Contributions to Healthcare Cost and Utilization of Wisconsin Medicare Part A Enrollees through 2018Ryan Goodrich and Dr. Yan Li

University of Wisconsin-Eau Claire Economics Department

IntroductionWith the aging of the baby boom generation, the percentage of the population that is 65 and older is projected to be 20% by the year 2030. It is well-known that, on average, older individuals utilize healthcare more than younger individuals. Mix these two trends with the rapid rise in healthcare costs in recent years and it is not difficult to see that budget issues are looming in the not-so-distant future.

The purpose of our research was to project the healthcare costs of Medicare enrollees in Wisconsin and to seek to understand how much of these costs are linked to lifestyle choices. We also study the utilization of specific inpatient hospital procedures to determine what procedures are the most costly now and in the future. Our hope is that by understanding what we’ve been spending our Medicare dollars on, we will be better able to control future spending. To achieve our purposes we collected and forecasted data for the demographics of Wisconsin, inpatient procedural utilization, procedural costs, Wisconsin’s share of HI Trust Fund revenues and expenditures, and Medicare enrollment.

Demographics and Medicare Enrollment

Since we sought the specific year in which Wisconsin will use more Medicare dollars than it puts in, our demographic data needed to be annual numbers. Thus our numbers are drawn from the most recent available breakdown of the Wisconsin population by one year age groups-the 2000 census. Using this data and the 2004 life table, we project each one year age group forward and then regroup the one year age groups into the five year age groups that are maintained annually by the Wisconsin Department of Human Services. Our projected numbers are compared to the WDHS numbers and the differences are then divided amongst the one year age groups according to their percentage composition of the five year age group in the previous year. The sum of the projected one year age group and its share of the difference are then projected using the life table for the following years estimate. This process is repeated until 2007, the most recently available WDHS population estimates. The life table estimates are divided by the WDHS population estimates for each year from 2001 through 2007 and the average is taken as an approximation of the “retainment” percentage for each particular age group. This “retainment” percentage is used in conjunction with the life table to project the demographics through 2018. This method allows us to keep track of the size of the working class (16-64), the young aged (65-84) and the elderly (85+) groups on an annual basis.

Medicare FinancingMedicare Part A is financed primarily through the hospital insurance (HI) tax, which is a part of FICA. The current FICA rates have been in place since 1990 and are 2.9% for the HI tax and 15.3% total. For an employed individual, the tax rate is split between employee and employer such that the HI tax rate is 1.45% for each. Self-employed individuals, however, pay the full 2.9%. This is important because the FICA tax collected in Wisconsin is not reported separately for employed and self-employed individuals, nor is it reported separately by the HI tax and OASDI tax revenues. Due to the inadequacy of available data, we estimate the HI tax collected in Wisconsin by multiplying the national HI tax collections, as reported by the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, by the ratio of individual income taxes collected in Wisconsin to those collected nationally. Since HI tax revenues are most but not all of the HI Trust Fund revenues, we divide Wisconsin’s share of HI tax collections by the proportion of national tax collections to total HI Trust Fund revenues. To forecast these numbers beyond 2008, the ARIMA forecasting method is used to forecast HI tax revenue, Wisconsin’s share of individual income taxes, and the percentage of HI revenues that are payroll taxes. The results are as follows:

Healthcare Utilization and Costs

Medicare Budget

Controllable Costs

YearPer Capita Gross

Income ($)Per Capita HI Tax

Collected ($)Aggregate HI Tax

Revenue ($)Total Medicare Financing ($)

2001 64,664.96 1,875.28 4,863,141,980.61 5,654,816,256.53

2002 62,379.24 1,809.00 4,685,738,991.55 5,448,533,711.10

2003 63,589.03 1,844.08 4,762,533,177.69 5,537,829,276.38

2004 65,119.83 1,888.48 4,889,109,090.20 5,685,010,570.00

2005 66,835.94 1,938.24 5,076,576,045.75 5,902,995,402.04

2006 70,480.56 2,043.94 5,398,542,195.76 6,277,374,646.23

2007 70,817.96 2,053.72 5,616,142,084.97 6,530,397,773.22

2008 69,304.91 2,009.84 5,934,059,807.65 6,900,069,543.77

2009 70,189.91 2,035.51 5,998,114,664.22 6,989,086,888.02

2010 71,074.92 2,061.17 6,051,049,699.79 7,050,767,529.97

2011 71,959.92 2,086.84 6,084,302,733.34 7,089,514,428.59

2012 72,844.92 2,112.50 6,081,156,281.59 7,085,848,139.11

2013 73,729.92 2,138.17 6,056,329,441.08 7,056,919,558.18

2014 74,614.92 2,163.83 6,022,558,978.30 7,017,569,743.82

2015 75,499.93 2,189.50 5,966,312,187.67 6,952,030,198.66

2016 76,384.93 2,215.16 6,010,824,954.66 7,003,897,095.76

2017 77,269.93 2,240.83 6,048,148,763.66 7,047,387,318.72

2018 78,154.93 2,266.49 6,094,269,631.85 7,101,127,997.79

The aged portion of our demographic forecasts are further refined since our concern is with the aged enrolled in Medicare. Since the percentage of aged persons (65+) enrolled in Medicare has been fairly steady in past years, the percentage for 2007 is held steady for our forecast period. We also use demographics to breakdown the total number of enrollees into the young aged (65-84) and the elderly (85+) for each gender. The limited data that was available indicated this was a reasonable approximation.

The number of inpatient procedures utilized by members of each of the four aged groups were collected and used to calculate the number of procedures per group member for each of the 579 diagnosis-related groups (DRGs). DRGs are a method of coding used for Medicare billing which has been changed often since its inception in the 1980s. The number of procedures per group member are forecasted forward in one of three ways, depending on whether they are increasing, decreasing, or are relatively unchanged from 2001 to 2007. The forecasting methods and reasoning are described here:

Group 1: DRGs have a decreasing number of procedures. For this group it is our assumption that improvements in technology, movement towards pharmaceutical treatments, and other factors are decreasing the frequency of these procedures and that this trend will continue at a decreasing rate. In other words, we assume that there are decreasing returns to the factors responsible for the decreasing trend. For admittance into this group we require a decrease in each year from 2001 to 2007 and correlation with time of less than -0.5. Forecasts for this group are done using logarithmic regression functions fitted for each DRG.

Group 2: DRGs have changed very little from 2001 to 2007. For this group we assume that the factors in play for Group 1 have a negligible effect and that changes from year to year are due simply to randomness. DRGs not admitted to either of the other groups are admitted into this one. Forecasts for this group are simply the average DRG procedures per enrollee from 2001 to 2007 for each DRG and elderly group.

Group 3: DRGs have an increasing number of procedures. For this group our assumption is that the increasing trend is primarily the result of social trends. Since social trends at the state level are relatively slow-changing, we have no reason to believe that the increases are exponential. For admission to this group, the correlation with time needs to exceed 0.75 or exceed 0.5 and have an increase every year. Forecasts for this group are done using a linear regression fitted for each DRG.

Costs for each DRG are available from 1997 to 2007 but are forecasted separately from procedural utilization and again use different methods. We use the national data for costs as opposed to state data because aggregate charges were only available at the national level. Since Medicare prices are set by the CMS and are adjusted by both year and region, we use a comparison of elderly Medicare costs in the Midwest to elderly Medicare costs on the national level to perform a regional adjustment to the average charge per DRG and estimate the average charge per Midwest DRG procedure. These estimations are forecasted using different methods that are based on two things: the correlation of costs with time and the availability of data. For the costs which have a correlation of time exceeding 0.8 and for which data is available in at least 10 of the 11 years, a linear extrapolation was used. This was done for 83.35% of the forecasts. For costs in which data is available for at least 10 of the 11 years but which has a correlation less than 0.8, an ARIMA model was used. This was done for 6.52% of the forecasts. For the costs which data is available for only a few non-consecutive years and for which there is no obvious upward trend, we used the average (10.13%).

Using the cost forecasts, the utilization forecasts, and our demographic forecasts we are able to calculate the expected cost per enrollee per DRG. To better understand where Medicare funding is being spent, the DRGs are grouped into their Major Diagnostic Categories (MDCs) as well for the year 2008.

Also of interest to our research is the idea of “controllable” costs. By this we mean the percentage of the total healthcare spending that have been linked to lifestyle choices. Specifically, we look at the percentage of total costs that have been linked to the following twelve factors: high blood glucose, high LDL cholesterol, high blood pressure, overweight-obesity (high BMI), high dietary trans-fatty acids, low dietary poly-unsaturated fatty acids, low dietary omega-3 fatty acids, high dietary salt, low intake of fruits and vegetables, alcohol use, physical inactivity, and tobacco smoking. These twelve factors together have been linked to various causes of death including heart disease, stroke, renal failure, diabetes mellitus, hypertensive disease, select other cardiovascular conditions, and certain cancers among others. We have matched these causes of death with the appropriate DRGs. For example, renal failure was matched with the following three DRGs: Adrenal and Pituitary Procedures (DRG 286), Renal Failure (DRG 316) and Admit for Renal Dialysis (DRG 317).

Through this matching process we are able to estimate the percentage of healthcare costs that have been linked to the twelve factors above. This is not to imply that these twelve factors are the only reasons for the procedures they have been linked to, our intention is only to indicate the percentage of healthcare costs that we have some control over.

ConclusionsUsing our forecasted costs per enrollee, forecasted demographics, and forecasted Medicare Part A financing, we are able to project Wisconsin’s share of the HI Trust Fund budget.

References

Utilization and costs are clearly dominated by circulatory system procedures, especially so for the male population. Yet, the percentage of total costs dedicated to these procedures is on a downward trend through 2018, just as total utilization per enrollee is decreasing. Costs per enrollee are beginning to level off and for the older age group (85 and older) total costs are flattening. At the same time, however, there are less favorable trends that we expect to see between now and 2018. First, the growth in the size of the 65 to 84 year old age group counteracts the decline in utilization per enrollee and the total cost of this age group increases steadily at a rate of 7.3% between 2008 and 2018. Also a disturbing trend is the high growth rate of the HI Trust Fund deficit. At a time in which the baby boomers are reaching Medicare eligibility, the recession (in addition to the shrinking of the working class) is leading to a lower level of funding. Adding to the problem, changes in utilization contribute to nearly 7% of the growth in healthcare costs between 2008 and 2018. The percentage of total costs linked to lifestyle changes is already very high in 2008 (roughly 60%) and the trend is worsening. Circulatory procedures are utilized less but are more expensive when they are utilized due to more complicated cases and longer hospital stays. Also, there has been a rapid increase in the number of kidney and urinary tract procedures in recent years and we project this trend to continue through 2018, further contributing to the increase in lifestyle related DRG procedures.

Holding costs and shifts in utilization constant, demographic changes account for 50.35% of the cost increase between 2008 and 2018 for males aged 65 to 84, 44.27% for females aged 65 to 84, 29.17% for males aged 85 and older, and 6.68% for females aged 85 and older. Clearly demographic increases pose a serious problem for the financing of Medicare and this study indicates that providing incentives to improve lifestyle choices may be a necessity in the continuation of the program.

Administration on Aging Family of Sites. The U.S. Department of Health and Human Services, 2009. <http://www.aoa.gov>.

Agency for Healthcare Research and Quality. Healthcare Cost and Utilization Project. United States Department of Health and Human Services, 2009. <http://hcupnet.ahrq.gov>.

The Centers of Medicare and Medicaid Services Family of Sites. The U.S. Department of Health and Human Services, 2009.<http://www.cms.hss.gov/MedicareEnrpts>.

Goodarz, Danaei, Eric Ding, Dariush Mozaffarian, Ben Taylor, Jurgen Rehm, Christopher Murray, Majird Ezzati. The Preventable Causes of Death in the United States: Comparative Risk Assessment of Dietary, Lifestyle, and Metabolic Risk Factors. 28 April 2009.

Internal Revenue Service Data Books. The Internal Revenue Service, 2009. <http://www.irs.gov/taxstats>.

Medicare Fact Sheets. Kaiser Family Foundation, 2009. <http://www.kff.org/medicare/factsheets.cfm>.

Mendelson, Danieal and William Schwartz. The Effects of Aging and Population Growth on Health Care Costs. Spring 1993.

Quinn, George. Current and Future Challenges Facing Wisconsin Hospitals. University of Wisconsin Eau Claire, Eau Claire, WI. 19 November 2003. Classroom Presentation.

Social Security and Medicare Board of Trustees. Status of the Social Security and Medicare Programs. Social Security Online Actuarial Publications. <http://www.ssa.gov/OCAT/TRSUM/index.html>.

Wisconsin Population Estimates. Wisconsin Department of Health Services, Bureau of Health Information and Policy, 2009. <http://dhs.wisconsin.gov/population/index.htm>.

Wisconsin Demographic Estimates/Forecasts, 2001 to 2018

Year Males 16-64 Males 65-84 Males 85+ Females 16-64 Females 65-84 Females 85+

2001 1,776,162 265,302 29,260 1,749,618 341,985 71,177

2002 1,801,451 265,179 30,684 1,774,770 340,333 72,862

2003 1,818,821 267,137 32,065 1,788,186 341,409 74,791

2004 1,849,117 268,536 33,294 1,816,928 339,316 78,340

2005 1,871,987 271,452 34,787 1,837,816 339,922 81,434

2006 1,884,345 275,217 34,521 1,834,881 343,529 77,710

2007 1,892,961 279,514 35,739 1,841,424 346,181 80,113

2008 1,901,662 285,342 36,617 1,849,222 351,320 81,092

2009 1,917,240 290,969 37,411 1,861,380 355,670 81,906

2010 1,931,520 295,980 38,510 1,872,709 359,476 83,129

2011 1,944,939 301,038 39,454 1,883,371 363,310 84,046

2012 1,950,600 312,593 40,281 1,886,700 374,308 84,444

2013 1,955,258 324,474 40,912 1,888,997 385,791 84,793

2014 1,960,029 336,195 41,270 1,892,685 396,829 84,580

2015 1,963,179 348,931 41,524 1,894,145 409,362 84,485

2016 1,966,914 361,863 41,473 1,896,123 421,476 84,235

2017 1,969,017 376,244 41,472 1,896,078 436,277 83,744

2018 1,969,556 391,235 41,324 1,894,835 452,042 83,092

Percent of Wisconsin's Medicare Part A Costs Linked to Controllable Factors

Year Males 65-84 Females 65-84 Males 85+ Females 85+

2001 60.85% 52.54% 59.22% 52.88%

2002 61.59% 53.20% 60.65% 53.84%

2003 62.28% 52.65% 61.22% 54.07%

2004 60.73% 51.52% 62.03% 54.94%

2005 63.06% 53.69% 63.91% 57.92%

2006 62.33% 53.31% 61.04% 55.36%

2007 60.78% 51.69% 60.28% 55.06%

2008 61.83% 53.11% 62.00% 56.60%

2009 61.97% 53.21% 62.11% 56.93%

2010 62.11% 53.30% 62.22% 57.24%

2011 62.20% 53.37% 62.29% 57.54%

2012 62.29% 53.43% 62.36% 57.81%

2013 62.37% 53.48% 62.41% 58.09%

2014 62.44% 53.52% 62.46% 58.35%

2015 62.50% 53.55% 62.51% 58.61%

2016 62.57% 53.58% 62.56% 58.87%

2017 62.63% 53.61% 62.60% 59.11%

2018 62.67% 53.63% 62.65% 59.36%

Wisconsin's Expected Annual Cost Per Medicare Part A Enrollee

Year Males 65-84 Females 65-84 Males 85+ Females 85+

2001 $5,439.35 $4,255.85 $7,536.27 $5,811.43

2002 $6,053.47 $4,811.10 $8,330.70 $6,625.34

2003 $6,663.24 $5,241.28 $8,950.52 $7,185.17

2004 $7,078.59 $5,696.56 $9,920.07 $7,860.98

2005 $7,986.91 $6,405.03 $10,575.20 $8,096.45

2006 $8,068.87 $6,521.37 $10,766.62 $8,781.09

2007 $8,313.54 $6,675.75 $11,158.46 $9,252.02

2008 $8,916.98 $7,091.76 $11,956.48 $9,725.90

2009 $9,339.71 $7,427.26 $12,490.17 $10,200.19

2010 $9,770.09 $7,769.23 $13,034.43 $10,681.82

2011 $10,207.28 $8,116.77 $13,573.77 $11,168.66

2012 $10,653.59 $8,472.71 $14,127.26 $11,664.36

2013 $11,108.59 $8,835.81 $14,679.85 $12,166.17

2014 $11,572.68 $9,206.99 $15,243.26 $12,675.37

2015 $12,046.15 $9,585.92 $15,809.08 $13,191.78

2016 $12,528.96 $9,973.39 $16,385.27 $13,715.69

2017 $13,021.36 $10,368.45 $16,963.13 $14,246.30

2018 $13,523.33 $10,772.22 $17,551.90 $14,784.95

26.98%

21.09%

10.77%

10.12%

6.17%

4.13%2.69%2.61% 15.44%

Females 65-84

38.17%

13.46%11.05%

7.69%

6.34%

4.15%2.80%

2.64%13.69%

Males 65-84

Circulatory System

Musculoskeletal System & Connective Tissue

Respiratory System

Digestive System

Nervous System

Kidney & Urinary Tract

Hepatobiliary System and Pancreas

Infectious and Parasitic Diseases

Other MDCs

30.11%

11.02%15.34%10.10%

7.76%

6.39%2.63%

3.43%

13.22%

Males 85+

25.59%

18.72%

12.44%11.46%

7.59%

5.74%2.53%

2.55%

13.37%Females 85+

Wisconsin's Share of HI Trust Fund Budget, 2001-2018

Year Financing Costs Difference % Change

2001 $2,933,567,197 $3,533,832,568 -$600,265,370 n/a

2002 $3,110,335,714 $3,978,559,709 -$868,223,995 44.64%

2003 $3,136,856,717 $4,380,291,530 -$1,243,434,813 43.22%

2004 $3,218,651,352 $4,743,094,673 -$1,524,443,321 22.60%

2005 $3,381,617,794 $5,286,510,061 -$1,904,892,267 24.96%

2006 $3,602,585,014 $5,491,482,317 -$1,888,897,303 -0.84%

2007 $3,720,513,342 $5,753,946,492 -$2,033,433,149 7.65%

2008 $3,848,195,349 $6,451,988,804 -$2,603,793,455 28.05%

2009 $4,119,604,486 $6,859,883,114 -$2,740,278,627 5.24%

2010 $4,191,347,513 $7,278,288,637 -$3,086,941,124 12.65%

2011 $4,301,273,715 $7,706,455,786 -$3,405,182,071 10.31%

2012 $4,352,790,534 $8,276,555,957 -$3,923,765,422 15.23%

2013 $4,433,428,823 $8,875,272,198 -$4,441,843,376 13.20%

2014 $4,470,586,525 $9,484,479,908 -$5,013,893,383 12.88%

2015 $4,529,611,395 $10,147,883,046 -$5,618,271,651 12.05%

2016 $4,556,500,669 $10,829,782,890 -$6,273,282,221 11.66%

2017 $4,599,637,631 $11,587,329,463 -$6,987,691,831 11.39%

2018 $4,619,143,344 $12,393,017,880 -$7,773,874,536 11.25%

DRG Procedures Per 1000 Enrollees

Group 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Males 65-84 299.20 292.75 296.96 294.47 300.74 285.15 280.45 278.99 277.33 275.99 274.93 274.13 273.58 273.26 273.15 273.22 273.47 273.88

Females 65-84 262.67 263.17 268.12 266.53 272.54 258.54 252.23 251.40 250.19 249.21 248.47 247.96 247.68 247.60 247.71 247.99 248.42 249.00

Males 85+ 542.22 534.38 541.98 545.11 517.41 511.68 501.20 505.53 502.86 500.60 498.76 497.34 496.30 495.60 495.23 495.14 495.32 495.75

Females 85+ 445.16 452.82 469.24 467.99 424.61 446.89 439.20 440.30 439.05 438.20 437.70 437.53 437.64 438.03 438.65 439.50 440.54 441.78