Chapter 10: Government as Health Insurer Health Economics

Topics l Coverage and Financing l Current Challenges uRestraining costs uImproving health

Medicaid Trends , , , , , , , ,579 $ 6,300 12,242 37,508 48,710 54,500 64, , ,552 Year # of Recipients Total Cost ($m)

Medicaid Recipients, 1997

Medicaid Financing l Joint financing by federal and state governments l States w/ lowest per capita income receive larger federal subsidies uCA, NY receive close to 50% federal funding. uMS, WV receive 70.09, 73.67% federal funding respectively.

l States have wide latitude in setting eligibility and medical benefits. uAccess and costs vary by state. l Minimum requirements for federal matching funds: uMust cover Temporary Assistance for Needy Families (TANF) and Supplemental Security Income (SSI) beneficiaries. uMust provide inpatient and outpatient hospital services, and physician services.

Medicaid & the Nursing Home Market l Individuals who meet certain low- income and disability requirements qualify for nursing home care covered by Medicaid. l Medicaid reimburses nursing homes on a fixed price basis (e.g. price per day).

Medicaid & the Nursing Home Market l How can the Medicaid program set prices in order to insure adequate access, but also restrain costs? l Keep in mind that nursing homes can choose to serve private pay or Medicaid patients.

Medicaid & the Nursing Home Market l We assume that most nursing homes have a local monopoly. ui.e. Most nursing homes face a downward sloping demand curve. l A nursing home with monopoly power which serves only private-pay patients will set price where MR=MC.

Medicaid & Nursing Homes $ NH patient days ATC MC Demand MR Q0Q0 P0P0

Medicaid & the Nursing Home Market l Now, assume instead that there are no private patients, and the gov’t must set a reimbursement level for care provided to Medicaid patients. l 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 $ NH patient days ATC MC Demand MR Q3Q3 PMPM MR M

Medicaid & the Nursing Home Market l Now, consider the graph when a nursing home can serve private pay patients and/or Medicaid patients. l The demand curve for private pay patients indicates that some are willing to pay more than P M for nursing home care.

Medicaid & Nursing Homes $ NH patient days ATC MC Demand MR Q3Q3 PMPM MR M The nursing home will now view its MR curve as the line ABMR M A B

Medicaid & the Nursing Home Market l 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. l 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 $ NH patient days ATC MC Demand MR Q3Q3 PMPM MR M The nursing home will care for Q 1 private pay patients and Q 3 - Q 1 Medicaid patients. A B Q1Q1 P0P0

Medicaid & the Nursing Home Market l Policy challenge: Medicaid can increase access to nursing homes by raising P M. uHowever, raising the reimbursement rate will lead to higher expenditures. l Some patients who might have been willing to pay out-of-pocket without Medicaid now may get Medicaid coverage. uGov’t attempts to subsidize care for low- income individuals can lead to “crowd-out” of private care.

Does Medicaid “work?” l In late 1980’s, income ceilings for Medicaid coverage were raised. uPregnancy care for women with incomes <133% of poverty. uChildren <6 covered if family income <133% of poverty. uChildren <9 covered if family income <100% of poverty.

l Did health insurance coverage for the poor increase, or did it “crowd out” private insurance? uSome low income people may have dropped private insurance to go on Medicaid. l Did health status among the poor improve?

l : Medicaid coverage of children rose (15%  21%), but private insurance coverage fell (77%  69%). uBut private insurance may have fallen for other reasons (e.g recession). l States could increase eligibility beyond federal minimums. è Compare increases in Medicaid coverage and falls in private insurance across states.

Results l The Medicaid expansion increased coverage for 1.5 million children uBut decreased private insurance by.6 million. uSimilar results for women of childbearing age. l The expansions lowered infant mortality by 8.5%; child mortality by 5.1%. uCost per life saved: $1-1.6m.

Was the expansion worth it? l Should Medicaid be “better targeted?” l Could we have gotten the same result cheaper?

Current challenges to Medicaid l Rising Medicaid costs have strained state budgets during recessions. uProblematic, because most state governments required by law to balance their budgets. èMany states have made Medicaid program changes.

1) Modest reductions in funding uLower physician, nursing home reimbursement rates. uLimits on prescription drug use. uNoncoverage of optical, dental care. 2) Expansion of Medicaid managed care. 3) Cost shifting to the federal government. uStates shifting all state-run health programs into Medicaid, in order to receive matching funds.

Medicaid and Managed Care l States vary widely in financing and delivery arrangements for managed care plans. uLow-intensity: primary care case management (PCCM). l Gatekeeper bears no risk for cost overruns. uHigh-intensity: mandatory enrollment in fully capitated plans.

Impact of Medicaid managed care (early evidence) 1) Savings of 5-15% per enrolled beneficiary. uThese studies were conducted prior to 1997 BBA, often in the context of a waiver renewal. è 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) l Medicaid managed care grew rapidly in mid 1990s due to attractive business opportunities. u“Foot in the door” for providing state employee health care coverage. uInsurers didn’t have to pay commercial rates to providers, could also transfer risk. uHMO industry was making high profits at this time.

Impact of Medicaid managed care (more recent evidence) l In last 2-3 years, HMO profits disappeared. uMirrors problems w/ health care costs in private sector and Medicare. l Still have 2-fold variation in capitation rates across states. l Difficult to monitor quality. uTennCare had significant differences in LBW babies and death in 1st 60 days across its Medicaid managed care programs.

Future challenges to Medicaid l HMOs have enrolled AFDC beneficiaries, but not the higher cost elderly, or chronically disabled. uHigh-cost populations may require carve- out programs.

l Eligibility, Marketing, and Enrollment. uIntermittent eligibility as enrollees cycle in and out of welfare. uHigh turnover forces HMOs to market aggressively, to maintain revenues (costs up to 1 month’s capitation per member). èStates may need to set marketing policies, to prevent “frivolous gimmickry.”

l Traditional providers may not be able to compete with commercial HMOs. uCommunity health centers, urban hospital outpatient programs, indigenous community-based physicians have provided much care to Medicaid beneficiaries. uSubsidized in past due to high level of uncompensated care. uIf forced to close, creates access problems for persons w/o coverage.

Wrap-up l Funding the Medicaid program provides health benefits, but sometimes at significant costs. l Future decisions on Medicaid should be made within the context of wider welfare reform.

The Medicare Program l Target population - individuals 65+ l Part A - Hospital Insurance program (compulsory) uInpatient hospital services uSkilled nursing care uHome health care uHospice care l 19m enrollees in 1966; 38.7m in 1999.

l Part B - Supplemental Medical Insurance program (voluntary) uPhysician services. uOutpatient care. uEmergency room services l 17m enrollees in 1966, 37.0m in 1999.

Medicare Costs Total Expenditures ($ billions)

Medicare Financing - Part A l Funding Sources u2.9% payroll tax shared equally by employers and employees uFederal Hospital Insurance Trust Fund uEnrollee deductibles and copayments

Part A Trust Fund 1966$ 1, , , , , , , , ,581 10,517 25,577 13,749 48,414 20,499 66,997 98, , , , , , ,380 YearReceiptsExpendituresBalance

Part A Patient Cost Sharing l No hospital inpatient coverage after 90 days. uExcept for 60-day lifetime reserve. uMedicare offers no coverage in “catastrophic circumstances.”

Part A Patient Costs 1966 $ YearDays 1-60Days 61-90After 90 Days Deductible Daily Coinsurance

Medicare Part B Financing l Funding sources uMonthly premium payments. uContributions from general revenue of the U.S. Treasury.

Part B Trust Fund 1966$ , , , , , , , ,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 YearReceiptsExpendituresBalance

Part B Patient Costs 1966 $ Year Annual Deductible Coinsurance Rate Monthly Premium

Medicare Part C l Since the 1980s, the aged could voluntarily enroll in Medicare HMOs. uHMO receives capitated payment based on Part A and B beneficiary costs adjusted for age, sex, region, etc. uHMO can provide lower copays and outpatient drugs not covered by Medicare Part B.

Medicare Part C: Medicare+Choice l 1997 BBA increased the variety of managed care plans under Medicare uPPOs - physician networks uPSOs - owned by hospitals and physicians uPOS - extra fee for out-of-network care uPrivate FFS l no limits on premiums charged to beneficiaries uMSAs l Turnover reduced by requiring enrollment for at least 1 year.

Medicare Part C: Medicare+Choice Medicare Risk HMO/M+C Enrollment and HMO Participation,

Medicare Part C: Medicare+Choice l Enrollment and plan participation has varied throughout the 90’s, but shows a strong net gain. l Plans are putting more limits and copays for prescription drug coverage. l Most elderly have access to a plan with no premiums, but the share is falling.

Medicare Part A Reforms l Pre-1983, hospitals reimbursed retrospectively according to costs. uLittle incentive for cost efficiency. uIncentive to provide unnecessary services. l 1983, Prospective Payment System uMedicare patients were classified by principal diagnosis into 1 of 470 Diagnosis Related Groups (DRGs).

l DRG weight - index # reflecting relative cost of care. l Examples from 1995: l DRG 33 - concussion, age<18, weight=.2003 l DRG heart transplant, weight=

The 5 Most Common DRGs in 1996 DRG Discharges 127 Heart failure & shock 709, 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 pulmonary361,545 disease 209 Major joint & limb reattachment 358,660 procedures of lower extremities

Impact of PPS 1) Costs u : Part A expenditures rose 15% per year on average. u : Growth slowed to 8.75% annually. uCaution: Most of the slower expenditure growth occurred in early years of the program. è Hospitals may have learned to game the system.

2) Patient Outcomes uNo evidence that quality of care changed for Medicare patients as a result of PPS. uHowever, hospital admissions and length of stay declined. 3) Hospitals uThe share of hospitals reporting Medicare profits fell from 84.5% in 1985 to 40.7% in 1990.

Medicare Part B reform l 1989 Omnibus Reconciliation Act 1) New prospective payment system for physicians. 2) Limits on total growth in Medicare Part B expenditures by Congress uVolume Performance Standards

3) Strict limits on balance billing. uAdditional 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 l Pre 1992, Medicare reimbursed physicians retrospectively. uPhysicians were paid lowest of bill submitted, physician’s customary charge, or area’s prevailing rate for that service. èPhysicians had incentives to raise charges, in order to raise future rates.

l , Gradual phase-in of Resource-Based Relative Value Scale. uFee schedule based on estimated time, effort, resources required for various physician services. uFavors evaluation and management services (e.g. office visits w/ established patients over technical medical procedures) ue.g. 1992: Average fees for GP’s rose 10%, specialty surgeons experienced an 8% fall.

The current cost crisis l The Medicare Part A trust find is predicted to be insolvent by l Part B expenditures are rising rapidly. l Why?

l Part A and B expenditure growth occurred for different reasons. l From 1987 to 1995, Part A utilization grew slowly (19  21%), but cost per claim rose 58%. l Part B utilization grew faster (74  84%), but costs per claim rose only 12%.

l High cost users are responsible for the level and growth rate of expenditures. l 1995: Top 1% of Medicare enrollees accounted for 19% of all expenditures. l Median expenditure per enrollee rose from $647 in 1987 to $884 in u37% growth rate. l Top 2% of enrollees’ expenditures was $28,000 in 1987, $42,000 in u52% growth rate.

Are higher costs “worth it”? Life Expectancy and Costs for Medicare Patients w/ a new heart attack: YearLife Exp.Costs ($1991) /12 $11, /12 11, /12 12, /12 13, /12 14,772 è Higher costs improve outcomes.

Regional comparisons paint a different picture. l 1995 average inpatient expenditures for Medicare patients in the last 6 months of life were 2 times higher in Miami vs. Minneapolis. u25.4 specialist visits in Miami; 4.7 in Minneapolis. l 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. uBalanced Budget Act of uBut most of the expenditure growth is in SNFs, hospice, home health, and outpatient services. 2)Shift more cost to beneficiaries. uTie benefits to income.

l Increase the eligibility age. uRaising the eligibility age to 67 only saves 6.7% annually. u32% of these cost savings will be shifted to other government sources (Medicaid, SSDI, etc.) uThe number of newly uninsured could rise by 1.75 million. l Shifting costs to beneficiaries is a political minefield.

3)Encourage Medical Savings Accounts uMSAs are more appealing to low-risk individuals, which doesn’t solve the high- cost user problem. 4)Move the Medicare population to managed care. uMedicare +Choice (Part C) u# 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. uPrior to the BBA, HMOs received 95% of the average expenditures of a FFS patient in the same region. uThe capitated rate is now based on a blend of national and previous local rates.

Medicare Prescription Drug Reform Proposal See newspaper editorial

Wrap-up l Prospective payment better than retrospective reimbursement in restraining costs. l However, prospective reimbursement rates are set by government, not by interaction of supply and demand. çPotential for surpluses and shortages in medical care market.

l In order to further restrain costs, more market-based incentives are under consideration. ue.g. competitive bidding by providers for Medicare managed care contracts.