Policies that enhance access

Social Insurance

Social Insurance Programs

National Health Care ExpendituresYear Total

Spending (in billions)

Percent change

Percent of GDP

Per capita spending

1950 $ 13 -- 4.5 $ 82

1960 28 8.8 5.2 148

1970 75 10.5 7.2 356

1980 254 13.0 9.1 1,100

1990 714 10.9 12.3 2,814

2000 1,353 5.9 13.6 4,789

2005 1,982 7.9 15.7 6,701

2006 2,113 6.7 15.8 7,071

2007 2,240 5.6 15.9 7,423

2008 2,339 4.3 16.2 7,681

Source: http://www.cms.hhs.gov/NationalHealthExpendData/

Personal Health Care Expenditures(in billions of dollars)

Private Spending Public Spending

Year Out of pocket

Private Insurance

Federal State

1960 $ 12.9 $ 5.9 $ 2.0 $ 2.9

1970 24.9 14.0 14.4 7.8

1980 58.1 61.2 62.3 23.9

1990 136.1 204.7 172.8 63.5

2000 192.6 402.8 369.8 117.1

2005 247.5 599.8 562.3 176.9

2006 254.9 634.6 620.1 178.7

2007 270.3 665.0 661.3 188.7

2008 277.8 691.2 718.0 189.8

Source: http://www.cms.hhs.gov/NationalHealthExpendData/

Private Health Insurance Coverage (under age 65, numbered in millions)

With Health Insurance* Without Health Insurance

Year Number Percent Number Percent

1999 161.2 68.3 38.5 16.1

2000 160.8 67.1 41.4 17.0

2001 162.4 67.0 40.3 16.4

2002 159.4 65.3 41.7 16.8

2003 157.5 64.4 41.6 16.5

2004 159.5 64.0 42.1 16.6

2005 160.1 63.6 42.1 16.4

2006 155.8 61.5 43.9 17.0

2007 157.9 61.6 43.3 16.6

* Employer-based.

Source: Health, United States, 2008, http://www.cdc.gov/nchs/hus/updatedtables.htm, Table 138 and 140.

Medicare Objective: improve access to medical care for elderly …and disabled persons

The elderly… 12.6% of US population 19% of personal health care spending 31% of hospital spending 20% of physician spending

The elderly… 12.6% of US population 19% of personal health care spending 31% of hospital spending 20% of physician spending

44 million voters

Percent of U.S. population age 65+P

erc

en

t o

f p

op

ula

tion

5

8

11

14

17

20

23

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

actual projected

Source: U.S. Census Bureau, 2004, "U.S. Interim Projections by Age, Sex, Race, and Hispanic Origin," Table 2a.

<http://www.census.gov/ipc/www/usinterimproj/>

Medicare Objective: improve access to medical care for elderly …and disabled persons

Institutional Features Part A—Hospital insurance (compulsory) Part B—Supplementary insurance (voluntary) Part C—Medicare Advantage (voluntary PPO or HMO) Part D—Outpatient prescription drugs (voluntary)

The elderly… 12.6% of US population 19% of personal health care spending 31% of hospital spending 20% of physician spending

The elderly… 12.6% of US population 19% of personal health care spending 31% of hospital spending 20% of physician spending

44 million voters

$468 billion in 2008$468 billion in 2008

Medicare SpendingYear Recipients

(millions)Total Spending

(billions)Annual Rate of

Change in Spending

1970 20.4 $ 7.5 --

1980 28.4 36.8 17.2

1990 34.2 111.0 11.7

2000 39.7 221.8 7.2

2005 42.6 336.4 8.7

2006 43.4 408.4 21.4

2007 44.1 431.5 5.7

2008 45.2 468.1 8.5

Source: http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2008.pdf

Medicare Part A: Hospital Insurance Plan:

Day 1-60: Deductible = 1 day @ hospital Day 61-90: daily coinsurance = 25% of deductible Day 91-150: daily coinsurance = 50% of deductible Day 151-?: nothing

Financed by 2.9% payroll tax

Medicare is not designed to provide protection against catastrophic illnesses

Medicare is not designed to provide protection against catastrophic illnesses

$1,100

$275

$550

Lifetime reserveLifetime reserve

Inpatient hospital careSkilled nursing facility careHome health agency care

Hospice care

Inpatient hospital careSkilled nursing facility careHome health agency care

Hospice care

Medicare Tax Rates and Bases (selected years)

Tax rate(% of taxable earnings)

Year Maximum tax base

Employees and employers, each

Self-employed

1966 $6,600 0.35% 0.35%

1970 7,800 0.60 0.60

1980 25,900 1.05 1.05

1984 37,800 1.30 2.60

1990 51,300 1.45 2.90

1993 135,000 1.45 2.90

1994-2009 No limit 1.45 2.90

Scheduled in current law: 2010 and later

No limit 1.45 2.90

Source: http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2009.pdf

Plan:

Annual deductible + monthly premium + 20% coinsurance

Financed by general tax revenues and premiums

Medicare Part B: Supplementary Insurance

Physicians’ servicesOutpatient hospital servicesER servicesLaboratory servicesOutpatient physical therapyDurable medical equipment

Physicians’ servicesOutpatient hospital servicesER servicesLaboratory servicesOutpatient physical therapyDurable medical equipment

$155 $96*

Optional program that allows elderly to receive Medicare benefits (Parts A and B) through private health insurance plans

Medicare Part C: Medicare Advantage

Part D: Prescription Drug Benefit Plan: (coverage is not standardized)

Medicare Part A + private stand-alone drug plan Medicare Advantage plan

Annual deductible + monthly premium + 25% coinsurance

Financed by general revenues and premiums

$30$310

Part D: Doughnut Hole

$310 $2,830 $6,440

25%

5%

100%

Percentage ofDrugExpendituresPaid byBeneficiary

Total Drug Expenditures

Deductible CatastrophicCoverage

46% 30% 14% 10%

Doughnut Hole

Payment Range Number of Enrollees (millions)

Percent of Total

Spending (billions)

Percent of Total

Average per enrollee

Over $20,000 4.1 12.4 $182.8 65.1 $44,585

$10,000-$19,999 2.8 8.5 40.2 14.3 14,357

$5,000-$9,999 3.6 10.9 25.1 8.9 6,972

$2,000-$4,999 6.4 19.3 20.6 7.3 3,219

$1,000-$1,999 5.1 15.4 7.4 2.6 1,451

$500-$999 4.2 12.7 3.1 1.1 738

Less than $500 6.9 20.8 1.5 0.5 217

Total 33.1 100.0 $280.7 100.0 $8,480

Medicare Payment Allocations, 2006

“80-20 Rule”20% of beneficiaries account for 80% of spending

“80-20 Rule”20% of beneficiaries account for 80% of spending

Source: Health Care Financing Review: Medicare and Medicaid Statistical Supplement, 2007, Table 3.6.

Part A Services (Hospitals) Prospective payment system (PPS) based

on diagnosis-related group (DRG)

Part B Services (Doctors) Fee schedule based on resource-based

relative value scale (RBRVS)

Medicare Reimbursement Payments

Upcoding: doctor makes more severe diagnosis to hedge against accidental costs

[RVU]*[GAF]*[CF] = payment

[5.46]*[1.13]*[$58.40] = $360.29CPT 45378

MedicaidObjective

Improve medical access for low income individuals

Institutional features Federal cost-sharing

Mandated coverage and services State administered

Eligibility standardsDetermine type, amount, duration, and scope of

servicesSet rate of payment for services

60% federal share on average

Medicaid SpendingYear Recipients

(millions)Total Spending

(billions)Average Payment

1966 10.0 $ 1.7 $ 170

1975 22.0 12.2 554

1980 21.6 23.3 1,079

1990 25.3 64.9 2,568

2000 42.7 168.4 3,928

2001 45.8 186.9 4,081

2002 49.7 213.5 4,291

2003 51.9 233.2 4,487

2004 55.0 257.7 4,685

Source: Health Care Financing Review, 2007, Table3 13.4 and 13.10.

Category Payment per capita

Number Eligible

(millions)

Percent of Total

Eligible population

Total spending (billions)

Percent of Total

Spending

Aged $ 13,837 4.3 7.8 $ 59.5 23.1

Disabled 14,127 7.9 14.4 111.6 43.3

Children 1,668 26.5 48.2 44.2 17.2

Adults 2,516 12.2 22.2 30.7 11.9

Other 2,853 4.1 7.5 11.7 4.5

Total $ 4,685 55.0 100.0 $ 257.7 100.0

Medicaid Spending by Eligibility Categories, 2004

Rising costs…• expanding enrollments• rising medical care costs• increased reimbursement rates

Rising costs…• expanding enrollments• rising medical care costs• increased reimbursement rates

Source: Health Care Financing Review: Medicare and Medicaid Statistical Supplement, 2007.

Medicaid: Large State Spending, 2004

StateTotal Payments

(in billions)Payment perBeneficiary

Number of Beneficiaries(in millions)

California $27.4 $2,740 10.0

Florida 12.8 4,267 3.0

Illinois 10.8 5,400 2.0

New York 37.3 7,936 4.7

Ohio 11.4 6,000 1.9

Pennsylvania 10.1 5,611 1.8

Texas 13.2 3,667 3.6

Seven-state total 123.0 4,556 27.0

Rest of the U.S. 134.7 4,811 28.0

Total U.S. 257.7 4,685 55.0

Source: Health Care Financing Review: Medicare and Medicaid Statistical Supplement, 2007.

Economic Impacts Health outcomes

Currie and Gruber (1996) 10% increase in eligibility for children resulted in 3.4% decrease in

child mortality rates 10% increase in eligibility for pregnant women resulted in 2.8%

decrease in infant mortality rates Baker and Royalty (2000)

10% increase in Medicaid fees resulted in 2.4% increase in office-based physician visits for poor patients

Enrollment in private insurance Cutler and Gruber (1996): “crowding-out” effect

Family structure Yelowitz (1998): Medicaid lowers the cost of childbearing

and favors single-parent families Savings

Gruber and Yelowitz (1999): Medicaid reduces incentive to save and encourages asset transfers

Other Government ProgramsSCHIP (State Children’s Health Insurance Program)

VA Hospitals 157 hospitals 860 clinics 137 nursing homes 15,000+ physicians

Objectives: Expand insurance coverage: + 32 million

Lower health care costs: - $143 billion over 10 years

Private InsuranceSocial InsuranceRevenue ProvisionsOther

Private Insurance Reforms

Insurance rules Community rating (age, area, family size, and tobacco use) Guaranteed issue (can’t deny for pre-existing condition) Prohibit lifetime limits on coverage Dependent children on parent’s plan until age 26 Establish health insurance exchanges

Individual Health Insurance Mandate Tax credit subsidies up to 400% poverty $695 fine (or 2.5% income) if you don’t buy

Employer Health Insurance Mandate $2000 fine per employee for firms N > 50 Tax credit subsidies to small employers High cost plan excise tax (t = 40%)

Social Insurance Reforms

Medicare “doughnut hole” eliminated by 2020 Prohibit physician-owned hospitals in Medicare Provide 10% bonus to primary care physicians in shortage

areas Medicaid

eligibility expanded to 133% poverty line Federal government assumes larger cost share

Revenue Provisions Medicare tax base expanded to include unearned

income and t = 3.8% (I > $250k) Medicare tax rate on individuals rises by 0.9 to

2.35% (I > $250k) Medical device excise tax (t = 2.9%) Excise tax on brand name pharmaceuticals Excise tax on indoor tanning salons (t = 10%) Limit Flexible Spending Accounts to $2500

Other Features Establish CLASS: voluntary, self-funded long-term care

insurance program Establish Patient-Centered Outcomes Research

Institute Establish value-based modifier for physician

payment formulas Expand supply of health care workers Grant 12 years exclusivity to biologics Promote preventive health care

Award grants for evidence-based public health programs Chain restaurants required to post caloric content

Policies To Contain Costs

Policy Options

TE = Σ Pi Qi

Price ControlsManaged Care (Quantity Controls)Market Alternatives

Economics of Price Controls

Competitive MarketsMonopoly Markets

Economics of Price ControlsCompetitive Market

Health Care

Price

D1

S1

P0

Q0

P1

QS QD

Shortage

Free Market: P0, Q0

Gov’t imposes price ceiling at P1

At P1: Qd > Qs

shortage results

Non-Price Rationing Black Market Bribes Discrimination Wait / Search

Free Market: P0, Q0

Gov’t imposes price ceiling at P1

At P1: Qd > Qs

shortage results

Non-Price Rationing Black Market Bribes Discrimination Wait / Search

P2

Economics of Price ControlsMonopoly Market

Health Care

Price

D1

MC1

P1

Q1

P0

Q0

Monopoly: P0, Q0

Gov’t imposes price ceiling at P1

At P1: there is no shortage; monopolist produces Q1

Monopoly: P0, Q0

Gov’t imposes price ceiling at P1

At P1: there is no shortage; monopolist produces Q1

MR1

Price Controls in Health Care

Mandated fee schedules Physician-induced demand shifts Unbundling of services

Global budgeting (capitation) Services delayed Personnel take unpaid vacations

Resource rationing Mandating primary care (gatekeepers) Limits on new facilities (CONs) Waiting lists

U.S. Cost-containment Strategies

Hospitals: Diagnosis-related groups (DRGs) Prospective payment based on point system

DRGs by Weight—Five Highest and Five Lowest

DRG DRG Title WeightsMean Length

of Stay

Highest Weights

103 Heart transplant 19.8195 57.5

483 Tracheostomy 15.2827 41.0

504 Extensive 3rd degree burns w/skin graft

13.8097 33.6

480 Liver transplant 10.6132 22.8

495 Lung transplant 8.8879 16.2

Lowest Weights

33 Concussion, age 0-17 0.2075 1.6

382 False labor 0.1607 1.3

343 Circumcision, age 0-17 0.1533 1.7

391 Normal newborn 0.1519 3.1

448 Allergic reactions, age 0-17 0.0970 2.9

Source: The Economics of Health and Health Care, Folland, Goodman, and Stano (2007), Table 20-2a.

U.S. Cost-containment Strategies

Hospitals: Diagnosis-related groups (DRGs) Prospective payment based on point system Economic impact of DRGs

Reduced hospitalization; shorter staysIncrease in outpatient careDRG creep

Physicians’ practices: Resource-based Relative Value Scale (RBRVS) Establishing a value scale

Work effortOverhead costLiability insurance premiums

Monetary conversion factor: (6 units) x $38 = $228

Managed Care Strategies

Types HMOs PPOs

Cost Control Strategies Practice guidelines

Restricted choice of providersSecond opinions requiredPrior authorizationCase management

Restricted choice of providersSecond opinions requiredPrior authorizationCase management

Market Alternatives

Managed competition Require employers to offer employees a

choice of health plansMedical savings accounts

Tax-free savings accounts for routine medical expenses

High deductible catastrophic insurance

Suppose employer pays $7000 for your family’s major medical and routine insurance coverage

Employer buys $3500 catastrophicinsurance policy and deposits other $3500 into MSA