home
reimbursement rates. Limits on prescription drug use. Noncoverage of optical, dental care.
2) Expansion of Medicaid managed care.
3) Cost shifting to the federal government. States shifting all state-run health
programs into Medicaid, in order to receive matching funds.
Medicaid and Managed CareMedicaid and Managed Care
States vary widely in financing and delivery arrangements for managed care plans. Low-intensity: primary care case
management (PCCM). Gatekeeper bears no risk for cost overruns.
High-intensity: mandatory enrollment in fully capitated plans.
Impact of Medicaid managed careImpact of Medicaid managed care(early evidence)(early evidence)
1) Savings of 5-15% per enrolled beneficiary. These studies were conducted prior to
1997 BBA, often in the context of a waiver renewal.
Biased towards finding cost savings.
2) HMOs and PCCM models lead to lower ER and inpatient service use.
3) Satisfaction appeared high early on, but there was little baseline evidence.
Impact of Medicaid managed careImpact of Medicaid managed care(more recent evidence)(more recent evidence)
Medicaid managed care grew rapidly in mid 1990s due to attractive business opportunities. “Foot in the door” for providing state employee
health care coverage. Insurers didn’t have to pay commercial rates to
providers, could also transfer risk. HMO industry was making high profits at this
time.
Impact of Medicaid managed careImpact of Medicaid managed care(more recent evidence)(more recent evidence)
In last 2-3 years, HMO profits disappeared. Mirrors problems w/ health care costs in private
sector and Medicare. Still have 2-fold variation in capitation rates
across states. Difficult to monitor quality.
TennCare had significant differences in LBW babies and death in 1st 60 days across its Medicaid managed care programs.
Future challenges to MedicaidFuture challenges to Medicaid
HMOs have enrolled AFDC beneficiaries, but not the higher cost elderly, or chronically disabled. High-cost populations may require carve-
out programs.
Eligibility, Marketing, and Enrollment. Intermittent eligibility as enrollees cycle in
and out of welfare. High turnover forces HMOs to market
aggressively, to maintain revenues (costs up to 1 month’s capitation per member).
States may need to set marketing policies, to prevent “frivolous gimmickry.”
Traditional providers may not be able to compete with commercial HMOs. Community health centers, urban hospital
outpatient programs, indigenous community-based physicians have provided much care to Medicaid beneficiaries.
Subsidized in past due to high level of uncompensated care.
If forced to close, creates access problems for persons w/o coverage.
Wrap-upWrap-up
Funding the Medicaid program provides health benefits, but sometimes at significant costs.
Future decisions on Medicaid should be made within the context of wider welfare reform.
The Medicare ProgramThe Medicare Program
Target population - individuals 65+ Part A - Hospital Insurance program
(compulsory) Inpatient hospital services Skilled nursing care Home health care Hospice care
19m enrollees in 1966; 38.7m in 1999.
Part B - Supplemental Medical Insurance program (voluntary) Physician services. Outpatient care. Emergency room services
17m enrollees in 1966, 37.0m in 1999.
Medicare CostsMedicare Costs
Total Expenditures ($ billions)
1966 1.7
1980 36.4
1990 109.6
1996 193.9
1998 213.6
1999 213.0
Medicare Financing - Part AMedicare Financing - Part A
Funding Sources 2.9% payroll tax shared equally by
employers and employees Federal Hospital Insurance Trust Fund Enrollee deductibles and copayments
Part A Trust FundPart A Trust Fund
1966 $ 1,943
1975 12,980
1980 26,097
1985 51,397
1990 80,372
1994 109,570
1997 130,154
1999 151,593
999 944
11,581 10,517
25,577 13,749
48,414 20,499
66,997 98,933
104,545 132,844
139,452 115,643
130,632 141,380
Year Receipts Expenditures Balance
Part A Patient Cost SharingPart A Patient Cost Sharing
No hospital inpatient coverage after 90 days. Except for 60-day lifetime reserve. Medicare offers no coverage in
“catastrophic circumstances.”
Part A Patient CostsPart A Patient Costs
1966 $ 40
1975 92
1980 180
1985 400
1990 592
1995 716
1999 768
2001 792
10 ---
23 46
45 90
100 200
148 296
179 358
192 384
198 396
Year Days 1-60 Days 61-90 After 90 DaysDeductible Daily Coinsurance
Medicare Part B FinancingMedicare Part B Financing
Funding sources Monthly premium payments. Contributions from general revenue of the
U.S. Treasury.
Part B Trust FundPart B Trust Fund
1966 $ 324
1975 4,673
1980 10,784
1985 25,106
1990 45,913
1995 55,607
1997 81,924
1999 80,902
203 122
4,735 1,444
11,245 4,530
23,880 10,924
43,987 15,482
60,317 19,422
74,124 36,131
82,327 44,787
Year Receipts Expenditures Balance
Part B Patient CostsPart B Patient Costs
1966 $ 50
1975 60
1980 60
1985 75
1990 75
1995 100
1999 100
2001 100
20 3.00
20 6.70
40 9.60
20 15.50
20 28.60
20 46.10
20 45.50
20 50.00
YearAnnual
DeductibleCoinsurance
RateMonthly Premium
Medicare Part CMedicare Part C
Since the 1980s, the aged could voluntarily enroll in Medicare HMOs.
HMO receives capitated payment based on Part A and B beneficiary costs adjusted for age, sex, region, etc.
HMO can provide lower copays and outpatient drugs not covered by Medicare Part B.
Medicare Part C: Medicare+ChoiceMedicare Part C: Medicare+Choice
1997 BBA increased the variety of managed care plans under Medicare PPOs - physician networks PSOs - owned by hospitals and physicians POS - extra fee for out-of-network care Private FFS
no limits on premiums charged to beneficiaries
MSAs Turnover reduced by requiring
enrollment for at least 1 year.
Medicare Part C: Medicare+ChoiceMedicare Part C: Medicare+Choice
Medicare Risk HMO/M+C Enrollment and
HMO Participation, 1985-1999
Medicare Part C: Medicare+ChoiceMedicare Part C: Medicare+Choice
Enrollment and plan participation has varied throughout the 90’s, but shows a strong net gain.
Plans are putting more limits and copays for prescription drug coverage.
Most elderly have access to a plan with no premiums, but the share is falling.
Medicare Part A ReformsMedicare Part A Reforms
Pre-1983, hospitals reimbursed retrospectively according to costs. Little incentive for cost efficiency. Incentive to provide unnecessary services.
1983, Prospective Payment System Medicare patients were classified by
principal diagnosis into 1 of 470 Diagnosis Related Groups (DRGs).
sAdjustment
Hospitalx
Payments
Outlier
sAdjustment
gionalx
weight
DRGPP 1
Re
DRG weight - index # reflecting relative cost of care.
Examples from 1995:
DRG 33 - concussion, age<18, weight=.2003
DRG 103 - heart transplant, weight=13.8273
The 5 Most Common DRGs in 1996The 5 Most Common DRGs in 1996
DRG Discharges127 Heart failure & shock 709,714
089 Simple pneumonia & pleurisy, >17 & w/ 431,389
complications and/or comorbidities
014 Specific cerebrovascular dis-orders, 379,967 except transient ischemic attack
089 Chronic Obstructive pulmonary 361,545
disease
209 Major joint & limb reattachment 358,660
procedures of lower extremities
Impact of PPSImpact of PPS
1) Costs 1977-84: Part A expenditures rose 15%
per year on average. 1985-92: Growth slowed to 8.75%
annually. Caution: Most of the slower expenditure
growth occurred in early years of the program.
Hospitals may have learned to game the system.
2) Patient Outcomes No evidence that quality of care changed
for Medicare patients as a result of PPS. However, hospital admissions and length
of stay declined.
3) Hospitals The share of hospitals reporting Medicare
profits fell from 84.5% in 1985 to 40.7% in 1990.
Medicare Part B reformMedicare Part B reform
1989 Omnibus Reconciliation Act
1) New prospective payment system for physicians.
2) Limits on total growth in Medicare Part B expenditures by Congress Volume Performance Standards
3) Strict limits on balance billing. Additional fees physicians can charge to
Medicare patients above Medicare reimbursement rates.
4) Agency for Health Care Policy Research (recently renamed as the AHRQ) established to develop outcomes research, provide guidelines.
Physician Prospective Payment SystemPhysician Prospective Payment System
Pre 1992, Medicare reimbursed physicians retrospectively. Physicians were paid lowest of bill
submitted, physician’s customary charge, or area’s prevailing rate for that service.
Physicians had incentives to raise charges, in order to raise future rates.
1992-96, Gradual phase-in of Resource-Based Relative Value Scale. Fee schedule based on estimated time,
effort, resources required for various physician services.
Favors evaluation and management services (e.g. office visits w/ established patients over technical medical procedures)
e.g. 1992: Average fees for GP’s rose 10%, specialty surgeons experienced an 8% fall.
The current cost crisisThe current cost crisis
The Medicare Part A trust find is predicted to be insolvent by 2015.
Part B expenditures are rising rapidly.
Why?
Part A and B expenditure growth occurred for different reasons.
From 1987 to 1995, Part A utilization grew slowly (1921%), but cost per claim rose 58%.
Part B utilization grew faster (7484%), but costs per claim rose only 12%.
High cost users are responsible for the level and growth rate of expenditures.
1995: Top 1% of Medicare enrollees accounted for 19% of all expenditures.
Median expenditure per enrollee rose from $647 in 1987 to $884 in 1995. 37% growth rate.
Top 2% of enrollees’ expenditures was $28,000 in 1987, $42,000 in 1995. 52% growth rate.
Are higher costs “worth it”?Are higher costs “worth it”?
Life Expectancy and Costs for Medicare Patients w/ a new heart attack:
Year Life Exp. Costs ($1991)
1984 5 2/12 $11,175
1986 5 4/12 11,998
1988 5 6/12 12,725
1990 5 9/12 13,623
1991 5 10/12 14,772 Higher costs improve outcomes.
Regional comparisons paint a different Regional comparisons paint a different picture.picture.
1995 average inpatient expenditures for Medicare patients in the last 6 months of life were 2 times higher in Miami vs. Minneapolis. 25.4 specialist visits in Miami; 4.7 in
Minneapolis. Regional survival rates for AMI, stroke,
GI bleeds not correlated with higher health care spending.
Current Medicare reform proposalsCurrent Medicare reform proposals
1)Decrease payments to doctors, hospitals, HMOs. Balanced Budget Act of 1997. But most of the expenditure growth is in
SNFs, hospice, home health, and outpatient services.
2)Shift more cost to beneficiaries. Tie benefits to income.
Increase the eligibility age. Raising the eligibility age to 67 only saves
6.7% annually. 32% of these cost savings will be shifted to
other government sources (Medicaid, SSDI, etc.)
The number of newly uninsured could rise by 1.75 million.
Shifting costs to beneficiaries is a political minefield.
3)Encourage Medical Savings Accounts MSAs are more appealing to low-risk
individuals, which doesn’t solve the high-cost user problem.
4)Move the Medicare population to managed care. Medicare +Choice (Part C) # of plans has fallen recently (mostly in
rural areas. But enrollment has grown to over 6m.
5)Target fraud and abuse.
6) Make HMOs compete with each other based on price to serve the Medicare market. Prior to the BBA, HMOs received 95% of
the average expenditures of a FFS patient in the same region.
The capitated rate is now based on a blend of national and previous local rates.
Medicare Prescription Drug Medicare Prescription Drug Reform ProposalReform Proposal
See newspaper editorial
Wrap-upWrap-up
Prospective payment better than retrospective reimbursement in restraining costs.
However, prospective reimbursement rates are set by government, not by interaction of supply and demand.Potential for surpluses and shortages in
medical care market.
In order to further restrain costs, more market-based incentives are under consideration. e.g. competitive bidding by providers for
Medicare managed care contracts.
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