Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 1 of 32 Health Insurance II: Medicare, Medicaid, and Health Care Reform 16.1 The Medicaid Program for Low-Income Mothers and Children 16.2 What Are the Effects of the Medicaid Program? 16.3 The Medicare Program 16.4 What Are the Effects of the Medicare Program? 16.5 Long-Term Care 16.6 Lessons for Health Care Reform in the United States 16.7 Conclusion

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 2 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M Medicare Federal program, funded by a payroll tax, that provides health insurance to all elderly over age 65 and disabled persons under age 65. Medicaid Federal and state program, funded by general tax revenues, that provides health care for poor families, elderly, and disabled.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 3 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.1 The Medicaid Program for Low-Income Mothers and Children How Medicaid Works Medicaid, like unemployment insurance (UI), is a program that is federally mandated but administered by the states. Who Is Eligible for Medicaid? Children’s Health Insurance Program (CHIP) Program introduced in 1997 to expand eligibility of children for public health insurance beyond the existing limits of the Medicaid program, generally up to 200% of the poverty line. All individuals age 18 or younger are eligible for Medicaid or CHIP up to 100% of the poverty line. Children under age 6 and pregnant women are covered up to 133% of the poverty line. In most states, eligibility extends further for both children and pregnant women: a typical state covers both groups up to 200% of the poverty line.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 4 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.1 The Medicaid Program for Low-Income Mothers and Children What Health Services Does Medicaid Cover? While federal Medicaid rules require states to cover major services, such as physician and hospital care, they do not require states to pay for optional services, such as prescription drugs or dental care. How Do Providers Get Paid? States can also regulate the rate at which health service providers are reimbursed. In most states, Medicaid reimburses physicians at a much lower level than does the private sector, which often leads physicians to be unwilling to serve Medicaid patients.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 5 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.2 What Are the Effects of the Medicaid Program? The goal of this large and rapidly growing program is to provide health insurance coverage to low-income populations who cannot afford private coverage and thereby improve their health. How Does Medicaid Affect Health? A Framework

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 6 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M How Does Medicaid Affect Health? Evidence 16.2 What Are the Effects of the Medicaid Program? Take-Up In 1982, 12% of individuals nationwide aged 18 or under were eligible for public insurance under Medicaid. By 2000, 46% of individuals in that age group were eligible. There was a parallel rise for pregnant women, with some small increase for parents of eligible children in selected states that chose to expand to that population. Crowd-Out Unlike people who prefer to hold on to their private health insurance, some individuals might find it attractive to leave private insurance for public insurance because the Medicaid insurance package is much more generous. This is another example of the ways government intervention can crowd out private provision, as we saw with fireworks, education, and social insurance.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 7 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M How Does Medicaid Affect Health? Evidence 16.2 What Are the Effects of the Medicaid Program? Health Care Utilization and Health Even at the largest estimates of crowd-out, expanding Medicaid still substantially reduces the number of uninsured, so expansions may affect the utilization of health care services. Cost-Effectiveness Findings suggest that investing in low-income health care may be a cost- effective means of improving health in the United States.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 8 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.2 What Are the Effects of the Medicaid Program? M P I R I C A L E V I D E N C E E USING STATE MEDICAID EXPANSIONS TO ESTIMATE PROGRAM EFFECTS An important feature of the Medicaid expansions is that they occurred at a very different pace across the states and at a different pace for different age groups of children within states. Studies can compare outcomes (such as degree of illness) in the treatment states, those that expand eligibility more, to outcomes in the controls, those that expand it less. Over the 1982–2000 period, Medicaid eligibility rose much more in Missouri than in Michigan (top panel). There were also dramatic differences in eligibility growth within states: eligibility rose much more for 13-year-olds in Washington, D.C. than for 0-year-olds (bottom panel).

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 9 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.3 The Medicare Program The largest public health insurance program in the United States is Medicare.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 10 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M Medicare Is Really Three Different Programs 16.3 The Medicare Program Medicare Part A Part of the Medicare program that covers inpatient hospital costs and some costs of long-term care; financed from a payroll tax. Medicare Part B Part of the Medicare program that covers physician expenditures, outpatient hospital expenditures, and other services; financed from enrollee premiums and general revenues. Medicare Part D Part of the Medicare program that covers prescription drug expenditures. How Medicare Works The Medicare program is administered at the federal level. All U.S. citizens who have worked and paid payroll taxes for ten years, and their spouses, are eligible for coverage. Other citizens who do not have the requisite work experience can purchase Medicare coverage at its full cost.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 11 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M Medicare Has High Patient Costs How Medicare Works 16.3 The Medicare Program Relative to private health insurance, the Medicare program has fairly high copayments and deductibles and a relatively lean benefits package. This greatly lowers the consumption-smoothing value of Medicare, since there is still some risk of very high medical expenditures if you are ill.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 12 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.3 The Medicare Program The Medicare Prescription Drug Debate APPLICATION  When Medicare was established in 1965, it covered most medical needs for the elderly and disabled, including hospital and doctor costs, but it excluded coverage for prescription drugs. Democrats and Republicans proposed two different approaches to deal with this problem. In December 2003, President Bush signed into law a bill that followed the Republican approach. For basic Part D plans, individuals receive coverage for:  None of the first $250 in drug costs each year.  75% of costs for the next $2,250 of drug spending (up to $2,500 total).  0% of costs for the next $3,600 of drug spending (up to $5,100 total).  95% of costs above $5,100 of drug spending. The effect of this donut hole on the use of prescription drugs for the elderly a source of debate for years. 

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 13 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.4 What Are the Effects of the Medicare Program? The Prospective Payment System Despite broad support, there is surprisingly little evidence that the Medicare program actually improves the health of the elderly. Prospective Payment System (PPS) Medicare’s system for reimbursing hospitals based on nationally standardized payments for specific diagnoses. This system had several key features: 1. All diagnoses for hospital admissions were grouped into 467 “ Diagnosis Related Groups, ” or DRGs. 2. The government reimbursed hospitals a fixed amount based on the DRG of patient admission. 3. The fixed amount of reimbursement was determined by a national standard for the cost of treating that DRG.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 14 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M Empirical Evidence on the Move to the PPS 16.4 What Are the Effects of the Medicare Program? The average length of a hospital stay for elderly patients fell from 9.7 days to 8.4 days in just one year, which was four times the rate of decrease over the previous two decades. In one Indiana hospital, the length of stay for hip fractures fell from almost 22 days to only 13 days. The move to a PPS led to a sharp reduction in the rate of growth of hospital costs: after growing at 9.6% per year from 1967 to 1982, hospital costs under Medicare grew at only 3.0% per year from 1983 to 1988.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 15 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M Problems with PPS 16.4 What Are the Effects of the Medicare Program? Why didn ’ t the PPS solve the long-run cost growth problems of the Medicare program? Medicare was paying a fixed price per diagnosis, but the choice of a diagnosis is something the hospital has some control over when patients are admitted. There was a large increase in reported severity of admission diagnoses for the elderly around the time of PPS! This short-run problem has a longer-run manifestation, which is a problem with the design of the DRGs themselves. Almost half of the DRG designations are based not purely on diagnosis but also on the actual treatment used for the patient. Another problem with the PPS has been that it applies only to one part of the medical system for treating the elderly, but there is enormous substitutability across different pieces of the medical system.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 16 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M Lesson: The Difficulty of Partial Reform 16.4 What Are the Effects of the Medicare Program? Just as with designing optimal insurance systems for workers, designing optimal reimbursement systems for providers reflects a trade-off. Retrospective reimbursement systems do not provide sufficient incentives to control medical costs. A purely prospective system, which we have not yet achieved, might lead providers to cut care too much in order to make money.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 17 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M Medicare Managed Care 16.4 What Are the Effects of the Medicare Program? Starting in 1985, the federal government allowed Medicare enrollees a choice of Medicare HMOs as well. A disadvantage for patients was that HMOs restricted their choice of provider and potentially engaged in other rationing devices to keep down costs that were not present in the traditional system.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 18 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M Medicare Managed Care 16.4 What Are the Effects of the Medicare Program? The Medicare program endeavored to lower its costs by reimbursing HMOs only 95% of the average annual medical costs of enrollees who stayed in traditional Medicare.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 19 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M Medicare Managed Care 16.4 What Are the Effects of the Medicare Program?

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 20 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M Should Medicare Move to a Full Choice Plan? Premium Support 16.4 What Are the Effects of the Medicare Program? premium support A system of full choice among health care plans for Medicare enrollees, whereby they receive a voucher for a certain amount that they can apply to a range of health insurance options (either paying or receiving the difference between plan premiums and the voucher amount). Rep. Ryan R Wisc. Has Medicare reform plan with this feature

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 21 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.4 What Are the Effects of the Medicare Program? A Premium Support System for Medicare APPLICATION 

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 22 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.4 What Are the Effects of the Medicare Program? A Premium Support System for Medicare APPLICATION  The advantages of a premium support system mirror the advantages of voucher systems for education: Respects consumer sovereignty by allowing individuals to choose the health plan that best matches their taste. Promotes efficiency in medical care delivery by allowing individuals to shop across plans. Solves the problem of “ appropriate ” reimbursement levels for managed care plans by simply letting the market work. 

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 23 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.4 What Are the Effects of the Medicare Program? Gaps in Medicare Coverage Individuals fill these coverage gaps in Medicare in one of three ways: 1. Low income elderly individuals are entitled to more generous coverage under the Medicaid program or through subsidies to private prescription drug plans. 2. About one-third of all retirees over 65 are covered by retiree health insurance from their former employers. 3. Many retirees not covered by Medicaid or their own retiree health insurance buy individual “ Medi-gap ” policies from insurance companies. These three means of filling the gaps in Medicare coverage exert a negative financial externality on the Medicare program.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 24 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M Financing Long-Term Care 16.5 Long-Term Care long-term care Health care delivered to the disabled and elderly for their long-term rather than acute needs either in an institutional setting (a nursing home) or in their homes. This care is delivered primarily in two forms: 1. Institutional care provided in nursing homes. 2. Home health care, where nurses and other aides provide care in the patient ’ s home. When savings are drawn below a threshold level, individuals qualify for state programs that pick up the cost of nursing homes under Medicaid.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 25 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.6 Lessons for Health Care Reform in the United States Rising Health Care Costs Since 1950, the Consumer Price Index for medical care has risen by 1.8 percentage points more per year than the Consumer Price Index for all items in the U.S. economy. Fundamental cost control in the United States is difficult: There is an enormous amount of waste in our medical system. We could produce similar health outcomes with much less spending. Much of what has driven the rapid rise in health care spending in the United States has been quality-improving technological change in the delivery of health care.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 26 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.6 Lessons for Health Care Reform in the United States The Uninsured Pooling Efficient provision of insurance requires large pools of participants that are created independently of health status. Solving the problem of the uninsured requires developing some new pooling mechanism, either through government insurance or through private insurance pools. Affordability Health insurance is expensive. For example, the average cost of employer-provided insurance in 2008 is $4,704 per year for individuals and $12,680 for families. Individual Mandates mandate A legal requirement for employers to offer insurance or for individuals to obtain some type of insurance coverage.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 27 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.6 Lessons for Health Care Reform in the United States National Health Insurance national health insurance A system whereby the government provides insurance to all its citizens, as in Canada, without the involvement of a private insurance industry. While public expenditures would rise dramatically, there would be a large reduction in private insurance expenditures. Thus, the rise in total social costs of health care would be small compared to the actual costs to the government. First, there may be a deadweight loss arising from the need to increase government revenues. Second, moving from private financing of health insurance through employer expenditures to public financing is like moving from a hidden tax to an explicit tax.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 28 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.6 Lessons for Health Care Reform in the United States The Massachusetts Experiment with Incremental Universalism APPLICATION  Incremental reform is not necessarily inconsistent with universal coverage. In 2006, Massachusetts introduced a plan that filled in the holes in its existing system of private and public coverage to move toward universal coverage:  A new program was established (“Commonwealth Care”) to provide free insurance coverage for all residents below 150% of the poverty line and heavily subsidized coverage for those up to 300% of the poverty line.  While there were no subsidies available above 300% of the poverty line, there were major changes to improve the insurance market.  The law specified that all adults in the state must be covered by health insurance, but only to the extent that such insurance was deemed “affordable”. The Massachusetts reform has successfully achieved its goals. Yet while it decreased the numbers of uninsured, it did not explicitly address the more difficult issue of cost control, and health care costs continue to rise faster than personal incomes in the state. 

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 29 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M Reform Efforts in Lessons for Health Care Reform in the United States As of August 2009, Congress had agreed on several principles to guide reform. There are a number of contentious problems that remain before reform can become reality:  Financing.  The role of the “public option.”  The importance of long-term cost control, referred to as “bending the cost curve downward.” One of the major difficulties facing health reformers is how much they can count on new ideas to deliver the savings that are needed to finance expanded coverage.

Public Finance and Public Policy Jonathan Gruber Third Edition Copyright © 2010 Worth Publishers 30 of 32 C H A P T E R 1 6 ■ H E A L T H I N S U R A N C E I I : M E D I C A R E, M E D I C A I D, A N D H E A L T H C A R E R E F O R M 16.7 Conclusion The Medicare and Medicaid programs play a central and growing role in the delivery of health care in the United States. Two lessons are apparent that can help guide health care reform efforts: Expanding health insurance to those without coverage can increase medical utilization and improve health in a cost-effective manner. More wide-ranging efforts are necessary to control health care costs.