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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 x1 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 (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”? 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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