Policies that enhance access

1. Policies that enhance access Social Insurance

2. Social Insurance Programs

3. National Health Care Expenditures Source: http://www.cms.hhs.gov/NationalHealthExpendData/

4. Personal Health Care Expenditures(in billions of dollars) Source: http://www.cms.hhs.gov/NationalHealthExpendData/

5. Private Health Insurance Coverage (under age 65, numbered in millions) * Employer-based. Source: Health, United States, 2008, http://www.cdc.gov/nchs/hus/updatedtables.htm, Table 138 and 140.

6. Medicare • Objective: improve access to medical care for elderly …and disabled persons The elderly… 12.6% of US population 19% of personal health care spending 31% of hospital spending 20% of physician spending 44 million voters

7. Percent of U.S. population age 65+ 23 actual projected 20 17 Percent of population 14 11 8 5 2030 2040 2050 1970 1980 1990 2000 2010 1950 1960 2020 Source: U.S. Census Bureau, 2004, "U.S. Interim Projections by Age, Sex, Race, and Hispanic Origin," Table 2a. <http://www.census.gov/ipc/www/usinterimproj/>

8. Medicare • Objective: improve access to medical care for elderly …and disabled persons • Institutional Features • Part A—Hospital insurance (compulsory) • Part B—Supplementary insurance (voluntary) • Part C—Medicare Advantage (voluntary PPO or HMO) • Part D—Outpatient prescription drugs (voluntary) The elderly… 12.6% of US population 19% of personal health care spending 31% of hospital spending 20% of physician spending 44 million voters $468 billion in 2008

9. Medicare Spending Source: http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2008.pdf

10. Medicare Part A: Hospital Insurance Inpatient hospital care Skilled nursing facility care Home health agency care Hospice care • Plan: • Day 1-60: Deductible = 1 day @ hospital • Day 61-90: daily coinsurance = 25% of deductible • Day 91-150: daily coinsurance = 50% of deductible • Day 151-?: nothing • Financed by 2.9% payroll tax $1,100 $275 $550 Lifetime reserve Medicare is not designed to provide protection against catastrophic illnesses

11. Medicare Tax Rates and Bases (selected years) Source: http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2009.pdf

12. Medicare Part B: Supplementary Insurance • Plan: • Annual deductible + monthly premium + 20% coinsurance • Financed by general tax revenues and premiums Physicians’ services Outpatient hospital services ER services Laboratory services Outpatient physical therapy Durable medical equipment $155 $96*

13. Medicare Part C: Medicare Advantage • Optional program that allows elderly to receive Medicare benefits (Parts A and B) through private health insurance plans

14. Part D: Prescription Drug Benefit • Plan: (coverage is not standardized) • Medicare Part A + private stand-alone drug plan • Medicare Advantage plan • Annual deductible + monthly premium + 25% coinsurance • Financed by general revenues and premiums $310 $30

15. Part D: Doughnut Hole 100% Percentage of Drug Expenditures Paid by Beneficiary Deductible Catastrophic Coverage Doughnut Hole 25% 46% 30% 14% 10% 5% $310 $2,830 $6,440 Total Drug Expenditures

16. Medicare Payment Allocations, 2006 Source: Health Care Financing Review: Medicare and Medicaid Statistical Supplement, 2007, Table 3.6. “80-20 Rule” 20% of beneficiaries account for 80% of spending

17. Medicare Reimbursement Payments • Part A Services (Hospitals) • Prospective payment system (PPS) based on diagnosis-related group (DRG) • Part B Services (Doctors) • Fee schedule based on resource-based relative value scale (RBRVS) Upcoding: doctor makes more severe diagnosis to hedge against accidental costs [RVU]*[GAF]*[CF] = payment CPT 45378 [5.46]*[1.13]*[$58.40] = $360.29

19. Medicaid • Objective • Improve medical access for low income individuals • Institutional features • Federal cost-sharing • Mandated coverage and services • State administered • Eligibility standards • Determine type, amount, duration, and scope of services • Set rate of payment for services 60% federal share on average

20. Medicaid Spending Source: Health Care Financing Review, 2007, Table3 13.4 and 13.10.

21. Medicaid Spending by Eligibility Categories, 2004 Source: Health Care Financing Review: Medicare and Medicaid Statistical Supplement, 2007. Rising costs… • expanding enrollments • rising medical care costs • increased reimbursement rates

22. Medicaid: Large State Spending, 2004 Source: Health Care Financing Review: Medicare and Medicaid Statistical Supplement, 2007.

23. Economic Impacts • Health outcomes • Currie and Gruber (1996) • 10% increase in eligibility for children resulted in 3.4% decrease in child mortality rates • 10% increase in eligibility for pregnant women resulted in 2.8% decrease in infant mortality rates • Baker and Royalty (2000) • 10% increase in Medicaid fees resulted in 2.4% increase in office-based physician visits for poor patients • Enrollment in private insurance • Cutler and Gruber (1996): “crowding-out” effect • Family structure • Yelowitz (1998): Medicaid lowers the cost of childbearing and favors single-parent families • Savings • Gruber and Yelowitz (1999): Medicaid reduces incentive to save and encourages asset transfers

24. Other Government Programs • SCHIP (State Children’s Health Insurance Program) • VA Hospitals • 157 hospitals • 860 clinics • 137 nursing homes • 15,000+ physicians

25. Objectives: • Expand insurance coverage: + 32 million • Lower health care costs: - $143 billion over 10 years • Private Insurance • Social Insurance • Revenue Provisions • Other

26. Private Insurance Reforms • Insurance rules • Community rating (age, area, family size, and tobacco use) • Guaranteed issue (can’t deny for pre-existing condition) • Prohibit lifetime limits on coverage • Dependent children on parent’s plan until age 26 • Establish health insurance exchanges • Individual Health Insurance Mandate • Tax credit subsidies up to 400% poverty • $695 fine (or 2.5% income) if you don’t buy • Employer Health Insurance Mandate • $2000 fine per employee for firms N > 50 • Tax credit subsidies to small employers • High cost plan excise tax (t = 40%)

27. Social Insurance Reforms • Medicare • “doughnut hole” eliminated by 2020 • Prohibit physician-owned hospitals in Medicare • Provide 10% bonus to primary care physicians in shortage areas • Medicaid • eligibility expanded to 133% poverty line • Federal government assumes larger cost share

28. Revenue Provisions • Medicare tax base expanded to include unearned income and t = 3.8% (I > $250k) • Medicare tax rate on individuals rises by 0.9 to 2.35% (I > $250k) • Medical device excise tax (t = 2.9%) • Excise tax on brand name pharmaceuticals • Excise tax on indoor tanning salons (t = 10%) • Limit Flexible Spending Accounts to $2500

29. Other Features • Establish CLASS: voluntary, self-funded long-term care insurance program • Establish Patient-Centered Outcomes Research Institute • Establish value-based modifier for physician payment formulas • Expand supply of health care workers • Grant 12 years exclusivity to biologics • Promote preventive health care • Award grants for evidence-based public health programs • Chain restaurants required to post caloric content

30. Policies To Contain Costs

31. Policy Options TE = ΣPi Qi • Price Controls • Managed Care (Quantity Controls) • Market Alternatives

32. Economics of Price Controls • Competitive Markets • Monopoly Markets

33. Economics of Price ControlsCompetitive Market • Free Market: P0, Q0 • Gov’t imposes price ceiling at P1 • At P1: Qd > Qs  shortage results • Non-Price Rationing • Black Market • Bribes • Discrimination • Wait / Search Price S1 P2 P0 P1 D1 QS Q0 QD Health Care Shortage

34. Economics of Price ControlsMonopoly Market • Monopoly: P0, Q0 • Gov’t imposes price ceiling at P1 • At P1: there is no shortage; monopolist produces Q1 Price MC1 P0 P1 D1 MR1 Q0 Health Care Q1

35. Price Controls in Health Care • Mandated fee schedules • Physician-induced demand shifts • Unbundling of services • Global budgeting (capitation) • Services delayed • Personnel take unpaid vacations • Resource rationing • Mandating primary care (gatekeepers) • Limits on new facilities (CONs) • Waiting lists

36. U.S. Cost-containment Strategies • Hospitals: Diagnosis-related groups (DRGs) • Prospective payment based on point system

37. DRGs by Weight—Five Highest and Five Lowest Source: The Economics of Health and Health Care, Folland, Goodman, and Stano (2007), Table 20-2a.

38. U.S. Cost-containment Strategies • Hospitals: Diagnosis-related groups (DRGs) • Prospective payment based on point system • Economic impact of DRGs • Reduced hospitalization; shorter stays • Increase in outpatient care • DRG creep • Physicians’ practices: Resource-based Relative Value Scale (RBRVS) • Establishing a value scale • Work effort • Overhead cost • Liability insurance premiums • Monetary conversion factor: (6 units) x $38 = $228

40. Managed Care Strategies • Types • HMOs • PPOs • Cost Control Strategies • Practice guidelines Restricted choice of providers Second opinions required Prior authorization Case management

41. Market Alternatives • Managed competition • Require employers to offer employees a choice of health plans • Medical savings accounts • Tax-free savings accounts for routine medical expenses • High deductible catastrophic insurance Suppose employer pays $7000 for your family’s major medical and routine insurance coverage Employer buys $3500 catastrophic insurance policy and deposits other $3500 into MSA