Chapter 10: Government as Health Insurer Health Economics

1. Chapter 10: Government as Health InsurerHealth Economics

2. Topics • Coverage and Financing • Current Challenges • Restraining costs • Improving health

3. 1972 17,606 1975 22,007 1985 21,814 1988 22,907 1989 23,511 1990 25,255 1996 36,118 1997 33,579 $ 6,300 12,242 37,508 48,710 54,500 64,859 121,685 123,552 Medicaid Trends # of Recipients Total Cost ($m) Year

4. Medicaid Recipients, 1997

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

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

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

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

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

10. Medicaid & Nursing Homes $ MC P0 ATC Demand MR Q0 NH patient days

11. Medicaid & the Nursing Home Market • Now, assume instead that there are no private patients, and the gov’t must set a reimbursement level for care provided to Medicaid patients. • 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.

12. Medicaid & Nursing Homes $ MC ATC MRM PM Demand MR Q3 NH patient days

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

14. Medicaid & Nursing Homes The nursing home will now view its MR curve as the line ABMRM $ MC A ATC MRM PM B Demand MR Q3 NH patient days

15. Medicaid & the Nursing Home Market • 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. • 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.

16. Medicaid & Nursing Homes The nursing home will care for Q1 private pay patients and Q3-Q1 Medicaid patients. $ MC A P0 ATC MRM PM B Demand MR Q1 Q3 NH patient days

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

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

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

20. 1987-1992: Medicaid coverage of children rose (15%21%), but private insurance coverage fell (77%69%). • But private insurance may have fallen for other reasons (e.g. 1990-91 recession). • States could increase eligibility beyond federal minimums. • Compare increases in Medicaid coverage and falls in private insurance across states.

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

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

23. Current challenges to Medicaid • Rising Medicaid costs have strained state budgets during recessions. • Problematic, because most state governments required by law to balance their budgets. • Many states have made Medicaid program changes.

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

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

26. Impact of Medicaid managed care(early evidence) 1) Savings of 5-15% per enrolled beneficiary. • These studies were conducted prior to 1997 BBA, often in the context of a waiver renewal. • Biased towards finding cost savings.

27. 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.

28. Impact of Medicaid managed care(more recent evidence) • Medicaid managed care grew rapidly in mid 1990s due to attractive business opportunities. • “Foot in the door” for providing state employee health care coverage. • Insurers didn’t have to pay commercial rates to providers, could also transfer risk. • HMO industry was making high profits at this time.

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

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

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

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

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

34. The Medicare Program • Target population - individuals 65+ • Part A - Hospital Insurance program (compulsory) • Inpatient hospital services • Skilled nursing care • Home health care • Hospice care • 19m enrollees in 1966; 38.7m in 1999.

35. Part B - Supplemental Medical Insurance program (voluntary) • Physician services. • Outpatient care. • Emergency room services • 17m enrollees in 1966, 37.0m in 1999.

36. Medicare Costs Total Expenditures ($ billions) 1966 1.7 1980 36.4 1990 109.6 1996 193.9 1998 213.6 1999 213.0

37. Medicare Financing - Part A • Funding Sources • 2.9% payroll tax shared equally by employers and employees • Federal Hospital Insurance Trust Fund • Enrollee deductibles and copayments

38. 1966 $ 1,943 1975 12,980 1980 26,097 1985 51,397 1990 80,372 1994 109,570 1997 130,154 1999 151,593 999 944 11,581 10,517 25,577 13,749 48,414 20,499 66,997 98,933 104,545 132,844 139,452 115,643 130,632 141,380 Part A Trust Fund Year Receipts Expenditures Balance

39. Part A Patient Cost Sharing • No hospital inpatient coverage after 90 days. • Except for 60-day lifetime reserve. • Medicare offers no coverage in “catastrophic circumstances.”

40. 1966 $ 40 1975 92 1980 180 1985 400 1990 592 1995 716 1999 768 2001 792 10 --- 23 46 45 90 100 200 148 296 179 358 192 384 198 396 Part A Patient Costs Deductible Daily Coinsurance Year Days 1-60 Days 61-90 After 90 Days

41. Medicare Part B Financing • Funding sources • Monthly premium payments. • Contributions from general revenue of the U.S. Treasury.

42. 1966 $ 324 1975 4,673 1980 10,784 1985 25,106 1990 45,913 1995 55,607 1997 81,924 1999 80,902 203 122 4,735 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 Part B Trust Fund Year Receipts Expenditures Balance

43. 1966 $ 50 1975 60 1980 60 1985 75 1990 75 1995 100 1999 100 2001 100 20 3.00 20 6.70 40 9.60 20 15.50 20 28.60 20 46.10 20 45.50 20 50.00 Part B Patient Costs Annual Deductible Coinsurance Rate Monthly Premium Year

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

45. Medicare Part C: Medicare+Choice • 1997 BBA increased the variety of managed care plans under Medicare • PPOs - physician networks • PSOs - owned by hospitals and physicians • POS - extra fee for out-of-network care • Private FFS • no limits on premiums charged to beneficiaries • MSAs • Turnover reduced by requiring enrollment for at least 1 year.

46. Medicare Part C: Medicare+Choice Medicare Risk HMO/M+C Enrollment and HMO Participation, 1985-1999

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

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

49. DRG weight - index # reflecting relative cost of care. • Examples from 1995: • DRG 33 - concussion, age<18, weight=.2003 • DRG 103 - heart transplant, weight=13.8273

50. The 5 Most Common DRGs in 1996 DRGDischarges 127 Heart failure & shock 709,714 089 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 pulmonary 361,545 disease 209 Major joint & limb reattachment 358,660 procedures of lower extremities