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CHAPTER 15

Public Health Insurance

OBJECTIVES

1. Identify the key policy goals of public health insurance plans. 2. Describe the Medicare and Medicaid programs in terms of

populations covered, services included, financing arrangements, reimbursement strategies, and pro- competition policies.

3. Explain some of the key issues surrounding public health insurance.

4. Identify the key types of policies required for the delivery of a public health insurance program and indicate their effect on the achievement of social goals.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666. Created from undip-ebooks on 2021-04-12 20:40:11.

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15.1 Introduction

This chapter presents an economic framework that can be used to analyze selected aspects of public health insurance coverage in the United States. Health insurance coverage is a critical element of the healthcare system, and public policies related to health insurance influence the functioning of the healthcare market. In this chapter, a discussion of how the economic framework can be used to analyze policy choices, a discussion of policy goals in relation to the economic framework, and an assessment of policy choices in terms of the social objectives are provided.

In Section 15.2, an overview of public health insurance in the United States is presented. The focus is on the Medicare and Medicaid programs, two of the major national public health insurance plans in the U.S. In Section 15.3, the issue of health insurance coverage is discussed. In Section 15.4, information on recent trends in public health insurance is presented. In Section 15.5, the social goals of Medicare are discussed. In Section 15.6, a sample of solutions proposed in recent years is described and discussion on how each solution contributes to or obstructs the achievement of specific health policy goals is described. Section 15.7 considers alternatives to Medicaid as approaches to addressing issues of inequity and access to needed healthcare services.

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15.2 Public Health Insurance

Public health insurance in the United States for nonmilitary populations involves two key programs aimed at specific target populations. These are the federal Medicare program and the state-federal Medicaid programs. The majority of states also participate in Medicaid expansion. Some states also provide additional public health insurance programs. Often these additional state programs will be tied in some way to Medicaid, but in some circumstances they are not. In this chapter, the focus is on Medicare and Medicaid, including Medicaid expansion.

15.2.1 Medicare

15.2.1.1 Who Is Covered Medicare is a national health insurance program for a subset of the U.S. population. Medicare was established in 1965 under Title XVIII of the Social Security Act and began coverage of beneficiaries on January 1, 1966. Originally, Medicare covered individuals 65 years of age or older, regardless of income or medical history, as long as they or their spouse contributed to Social Security for at least 10 years (40 quarters), Railroad Retirement, or federal retirement programs. In 1972, Medicare was expanded to cover individuals under 65 with certain permanent disabilities or who had end-stage renal disease (ESRD), the permanent failure of kidneys requiring dialysis or a transplanted kidney. Medicare was again expanded in 2001 to cover individuals with amyotrophic lateral sclerosis (ALS, or Lou Gehrig’s disease).

In 2019, Medicare covered about 64 million people of which 22 million, or almost 34%, were enrolled in Medicare Advantage plans. Of the individuals covered by Medicare, about 85% were 65

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and older and 15% were disabled. Medicare covered about 18% of the total population (Annual Report of the Boards of Trustees, 2019; Kaiser Family Foundation, 2019). Between 1966 and 2000, the population covered by Medicare doubled and is projected to double again to about 80 million by 2030.

The population served is also diverse. For example, in 2017, about 55% of the beneficiaries were female, 75% were White, and 12% were under 100% of the national poverty level and another 20% were between 100% and 199% of the federal poverty level. As the characteristics of the population change over time, the diversity of the covered population will become more racially and ethnically diverse. About 25% of beneficiaries reported only fair to poor health in 2017, with disproportionate representation in the nonelderly, Black, Hispanic, and lower-income populations. Also, about 90% of noninstitutionalized Medicare beneficiaries have one or more chronic illnesses, with 68% with two or more chronic conditions, and 17% with six or more chronic conditions (CMS, 2018).

15.2.1.2 What Is Covered? Medicare consists of four parts: Part A, Hospital Insurance; Part B, Supplemental Medical Insurance; Part C, Medicare Advantage; and Part D, Prescription Drugs. Each of these will be discussed in more detail in the following paragraphs.

Part A, Hospital Insurance (HI), covers inpatient hospital services, limited skilled-nursing facility services for rehabilitation, home health care, and hospice services. Most individuals are automatically eligible for Part A coverage if they are a U.S. citizen or permanent resident, if they or their spouse are eligible for Social Security payments, have made payroll tax contributions for 40 quarters (10 years), and are age 65 or older. These individuals are

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eligible regardless of income or asset level or any preexisting medical condition.

Individuals under age 65 qualify for Medicare Part A if they have received Social Security Disability Income (SSDI) payments for at least 24 months; these individuals do not have to have made payroll tax contributions for 40 quarters. In addition, people with end-stage renal disease or Lou Gehrig’s disease are eligible for Medicare as soon as they begin receiving SSDI payments. Individuals age 65 and older not eligible (e.g., who have not contributed to payroll tax for 40 quarters) can enroll in Part A by paying a monthly premium.

Individuals who are eligible for Medicare Part A do not pay a premium. Part A beneficiaries on original Medicare (not Medicare Advantage) are responsible for a deductible before Medicare begins to pay; in 2019, the Part A deductible was $1364 for each episode or “spell of illness” for an in-hospital stay during the benefit period. In addition, beneficiaries generally pay a coinsurance amount for extended hospital stays (days 61–90) or skilled-nursing facility stays (days 21–100). In 2019, the cost per day of extended hospital stay was $341.04 for days 61–90 and $682 for each lifetime reserve day after day 90 (up to 60 days over the beneficiary’s lifetime). Beyond the lifetime reserve days the beneficiary is responsible for all costs. For extended nursing facility stay beneficiaries paid $175.50 per day for days 21–100, and were responsible for all costs beyond 100 days. If an individual is enrolled in a Medicare Advantage Plan, the rules may differ, but the plan must provide at least the same coverage as original Medicare.

If an individual has Part A (hospital insurance), then the individual is eligible for hospice care. To qualify for hospice care, a physician must certify that the individual is terminally ill with a life expectancy of 6 months or less. And, the individual agrees to accept palliative

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care instead of curative care, and the individual signs a statement choosing hospice instead of other Medicare-covered benefits to treat the terminal illness and related conditions. Then, the beneficiary pays nothing for hospice care. There may be a copayment of 5 dollars for each prescription drug and other similar products for pain relief and symptom control while at home. The individual may, however, be required to pay 5% of the Medicare- average amount for inpatient respite care. Respite care is short- term inpatient care provided to the beneficiary in order to relieve family members or other caregivers that are caring for the beneficiary at home. It is reimbursed for no more than five consecutive days per respite period. Medicare does not cover room and board for hospice care in the home or other facility (like a nursing home).

Part B, Supplementary Medical Insurance (SMI), Original Medicare assists beneficiaries paying for medically necessary physician services, outpatient services, home health services, preventive services, ambulance services, clinical laboratory services, durable medical equipment (DME), kidney supply and services, outpatient, inpatient, and partial hospitalization for mental health services, and diagnostic tests. In addition, it covers an annual comprehensive wellness visit and personalized prevention plan. Beneficiaries pay nothing for preventive services if the provider accepts assignment. Assignment means that the provider agrees (or is required by law) to accept the Medicare-approved amount as full payment for covered services. Unlike Part A, however, Part B is voluntary and beneficiaries are required to pay a premium for the program (in 2019 the base premium was $135.50 per month, and additional premium amounts were charged for individuals with higher incomes).

About 95% of the rate of increase in the premium is limited to the cost-of-living increase in Social Security benefits. Also, the

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premium paid is related to income; single individuals with an income greater than $85,000, or couples filing separately with income greater than $85,000, or couples with an income greater than $170,000 in 2019 pay a higher premium, ranging from $189.60 to $460.50 per month. Part B benefits are also subject to annual deductibles ($185 in 2019) and a 20% coinsurance rate, although the preventative services are exempt from the coinsurance and deductible. Over 90% of eligible beneficiaries enroll in Part B.

Part C, Medicare Advantage plans, are alternatives to the Original Medicare plan. Part C allows beneficiaries to enroll in a private plan, such as a health maintenance organization (HMO), preferred provider organization (PPO) or a private fee-for-service plan with specific characteristics, such as an accountable care organization. These Medicare Advantage plans contract with Medicare and must cover all of the medically necessary services that Original Medicare covers, although Original Medicare still covers the cost of hospice care, some new Medicare benefits, and some costs of clinical research studies. In addition, most Medicare Advantage plans offer coverage for items not covered under Original Medicare, such as vision, hearing, dental, and some wellness programs like gym memberships. Many of the plans cover other health-related services that promote health and wellness. Most include Medicare prescription drug (Part D) coverage. In addition to the Part B plan, most plans charge an additional premium.

Part D, Outpatient Prescription Drug Benefit, is a relatively recent addition to Medicare, implemented in 2006. It is an optional benefit offered to all Medicare beneficiaries. If an individual does not enroll in Part D when first eligible, then usually a late enrollment penalty is required for the delayed enrollment, which is applied as long as the individual is enrolled in the prescription drug coverage. Private plans contract with Medicare to provide coverage to

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voluntarily enrolled beneficiaries. Beneficiaries enrolled in the plan typically pay a monthly premium, and individuals with modest income and assets are eligible for assistance. Beginning in 2011, the health reform law establishes a new Part D premium program similar to the Part B program and gradually phases in coverage of the Part D coverage gap (the donut hole) by 2020. Beneficiaries then pay 100% of drug costs until they have spent $4550 out-of- pocket for prescriptions. Both original Medicare and Medicare Advantage plans offer Part D coverage.

Each Part D drug plan under Medicare is required to provide at least a standard level of coverage set by Medicare. Plans are permitted to vary the list of prescription drugs they cover (their formulary) and how they place drugs in two different “tiers” on their formulary. These formularies cover both generic and brand-name prescription drugs. The formularies are required to include at least two drugs in the most commonly prescribed categories and classes, but can select which specific drugs are covered. Beginning in 2019, drug plans that meet certain requirements can immediately remove brand-name drugs from the formularies and replace them with new generic drugs or change the cost of coverage rules for brand names when adding new generic drugs. Table 15-1 provides information on the premiums for Part D coverage in 2019. The additional paid above the plan’s premium is paid directly to Medicare, and not to a Medicare Advantage plan.

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Table 15-1 Filing Status and Yearly Income in 2017*

Deductibles charged by plans vary across the plans, but the maximum deductible in 2019 was $415. Some plans do not have a deductible. Many plans also have a copayment per tier (a fixed amount) or a coinsurance rate (percent of the cost of the drug) per prescription.

15.2.1.3 Financing Medicare The primary sources of Medicare funding are general revenues (43%), payroll tax revenues (36%), and premiums (15%) paid by beneficiaries. In addition, taxation of Social Security benefits (2%), transfers from states (1%), and other sources, such as interest (1%) also help fund Medicare.

Part A, the Hospital Insurance Trust Fund, receives funding through a dedicated tax levied against earnings (88%). This tax (2.9%) is paid equally by employers and employees (1.45% each), with self-employed individuals paying both parts. Beginning in 2013, the health reform law increases the tax for higher-income individuals (greater than $200,000 per individual and greater than $250,000 per couple) to 2.35% from 1.45%. This tax is levied against earnings (salary and wages), not total income. Part A receives about 1% from premiums, 8% from taxation of Social Security benefits, 2% from interest, and 1% from other sources.

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Part B, the Supplementary Medical Insurance Trust Fund, is financed in part from general revenues (72%) and in part by premiums (26%) paid by beneficiaries voluntarily enrolled in the program. The goal is to have premiums to cover about 25% of the costs of Part B, and general revenues cover about 75%, interest and other sources cover approximately 1% each. Higher-income individuals pay a larger share toward the premiums.

Part C, the Medicare Advantage program, is not separately funded. It provides benefits under Parts A, B, and D and so receives its funding through these sources.

Part D, the Prescription Drug program, receives funding from general revenues (71%), premiums from beneficiaries (17%), and state payments for dual eligible individuals (12%). The monthly premiums from beneficiaries are established to cover 25.5% of the costs of the standard plan and Medicare funds the other 74.5%. As under Part B, higher-income individuals pay a larger share of the coverage and therefore receive a smaller subsidy from Medicare.

Financing the Medicare program continues to face a number of challenges. These challenges include rising healthcare costs, a population that continues to age, and a declining ratio of workers contributing to the system to beneficiaries enrolled in the program. Efforts to control the costs of Medicare remain a federal priority because it accounted for about 15% of the total federal budget in 2018 and is projected to increase to 18% in 2029 (Cubanski, Neuman, & Freed, 2019; Potetz, Cubanski, & Neuman, 2011).

15.2.1.4 Paying Providers Except for Medicare Advantage (Part C) arrangements, Medicare pays most providers on a fee-for-service basis, with bundling of services occurring under the hospital prospective payment system with MS-DRGs. Physician fees include an aggregation of elements

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under the RBRVS system, and home health is paid a bundled, capitated amount. Medicare has implemented a number of programs to improve quality and control costs that will be discussed later.

Medicare benefit payments totaled $731 billion in 2018, up from $462 billion in 2008. During this period spending on Part A benefits decreased from 50% to 41%, while Part B spending increased from 39% to 46%. Spending on Part D increased from 11% to 13%. Medicare financed about 20% of total national healthcare expenditures in 2017, with its share varying by the type of service. For example, Medicare funded about 23% of the total spending on physician services. The most rapidly growing service funded by Medicare is prescription drugs, in which Medicare financed about 30% of national retail drug sales in 2017, compared to only 3% in 2005, the year prior to implementation of Part D. Hospitals received about 25% of their funding from Medicare in 2017 (Cubanski, Neuman, & Freed, 2019).

Payments to Medicare Advantage plans have increased substantially in recent years as more and more beneficiaries have elected to enroll in these plans instead of Original Medicare. In 2018, 34% of Medicare beneficiaries were enrolled in Medicare Advantage plans. Payments to Medicare Advantage plans for Parts A and B benefits increased from $99 billion (21%) in $2008 to $233 billion (32%) in 2018. Total Part D benefit payments increased from $49 billion (11%) in 2008 to $95 billion (13%) in 2018.

Medicare has experienced slower growth in spending in recent years, mainly because of the implementation of the Patient Protection and Affordable Care Act (ACA) and the Budget Control Act (BCA) of 2011. The ACA introduced system reforms to improve efficiency and quality of patient care and reduce costs. These reforms included Accountable Care Organizations (ACOs),

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medical homes, bundled payments, and value-based purchasing initiatives. The ACA also included reductions in payments to plans and providers. The BCA, through sequestration, reduced payments to providers and plans by 2% beginning in 2013. And while Medicare has seen an increase in enrollment as the “baby boomer” generation begins to age into the Medicare program, these individuals tend to help lower the average age of the Medicare population and are healthier (Cubanski, Neuman, & Freed, 2019).

15.2.1.5 Supplemental Insurance Coverage Because of the risk of substantial out-of-pocket costs to Medicare beneficiaries through deductibles, coinsurance, and uncovered services, about 90% of Medicare beneficiaries have purchased supplemental insurance coverage (a.k.a. Medigap plans). This supplemental coverage takes several forms, but the goal is to assist the beneficiaries in covering the relatively high cost-sharing expenses of Medicare and also to cover benefits that Medicare does not cover currently. While traditionally the primary source of supplemental coverage was employer-sponsored benefits, large employers offering retiree health benefits have declined substantially due to rising costs and the economic environment. However, the number of beneficiaries enrolled in Medicare Advantage plans has been increasing, and the additional coverage offered by these plans has helped to cushion some of these changes.

Another source of supplemental coverage comes from state Medicaid programs, which provide some assistance to low-income Medicare beneficiaries who also have modest assets. The Medicaid programs often pay the Parts B and D premiums for these eligible beneficiaries to ensure they have coverage under these voluntary programs. Medicaid may also pay premiums for individuals who don’t qualify for subsidized enrollment but are

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eligible to pay premiums to join the program. More about these “dual-eligible” beneficiaries will be provided in the Medicaid section.

Medicare beneficiaries also have the ability to purchase supplemental private insurance plans, usually called Medigap plans. These Medigap policies help cover the cost-sharing requirements of Medicare and fill in the gaps in the benefits. These policies are designed to cover the deductibles, coinsurance, and copayments associated with Medicare-covered services. While these plans reduce financial burdens to the beneficiaries, they do reduce the typical incentives associated with having beneficiaries retain some financial responsibility, impacting the price consciousness of consumers. In general, these Medigap policies must conform to 1 of 10 standard benefit packages. Each of these packages offers coverage of a different set of benefits from which the beneficiaries can select. The monthly premium charged varies by the benefits covered, the insurer, the age of the beneficiary, and the place of residence. Beginning in 2020, Medigap plans purchased by new Medicare enrollees will not be allowed to cover the Part B deductible.

Some beneficiaries enroll in multiple supplementary plans to provide more complete coverage of medical expenses. Even with all these supplemental policies, many Medicare beneficiaries still experience substantial out-of-pocket expenses. For example, Medicare beneficiaries spent over 14% of their income out-of- pocket for health care in 2013, and that percentage has been increasing with economic conditions and changes in premiums and services covered. In 2013, one-fourth of Original Medicare enrollees spent about 30% of their income on out-of-pocket cost, even with Medigap coverage. As out-of-pocket costs increase, Medicare beneficiaries face additional challenges to maintaining daily necessities. As cost-sharing increases, more Medicare

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beneficiaries may have to choose between basic necessities and health care, with the results being adversely impacted health.

15.2.2 Medicaid

15.2.2.1 Who Is Covered? Medicaid is another public insurance program. Medicaid was established in 1965 as part of the “Great Society” program under Title XIX of the Social Security Act; it was implemented as of July 1, 1966. Medicaid was established as an entitlement program to provide financial assistance for healthcare services and long-term care services for certain low-income individuals and families who were receiving cash assistance (welfare recipients). However, since its beginning, it has been expanded to increase eligibility to cover additional individuals living below or near the poverty level. Today, Medicaid covers both working and jobless families and children, pregnant women, individuals with a variety of physical and mental conditions, and elderly individuals. The role of Medicaid has expanded substantially under health reform.

Unlike Medicare, which is a federal program operated under guidelines established by the Social Security Administration and administered through the Centers for Medicare and Medicaid Services (CMS), Medicaid is a state-federal partnership program. The administration of Medicaid is at the state level, according to federal requirements. Medicaid participation by states is voluntary, although all states currently participate in the original Medicaid program, and it is financed jointly by federal and state governments, with the federal government “matching” dollars expended by the states. The federal match rate (Federal Medical Assistance Percentage, or FMAP) to the states varies and is based on average state per capita income relative to the national average. By law, FMAP is at least 50% (meaning that for every dollar the state spends on Medicaid, the federal government will

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provide another dollar for Medicaid services) and reached as high as 74.94% for the fiscal year 2020. The higher the FMAP, the greater the percentage of total Medicaid costs that are financed by the federal government.

In 2009, the American Recovery and Reinvestment Act temporarily increased the FMAP, and for 2010, the FMAP ranged from 50% to 85%. This increased the federal share of total Medicaid spending in 2010 from 57% to 66%, enabling states to cover additional individuals due to the economic conditions.

Because most private insurance is obtained through place of employment, when individuals lose employment, they also usually lose insurance coverage. The expansion in Medicaid during the period covered by the American Recovery and Reinvestment Act was designed to provide financial assistance to individuals until they became reemployed and began receiving insurance coverage again (Doty, Collins, Robertson, & Garber, 2011).

Under the partnership, Medicaid is administered by the states under broad federal guidelines and oversight by CMS. The broad federal guidelines enable states to exercise considerable variation in the design of their programs. While state participation in Medicaid is voluntary, currently all states participate. The federal government defines minimum requirements that states must meet, but the states have broad authority to establish eligibility criteria, benefits covered, provider payments, delivery systems, and a number of other conditions for their program. As a result, the percentage of the population covered across states varies widely.

In addition, states may request a waiver from the federal government, enabling them to design and operate their program outside the federal guidelines. A typical reason for requesting a waiver is to adopt a new model of coverage and delivery system for their low-income population. The waiver capability and the inherent flexibility of the Medicaid program have enabled states to

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adapt and evolve to meet the needs of their populations better. States can adjust more quickly to changing economic conditions or medical conditions (such as the HIV/AIDS pandemic) to coordinate and manage the health of their populations. The flexibility also means that there is substantial diversity in who is covered across the states.

In general terms, not only must an individual qualify based on financial criteria, but the individual must also belong to a group designated as “categorically” eligible for coverage. The federal government mandates that pregnant women and children under 6 with family incomes less than 133% of the federal poverty level (FPL) be covered. In addition, children age 6–18 with family income below 100% of the FPL must be covered, as must parents below states’ 1996 welfare eligibility levels. Most elderly populations and individuals with disabilities and on SSI must also be covered. States do, however, have flexibility in determining what counts as income for the program, with most states including assets in the measure. In addition to the minimum mandatory groups, states have the option of expanding coverage to additional groups. These optional groups covered typically extend the upper income levels for covered groups.

Medicaid is an entitlement program. Once a state has established the eligibility criteria for its Medicaid program, then all individuals in the state meeting the criteria have a federal right to Medicaid coverage; the individuals are entitled to coverage, and enrollment cannot be limited by the state, nor can waiting lists be applied. One federal criterion is that individuals must be American citizens or specific categories of lawfully residing immigrants who have resided in the United States for 5 years.

Medicaid is currently core to the financing structure of the U.S. healthcare system and expanded substantially under health reform. Currently, more children are covered under Medicaid than

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any other source. Also, the majority of adults who are covered under Medicaid are in working families, holding low-paying jobs without access to employer-based health insurance. Many nonelderly individuals with disabilities unable to obtain coverage in the private market or for whom the coverage available does not meet all their needs, rely on Medicaid. Medicaid also covers pregnant women, with about 40% of all births occurring to Medicaid mothers.

Another group of enrollees in Medicaid are the low-income individuals on Medicare, the “dual-eligible” individuals. In 2017, there were 12 million individuals dually enrolled. The dual-eligible populations are poorer than the other Medicare populations and also tend to have poorer health, with higher rates of chronic illness, require more long-term care needs, and have greater social risk factors. In 2017, 41% of the dually enrolled individuals had at least one mental health diagnosis.

About one in six Medicare beneficiaries are also enrolled in Medicaid, which assists enrollees in paying their premiums for Parts B and D, cover the cost-sharing obligations of Medicare, and cover services not covered under Medicare, especially custodial long-term care in nursing facilities. Because of poorer health and services needed, these individuals place greater financial strain on the Medicaid program than the typical Medicaid recipient. Typically, Medicare pays for covered services first, with Medicaid the payer of last resort. Medicaid may also pay for services Medicare does not cover and will pay the premium for those individuals to enroll in Medicare Parts B and D plans.

In 1997, the Children’s Health Insurance Program (CHIP) was created under Title XXI of the Social Security Act. CHIP is another insurance program that provides federal matching funds to states to provide health coverage to children in families that have incomes that are too high to allow them to qualify for Medicaid but

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do not have sufficient income to enable them to purchase private health insurance coverage. CHIP allowed states substantial flexibility in the expansion of insurance coverage of children, but every state now covers children and families to at least 200% of the federal poverty level.

This program can either be included with the state’s Medicaid program or established as an independent program or as a combination. The independent design allows states more flexibility and requires states to describe the characteristics of their program in a state health plan. If the state includes CHIP in their Medicaid program, then the same rules apply as to other recipients, although eligibility is extended to higher-income individuals. As eligibility for coverage became more expansive, concerns were raised that the public insurance program would “crowd out” private insurance coverage. The concern was that the lower, subsidized premium of CHIP would cause parents to drop dependent children from their private insurance plan and enroll them in the public program.

The goal of the Affordable Care Act (ACA) was to reduce the number of uninsured individuals in the United States by providing a number of affordable care options through Medicaid and the health insurance marketplace. The ACA authorized states to expand Medicaid eligibility if they wished to enroll individuals under 65 and families with incomes below 138% of the federal poverty level (FPL). It also standardized the rules for determining eligibility and providing benefits through Medicaid, CHIP, and the health insurance marketplace. In June 2012, the Supreme Court ruled that participation by states to expand Medicaid coverage had to be voluntary.

Under Medicaid expansion, the cost-share of the new enrollees covered was financed 100% by the federal government for the years 2014 through 2017, and then gradually declining until it

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reached 90% federal share in 2022 and beyond. This federal share percent is much more generous than the 50%–75% (averaging 57%) for existing Medicaid expenditures. As of 2019, 14 states were still not participating in Medicaid expansion.

Even with the expanded coverage under Medicaid, there are still groups, or categories, of individuals who are not eligible for Medicaid, regardless of income level. Low income is a necessary condition but not a sufficient condition for coverage. One group of the uninsured is the parents of children who are on Medicaid because the income requirements are more restrictive for adults than for children. Another group is adults without dependent children, who no matter how low their income is, unless they are pregnant or disabled, do not qualify for Medicaid. This latter group was the primary focus of the Medicaid expansion program. Most states do not cover lawfully resident immigrants during their first 5 years in the United States. Federal law prohibits undocumented immigrants from being covered by Medicaid.

15.2.2.2 What Is Covered? Medicaid covers a broad array of services, both mandatory and optional. The federal government mandates each state offer a specific set of services in order to participate in the program. The federal government also allows states to cover additional optional services under the Medicaid allowable services. These optional services qualify for the same federal match as the mandated services. The specific optional services covered vary across states.

Because of the rather diverse needs of the Medicaid population, not only are the typical benefits covered under private insurance provided, but Medicaid programs also typically cover dental, vision, transportation, translation services, and long-term care services and support. Table 15-2 provides a list of mandatory

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services as well as typical optional services covered. States employ a number of strategies to limit utilization of services, such as concurrent and retrospective utilization review, prior authorization, restrictive definitions of medical necessity, and case management, especially for high-risk/high-cost cases.

Table 15-2 Services Covered by Medicaid Programs

Mandatory Services Commonly Offered Optional Services

Inpatient hospital services Prescription drugs

Outpatient hospital services Clinic services

Early and periodic screening, diagnostic, and

treatment (EPSDT) services for individuals under 21

years of age

Physical therapy

Nursing facility services Occupational therapy

Home health services Speech, hearing, and language

disorder services

Physician services Respiratory care services

Rural health clinic services Other diagnostic, screening,

preventive, and rehabilitative

services

Federally qualified health center services Podiatry services

Laboratory and X-ray services Optometry services

Family planning services Dental services

Nurse midwife services TB-related services

Certified pediatric and family nurse practitioner

services

Dentures

Freestanding birth center services (when licenses or

otherwise recognized by the state)

Prosthetics

Transportation to medical care Eyeglasses

Tobacco cessation counseling for pregnant women Chiropractic services

Tobacco cessation, Other practitioner services

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www.governing.com/news/state/gov-Study- Medicaid-Anti-Smoking-Programs-Lead-to- Significant-Savings.html

Private duty nursing services

Personal care

Hospice

Case management

Services for individuals age 65

or older in an Institution for

Mental Disease (IMD)

Services in an intermediate

care facility for the mentally

retarded

State plan home-and-

community based services

1915(i)

Self-directed personal

assistance services 1915(i)

Community first choice option

1915(k)

Inpatient psychiatric services

for individuals under age 21

Health homes for enrollees with

chronic conditions—Section

1945

Other services approved by the

secretary*

*This includes services furnished in a religious nonmedical healthcare institution, inpatient psychiatric services for individuals under age 21, emergency hospital services

by a non-Medicare certified hospital, and critical access hospital (CAH).

Mandatory & Optional Medicaid Benefits. Retrieved from

https://www.medicaid.gov/medicaid/benefits/list-of-benefits/index.html

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For children under 21, the mandatory coverage of Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) benefit provides a very comprehensive set of services to correct or ameliorate acute and chronic physical and mental health conditions. The services covered under the EPSDT benefit are broader than most private insurance plans and are especially important for children with disabilities.

Also not widely provided under private health insurance are the long-term services and support provided under Medicaid, although individuals can purchase long-term care policies privately. Medicaid includes services provided in skilled and intermediate- level nursing homes, as well as such community-based services as home health, rehabilitation therapy, medical equipment, adult daycare, and respite care for caregivers, to enable individuals to live as independently as possible. Medicaid is the largest public payer of mental health care, and Medicaid also covers about two- thirds of all nursing home residents and about 40% of individuals with HIV.

15.2.2.3 Financing Medicaid The federal-state partnership organizational structure of Medicaid results in financing also shared between the two. There is a statutory formula that dictates how the federal government matches the spending of each state. The federal match rate, FMAP, is based on a state’s per capita income relative to the national average—the lower a state’s per capita income, the higher the rate paid by the federal government. There is not a limit on total Medicaid expenditures, but expenditures are limited by the ability of the state to generate its share of the expenses. This creates a barrier for many states that are required to balance their budgets, because states must first spend the Medicaid monies paying providers and then get reimbursed retrospectively from the federal government for their share.

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The Basic Health Program was part of the ACA and provides states an option to establish health benefit programs for low- income residents who would otherwise be eligible to purchase coverage through the health insurance marketplace. The Basic Health Program is designed to provide affordable coverage and better continuity of care for people whose income fluctuates above and below Medicaid and CHIP levels. States may offer coverage to individuals with incomes between 133% and 200% of the federal poverty level.

For most states, Medicaid is the largest source of federal revenue for the state, while it tends to be the second-largest sector of a state’s budget, behind education. Because most states must balance their budgets, generating revenue to support Medicaid can be difficult, especially in economic downturns, when state revenues decline while the enrollment in Medicaid increases. However, because increased Medicaid spending by the state results in an influx of federal dollars, it increases the multiplier effect of those dollars, as businesses and residents generate successive rounds of earnings and purchases. This influx of federal dollars into the state’s economy provides an incentive for states to focus on health care and not necessarily reduce coverage of their populations, although states are forced to control costs to balance their budget.

15.2.3 Paying the Providers

15.2.3.1 Fee-For-Service There are two generic types of healthcare financial coverage for providers under Medicare: fee-for-service and per capita (or capitation) payment, although recently Medicare has implemented a blended strategy combining the two types of payment. In the fee- for-service plan, the Medicare program sets prices for individual patient contacts or encounters. Medicare has developed systems

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for classifying services of providers for most types of care supplied; these systems now include inpatient hospitalization, outpatient care, home care, and skilled-nursing facility care. Any classification system can divide cases or patients into groups of patients or encounters; the patients within each group are assumed to use a similar amount of resources. Each group is assigned a relative weight, and a dollar value is assigned to a weighted unit. Medicare adjusts the monetary prices for a variety of factors, including whether the provider is in an urban or rural area, area wage and cost-of-living levels, and provider characteristics (e.g., teaching versus nonteaching units). The result is a complex array of prices that are being paid for patients with the same diagnosis.

The inpatient hospital stays under Medicare Part A are paid a prospectively set rate and the payments system is referred to as the inpatient prospective payment system (IPPS). Under IPPS, hospitals are paid according to the Medicare Severity Diagnosis Related Group (MS-DRG) system. The original DRG system was implemented in 1983, with 467 DRGs; the system was modified to incorporate the severity of cases within the DRGs in 2007, with over 700 groups established. In 2019 there were over 750 groups established. Each group is assigned a basic weighted rate that is then multiplied by the conversion rate to obtain the amount paid for patients hospitalized in that group. The group reflects the average resources used to treat Medicare patients in that MS- DRG.

This payment rate is divided into two components: labor-related and nonlabor-related, with proportions based on the wage index. In defining the service area of hospitals to be used in the labor- related adjustment, a commuting ratio of workers commuting from home to work is used in defining the hospital’s labor market. For 2020, the base rate was $5654.75 per admission. If the wage

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index was greater than one, then the labor share accounted for 68.3% of the relative weight, or $3862.19 per unit, and the nonlabor share accounted for 31.7%, or $1792.56 per unit. If the wage index was equal to or less than one, then the labor share was 62.0%, or $3505.95 per unit, and the nonlabor share was 38.0%, or $2148.80 per unit. These base rates are multiplied by the relative weight of the MS-DRG to obtain the amount the hospital will receive for a patient hospitalized with that diagnosis.

Under programs established by the ACA, additional adjustments to the labor and nonlabor wage index numbers are made. For hospitals that submitted quality data and were a meaningful user of an electronic health record (EHR) then the amounts they were paid for the labor and nonlabor wage index components were increased by 2.2%. If the hospitals submitted quality data but were not a meaningful user of an EHR, their amounts were increased by 0.35%. If the hospitals did not submit quality data but were a meaningful EHR user, the amounts were increased by 1.85%. For hospitals that did not submit quality data and were not a meaningful user of an EHR, their amounts were decreased by 0.4%.

Hospitals may receive an add-on payment to the base payment if they treat a high percentage of low-income patients, known as the disproportionate share hospital (DSH) adjustment. The ACA modified how hospitals are reimbursed for serving a disproportionate share of low-income patients. Beginning in FY 2014, hospitals receive 25% of the amount they previously would have received under the current statutory formulas for Medicare DSH. The remaining 75% of what would have been paid as Medicare DSH becomes available for uncompensated care payments after the amount is reduced for changes in the percentage of individuals that are uninsured in the hospital’s service area.

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If a hospital is an approved teaching hospital, then it receives an indirect medical education (IME) adjustment percentage add-on payment. This rate depends upon the ratio of residents-to-beds for operating costs and on the ratio of residents to average daily census for capital costs.

The final adjustment is made for unusually costly patients—the outlier adjustment. This adjustment is designed to protect hospitals from unusually expensive cases. The total payment hospitals receive for a patient in a MS-DRG then, reflects the base payment plus DSH adjustment, plus IME adjustment, plus outlier adjustment (see https://www.cms.gov/AcuteInpatientPPS/01_overview.asp#TopOfPage). Hospitals can also receive additional payments for treating patients with certain new expensive technologies under the capital payment rate. For 2020 the national rate was $462.61.

The IPPS payment to hospitals is also adjusted for the hospitals participating in the value-based purchasing (VBP) program, the hospital readmission reduction program (HRRP), and the hospital- acquired conditions (HAC) reduction program. The hospital’s VBP can result in the rate being adjusted upward, downward, or remaining neutral based on the performance on a set of quality measures. The VBP program provides incentive payments to participating hospitals that exceed performance standards and/or improve performance during the period. Beginning in 2017 the reduction to base operating MS-DRG payment amounts decreased by 2.0% for those hospitals not meeting the standards.

The HRRP allows an adjustment to the base payment to hospitals to account for excessive readmissions for the conditions of acute myocardial infarction, heart failure, pneumonia, chronic obstructive pulmonary disease (COPD), total hip/knee arthroplasty, and coronary artery bypass graft surgery (CABG). Hospitals ranking in the lowest performing hospital-acquired conditions (HAC)

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reduction program quartile will receive payment equal to 99% of what the IPPS would normally pay the hospital.

Medicare has also implemented a prospective payment system for post-acute home care. A classification system was developed that is based on the patient’s diagnosis, clinical factors, functional factors, and on therapeutic needs (physical therapy [PT], speech- language pathology therapy [SLP], and occupational therapy [OT]), medical social services, routine and nonroutine medical supplies, and home health services (Liu, Gage, Harvell, Stevenson, & Brennan, 1999; Medicare Learning Network, 2018). As with inpatient care, a weight is assigned to each group in the class, and a price per weighted unit is set. There were 153 case-mix groups in 2018 and the rate is established to cover a 60- day period. The Medicare home care payment system replaced a system by which home care providers billed for individual services. It thus represents a bundling of services, in comparison with the payment system prior to 1999, when the prospective payment system was introduced. The price includes a wage adjustment factor. Outliers are also permitted for additional payment. The ACA places an limit on home health services so that no more than 1% of a home health agency’s (HHA’s) total payments are paid as outliers.

Unlike hospital and home care reimbursement, the payment for physicians under Medicare remains on an individual service basis. Physicians are paid by fee category, called Current Procedural Terminology (CPT). There are over 10,000 CPT codes currently. Each service is assigned a weight; currently, the weighting system is called the Resource-Based Relative Value System (RBRVS). The RBRVS contains separate component weights that reflect work performed, practice expenses, liability insurance, and regional cost variations. A dollar value is assigned by Medicare, which converts the resource-based weights to dollar payments. In

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2019, this conversion figure was $36.0391. CMS has established 89 physician fee schedule (PFS) localities reflecting geographical cost variation to adjust the payment rates for physicians.

15.2.3.2 Additional ACA Programs In July 2014, the Medicaid Innovation Accelerator Program (IAP) began. This program is a collaboration between the Center for Medicaid and CHIP Services (CMCS) and the Center for Medicare and Medicaid Innovation (CMMI). Under this program, support is provided to state Medicaid agencies to build capacity in key program functional areas by offering targeted technical support, tool development, and cross-state learning opportunities. The programs in which technical support is being offered include: reducing substance use disorder; improving care for Medicaid beneficiaries with complex care needs and high cost; promoting community integration through long-term services and supports; and supporting physical and mental health integration. IAP also works with states through its functional areas for Medicaid delivery system reform: data analytics, performance improvement, quality measurement, and value-based payment of financial simulations.

Another feature of the ACA was the creation of the Health Insurance Marketplace, also known as the Health Insurance Exchange program. The health insurance marketplace program is a service that helps people shop for and enroll in affordable health insurance. These are plans offered by private insurance companies with a range of prices and features accessed through the federal government, although some states operate their own program. Individuals who qualify may be eligible for a premium tax credit and other savings that would lower monthly insurance bills and allow extra savings for out-of-pocket costs like deductibles, coinsurance, and copayments. The premiums under the health insurance marketplace program are based on estimated income of the enrollee.

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Under the Medicare Shared Savings Program providers that participate in an Accountable Care Organization (ACO) continue to receive traditional Medicare fee-for-service payments under Parts A and B. However, the ACO may be eligible to receive a shared savings payment if it meets specified quality and savings requirements. This program was a one-sided program in that the ACOs could receive bonus payments, but were not at risk for excess costs. Under the new Pathways to Success Program the direction of the shared savings program is redesigned to encourage participating ACOs to transition to a two-sided model. Under this new model, ACOs continue to be able to share in savings, but are now accountable for repaying shared losses.

The objectives of the Pathways to Success Program are to: increase savings for the Trust Fund and mitigate losses, reduce gaming opportunities, promote flexible regulatory requirements, and promote free-market principles. Under this program, CMS introduced additional access to telehealth services provided in a patient’s place of residence (home or long-term care facility). Also, the ACO can offer new incentive payments to beneficiaries for taking steps to achieve better health. For the ACOs taking on the risk for spending increases above the cost targets, they are held responsible for paying back to CMS up to at least 2% of the revenue or 1% of their cost targets. In return for accepting the risk, they are eligible for higher levels of shared savings.

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15.3 Uncovered Care

Despite the existence of Medicare, Medicaid, the Medicaid expansion program, and the mandated health insurance requirement, many individuals either have no health insurance coverage at all or have large gaps in coverage. According to estimates by the U.S. Bureau of the Census, 16.3% of all individuals (about 49.9 million) had no insurance coverage in 2010 (DeNavas-Walt, Proctor, & Smith, 2011). In 2017, the number of uninsured increased to 28.0 million from the 27.3 million in 2016, still much lower than the 49.9 million in 2010 (Berchick, 2018). Most uninsured individuals (84.6%) were 19–64 years of age. The uninsured were disproportionately located in the south, where participation in Medicaid expansion was low. The uninsured have lower education and are more likely to live in poverty than the insured population. Most uninsured have at least one individual in the family working, which poses a problem because employment is the usual route through which health insurance is obtained.

It should be pointed out that uninsured is not the same thing as unserved. Many individuals with no insurance still receive medical care: they either pay the full price for this care or receive subsidized or charity care. What is likely, however, is that they receive less care than they would if they had insurance coverage.

In addition to those with no coverage, a substantial number of individuals have gaps in coverage. The Medicare deductibles and copayments can add up to a substantial amount, and individuals who are covered by Medicare but do not have additional private (Medigap) or Medicaid coverage can, if they become ill, incur substantial out-of-pocket costs. This is especially true for individuals who need nursing home care. There is very little in the way of long-term care insurance coverage at present, although

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private policies are available, and so individuals in nursing homes (especially intermediate-care facilities) will be required to pay for such care themselves, unless they “spend down” to the point at which, if married, both incomes (less medical expenses) and their assets are below the state Medicaid limits.

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15.4 Some Trends in Public Health Insurance

In recent years, several public insurance trends have captured interest in the public policy arena. In this section, these trends are reviewed briefly.

15.4.1 Disbursements of the Hospital Insurance Trust Fund Medicare’s HI funding is tied to the growth of the portion of the Social Security tax that is earmarked for the Hospital Insurance Trust Fund. However, there is no automatic link between the growth of trust fund revenues and the growth of fund expenditures, which primarily go to reimburse hospitals (Iglehart, 1999; Wolkstein, 1984). The revenues are based on a percentage of payrolls and so cannot be increased by more than the increase in payrolls, unless the Social Security tax rate is increased or, as happened recently, the base on which the tax is levied is increased (i.e., employment and wages have increased). In the absence of such increases in tax revenues, large deficits in the fund had been experienced, and until very recently, increasingly large deficits had been predicted.

According to the 2018 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, expenditures from the HI Trust Fund exceeded revenues by $1.8 billion. Deficits in the Trust Fund are projected to continue, requiring redemption of Trust Fund assets to pay expenditures. It is estimated that Trust Fund assets will be depleted/exhausted in 2026.

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15.4.2 Medicare’s SMI Revenues and Expenditures SMI funds come from two main sources: premiums paid directly by the enrollees (or by Medicaid for those qualifying for Medicaid coverage) for Parts B and D revenue funds and from general revenue funds. Parts B and D are maintained in separate accounts in the SMI. Originally, the premium rate for Part B was set so that premium revenues of the SMI trust fund were one-half of all revenues. From 1973, the growth of premiums was mandated to be no greater than the growth of Social Security cash benefits. As a result, since then, the premium share of total fund revenues in Part B has fallen to about 30%. The nature of financing for both Parts B and D is similar, with premiums and the transfer from general revenues for each part established annually at a level sufficient to cover the following year’s estimated expenditures. Accordingly, each account within SMI is automatically financially balanced each year. As in the case of the Hospital Insurance Trust Fund, this growth in expenditures has been a major cause of concern. However, unlike Hospital Insurance Trust Fund outlays, Medical Insurance Trust Fund expenditures can be increased by government appropriations.

According to the Trustee’s Report (2019), expenditures for Parts B and D grew at an average annual rate of 6.6% and 3.6%, respectively, over the past 5 years. Part B cost increases are projected to grow at an annual rate of 8.3% and Part D costs are projected to grow at an annual rate of 7.3% over the next 5 years. A “hold harmless” provision does not allow Part B premium increases to cause a beneficiary’s net Social Security benefits to decrease, limiting the amount of revenue generated from premiums.

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15.5 Goals of Medicare

In order to discover what the policy issues are with Medicare, the social goals of Medicare need to be examined. It was relatively recently that these goals were stated explicitly (Cutler, 2000; U.S. General Accounting Office, 1999). Among these stated goals were affordability, equity, adequacy, feasibility, and acceptance. The definitions of these concepts given here are those of the U.S. Government Accounting Office (GAO), which differ from the standard economic definitions.

Affordability refers to the total costs incurred by the program. When stating this goal, the GAO is referring to the public component of the program and its burden on public spending. Equity refers to the burden of payments on specific groups. Individuals can be viewed as paying too much if they don’t have sufficient coverage or if their premiums are too high. Individuals can also be paying too little for premiums and copayments; with low direct costs, they would be using too much care (from a strict efficiency viewpoint). Adequacy refers to the availability of care. Feasibility refers to the ability of Medicare to actually implement changes in policy. Acceptance refers to the acceptability of the program to consumers, intermediaries, and providers.

These goals bear some resemblance to the following very general economic goals of health policy: economic efficiency (which has demand, technical efficiency, and adequacy-of-supply aspects), equity in utilization and equity in payment, quality of care, and public expenditure control. The economic goal of public expenditure control translates into the GAO goal of affordability. The economic goal of equity of payment translates into the GAO goal of equity. The economic goals of equity in utilization and adequacy of supply translate into the GAO goal of adequacy. The

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economic goals of quality of care and technical efficiency are not directly addressed in the GAO goals, although quality assurance activities are a very important component of Medicare activities (Medicare Payment Advisory Commission, 2000, 2019). The GAO goals of feasibility and acceptance are not directly addressed in the general economic goals.

In order to assess Medicare policies, Medicare performance must be evaluated in light of the policy goals. The major issues facing Medicare include rising expenditures, hospital trust-fund deficits, and large out-of-pocket payments for some groups of beneficiaries. These phenomena are related to the goals of affordability, equity of payment, and adequacy of supply. Most importantly, the goals may well conflict with each other (otherwise there would not be an economic problem). In the late 1990s, the Health Care Financing Administration (the agency that administered Medicare at that time) and the Congress instituted a series of reforms designed to address the goal achievement balance under Medicare. The policy initiatives were Medicare Part C and the Balanced Budget Act of 1997. In the following section, an overview of the policies that are available to Medicare is provided.

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15.6 Policy Alternatives for Medicare

15.6.1 Economic Analysis and Alternative Solutions Six basic types of policies can be identified that can be used to help achieve policy goals. The first set of policies deals with the setting of the broad outline of the program. For example, Medicare can change who is entitled to benefits or what benefits individuals receive. The second set of policies deals with health insurance premiums. Medicare can change Part B premiums, and it can change the out-of-pocket price of supplementary private insurance premiums. As well, Medicare can arrange for supplementary coverage in other programs, such as Medicaid.

The third set deals with the direct price of care. Medicare can change the deductibles and copayments paid by enrollees and, in the process, impact the demand for care (subject, of course, to the purchase of supplementary insurance). The fourth set deals with provider reimbursement. Medicare can change the basis of reimbursement. For example, home health care was formerly funded on the basis of individual services. Most recently, Medicare developed a home healthcare classification system that bundled individual services within diagnostic and needs-based groups. In addition to changing the definition of what output they will cover, Medicare can change the rate of payment. Fifth, Medicare can introduce competitive practices into its reimbursement mechanism. It can fund care on the basis of vouchers, encouraging individuals to shop around for their care. And sixth, Medicare can regulate the behavior of providers (i.e., make them provide care based on specific norms set by the program).

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15.6.2 The Scope of the Program Currently, Medicare’s main line of business is to provide insurance coverage for persons 65 years of age and older. In 1997, Congress set up the Medicare Payment Advisory Commission to make recommendations about policies that could affect the future of Medicare. One of the policies recommended by the two committee chairs was to increase the age of Medicare beneficiaries to 67 to have it in line with the age requirement for Social Security benefits. This proposal did not achieve policy status, but it is an obvious way of changing the number of beneficiaries in the system. One proposal intended to extend the Medicaid mandate to Medicare was to provide prescription drug insurance coverage (Davis, Poisal, Chulis, Zarabozo, & Cooper, 1999; Soumerai & Ross-Degnan, 1999). Prescription drug coverage was implemented in 2006 with a wide variety of features, including additional premiums, copayments and deductibles, prescription limits, and so forth. Its inclusion added a new dimension to the program, and administrative costs increased considerably.

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15.6.3 Insurance Premiums Individuals and groups have proposed policies that would both increase and decrease health insurance premiums. Concern over the growth in first-dollar coverage has led some observers to propose a premium tax on Medigap policies. The introduction of such a tax would raise the price of Medigap coverage and reduce the amount of coverage purchased. The reduction in such coverage would lead to a reduction in the use of medical services in the short run.

There is a premium only for Parts B and D Medicare. The premiums under Part C are set by the insurance plans in which the beneficiaries are enrolled. About one-quarter of Part B revenues come from this premium and the rest from general government revenues. The Balanced Budget Act of 1997, which overhauled Medicare’s finances, did not substantially increase the premium; however, the premium is based on Social Security payments, and as such payments increase, so will the Part B premium. In 2000, the premium was $45.50 per month; by 2012, it increased to $99.90 (or $115.40 for those not under the Social Security cap). In 2019, the base premium was $135.50, with individuals having higher incomes paying between $54.10 and $325.00 more per month. An increase in the premium influences the goal of equity in payment.

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15.6.4 Copayments, Coinsurance, and Deductibles Copayments, coinsurance, and deductibles serve to regulate demand for covered healthcare services and to reduce government expenditures. Coinsurance is fixed as a percentage of medical charges, and it increases as charges rise. Copayments and deductibles are based on usage and are not always predictable. Individuals seek predictability by purchasing Medigap insurance coverage, which pays for the copayments and deductibles. The deductible in 2019 was $1364 for Part A and $185 for Part B. There was also 20% coinsurance for Part B. These payments have increased annually, but they have not been a major part of Medicare’s cost-cutting plans. Higher copayments, deductibles, and coinsurance reduce availability.

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15.6.5 Provider Payments In 1983, Medicare began paying for inpatient hospitalization on a DRG basis, and expanded to MS-DRG in 2007. A price is applied to the MS-DRG weighted units to obtain a given price per weighted unit, which is what the hospitals receive. Every year, this price is increased by a given update factor in order to account for inflation and technological change. The update factor is supposed to cover changes in capital input prices, technology changes, and any real changes in the case-mix factor. The Balanced Budget Act of 1997 made changes to Medicare that were projected to result in $116 billion in savings between 1998 and 2002. Two-thirds of these savings were to come from limits in the update factors for inpatient care (Moon, Gage, & Evans, 1997). For the first year, there was a freeze on payment rates (Levit et al., 2000).

The Medicare Part A payment strategy also included a switch from fee-for-service to prospective payment systems for home health care and outpatient care. Classification systems have been developed for home health care (Goldberg, Delargy, Schmitz, Moore, & Wrobel, 1999) and outpatient care (Health Care Financing Administration, 2000). Such systems are expected to increase control over spending in these areas by Medicare. They may also reduce availability.

15.6.6 Managed Care and Competition In the original Medicare scheme for HMO coverage, the fees paid to HMOs were based on total medical care expenditures per beneficiary. Using the adjusted average per capita cost (AAPCC) method of rate setting, fees were set at 95% of the total medical costs for persons in the geographic area (usually the county). Included in the rate was the enrollee’s Part B premium. The health plan decided on any benefit package in excess of the standard Medicare A and B coverage (e.g., whether to include drug coverage), additional premiums (if any), and copayments for

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medical visits. The basic rate was risk-adjusted for age, gender, eligibility for Medicaid supplemental coverage, and whether the enrollee was institutionalized.

In 1998, Congress enacted a new Part C of Title XVIII of the Social Security Act, creating the Medicare + Choice program. The program had two new features. First, it created a blended national- regional rate for the managed care premium. In this rate, Medicare combined a national rate ($398 per month) with the county rates (the old AAPCC rates). There was to be a floor below which no county-specific rate would fall. This resulted in a severing of the link between fee-for-service costs and managed care rates (McClellan, 2000).

Second, Congress instituted a new risk-adjustment variable, called the Principal Inpatient Diagnostic Cost Group (PIP-DCG). According to the PIP-DCG, a patient who is hospitalized in the previous year for a specific (serious) condition will fall into a higher risk category, and the HMO will receive a higher rate adjustment for this patient. The intent of these changes was to encourage HMOs to establish programs in areas that are now poorly served and to accept higher risk patients who have been hospitalized for serious conditions. Other features of the Medicare risk system remained. These include the variable benefits package, additional premiums tied to the benefits package, and consumer premiums and copayments.

In 2003, the Medicare Modernization Act renamed Medicare + Choice to Medicare Advantage (MA). The focus of MA became one of expanding access to private plans and providing additional benefits to private plan enrollees rather than cost control. The result is that Medicare pays more per enrollee in these plans than it does per enrollee in the traditional Medicare plan. In 2010, the Health Reform Act caused another shift by beginning to reduce payments to MA plans in an effort to bring their costs back in line

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with the fee-for-service Medicare system. A bonus system was also introduced into the MA program in which bonuses would be paid according to quality ratings for the plan. In addition, by 2014, the plans would be required to maintain a medical loss ratio of at least 85%, limiting administrative expenses and profits to 15%. By 2018, 21.1 million beneficiaries were enrolled in the MA plans. In electing to enroll in an MA, individuals are making the determination that such a plan is best for them.

Medicare Advantage plans are paid a capitated amount to provide all Parts A and B benefits. A separate amount is paid to cover Part D. The rate paid is established in a bidding process based on estimated costs per enrollee for covered services. All bids that meet the necessary condition are accepted. The bids are compared to a benchmark amount, and the benchmarks become the maximum amount Medicare will pay a plan in a given area. If the bid from a plan is higher than the benchmark, then enrollees pay the difference in the form of a monthly premium. If it is lower, the plan and Medicare split the difference. The plan’s share is known as a rebate and must be used to offer supplemental benefits to enrollees. Medicare’s payments to plans reflect the enrollees’ risk profile. The 2010 health reform law reversed the methodology for paying plans and reduced the benchmarks. The amount of the rebate in the future will depend upon the quality rating of the plan.

In the coming years, there will be many reform proposals seeking to push Medicare toward becoming a competitive system. It is questionable whether such reforms would solve the problems associated with introducing managed care principles into the Medicare program. Medicare enrollees still join HMOs individually and have high and variable costs. The very significant incentive to select healthier cases will remain as long as the risk-adjustment tools do not permit the identification of high-risk individuals.

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As well, any attempt to regulate competitive practices will result in an extremely complex set of rules. However, the set of rules may not be any more complex than the set of current fee-for-service rules, in which a multitude of prices and adjustments have been introduced within a complicated regulatory framework. Further, the definition and regulation of the basic product characteristics will prove to be a daunting task. Medical care is a service with many aspects, and the between-patient and between-provider differences are very subtle.

A successful capitation program will better allow Medicare to achieve a greater degree of control over public expenditures. Competition should lead to a greater degree of efficiency in the market. The achievement of the other social goals may be more controversial. The ability of Medicare to ensure uniformly high- quality services is still open to question. And the availability of care may be hampered by the continual attempt by managed care plans to enroll low-cost patients. Nevertheless, any system must be judged by comparing it to other feasible systems. Currently, fee-for-service is the alternative to Medicare Advantage. Fee-for- service may perform better in terms of availability and quality of care, but it is lacking in regard to the goals of efficiency and expenditure control. In the end, the policy maker is faced with a trade-off, and the choice of system will depend on the degree of importance given to each of the social goals.

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15.7 Policy Alternatives for Medicaid

Medicaid programs are run by the states under federal requirements and financed by states and the federal government. Individual states have a great deal of discretion in the policies they institute to govern the programs, which indeed exhibit substantial variability. Part of this variability is due to the fact that Medicaid serves several very different populations, including the poor aged, poor families with dependent children, and the blind and disabled.

Medicaid’s problems are somewhat different from those of Medicare. To begin with, there are a number of uninsured children in the United States who are eligible for coverage under the Accountable Care Act but who have not been enrolled for one reason or another. In addition, there are many persons 65 years of age and older who have low incomes but no supplementary coverage and who are thus at risk for considerable out-of-pocket expenditures. In 2018, about 15% of the Medicaid population was 65 years old and older and had joint Medicare-Medicaid coverage (Berchick, Barnett, & Upton, 2019).

Until 1990, the growth in total expenditures for Medicaid was moderate. However, beginning in 1990, following the expansion of the program to cover children and women whose incomes were above the poverty level but still low, the growth in expenditures was substantial, although in 1996 and 1997, expenditure growth leveled off. At its inception, the Medicaid program accounted for 2.9% of all national health expenditures. In 2017 state and federal outlays for Medicaid totaled $581.9 billion, accounting for 16.7% of the nation’s health expenditures.

15.7.1 Scope of the Program Until 1987, only low-income women (under age 65 and not blind or disabled) and their children who were receiving Aid to Families

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with Dependent Children (AFDC) payments were eligible for Medicaid enrollment. The Medicaid program expanded eligibility in 1987 to include low-income women and children who were not on the AFDC program. At their discretion, states could offer coverage to families whose incomes reached 185% of the poverty level. This expansion of coverage led to a rapid increase in Medicaid enrollment and expenditures beginning in 1990 (Cutler & Gruber, 1996a, b). If states enrolled in the Medicaid expansion program, then all individuals with incomes at or below 138% of the federal poverty level are eligible for Medicaid. This increased the number of individuals enrolled in Medicaid in those states, leaving a substantial number of individuals uninsured in the states not enrolling in Medicaid expansion.

Medicaid’s scope of coverage is very broad. It usually includes outpatient drugs and dental care. Because the breadth of coverage is wider than that for Medicare, Medicaid also enrolls low-income Medicare enrollees who do not have supplementary coverage.

Although the variety of services was not affected, the state of Oregon instituted a benefit limitation policy in 1994. It created a ranking of the costs and benefits of alternative medical procedures and proposed to pay for only those procedures whose cost–benefit ratios ranked above a certain cut-off point. Near the top of the list were treatments for disorders such as bone cancer and multiple sclerosis, which, it was claimed, yield substantial benefits per dollar of cure. Lower on the list were disorders whose treatments have a lower rate of return, including chronic ulcers and sleep disorders. Thus, the scope of the services was to be limited by type of treatment. This program was quite controversial and has generated a great deal of discussion.

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15.7.2 Copayments Generally, Medicaid does not charge recipients for their services. However, states can institute a copayment for some services. As of 2004, some 41 states had copayments for prescription drugs, usually ranging from $0.50 to $1.00 per prescription. In addition, some states have mandated limits on the quantity of drugs prescribed and the number of refills. After the enrollee reaches these limits, the drugs are no longer covered. There is evidence that these copayments affect the utilization of drugs, and there is only limited evidence that health status is adversely affected (Stuart & Zacker, 1999).

15.7.3 Provider Payments Medicaid programs are noted for the low levels of fees paid to providers (Gruber, 1997). Low fee levels discourage providers from serving Medicaid enrollees and thus reduce availability. This is a problem often noted when Medicaid is discussed.

15.7.4 Competitive Bidding by Suppliers Competitive bidding, which has been implemented by the California and Arizona Medicaid programs, has the objective of providing cost-effective care for indigents. If the buyer has a considerable degree of market power, it can extract a lower price from competitive sellers, and if there is any room for cost reductions, either through increasing efficiency or lowering quality, the reductions will be incorporated into the providers’ bids. However, the bidding process is a complex one and may not automatically lead to savings.

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15.7.5 Managed Care Many states are looking to managed care programs in order to consolidate their efforts at provision of services to their populations. In 1998, about 53% of the Medicaid population was enrolled in managed care plans, while by 2017, approximately 83% were enrolled in some type of managed care plan. The proportion of persons who were enrolled in managed care varied by group.

Many older individuals receive long-term care coverage through Medicaid (as well as through their Medicare coverage). Long-term care utilization, for those who need it, is less controllable than other types of care (acute care), and long-term care is thus less amenable to managed care-type coverage. Older Medicaid long- term care patients would therefore tend not to be enrolled in a Medicaid managed care plan. Indeed, only 4.9% of Medicaid enrollees who are served by managed care are age 65 or older. The majority of Medicaid-managed care enrollees are children and parents.

Under Medicaid, managed care organizations face the same issues as under Medicare. There is a wide variation in fee-setting practices and in fees among states (Holahan, 1999). In addition, as in the fee-for-service sector, managed care rates in general are quite low (Bruen & Holahan, 1999). As well, risk-adjustment factors have not been well developed, and so biased selection in membership may be a problem. In short, Medicaid has problems enrolling members and maintaining the provision of care for these individuals. Since managed care organizations are paid a capitated fee per enrolled member per month, the movement of individuals on and off the Medicaid roles makes it difficult to keep track of and manage the care of these individuals. This policy has the effect of reducing the availability of care for these populations.

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15.8 Pay-For-Performance Initiatives

A number of different pay-for-performance (P4P) models have been proposed and tried in recent years. The Centers for Medicare and Medicaid Services (CMS) have supported a number of demonstration projects to evaluate their effectiveness in improving quality and decreasing costs. The health reform law also calls for a number of additional demonstrations to incorporate value-based purchasing into the payment system.

Basically, P4P links the payment system to the accomplishment of predefined performance measures. These performance measures can contain either positive incentives or disincentives. An example of a positive incentive is to link the amount paid to the provider to the documented achievement of a certain level of preventive services performed (e.g., the percentage of women in the practice over age 50 who have received mammography screenings in the last 2 years). The provider receives higher payment if his/her practice percentage is equal to or greater than the desired, predefined percentage. A disincentive establishes a penalty for the occurrence or nonoccurrence of certain events (Cromwell, Trisolini, Pope, Mitchell, & Greenwald, 2011). For example, Medicare has established a policy that it will no longer pay providers for the increased costs associated with medical errors or hospital-acquired infections. Another area being carefully scrutinized currently is the rate of readmission to hospitals in less than 30 days, especially for the same diagnosis or for diagnoses related to the original admission.

An issue that needs to be carefully considered in the development of incentives and/or disincentives is the potential negative impacts on patients. Will a P4P incentive encourage adverse selection of patients that will assist the provider in reaching the desired goal?

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How will patients who have serious and complex conditions be treated in a P4P system when the patient interacts with multiple providers in multiple locations. Will a P4P system decrease access to care for the sickest, most vulnerable populations? In the complex, fragmented delivery system, can a P4P model be developed that can accurately and appropriately attribute responsibility for the outcome of care for complex patients?

Pay-for-performance models and demonstration projects have been undertaken and supported by CMS in an effort to transform itself from a passive payer for services delivered to its beneficiaries to an active, value-based purchaser of higher quality, affordable healthcare services. To become a value-based purchaser, CMS is attempting to establish incentives and disincentives designed to change the behavior of providers by linking effective resource utilization and clinical measures to a redesigned payment system, increasing joint clinical and financial accountability in the healthcare system.

When evaluating the transformation of the system to achieve value in the healthcare system, Christianson, Leatherman, and Sutherland (2007) provide a number of issues that require consideration and answers. First, is the goal of the incentive/disincentive to achieve improvement or attainment? If the goal is improvement, then rewarding change may maximize the potential improvements in quality, because the low-performing providers can improve the most. On the other hand, rewarding achievements would tend to focus and reward the providers who were delivering superior care.

The second issue revolves around deciding if the goal is to reward achievement of an absolute value or standard or to achieve a relative rating or percentage of a target. Establishing an absolute value to be achieved can be difficult and expensive to establish the correct benchmark and keep it up to date. It can also be

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expensive, if most providers surpass the threshold established. A relative rating (such as using quartiles), can be easier to calculate, but may not be very informative if there is very little variation among the providers; if the first quartile and the fourth quartile are clustered close together, then differentiating between them for payment is relatively worthless.

Third, how should risk adjustments or exemptions/exclusions be handled? Risk adjustments are typically undertaken to reflect differences in case mix or severity of patients in a panel or practice. Determining and appropriately measuring the risk and establishing a valid adjustment factor is difficult, or even not applicable to certain metrics (e.g., immunizations). On the other hand, if exemptions or exclusions for certain patients or providers are allowed based on predetermined/prespecified conditions or characteristics, then opportunities for gaming the system are increased.

Another issue encountered in applying P4P criteria to individual physicians is the small sample size of eligible patients or procedures. If a practice has very few patients, procedures, or conditions eligible to be scored in the metric, then a single outlier can significantly impact the results, making them uninformative. As a result, these providers can either be excluded from the P4P system, or multiple years of data combined to achieve larger numbers. A problem with using multiple years is that it may camouflage important changes over time.

When patients see multiple providers, it is especially difficult to obtain outcome measures that can be attributed to an individual provider. This ties into the next issue of obtaining physician engagement to improve care processes: if the physician doesn’t see the relevancy to their own activities, it is hard to get him/her motivated to participate and change behavior.

P4P may also have unintended consequences. For example, the Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666. Created from undip-ebooks on 2021-04-12 20:40:11.

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selection of the measurement criteria may lead to better documentation rather than an actual improvement in the outcome being measured. Physicians could also either move practices or select patients that are more likely to manage their own care, thereby reducing access to services for certain groups of patients. Providers could also focus on the areas that are included in the incentives and let other areas decline because they are not being measured. Coordination of care could also decrease for patients with multiple conditions, and administrative costs could increase, as additional time is needed to comply with the quality metrics, document care provided, or track rewards to individual providers in a group.

As this discussion indicates, implementing a value-based, pay-for- performance system is not without problems. However, careful evaluation of incentives/disincentives created will enable Medicare and other purchasers to become more prudent purchasers, not just payers.

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Exercises 1. What populations and what services are covered by

Medicare? 2. What are the major sources of funding for Medicare? 3. What populations and what services are covered by

Medicaid? 4. What are the major sources of funding for Medicaid? 5. What is Medigap and what purpose does it serve? 6. What are the goals of Medicare? 7. List five policies for Medicare and identify what goal(s) each

address. 8. What are the most important problems faced by Medicaid

and what policies might be used to help solve them?

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