Public Policy for Health Care. Government Involvement in the Health Care Market As health insurer...

Public Policy for Health Care

Government Involvement in the Health Care Market

As health insurer Medicare and Medicaid Veterans, military personnel, Native Americans Public hospitals, clinics, psychiatric centers

As direct provider of services Government paid employees in Veteran system Government paid employees in DoD system Setting reimbursement rates for providers in

Medicare/Medicaid

Financier of research and monitoring public health NIH biomedical research Other health related research

Tax policy “Sin” taxes Waiver of employer spending on health

insurance


Regulator Drugs and medical devices Regulation of rates Capacity approvals for nursing homes Insurance rate regulation Standards for malpractice litigation


On what grounds is it justified?


Justification

Externalities Individual lifestyle choices

Market failures Support/replace markets

Income (resource) distribution Re-distributive policies

If the government does get involved in the health care

market…..

What are inputs to public health?

Determinants of Health

Lifestyle Risk perceptions Risky behaviors

Public healthMedical careRandom effects

Public health dilemma

Three goals of a public health delivery system

Right amount of care

To the right amount of people

With the costs equitably

distributed

Types of problems facing public policy makers

Why are medical health costs rising so rapidly

Should we have public or private provision of

health insurance?

Should receipt of health insurance be linked to

employment?

Knowledge of the Market

Trends in Medical Spending:National health care expenditures in billions of $

Year Total Per Capita %GDP

1970 262.7 1,224 7.1

1975 344.7 1,535 8.0

1980 445.1 1,894 8.9

1985 595.0 2,399 10.2

1990 790.9 3,048 12.1

1993 915.1 3,416 13.6

1994 949.4 3,510 13.71996 medical inflation rate > CPI

Hospital room prices driving the inflation factor

Source of Health Insurance: 1993

Health Workers NoWorker

Coverage full-time part-time self in family

Employer 75.0 54.4 41.5 10.9

Medicaid 2.4 7.2 2.7 54.6

Other 1.0 2.2 2.6 6.3

Non-group 6.2 14.5 25.4 7.0

Uninsured 15.4 21.7 27.8 21.1

Employers are being asked to pick up a greater share of health insurance costs.

Facts: Medical care cost have been increasing at an

alarming rate

Expansion of benefits in the public sector has been

larger than in the private sector

Expansion of enrollment in the public sector has

been larger than in the private sector

What has accounted for the increase in per capita medical care?

Demographics (2%)

Income (5%)

Spread of insurance (13%)

“Cost disease” in services sector (5%)

Administrative expenses (13%)

Inflation in factor prices or “economic rents” (3%)

New technologies and resulting over consumption of medical care (59%)

Diffusion of new technologies

New and better treatment options Dental care, joint replacement, orthroscopic surgery,

lazic surgery,etc

Diffusion of new technologies Mamograms, colonoscopy, skin biopsies, cholesterol

drugs, etc

Change in treatment options: Gall bladder stones, heart surgery, etc

Heart Attack……………

Medical Management: Drugs, monitoring, counseling,

treatment (100%)

Cardiac Catherization: Coronary bypass surgery (+300%) Angioplasty (+160%)

Essentially all of the growth of costs for treatment of heart attacks has resulted from the diffusion of new technologies

What is the marginal value of more health care?

Do people who receive these additional treatments live longer and fare better than those who don’t?

Is more care resulting in better outcomes?

The impact of new technologies

Average value of technology Is technology on net valuable?

Marginal value of technology What is the impact of more care on mortality and

morbidity?Overprovision of care?Root problem in health care cost inflation?

Studies on the Marginal Value of Health Care

Comparison studies of “insured” and “uninsured” patients

Comparison studies of “private” and “state” physician care

Comparison studies of “more intensive” and “less intensive” treatment options

The marginal value of new technology

Overuse of care

New technologies and medical ethics

Genetic testing?

Demand-side explanation

Moral hazard and over insurance

Supply-side explanation

Supplier induced demand and the medical arms race

Solutions to over consumption of medical care?

Basic problem is one of separation of insurance and provision of care

Providers decide on treatment

Insurers pay the bills

Solutions to over consumption of medical care?

Basic problem is one of separation of insurance and provision of care

No knowledge of probability of

illness

Socially desirable optimal insurance

coverage

Who bears the cost of medical care financing?

Optimal insurance markets Risks are large and neither the insurer or insured know

the individual’s probability of experiencing a particular medical condition

Adverse selection Selection of health insurance based on prior knowledge

and resulting price inflation Experience rating, risk selection, and market

failure Price discrimination and refusal of care

Three solutions to the problem of risk selection:

Contracts for more than one yearMandatory pooling on a basis

other than riskRisk adjustment

Taxes on, rebates to, insurers who insure “healthier” or “sicker” individuals

Solutions to overprovision of care

Health Maintenance Organizations (HMOs) Preferred Provider Organizations (PPOs) Point of Services Plans (POSs)

Logic: Increase the choice that people have over different insurance policies, particularly policies that will limit the amount of care provided, and increase the financial returns from choosing less expensive health insurance.

Growth of Managed Care

73%

49%

16%22%

11%

20%

0%

9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

FFS HMO PPO POS

19871993

Integration of insurance and delivery function in health care

Evidence of the effectiveness of managed care in limiting

costs Short-run effects

10% cost saving Slower cost growth Fee for service lower No evidence of health impact

Long-run effects No evidence of long-term cost savings No evidence of health impact

Public Policy for Health Care


As health insurer

As direct provider of services

Financier of research and monitoring public

health

Tax policy

Regulator

Justification

Externalities

Market failures

Income (resource) distribution

Three goals of a public health delivery system

Right amount of care

To the right amount of people

With the costs equitably

distributed

Facts: Medical care cost have been increasing at an

alarming rate

Expansion of benefits in the public sector has


Expansion of enrollment in the public sector has


What has accounted for the increase in per capita medical care?

Demographics

Income

Spread of insurance

Cost disease in services sector

Administrative expenses

Inflation in factor prices or “economic rents”

New technologies and resulting over consumption of medical care


New and better treatment options


Change in treatment options

The marginal value of new technology

Overuse of care

Demand-side explanation (moral

hazard)

Supply-side explanation

Who bears the cost of medical care financing?

Optimal insurance markets

Adverse selection

Experience rating, risk selection, and

market failure

Three solutions to the problem of risk selection:

Contracts for more than one year Mandatory pooling on a basis other than

risk Risk adjustment

Taxes on, rebates to, insurers who insure “healthier” or “sicker” individuals

Solutions to overprovision of care

Health Maintenance Organizations (HMOs)

Preferred Provider Organizations (PPOs)

Point of Services Plans (POSs)

Logic: Increase the choice that people have over different insurance policies, particularly policies that will limit the amount of care provided, and increase the financial returns from choosing less expensive health insurance.

Growth of Managed Care

73%

49%

16%22%

11%

20%

0%

9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

FFS HMO PPO POS

19871993

Integration of insurance and delivery function in health care

Evidence of the effectiveness of managed care in limiting

costs Short-run effects

10% cost saving Slower cost growth Fee for service lower No evidence of health impact

Long-run effects No evidence of long-term cost savings No evidence of health impact

Public Health Care Programs

MedicaidMedicare

Medicaid

Dominant public program for financing basic health

and long-term care services for low-income Americans

Medicaid Entitlement Program

Jointly funded by federal and state funds Rich states 50/50 cost sharing Poor states 80/20 cost sharing

Administered by the states Eligibility not tied to TANF benefit receipt State flexibility:

Eligibility criteria Benefit package Payment policies

Covers only 46-60% of poor and near poor Half Medicaid beneficiaries are children


Covers only 46% of poor and near poor Half Medicaid beneficiaries are children

Only 23% are adults in families with children

Distribution of beneficiaries does not match distribution of expenditures 67.7% goes to the elderly and disabled Mainly acute and long-term care

Expenditures dominated by hospital expenditures


Medicaid Spending Growth

1988-1992 saw an increase in Medicaid spending of 22% per year

Medicaid Spending Growth1988-1992

Enrollment Growth De-linking of eligibility (1987) Expansion of SSI eligibility

1988 Medicare Catastrophic ActLow income elderly and disabledLearning disabled, AIDS, substance abuse, other

social/medical problems Recession


Utilization Growth Population growth Expansion of services covered

Disproportionate Share Hospital (DSH) Payments

Other Factors Inflation in health care prices Growth in nursing homes


Why the expenditure slowdown in 1992?

Medicaid growth has averaged only 9.5% per

year from 1992-1995

Medicaid Expenditure Slowdown

Enrollment TANF rolls

Spending per enrollee Managed care?

DSH Payments 1991 and 1993 legislation?

Other Factors inflation in factor prices

Medicare Program

Major public health care program for the elderly (1965), the disabled, and people with end-stage renal disease (1972)

Medicare Financing Part A (Hospital Insurance) Accounts for 2/3rds of the program costs

Inpatient care, skilled nursing, home health care, hospice

Funded by “Hospital Insurance Trust Fund” Hospital Insurance Trust Fund funded by a

2.9% payroll tax on all wage/salary income All 65+ elderly are eligible to receive benefits

if they (or their spouse) are on Social Security

Part B (Supplemental Medical Insurance)

Accounts for 1/3rd of program costs Physicians, outpatient, lab services, ambulatory care

Funded by Supplemental Medical Insurance Trust Fund

Supplemental Medical Insurance Trust Fund funded by beneficiaries and general revenues Beneficiary premiums approximately $50/month

Medicare Financing

Medicare v. Private Insurance

Does not cover outpatient prescription drugs

Limited coverage for long-term care

No “stop loss” provision

Unrestricted choice of care provider

Covers outpatient prescription drugs

Does not cover long-term care

Usually has a “stop loss” provision

Some have choice restrictions

Medicare Private Insurance

Medicare Benefits

Medicare covers approximately ½ of the medical needs of the aged

Additional insurance Former employers Medigap insurance Neither cover long-term care Long-term care insurance

Link between Medicare and Medicaid:

Distributional effects

Medicaid must pick up Medicare’s premiums, deductible, and

coinsurance for poor aged and disabled people.

Medicare Cost Containment

Medicare Managed Care

Insurance plans that provide treatment using specified sets of providers and beneficiaries have no cost sharing in the program


Narrow choice of plan providers

Reimbursement rates at 95% of average fee-for-service in the area

Or, fixed per patient fee (capitization)

HMO monitors and controls service provision

Usually covers prescription drugs

Only 10% or all Medicare patients are enrolled in Medicare Managed Care programs. Why? Limited choice Limited financial incentive to join


Medicare’s successes

Medicare’s successes

Improved access to health care among elderly and

disabled

Reduced impoverishment related to large medical bills

Income from Medicare has become the bedrock for

many medical practices

Has contributed substantially to overall public health

The problems with Medicare

Problems with Medicare

Cost of program places it in jeopardy

To put these statistics in perspective, public sector spending on education has remained constant at about 5% of GDP

for over two decades

Cost of Medicare

Retirement of baby boomers 2010-2030

Aging of the population Twice the cost for the

+85 group

Dependency ratio Lower fertility rates Less wage earners

Percentage increase in costs versus percentage increase in payroll taxes

Real per capita spending

Number of Enrollees Cost of Care

Problems with Medicare

Cost of program places it in jeopardy Wasted resources

Cost sharing so low that beneficiaries have no incentive to limit care or choose between care options, particularly those with supplemental insurance

Providers who are paid fee-for-service have no incentive to cut back on services

Overprovision of care based on technological development and ethical practices

Political Context for Medicare Reform

Political Environment

Medicare is an enormously popular program Medicare is a universal program Medicare coverage is fairly comprehensive Interrelatedness between the public and

private systems If Medicare reimbursement rates substantially <

than private rates access to care may be a huge problem

Medicare-Options for the Future

Payment reductionsIncreasing beneficiary paymentsRestructuring Medicare program

Capping Medicare Spending

Payment Reductions

Fee-for-service = excessive care Prospective Payment System (PPS) for

inpatient hospital care: Weighted base rate per patient Offsetting behavior “squeezing the balloon” Targeted only price not the technology intensity

of service – compensation by increasing number of services

Increasing Beneficiary Payments

Increased cost sharing Huge distribution impact

Increased Part B premium contributions Changes relative contributions of working and

non-working population Doesn’t address overall cost containment

Increased age at eligibility

Restructuring Medicare Program

Convert to a “choice-based” program Coupon system and cost sharing Financial incentive for efficient choices Guaranteed plan for guaranteed price

+ more efficient choices + Less rapid increase in costs - Bigger base package cost (LTC, Rx drugs) - Quality assurance (coupon value v. care) - Service availability (coupon value v. care)

Restructuring Medicare Program

Global Budgets Sectors (hospitals) paid a fixed amount for the

entire year rather than separate payments for each patient/service

The Social Role of Medicare

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