Financing
any mechanism that gives people the ability to pay for health care services
- necessary to have access to health care
Primary sources of finance that allow access to health care
- the purchase of health insurance or eligibility in a public insurance program such as Medicaid or Medicare
- or through uncompensated or charity care (usually free clinics and hospital emergency rooms)
Complexity of financing
- a primary characteristic of health care delivery in U.S.
- many payers, plans, programs, and payment options
Primary financiers of health care
employers and the government
From economic perspective
americans already finance their own health care through employment or taxes
US has a voluntary system
- employers not mandated to offer insurance
- government covers certain groups
Health Insurance
- primary mechanism to obtain health care
- regarded as key to health care finance
Finance...
determines who has access to health care
Demand is related to...
finance
Insurance lowers out of pocket payments..
therefore patients consume more
Insurance
protects against risk
Risk
the possibility of substantial financial loss from some event, where probability of occurrence is small
Insured
an individual protected by insurance
Insurer
an insurance agency that assumes the risk
Underwriting
evaluates, selects/rejects, classifies, and rates risk
Beneficiary
- "the insured"
- covered under a health insurance plan
Premiums
- amount charged by insurer to be insured against risk
- in a job-based plan, employer and employees pay into rate
Four Principles of Insurance
1) risk is unpredictable
2) risk can be predictable with some accuracy in a large group
3) insurance can shift risk from the individual to the group through pooling resources
4) losses are shared by all members
Insurance
requires some type of cost sharing
The Insured
assumes at least part of the risk
Purpose of cost sharing
to reduce misuse of insurance benefits
3 main types of cost sharing in private health insurance
- premium cost sharing
- deductibles
- co-payments
Deductibles
- the amount the insured pays first before benefits are paid by the plan
- paid out of pocket each time health services are received
Co-payment
- money paid out of pocket each time health services are received
- paid after the deductible has been met
Coinsurance
80/20 ratio of cost sharing between the insurance plan and the insured
Stop-loss provision
maximum out of pocket liability an insurance agency would insure in a given year
Service Plans
- provide services to the insured
- pay the hospital and physician directly except for deductibles and copayments
Group Insurance
- offered through an employer, a union, or professional organization
- anticipates large numbers of people in a group will buy insurance through a sponsor
- cost and risk are distributed equally among the insured
Self-Insurance
- big employers' workforces are large and diversified enough that they can predict their own medical experience
Large Employers
- assume risk
- don't have to pay insurers a dividend
Reinsurance
- employers can protect themselves against the potential risk of high losses and is purchased from a private insurance company
- many employers find managed care to be more economical, consequently the number of self-insured plans declined during the 1990
Individual Private Health Insurance
- an important source of coverage for many Americans
- covers 5.1% of the non-elderly population (12 million people)
Managed Care Organizations
- Health Maintenance Organizations (HMO)
- Preferred Provider Organizations (PPO)
- assume the risk in exchange for an insurance premium
- provide a broad range of service, emphasizing primary care and prevention
Government Financing
- accounted for 45.4% of total US health care expenditures
New prescription drug coverage to Medicare
will further the burden of national health care spending to taxpayers
Categorical Programs
- each designed to benefit a certain category of people who meet the eligibility criteria to become beneficiaries
Medicare and Medicaid
categorical programs and were created under the Social Security Amendments (1965)
Medicare
- Title 18 of Social Security Act
- entitlement program; people contribute through taxes and are entitle regardless of income and assets
Centers for Medicare and Medicaid Services (CMS)
- an agency under the US Department of Health and Human Services (DHHS)
- Medicare administered by CMS
Medicare covers...
- those 65 years old and older
- disabled people who are entitled to Social Security benefits
- those with end-stage renal disease
Medicares Dual Structure
- comprising two separate insurance programs that are distinct regarding; benefits, coverage, financing, and administration
- Part A and Part B
Hospital Insurance (Part A) financed by
payroll taxes collected by Social Security
Hospital Insurance (Part A) has mandatory taxes that are...
paid by all working individuals, including those who are self-employed
- all earnings are subject to the Medicare tax
- taxes finance the hospital insurance Trust Fund
Hospital Insurance (Part A) covers..
inpatient services
short term convalescence and rehabilitation in a skilled nursing facility (SNF)
home health
hospice
Benefit Period
- determines the timing of benefits for hospital and nursing home stay under Part A
- begins on the day a beneficiary is hospitalized
- ends when the beneficiary has not been in a hospital or a skilled nursing facility for 60 consecutive days
- if after 6
Benefits under Part A for acute care, post-acute skilled nursing care, home health and hospice are
- all covered hospital services are paid for the first 60 days in a benefit period, after a deductible ($876 in 2004) has been paid
Medicare pays for up to 100 days of care in a Medicare-certified SNF
subsequent to inpatient hospitalization for at least 3 days, not including the day of discharge
Medicare pays for home health care when a person is...
homebound and requires intermittent or part-time skilled nursing care or rehabilitation care
For the terminally ill..
Medicare pays for care provided by a Medicare-certified hospice program
Supplementary Medical Insurance (SMI) (Part B or Medigap policies) covers...
physician services
hospital outpatient services (surgery)
diagnostic tests
radiology
emergency department
rehab
ambulance
dialysis
radiation
durable medical equipment
Medigaps, SMI, or Part B
- covers all or a portion of Medicare deductibles and co-payments
- may pay for services not covered by Medicare
- are voluntary programs paid partly by general tax revenue and a premium
- in 2001 94% of all Medicare enrollees had a supplement
Services not covered by Medicare
-neither Parts A or B offer comprehensive care
vision
eyeglasses
dentures
hearing aids
preventative services
routine physicals
Medicare Prescription Drug, Improvement and Modernization Act (MMA) of 2003
- prescription drug benefits
- it expanded Medicare for the first time
- Medicare beneficiaries can voluntarily enroll in the program
Medicare Part D takes effect in 2 stages...stage 1
1) Medicare contracts with private companies to offer drug discount cards; allows beneficiaries to save 10% to 25%
Medicare Part D takes effect in 2 stages...stage 2
- will begin in 2006 with: voluntary enrollment, a monthly premium of $35, an annual deductible of $250, benefits paid according to three layers of personal out of pocket spending
Medicare Part D coverage compared to beneficiary spendings
- benefits paid on three layers of personal out of pocket spending by each beneficiary
- spend $250-$2,250, Medicare 75% of costs
- spend $2,250 to $3,600, Medicare No coverage
- $3,600+, Medicare 95% of costs
- designed to help at a basic threshold and t
Medicare+Choice
Medicare Advantage"
took effect on January 1, 1998
mandated by the Balanced Budget Act (BBA) of 1997
Medicare Managed Care Plans
beneficiaries to seek care only from physicians and hospitals participating in an HMO network
Medicare Private Fee for Service Plans
beneficiaries seek care from a physician or hospital that accepts the plan's payment
Medicare Preferred Provider Organization (PPO)
beneficiaries seek care from in-network providers or go outside the network at a higher personal out of pocket expense
Medicaid
- Title 19 of Social Security Act
- finance health care for the indigent, but not all poor
- each state establishes its own eligibility according to income and resources such as bank accounts and assets
- each state administers its own Medicaid program
Medicaid "medically needy
states define "medically needy" categories based on income and assets
In order for a state to receive federal matching funds for Medicaid...
federal law mandates every state to provide basic health services
A means-tested program
qualify for Medicaid based on assets and income being below state threshold
Medicad Jointly financed by...
federal and state government
- federal government matches states based on per capita income
State Children's Health Insurance Program (SCHIP)
- program under balanced budget act of 1997
- title 21 of social security act
- additional funds to states to expand Medicaid for children under 19 years
SCHIP available to families with incomes up to...
200% of federal poverty level or about $37,000 for a family of four in 2004
US Department of Defense
- health care for those on active duty and retirees, and their dependents and survivors
- 8.3 million are eligible
- staffed mostly by military personnel for active-duty members
- dependents and retirees can receive health care under TriCare
Tricare health plan options
Tricare Prime
Tricare Extra
Tricare Standard
Tricare Prime
functions like an HMO with a primary care manager
- the most efficient
Tricare Extra
a preferred provider option
receive medical care from participating civilian network providers at a discount
has an expanded network of providers
Tricare Standard
- fee for service
- services are provided by civilians
- greatest choice of physicians by at a higher cost
Veterans Health Administration (VHA)
- an executive department of the US government
- one of the largest health service networks in the US (172 hospitals, 860 outpatient clinics,137 nursing homes)
Veterans Integrated Service Networks (VISN)
VHA organized into 22 geographically distributed VISNs
- each VISN receives an allotment of federal funds and is responsible for equitable distribution of funds among hospitals and providers
Veterans with a service connected illness or disability
care is given on a priority basis to...
Third Party payer
insurance companies, managed care organizations, BlueCross Blueshield, government
Reimbursement
payment made by third-party payers to the providers of services
Fee-for-Service
- changes were set by providers
- each service is billed separately
Usual, Customary, and Reasonable amount (UCR)
determined by each payer
insurers later limited reimbursement to this
providers would balance bill, patients pay the difference between the actual charges and the payments received from insurers
- main drawback, providers induce demand
Package Pricing (bundled pricing)
- number of related services in one price
- reduces provider-induced demand because fees are inclusive of all bundle services (optometry includes exam, frames, and lenses)
Resource-Based Relative Value Scale (RBRVS)
- under the Omnibus Budget Reconciliation Act of 1989
- Medicare developed an initiative to reimburse physicians according to a "relative value" assigned to each service based on time, skill, intensity
- a complex formula
RBRVS
- each year, Medicare publishes the Medicare Fee Schedule (MFS)
- goal: narrow gap between incomes of specialists and generalists
Medicare Fee Schedule (MFS)
- gives the reimbursement amounts for each of the services and procedures under a CPT (current procedural terminology) code
- reimbursements are adjusted for the geographic area
Managed Care Approaches
capitation
retrospective reimbursement
prospective reimbursement
Capitation
per member, per month fee to cover all needed services
incentive to give only services needed
minimize provider-induced demand
- drawback: incentive to limit services can result in underutilization of services
Retrospective Reimbursement
rates were set after evaluating the costs retrospectively
historical costs are used to determine the amount to be paid
Prospective Reimbursement
- uses certain reestablished criteria to determine in advance the amount of reimbursement
- Medicare has been using the prospective payment system (PPS) to reimburse inpatient hospital acute care services under Medicare part A since 1983
4 Main Prospective Reimbursement Methods
Diagnosis Related Groups (DRGs)
Ambulatory Payment Classifications (APS)
Resources Utilization Groups (RUG)
Home Health Resources Group (HHRG)
Diagnosis Related Groups (DRGs)
- for hospital inpatients, reimbursement has forced hospitals to control costs, keeping actual costs below the fixed reimbursement amount, as they get to keep the difference as profit
- approximately 500 DRGs
- prospectively set a bundled price according
Ambulatory Payment Classification (APC)
- prospective payment method implemented in August, 2000
- associated with Medicare's Outpatient Prospective Payment System (OPPS)
- for services provided by hospital outpatient departments
- 300 procedure groups
- reimbursement rates are associated with
Resource Utilization Groups (RUG)
are a case-mix method to reimburse skilled nursing facilities (SNF)
- used for determining a SNF's overall intensity of health conditions requiring medical and nursing intervention
- each patient is classified into one of 44 RUGs
Case Mix
overall acuity level in a facility
determines a fixed per-diem, the higher the case mix score, the higher the reimbursement
Home Health Resource Groups (HHRG)
-implemented October, 2000
-pay a fixed, predetermined rate for each 60 day episode of care, regardless of services given
- services are bundled under one payment on a per-patient basis
- 80 distinct groups to indicate severity of a patient's condition
National Health Expenditures
an estimate of the amount spent for all health services, supplies, health-related research and construction activities in the United States during a calendar year
- in 2001, $1.425 trillion spent on national health care expenditures in US
GDP
used to compare the total expenditures on health to the total economic consumption
Gross Domestic Product (GDP)
measure the total value of goods and services produced and consumed
- in 2001, the GDP was $10.082 trillion, $5,035 per capita spending on average
In 2001, 87% of national health expenses were spent on...
personal health ( hospital care, physician services, dental care, other professional services, nursing home care, home health care, prescription drugs, medical supplies, durable medical equipment, vision care)
- remaining 13% spent on public health servic
Cost inflation in health care is evaluated by..
comparing it to the growth of GDP and also to the consumer price index (CPI)
health care cost inflation has exceeded the growth in GDP and CPI
Consumer Price Index (CPI)
measures inflation in the general economy