Public Policy for Health Care

1
Public Policy for Health Care
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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

3
Government Involvement in the Health Care Market

• 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

4
Government Involvement in the Health Care Market

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

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Government Involvement in the Health Care Market

• On what grounds is it justified?

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Justification

• Externalities
• Individual lifestyle choices
• Market failures
• Support/replace markets
• Income (resource) distribution
• Re-distributive policies

7
If the government does get involved in the health
care market..

• What are inputs to public health?

8
Determinants of Health

• Lifestyle
• Risk perceptions
• Risky behaviors
• Public health
• Medical care
• Random effects

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Public health dilemma
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Three goals of a public health delivery system

• Right amount of care
• To the right amount of people
• With the costs equitably distributed

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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?

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Knowledge of the Market
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Trends in Medical SpendingNational 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 13.7
1996 medical inflation rate gt CPI Hospital room
prices driving the inflation factor
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Source of Health Insurance 1993
Health Workers NoWorker Coverage ful
l-time part-time self in family Employer 75.0 5
4.4 41.5 10.9 Medicaid 2.4 7.2 2.7 54.6 Othe
r 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.
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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

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Why?
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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)

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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

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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
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What is the marginal value of more health care?

• Do people who receive these additional treatments
  live longer and fare better than those who dont?
• Is more care resulting in better outcomes?

21
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?

22
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

23
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

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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
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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
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Who bears the cost of medical care financing?

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

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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

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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.
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Growth of Managed Care
Integration of insurance and delivery function in
health care
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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

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Public Policy for Health Care
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Government Involvement in the Health Care Market

• As health insurer
• As direct provider of services
• Financier of research and monitoring public
  health
• Tax policy
• Regulator

33
Justification

• Externalities
• Market failures
• Income (resource) distribution

34
Three goals of a public health delivery system

• Right amount of care
• To the right amount of people
• With the costs equitably distributed

35
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

36
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

37
Diffusion of new technologies

• New and better treatment options
• Diffusion of new technologies
• Change in treatment options

38
The marginal value of new technology

• Overuse of care
• Demand-side explanation (moral hazard)
• Supply-side explanation

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Who bears the cost of medical care financing?

• Optimal insurance markets
• Adverse selection
• Experience rating, risk selection, and market
  failure

40
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

41
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.
42
Growth of Managed Care
Integration of insurance and delivery function in
health care
43
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

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Public Health Care Programs

• Medicaid
• Medicare

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Medicaid

• Dominant public program for financing basic
  health and long-term care services for low-income
  Americans

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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

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Medicaid Entitlement Program

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

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Medicaid Entitlement Program

• 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

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Medicaid Spending Growth

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

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Medicaid Spending Growth1988-1992

• Enrollment Growth
• De-linking of eligibility (1987)
• Expansion of SSI eligibility
• 1988 Medicare Catastrophic Act
• Low income elderly and disabled
• Learning disabled, AIDS, substance abuse, other
  social/medical problems
• Recession

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Medicaid Spending Growth1988-1992

• Utilization Growth
• Population growth
• Expansion of services covered

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Medicaid Spending Growth1988-1992

• Disproportionate Share Hospital (DSH) Payments
• Other Factors
• Inflation in health care prices
• Growth in nursing homes

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Why the expenditure slowdown in 1992?
Medicaid growth has averaged only 9.5 per year
from 1992-1995
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Medicaid Expenditure Slowdown

• Enrollment
• TANF rolls
• Spending per enrollee
• Managed care?
• DSH Payments
• 1991 and 1993 legislation?
• Other Factors
• inflation in factor prices

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Medicare Program

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

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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

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Medicare Financing

• 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

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Medicare v. Private Insurance
Medicare
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

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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

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Link between Medicare and Medicaid
Distributional effects

• Medicaid must pick up Medicares premiums,
  deductible, and coinsurance for poor aged and
  disabled people.

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Medicare Cost Containment
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Medicare Managed Care

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

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Medicare Managed Care

• 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

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Medicare Managed Care

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

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Medicares successes
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Medicares 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

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The problems with Medicare
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Problems with Medicare

• Cost of program places it in jeopardy

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To put these statistics in perspective, public
sector spending on education has remained
constant at about 5 of GDP for over two decades
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(No Transcript)
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Cost of Medicare
Number of Enrollees
Cost of Care

• 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

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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

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Political Context for Medicare Reform
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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 lt
  than private rates access to care may be a huge
  problem

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Medicare-Options for the Future

• Payment reductions
• Increasing beneficiary payments
• Restructuring Medicare program
• Capping Medicare Spending

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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

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Increasing Beneficiary Payments

• Increased cost sharing
• Huge distribution impact
• Increased Part B premium contributions
• Changes relative contributions of working and
  non-working population
• Doesnt address overall cost containment
• Increased age at eligibility

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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)

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Restructuring Medicare Program

• Global Budgets
• Sectors (hospitals) paid a fixed amount for the
  entire year rather than separate payments for
  each patient/service

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The Social Role of Medicare