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.