Issues Related to Health Care Financing

1. Issues Related to Health Care Financing • Overview of the size and growth of the health care sector • The distribution of personal health care services • Flow of Funds for Health Care • Nature of Financing Decisions Judith R. Lave, Ph. D. January 2004

2. Share of National Health Expenditures, By Type 2002

3. Notes on Data • Summary Information: Jan/Feb Issues of Health Affairs (K. Levit et al. Health Spending Rebound Continues. Health Affairs. 23(1), 2004. • Complete data:www.cms.gov: Search: National Health Expenditures, Click: Health Accounts. Click: Tables

4. Annual Percent Change in National Health SpendingSelected YearsCurrent Dollars

5. Many Definitions of Healthcare Costs • Healthcare Expenditures (p x q) • Prices of Individual Services • Premiums for Health Insurance • Out-of-Pocket Payments • % of GDP to Health Care (14.9%)

6. National Health Expenditures as a Percent of GDP1970-2010 Managed care and BBA impacts: “one- time” effects on price and volume levels Moderate Growth Accelerated growth

7. Hospitals 36.3% Distribution Expenditures on Personal Health Care 2002 Nursing-- home care Prescription drugs 12.1% 10.4% Other health services Physician& Clinical Services 15.9% 25.3%

8. Percentage Change in Expenditures2000-20002

9. Third Parties Government Agencies Insurance Companies (Health Plans) Employers Employees The Financing of Health Care premiums, general taxes, payroll taxes premiums, general taxes, payroll taxes, state lotteries fee-for-service, budgets, capitation “claims” Providers (doctors, hospitals, dentists, etc.) Patients medical services HouseholdsTax payers out-of-pocket payments Financing Side Reimbursement Side

10. Nonelderly Americans With Selected Sources on HealthInsurance Coverage: 2002 Population: 250.8 million * Does not add up to 100% because people can have more than one source of health insurance

11. Sources of Supplemental Coverage: Among Non-Institutional Medicare Beneficiaries: 1999 Other* 2% Medicare Only 13% Medicare HMOs 17% Employer-Sponsored 33% Medigap 24% Medicaid 11% Total = 34.7 million non-institutional Medicare beneficiaries

12. No Standard Health Plan • Health Insurance Policies Vary With Respect to: • covered services • covered providers • administrative terms under which services are accessed • methods for paying providers

13. Importance of Insurance Coverage • Use of services is a function of price (which depends on insurance structure and coverage) (i.e., Claritin) • Decisions to cover or not cover certain providers/technologies/services can make or break an industry (i.e., physical therapy, mammograms, obesity surgery) • Medicare is often pace-maker on ways to pay providers

14. Brief Discussion of HealthCare Financing Terms Insurance policies vary considerably. They vary with respect to which services will be covered, how much cost sharing will be borne by the policy holder, administration conditions under which consumers/patients access care, what providers will be covered, how much providers will be paid. Private Health Insurance: Health insurance is purchased in the market by groups (either through the place of business or through professional associations) or by individuals. The premium is the price paid for the insurance policy. Under employer sponsored group health insurance plans, the cost of the premiums is paid in whole or in part by the employer.

15. Definitions of Terms in the Following Charts • Direct Patient Payments: This is the total amount paid out of pocket by the patient or by the patient’s family for a given service. • Private Third Parties: This is the total amount paid for a given service on the behalf of the consumer or services. This would include payments made by blue cross, blue shield, a health maintenance organization, Aetna, etc. • Public Federal: This is the total amount paid by the federal government for health care. It includes expenditures made under Medicare, Medicaid, The Veteran’s Administration, etc.

16. National Health Expenditures By Source of Funds Selected Calendar Years1970-2002 Source of Payment 1970 1980 1993 2002 Total 100% 100% 100% 100% Private Funds 62.1 57.3 56.0 54.1 Out of Pocket Payments 34.3 23.7 16.5 13.7 21.2 27.7 33.6 Private Health Insurance 35.4 Other 6.6 5.9 5.9 5.0 Public Funds 37.8 42.6 44.0 45.9 Federal 24.0 29.0 30.9 32.5 State & Local 13.7 13.6 13.1 13.4

17. Percent of Personal Health Care ExpendituresPaid Out of Pocket *This is for 1992

18. Source of Payment for Personal Healthcare: Percent Distribution for Selected Services (2002)Note: only selected sources enumerated Source of Expenditure (%) Private Government Type of Service Expendi-tures (billions) Total Total Private Private Insu-rance Out of Pocket Medi-care Medicaid (Fed & State) Total Personal Healthcare 100.0% 55.8 35.8 15.8 19.3 17.4 $1,340.2 Hospital Care 486.2 100.0% 41.1 33.9 3.0 30.7 17.2 66.2 Physician Services 339.5 100.0% 49.2 10.1 20.3 12.4 Dental Services (99) 70.3 100.0% 93.6 49.5 44.0 …. 5.4 Prescription Drugs (99) 162.4 100.0% 77.7 47.8 30.0 0.2 17.6 Nursing Home Care 103.2 100.0% 35.9 7.5 25.1 12.5 49.3

19. What are some of the problems that people have with current insurance?

20. Employer Sponsored Health Insurance • 90% of Private Health Insurance Obtained Through Employer • Employer Share of Premium Excluded from Taxes • Employer Selects Plan • Who Bears the Cost? • Economists: The Employee in lower wages • Others: The Employer in lower profits

21. Question What are the advantages/disadvantages of getting health insurance through the employer?

22. New WrinkleDefined Contribution • Pay same amount towards all plans offered by employer. • Pay employee fixed amount divided between cash and a catastrophic cap. Employee selects a plan from a network of providers. • Pay employee fixed amount to purchase insurance privately.

23. A Very Conservative Position • Decide how much you want to subsidize health care—who do you want to help? • Get rid of the incentives that encourage people to obtain their health insurance through their employers. • Eliminate the tax subsidy of employer based health insurance: treat all health insurance equally—probably with a tax credit. • Let people use their own dollars to purchase medical care/insurance—let them make their own trade-offs. (could be defined contribution) Note: Similar to the A.M.A. position.

24. Selected Policies By Third Parties • Control Over Prices • Government – Administered Prices • Prospective Payment System • Hospitals – “DRG’s” • Nursing Home – “RUG’s” • Home Health Agencies – “HHRG” • Outpatient Department – - “APC” • Rehabilitation Facilities – “FIM-FRG” DRG = Diagnoses Related Group RUG = Resource Related Group HHRG = Home Health Related Group APC = Ambulatory Patient Classification FIM-FRG = Functional Independence Measure- Function Related Group

25. Development of Managed Care Strongly Encouraged By Capitation • Selection of Physician/Providers who Practice Cost-Effectiveness Care • Capitation of Primary Care (Gate-Keeper and Other Providers) • Utilization Management • Care management • Preadmission screening • Concurrent review • Guidelines • Disease management • Introduction of Best Practices

26. Percent Distribution of Medicare Enrollees and Program Payments Under Medicare: CY 1998 29.3 Million Enrollees $168.2 Billion in Program Payments $25,000 or More $10,000-24,999 $5,000-9,999 $2,000-4,999 $25,000 or More Amount of Program Payments $500-1,999 $10,000-24,999 $5,000-9,999 $1-499 $2,000-4,999 $500-1,999 Percent of Persons Served Percent of Program Payments