Medicare and Medicaid

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					Chapter 10: Government
   as Health Insurer




  Health Economics
Topics

 Coverage and Financing
 Current Challenges
    Restraining costs
    Improving health
Medicaid Trends
          # of
Year                Total Cost ($m)
       Recipients
1972    17,606        $ 6,300
1975    22,007         12,242
1985    21,814         37,508
1988    22,907         48,710
1989    23,511         54,500
1990    25,255         64,859
1996    36,118        121,685
1997    33,579        123,552
Medicaid Recipients, 1997

            % of         % of       Average
            recipients   payments   payment

Kids(<21)        45       13        $1027

Adults           20       10        $1809
w/Kids
Age 65+          12       30        $9477

Other            23       47        $8433
Medicaid 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 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 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 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 Homes

$
                 MC




P0                    ATC




                            Demand
            MR


       Q0                   NH patient days
Medicaid & 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 Homes

$
                   MC




                        ATC


PM                            MRM

                              Demand
              MR


         Q3                   NH patient days
Medicaid & 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 Homes

$                         The nursing home will
                          now view its MR
                       MC curve as the line
     A                    ABMRM


                         ATC


PM                               MRM
         B
                                Demand
                  MR


             Q3                  NH patient days
Medicaid & 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 Homes

$                        The nursing home will
                         care for Q1 private
                      MC pay patients and Q -
                                             3
     A                   Q1 Medicaid patients.


P0                      ATC


PM                              MRM
         B
                               Demand
                 MR


         Q1 Q3                  NH patient days
Medicaid & 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?”

   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.
    Results
   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?

 Should Medicaid be “better targeted?”
 Could we have gotten the same result
  cheaper?
Current 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 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 care
        (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 care
         (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 care
         (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 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-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 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 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 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 Fund
Year   Receipts   Expenditures   Balance

1966   $ 1,943          999          944
1975    12,980       11,581       10,517
1980    26,097       25,577       13,749
1985    51,397       48,414       20,499
1990    80,372       66,997       98,933
1994   109,570      104,545      132,844
1997   130,154      139,452      115,643
1999   151,593      130,632      141,380
Part 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 Costs
       Deductible     Daily Coinsurance
Year   Days 1-60    Days 61-90   After 90 Days

1966    $ 40             10           ---
1975      92             23            46
1980     180             45            90
1985     400            100          200
1990     592            148          296
1995     716            179          358
1999     768            192          384
2001     792            198          396
Medicare Part B Financing

    Funding sources
     Monthly premium payments.
     Contributions from general revenue of the
      U.S. Treasury.
Part B Trust Fund
Year   Receipts   Expenditures   Balance

1966   $  324          203          122
1975    4,673        4,735        1,444
1980   10,784       11,245        4,530
1985   25,106       23,880       10,924
1990   45,913       43,987       15,482
1995   55,607       60,317       19,422
1997   81,924       74,124       36,131
1999   80,902       82,327       44,787
Part B Patient Costs
        Annual      Coinsurance   Monthly
Year   Deductible       Rate      Premium

1966     $ 50            20        3.00
1975       60            20        6.70
1980       60            40        9.60
1985       75            20       15.50
1990       75            20       28.60
1995      100            20       46.10
1999      100            20       45.50
2001      100            20       50.00
             Medicare 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+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+Choice
 Medicare Risk HMO/M+C Enrollment and
      HMO Participation, 1985-1999
Medicare 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 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).
      DRG     Re gional  Outlier           Hospital 
PP         x                       x1  Adjustment s 
      weight Adjustment s  Payments                    



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 1996

DRG                                    Discharges
127 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 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.
          may have learned to game
 Hospitals
 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 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 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 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 (1921%), but cost per
  claim rose 58%.
 Part B utilization grew faster (7484%),
  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”?
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
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 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
    Reform Proposal

      See newspaper editorial
Wrap-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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