Health Insurance II: Medicare, Medicaid, and Health Care Reform

Health Insurance II: Medicare, Medicaid, and Health Care Reform P R E P A R E D B Y FERNANDO QUIJANO AND SHELLY TEFFT

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.

16.1 The Medicaid Program for Low-Income Mothers and Children 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? 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. 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.

16.1 The Medicaid Program for Low-Income Mothers and Children 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.

16.2 What Are the Effects of the Medicaid Program? 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

16.2 What Are the Effects of the Medicaid Program? 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.

16.2 What Are the Effects of the Medicaid Program? 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.

M P I R I C A L E V I D E N C E E 16.2 What Are the Effects of the Medicaid Program? 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. Over the 1982–2000 period, Medicaid eligibility rose much more in Missouri than in Michigan (top panel). There were also dramatic differences in eligibility growth within states: eligibility rose much more for 13-year-olds in Washington, D.C. than for 0-year-olds (bottom panel). 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.

16.3 The Medicare Program The largest public health insurance program in the United States is Medicare.

Even Bigger Mess: Medicare • Congressional efforts for Social Security reform ended with 2006 election • Current health care reform debate has shifted focus to Medicare • Much bigger financial problem • Same concerns about aging with little control on benefit costs • Serves as an example of government-run health care • Considered in Affordable Care Act – mostly as a source of funds

Medicare defined • Medicare is publicly-provided health insurance for the elderly • Medicaid is publicly-provided health insurance for low income uninsured • Four parts • Part A: Hospital Insurance (HI) • Part B: Supplemental Medical Insurance (SMI) • Part C: Medicare Advantage is alternative to A&B • Part D: Prescription Drugs

Who is covered? • Elderly, 65+ (83.6% of beneficiaries) • Everyone automatically covered by HI, must sign up for SMI (95% do) • 38.7 million beneficiaries in 2009 • Disabled eligible after two years receiving DI benefits • 7.6 million beneficiaries in 2009 • End stage renal disease (kidney dialysis)

What is covered? • HI covers inpatient hospital care, skilled nursing facilities, home health services, and hospice care • SMI covers doctor visits, lab tests, and outpatient hospital care • Part D covers prescription drugs (w limits – some removed as part of ACA) • Does NOT cover nursing homes

How is Medicare financed? • HI financed through payroll taxes • 1.45% (3.9%) on all earnings (HI Trust Fund) • SMI and Part D financed through monthly premiums (25%) and general revenues • SMI $96.40-369.10 (2011) each month • means-tested premium • Part D varies by plan • Deducted from Social Security checks • Also co-pays and deductibles

Medicare in financial trouble • Dramatic growth in the program • 1980: $37 Billion • 2009: $502 Billion ($40 Billion 1-yr increase) • Similar to Social Security, Medicare has a bleak financial future • Baby boomers start reaching 65 7,000 per day • People living longer • Health costs rising faster than economy as a whole

Excess Cost Growth • Growth in spending per beneficiary that exceeds growth in per capita GDP • 3.0 percent over 1970-2005 • 2.1 percent over 1990-2005 • Captures both policy changes and “residual” growth • Assumption going forward dramatically alters projections of program growth • Same issues for Medicaid (program for poor jointly funded by the states)

Medicare and Medicaid Spending as Share of GDP: Excess Cost Growth??

…so federal budget in trouble • HI Trust Fund, currently in surplus, is projected to be exhausted in 2029 as costs rise • Improved by ACA changes to spending • SMI will squeeze other federal spending as the Part B costs rise – 75% from current taxpayers • Part D cheaper so far, but cries to expand coverage may raise costs • Estimated to cost $400 B over 10 years

Your future retirement? • Health care diminishing as private retirement benefit • Reliance on Medicare also uncertain • Health care likely to undergo major changes in next few years as costs rise • Economics informs us – solution is political

Obama Rejects Governors’ Plan to Overhaul Medicaid • Topics: Politics, Health Reform, Medicaid • By Merrill Goozner • Mar 01, 2011 • This story comes from our partner • The recession-fueled state budget crisis has turned Medicaid into the next battleground in the ongoing war over President Obama’s signature health care reform law.

Medicare Reform Options • Increase Medicare Revenues • Increase HI payroll tax • Make HI tax progressive • Increase general revenue spending • Increase beneficiary premiums • Investment of trust fund assets

Options to Reduce Medicare Spending • Reduce provider and plan payments • Slow the growth of provider payments • Reduce payments to Medicare Advantage Plans • Benefit Cuts/Increase costs to beneficiaries • Increase eligibility age • Increase beneficiary cost share requirements • Eliminate 1st dollar coverage • Reduce/eliminate some covered services

Savings, contd. • Improve delivery efficiency/quality -Capture delivery management efficiencies (PartD drugs) -incorporate pay for performance • Defined contribution approach • Set funding, find service levels • Current fee for service • High deductibles • Two-tier Medicare options • Automatic adjustment to Revenue and spending

Effective Medicare reform options • What incentives could be used • Reducing moral hazard?

16.6 Lessons for Health Care Reform in the United States 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. Fundamental cost control in the United States is difficult: • There is an enormous amount of waste in our medical system. • We could produce similar health outcomes with much less spending. • Much of what has driven the rapid rise in health care spending in the United States has been quality-improving technological change in the delivery of health care.

16.6 Lessons for Health Care Reform in the United States 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 2008 is $4,704 per year for individuals and $12,680 for families. Individual Mandates mandate A legal requirement for employers to offer insurance or for individuals to obtain some type of insurance coverage.

16.6 Lessons for Health Care Reform in the United States 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.

 APPLICATION 16.6 Lessons for Health Care Reform in the United States The Massachusetts Experiment with Incremental Universalism • Incremental reform is not necessarily inconsistent with universal coverage. In 2006, Massachusetts introduced a plan that filled in the holes in its existing system of private and public coverage to move toward universal coverage: • A new program was established (“Commonwealth Care”) to provide free insurance coverage for all residents below 150% of the poverty line and heavily subsidized coverage for those up to 300% of the poverty line. • While there were no subsidies available above 300% of the poverty line, there were major changes to improve the insurance market. • The law specified that all adults in the state must be covered by health insurance, but only to the extent that such insurance was deemed “affordable”. • The Massachusetts reform has successfully achieved its goals. Yet while it decreased the numbers of uninsured, it did not explicitly address the more difficult issue of cost control, and health care costs continue to rise faster than personal incomes in the state. 

16.6 Lessons for Health Care Reform in the United States Reform Efforts in 2009 • As of August 2009, Congress had agreed on several principles to guide reform. • There are a number of contentious problems that remain before reform can become reality: • Financing. • The role of the “public option.” • The importance of long-term cost control, referred to as “bending the cost curve downward.” • One of the major difficulties facing health reformers is how much they can count on new ideas to deliver the savings that are needed to finance expanded coverage.

16.7 Conclusion 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: • Expanding health insurance to those without coverage can increase medical utilization and improve health in a cost-effective manner. • More wide-ranging efforts are necessary to control health care costs.

The Atlantic Sept. 2009 How American Health Care Killed My Father by David Goldhill URL for this page is http://www.theatlantic.com/doc/200909/health-care <

Problems with Current efforts • Not following a rational business model • Reform is only targeting incremental change • -extending insurance benefits • -using bureaucratic rules to control costs • Need to deal with incentives

Foundation of the health care problem • A problem with incentives • Need to: • -reduce (not expand) role of insurance • -focus government role on things such as safety net, catastrophic coverage, enforce standards, competition • -stop Ponzi scheme financing, hidden subsidies, unclear pricing, • -focus on consumer driven

Health Insurance is not health care • Health insurance used for major illnesses and health care expenses • Health care began as non wage benefit during WWII • Moral Hazard issues are HUGE • -changes behavior of insuree and HC providers • -insured consume more HC • -HC providers provide more • -HC demand has no limit • Spend other people’s money differently than your own • Hard to control costs in this arrangement

Problems with current Health care system, contd. • Uncompetitive (hospital regulated) • Medicare costs are running away • Consumers don’t know price of what they are buying • Benefits of new Technology not passed on

Potential problems of comprehensive health care reform • Moral hazard • Distorted incentives • Bias toward treatment • Lack of transparency • Curbs on competition

How to address Health Care reform • Move away from comprehensive health insurance model • Address universal coverage by subsidizing insurance for low income • Consumer-focused health care reform • -cash pay for routine health care expenses • -HSA for major medical issues • -offer catasrophic health care policies • -more transparency in fees • Financing reform • -capture the $1.7 million of lifetime health care costs • --subsidize low income • g

Issues in shifting to a consumer-focused system • Shifting from health industry-complex to a consumer-based • Politics of transitioning

Health Insurance II: Medicare, Medicaid, and Health Care Reform