1. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 1 of 33 16.7 Conclusion Health Insurance II: Medicare, Medicaid, and Health Care Reform 16.3 The Medicare Program 16.2 What Are the Effects of the Medicaid Program? 16.1 The Medicaid Program for Low-income Mothers and Children Chapter 16 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

2. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 2 of 33 Health Insurance II: Medicare, Medicaid, and Health Care Reform

3. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 3 of 33 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. Health Insurance II: Medicare, Medicaid, and Health Care Reform

4. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 4 of 33 The Medicaid Program for Low-income Mothers and Children 16. 1 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? 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. 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.

5. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 5 of 33 The Medicaid Program for Low-income Mothers and Children 16. 1 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.

6. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 6 of 33 What Are the Effects of the Medicaid Program? 16. 2 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

7. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 7 of 33 What Are the Effects of the Medicaid Program? 16. 2 How Does Medicaid Affect Health? Evidence 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.

8. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 8 of 33 What Are the Effects of the Medicaid Program? 16. 2 How Does Medicaid Affect Health? Evidence 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.

9. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 9 of 33 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. E M P I R I C A L E V I D E N C E 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.

10. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 10 of 33 The Medicare Program 16. 3 The largest public health insurance program in the United States is Medicare.

11. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 11 of 33 The Medicare Program 16. 3 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. How Medicare Works

12. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 12 of 33 The Medicare Program 16. 3 Medicare Is Really Three Different Programs 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

13. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 13 of 33 The Medicare Program 16. 3 Medicare Has High Patient Costs 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. How Medicare Works

14. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 14 of 33 The Medicare Prescription Drug Debate  A P P L I C A T I O N Because outpatient drugs were only a very small share of medical spending when Medicare was established in 1965, their absence from the benefits package was not viewed as a terrible omission. As prescription drugs grew in importance, became a glaring deficiency. Democrats suggested adding a drug benefit to the Medicare program, with the government negotiating directly with drug companies to ensure the lowest drug prices. Republicans suggested that the government subsidize private insurers to offer prescription drug coverage to the elderly. 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

15. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 15 of 33 What Are the Effects of the Medicare Program? 16. 4 Despite broad support, there is surprisingly little evidence that the Medicare program actually improves the health of the elderly. The Prospective Payment System 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. Prospective Payment System (PPS) Medicare’s system for reimbursing hospitals based on nationally standardized payments for specific diagnoses.

16. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 16 of 33 What Are the Effects of the Medicare Program? 16. 4 Empirical Evidence on the Move to the PPS 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.

17. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 17 of 33 What Are the Effects of the Medicare Program? 16. 4 Problems with PPS 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.

18. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 18 of 33 What Are the Effects of the Medicare Program? 16. 4 Lesson: The Difficulty of Partial Reform 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.

19. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 19 of 33 What Are the Effects of the Medicare Program? 16. 4 Medicare Managed Care 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.

20. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 20 of 33 What Are the Effects of the Medicare Program? 16. 4 Medicare Managed Care The Medicare program lowered its costs by reimbursing HMOs only 95% of the average annual medical costs of enrollees who stayed in traditional Medicare.

21. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 21 of 33 What Are the Effects of the Medicare Program? 16. 4 Medicare Managed Care

22. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 22 of 33 What Are the Effects of the Medicare Program? 16. 4 Should Medicare Move to a Full Choice Plan? Premium Support 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).

23. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 23 of 33 A Premium Support System for Medicare  A P P L I C A T I O N

24. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 24 of 33 A Premium Support System for Medicare  A P P L I C A T I O N The advantages of a premium support system mirror the advantages of voucher systems for education. First, such a system respects consumer sovereignty by allowing individuals to choose the health plan that best matches their taste. Second, such a system promotes efficiency in medical care delivery by allowing individuals to shop across plans. Finally, such a system solves the problem of “appropriate” reimbursement levels for managed care plans by simply letting the market work.

25. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 25 of 33 What Are the Effects of the Medicare Program? 16. 4 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.

26. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 26 of 33 Long-term Care 16. 5 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. 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. Financing Long-term Care When savings are drawn below a threshold level, individuals qualify for state programs that pick up the cost of nursing homes under Medicaid.

27. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 27 of 33 Lessons for Health Care Reform in the United States 16. 6 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. Controlling medical care costs is a tremendously difficult proposition for two reasons. First, it is not clear that costs should be controlled. Second, even if costs should be controlled, it is not clear how this can be done.

28. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 28 of 33 Lessons for Health Care Reform in the United States 16. 6 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 2006 is $4,024 per year for individuals and $10,880 for families. Mandates mandate A legal requirement for employers to offer insurance or for individuals to obtain some type of insurance coverage.

29. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 29 of 33 Lessons for Health Care Reform in the United States 16. 6 Incremental Reforms Incremental Cost Controls One approach that has been used extensively in recent years by the Medicare program is to restrict provider reimbursement, either by lowering prices or moving to more prospective reimbursement. Incremental Reforms to Cover the Uninsured One option is to try to make the small employer and nongroup markets more hospitable to the uninsured, in the hopes of inducing the uninsured to buy insurance. Another possibility for increasing insurance coverage for the uninsured is to continue to expand the public insurance safety net. A third possibility (which is currently very popular) is to offer individuals new tax subsidies with which to purchase health insurance.

30. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 30 of 33 Lessons for Health Care Reform in the United States 16. 6 Fundamental Reform: Public 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.

31. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 31 of 33 Lessons for Health Care Reform in the United States 16. 6 Fundamental Reform: Private-Sector Solutions An alternative approach to fundamental reform would be to build on the existing hybrid of private and public insurance in the United States. State governments could each set up new pools of insurance plans, akin to the pools offered by employers, from which individuals could choose insurance.

32. Chapter 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform © 2007 Worth Publishers Public Finance and Public Policy, 2/e, Jonathan Gruber 32 of 33 Conclusion 16. 7 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: First, expanding health insurance to those without coverage can increase medical utilization and improve health in a cost-effective manner. Second, there are no easy answers when it comes to controlling health care costs.