Medicare Professor Vivian Ho Health Economics Fall 2009

Topics l Coverage l Financing l Case Study

The Medicare Program l Target population - individuals 65+, certain disabled people, and people with kidney failure l Part A - Hospital Insurance program (compulsory) uInpatient hospital services uSkilled nursing care uHome health care uHospice care l 19.1m enrollees in 1966; 44.9m in 2008 *Source:

l Part B - Supplemental Medical Insurance program (voluntary) uPhysician services uOutpatient care uEmergency room services l 17.7m enrollees in 1966, 41.7m in 2008 *Source:

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 ($ millions) 1967$ 3, , , , , , , , ,815 2,597 1,343 10,612 9,870 24,288 14,490 48,654 21,277 66,687 95, , , , , , , , ,270 YearIncomeDisbursementsBalance

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 1967$ 1, , , , , , , , , ,170 1,424 10,737 4,532 22,730 10,646 43,022 14,527 65,213 13,874 88,992 45, ,536 16, ,303 59,382 YearIncomeDisbursementsBalance

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

l Enrollment and plan participation has varied over time, 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 Provider Reimbursement 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 2003: l DRG 33 - concussion, age<18, weight=.2072 l DRG heart transplant, weight=

Impact of PPS 1) Costs uCost growth has slowed periodically, but they continue to grow in some periods 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 uProfits from Medicare patients initially fell, but some hospitals still very profitable

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

Medicare Part B Provider Reimbursement l 1989 Omnibus Reconciliation Act 1) 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

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

2003 Medicare Modernization Act l Created Medicare Part D uPrescription Drug Benefit- Jan 2006 l Private insurers offer drug plans subsidized by CMS uDrug-only insurance plans uMedicare Advantage comprehensive plans l eg. PPO’s or HMO’s

2003 Medicare Modernization Act l All private insurers must include certain features in their policies: u$250 deductible for drug purchases u25% copay for the next $2000 u100% copay for purchases from $2250 to $5100 l the “donut hole” u5% copay for purchases > $5100 l ‘catastrophic coverage’

2003 Medicare Modernization Act l Plans may compete for customers based on: upremium price uformularies for which drugs are covered udrug prices they negotiate with drug manufacturers udisease management services

2003 Medicare Modernization Act l CMS pays insurers a subsidy equal to 75% of the expected costs of all accepted plans è Insurers bid for access to the Medicare market before they know their actual costs

2003 Medicare Modernization Act l Initial cost impact of MMA may be low, because copayments are so high l But the number of highly effective, high- cost drugs > $10,000 is growing l Numerous regulations restrict price competition l Limited penalties for cost over-runs uInsurers reimbursed 80% of costs if > 2.5% of projected costs

Medicare Costs l Projected Medicare cost increases are alarming  costs must be paid for w/  taxes or  other spending l Part B & D premiums are set to cover 25% of costs u2003 Part B premiums = 15% of average SS benefit uPart B & D premiums expected to = 35% of average SS benefit in 2010, 50% by 2030