McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 22 Medicare

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter Outline PUBLIC INSURANCE AND THE ELDERLY MEDICARE’S NUTS AND BOLTS COST CONTROL PROVISIONS MEDICARE TRUST FUND

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Background Medicare –covers health care for those over 65 –was established in 1964 –was fully in force in 1967 –part of President Johnson’s Great Society Programs –paired with Medicaid (which covers health care for the poor) –is a federally-administered program

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Public Insurance and the Elderly: Why It Is Needed A private insurance market for the elderly is likely to fail because of –Adverse Selection the problem in insurance in which those who need it the most will be the only ones willing to pay for it driving the price up and driving out those who need it somewhat less –Lack of a group Most private health insurance is obtained through employers and a group is formed to overcome the problem of adverse selection. Because most Medicare recipients are retired, there is no group.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Those over 65 have a poverty rate that is typically 2-3 percentage points lower than the rest of the nation. The cost-split was intended to be with the taxpayer and recipient paying roughly equal shares. Today that split is with taxpayers carrying the larger share. Public Insurance and the Elderly: Who Should Pay?

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Why Medicare’s Costs Are High The elderly are susceptible to much more costly illnesses and treatments for these illnesses are expensive. Costs to patients are relatively low so there is the problem of the Third Party Payer –when someone other than the producer or consumer pays the costs of a good or service and as a result neither is cost conscious New treatments are available for ailments that in prior times would have led to the patient dying. These treatments are expensive.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Costs of Medicare

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Retrospective Payments Most payments for services are made after the service has been rendered. When there are third-party payments this can inflate costs. Gatekeepers can be used to limit these costs. –doctors who treat general afflictions and who are charged with referring patients to specialists

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Medicare Nuts and Bolts Medicare Part A –Pays for hospital care –Mandatory Medicare Part B –Pays for doctor visits –voluntary

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Provider Types Health Maintenance Organizations (HMOs) Non-HMOs Fee-for-service

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Medicare, Part A Premiums –In 1999 $309 for those between 65 and 72.5 $170 for those over 72.5 Deductible –In 1999 $768 first the first day in the hospital After the first day –Medicare pays all of the next 60 days But $192 per day from days But $384 per day from 90 days on until reserve days are gone. There is a 60 day reserve

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Prospective Payments and the DRG All incidents are categorized by Diagnosis Related Groups (DRGs). There are more than 400 DRGs Hospitals receive payment from Medicare based on the DRG not costs. Prospective payments are designed to keep costs down.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Medicare, Part B Premium –In 1999 $45 per month (much lower than market prices) Deductible –In 1999 $100 per year (also much lower than market alternatives.) Subsidy –General tax revenues make the program 75% paid by taxpayers and 25% paid by recipients.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. No Prospective Payments Because it would be impossible to track expenses for Part B by individual provider prospective payments are not attempted in Part B.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Medicare HMOs Health Maintenance Organizations are offered as an option for Medicare, Part B. Many HMO’s stopped covering Medicare patients in 2000.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. No Coverage Prescription Drugs Long Term Care –Nursing Homes –Hospice

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Medicare Trust Fund Like Social Security, the Trust Fund is made up of bought-back government debt. Depending on assumptions, the trust funds will be out of bonds to sell in 2025 under their “intermediate” assumptions

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Trust Fund Estimates

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Taxes Necessary to Pay for Medicare