DW4.1

Health Services Financing

LEARNING OBJECTIVES

• Study the role of health care financing and its impact on the delivery of health care. • Understand the basic concept of insurance and how general insurance terminology

applies to health insurance. • Differentiate among group insurance, self-insurance, individual health insurance,

managed care, high-deductible plans, and Medigap plans. • Discuss private health insurance under the Affordable Care Act and certain plans

. created or expanded under President Donald Trump. • Explore trends in employer-based health insurance. • Examine the distinctive features of public insurance programs, such as Medicare,

Medicaid, the Children's Health Insurance Program, the Department of Defense's

programs, the Veterans Health Administration, and the Indian Health Service. • Understand the various methods of reimbursement and the current focus on value­

based reimbursement models. • Discuss national health care and personal health care expenditures and trends in

private and public financing. • Explore the effects of the COVID-19 pandemic on financing and insurance.

"/have comprehensive insurance."

241

242 Chapter 6 Health Services Financing

� Introduction Complexity of financing is one of the pri­ mary characteristics of medical care deliv­ ery in the United States. The single-payer systems implemented in countries such as Australia, Canada, and the United King­ dom simplify health care financing: Taxes are raised by the government to provide health insurance to the citizens, and pri­ vate financing plays a minor role for those who want more extensive coverage than what the government offers. In the United States, both public and private financing play substantial roles. In the public sector, the government has created a multitude of tax-financed programs; each program serves a defined category of citizens pro­ vided they meet the established qualifica­ tions. Insurance overlap is also relatively common. For example, a significant number of Medicare beneficiaries either qualify for Medicaid or have purchased private supplementary insurance to pay for expenses not covered by Medicare. In the private sector, financing for health

_ insurance is shared between the employer and the employee; the employer provides the bulk of financing. Self-employed peo­ ple purchase health insurance in the open market. For the unemployed, the under­ employed (those working part-time who do not qualify for employer-sponsored health insurance), and those who lost their private insurance due to the original formulation of the Affordable Care Act (ACA; colloquially known as Obamacare), the government attempted to facilitate the purchase of health insurance starting in 2014.

The actual payments to providers of care are handled in numerous ways. Patients generally pay a portion of the

costs directly, but the bulk of these costs is paid through the insurance plans. The government and some large employers use the services of third-party administrators to process payment claims from providers.

In this chapter, financing is discussed in broad terms that include the concepts of financing, insurance, and payment. This does not mean, however, that these three functions are structurally integrated. For example, government-financed programs, such as Medicare and Medicaid, integrate the functions of financing and insurance, but contracted third-party administrators take over the payment function. Tradi­ tional insurance plans integrate the func­ tions of insurance and payment, whereas both employers and employ�es provide the financing. Managed care has gone one step further in integrating all four func­ tions of health care delivery-financing, insurance, delivery, and payment.

This chapter focuses on financing for both private and public health insurance, points out trends, discusses health care expenditures, and explains various pay­ ment methods to reimburse providers. The chapter concludes by exploring the effects of the COV ID-19 pandemic on health insurance and financing.

� The Role and Scope of Health Services Financing -----------·-·-·-·--···-----------

As its central role, health services financ-

. ing pays for health insurance premiums. Providers generally rely on their patients' insurance to get paid for the services they deliver. The various methods used to determine how much providers should be

The Role and Scope of Health Servic es Financing 243

aid (i.e., reimbursement) for their ser­

�ices are also closely intertwined with the

broad financing function.

To a large extent, financing deter-

mines who has access to health care and

who does not. The distinction between

insurance and access is an important one.

Health insurance is a financial mechanism

for paying for health care, while access

refers to the process of actually obtaining

that health care (Manchikanti et al., 2017).

For instance, many uninsured people have access to charitable care, and charity is likely to continue to play a noteworthy role for a sector of the population in the United States. For example, free clinics

continue to play a key role in providing

health care to the uninsured (Kennedy et al., 2020). Charity care also benefits ille­ gal immigrants, young healthy individu - als who choose not to buy insurance, and individuals

. who do not qualify for Medic­

aid based on income. Health insurance increases the demand

for covered services; the demand would be less if patients paid for those same services out of pocket. Increased demand means greater utilization of health services, given adequate supply. According to economic theory, insurance lowers the out-of-pocket cost of medical care to consumers; hence, they will consume more medical services than if they had to pay the entire price out of their own pockets. Consumer behavior that leads to a higher utilization of health care services when the services are cov­ ered by insurance is referred to as moral hazard (Feldstein, 1993).

Financing also exerts powerful influ­ ences on supply-side factors, such as how much health care is produced in the private sector. Health care services and technology proliferate when services are

covered by insurance. Even new services and technologies may start emerging, and new models of organization may form. Conversely, when reimbursement is cut, supply of health care services may also be curtailed.

Issues pertaining to reimbursement for services are critical in health services man­ agers' decision making. Demand-side fac­ tors, including reimbursement, typically guide health services managers in evaluat­ ing and determining the type and extent of services that their organizations will offer. The amount of reimbursement needed to recoup capital costs over time also heavily influences decisions such as acquisition of new equipment, renovation or expansion of facilities, and launching of new services.

Similarly, financing can influence the supply and distribution of health care professionals. As an example, employer financing for dental insurance spawned growth in the number of dentists and dental hygienists. Mechanisms for reim­ bursing physicians, such as the resource­ based relative value scale (RBRVS) used by Medicare, directly affect physicians' incomes. One of the main goals of RB RVS, implemented in 1992, was to entice more medical residents into general practice by increasing the reimbursement for services provided by generalists. Due to other fac­ tors, however, the imbalance between generalists . and specialists has continued to persist.

Financing eventually affects-both directly and indirectly-the total health care expenditures incurred by a health care delivery system. The next section dis­ cusses the relationship between financing and health care expenditures and provides a general framework for controlling health care costs.

244 Chapter 6 Health Services Fi n a n c i n g

� Financing and Cost Control

Health care financing and cost control are closely intertwined. FIGURE 6·1 presents a conceptual model of cost control. In the U.S. health care delivery system, insur­ ance is the main factor that determines the level of demand for medical services. Restricting financing for health insur­ ance-as occurs with demand-side ration­ ing-eventually controls total health care expenditures. Conversely, extension of health insurance to the uninsured, with­ out supply-side rationing, increases total health care expenditures (E) . Apart from the extent of insurance coverage, the cost of health insurance affects system-wide health care expenditures.

Insurance, along with payment (price =

P), influences the supply or availability of health services. Reducing reimbursement for providers has a direct influence on E, as well as an indirect influence through shrinkage in supply. Cuts in reimburse­ ment have been used in the United States,

- as well as in other countries, as a primary strategy to contain the growth of health care expenditures.

p Payment

Diffusion of technology and other types of services can be directly restricted through central planning-an approach commonly used in countries that have national health insurance. When supply of technology is rationed, people may be insured but do not have free access to those services. Their reduced utilization of expensive technology results in direct sav­ ings. Countries that have national health care also achieve indirect savings by hav­ ing fewer specialist physicians and special­ ized technicians and by spending less on research and development (R&D).

Insurance and supply of health care services together determine access and, ultimately, the utilization of services (quantity of services consumed = Q) . Uti­ lization can also be directly controlled. For example, private health insurance, as well as Medicare and Medicaid, trys to exert some limits on utilization by specifying which services are not covered, how often certain covered services may be received, and how much of the cost the insured may have to pay out of pocket.

Because E = P x Q, rising health care costs can be controlled by managing the numerous factors that influence P and Q. Many of these factors are external to the

Supply

Basic services

Special programs E

H ealth care expenditures Financing

Demand ___...., Research and technology

Physicians

Al l ied health professionals

+ I ns u rance ------... Access

Q ----->.- Uti l ization

FIGURE 6·1 I nfl u ence of fi n a nc ing on the de l ive ry of hea lth services.

E = P x Q

health care delivery system. The P compo­ nent, for example, includes general econ­ omy-wide inflation, as well as medical inflation that exceeds general inflation. In addition to being influenced by the intrin - sic factors discussed in this section, the Q component is a function of changes in the size and demographic composition (i.e. , age, sex, and racial mix) of the population (Levitt et al. , 1994).

� The Insurance Function

Insurance is a mechanism for protection against risk; this is its primary purpose. In this context, risk refers to the possibil­ ity of a substantial financial loss from an event whose probability of occurrence is relatively small (at least in a given indi­ vidual's case). For example, even though auto accidents are common in the United States, the likelihood is quite small that a specific individual will ·have an auto acci­ dent in a given year. Even when the risk is small, people buy insurance to protect their assets against catastrophic loss.

The insuring agency that assumes risk is called the insurer, or underwriter. Underwriting is a systematic technique for evaluating, selecting (or rejecting), clas­ sifying, and rating risks. Medical under­ writing, for example, takes into account the health status of people to be insured. Medical underwriting is no longer appli­ cable to health insurance in the United States, mainly because the ACA has made it illegal to charge more or to refuse cover­ age for people who have preexisting con­

ditions, such as diabetes, cancer, heart disease, and HIV I AIDS. Even though charging more or refusing insurance to

The Insurance Function 245

people with poor health status can be crit­ icized on equity grounds, a disregard of insurance underwriting principles makes premiums increase for everyone, so that healthy people end up subsidizing health insurance for the unhealthy.

Four fundamental principles underlie the concept of insurance (Health Insur­ ance Institute, 1969; Vaughn and Elliott, 1987):

• Risk is unpredictable for the individ­ ual insured.

• Risk can be predicted with a reason - able degree of accuracy for a large group or a population.

• Insurance provides a mechanism for tr an sf erring or shifting risk from the individual to the group through the pooling of resources.

• All members of the insured group share actual losses on some equitable basis.

Technically, health care services for all Americans 65 and .older (the elderly pop­ ulation) are provided through Medicare. For those younger than age 65, private insurance-either employment based or self-financed-is the predominant avenue for receiving health care. Medicaid and the Children's Health Insurance Program (CHIP) cover many low-income indi­ viduals, including children in low-income households. Other public programs cover defined groups of people, such as the insurance program offered by the Depart­ ment of Veterans Affairs (VA) and the military health system. The remainder of the population, who lack any coverage, are the uninsured.

Because of some overlap in coverage, it is almost impossible to neatly fit people into categories based on specific types

246 Chapter 6 Hea lth Services F i n a n c i n g

Total publ ic 36% Total private 55%

I ndividual private 6%

FIGURE 6·2 Hea lth i ns u ra nce status of the tota l U.S. popu lat ion, 20 1 8. Note: Numbers may not add to 1 00 because of rounding. Data from Kaiser Family Foundation. Health insurance coverage of the total population. Timeframe: 2018. Available at : https://www.kff.org/other/state­

indicator/total-population/?currentTimeframe=O&sortModel=%7B%22col ld%22:%22Location%22,%22sort%22:%22asc%22%7D. Accessed July 2020.

of health insurance. F IGURE 6,-2 provides broad approximations of the proportion

. of the U.S. population covered through private and public sources of health insur­ ance. Between 2013 and 2016, the propor­ tion of uninsured dropped from 15. l % to 9% (Wiltshire et al., 2020), shortly after the ACA was implemented in 2014.

Health insurance, particularly private health insurance, comes in the form of a plan, which specifies, among other details, information pertaining to costs, covered services, and ways to obtain health care when needed. Numerous plans are avail­ able. Anyone covered by health insurance is called the insured or a beneficiary.

Two types of employer-sponsored plans are single coverage plans and family cov­ erage plans; the latter cover the spouse and dependent children of the working employee. Medicare and Medicaid plans recognize only individual beneficiaries. In the case of married couples, for instance,

Medicare and Medicaid recognize each spouse as an independent beneficiary.

� Private Health Insurance

Private health insurance has also been called "voluntary health insurance:' Most private health insurance is employment based, but workers are not mandated to buy it. Private insurance includes many different types of health plan providers, such as commercial insurance companies (e.g., United Health Group, Well Point, Cigna, and Aetna), Blue Cross/Blue Shield, and managed care organizations (MCOs). The nonprofit Blue Cross and Blue Shield Associations are similar to private health insurance companies, and almost all insurers operate their own MCOs. Many businesses are self-insured, using insur­ ance companies for stop-loss coverage.

Basic Health Insurance

Terminology

Premiums

A premium is the amount charged by the

insurer to insure against specified risks. An

employer may off er more than one health

insurance plan, in which case premiums

can vary depending on the plan selected

by the employee. Employment-based

health insurance is heavily subsidized by

the employer, and the employee is asked to share in the cost of premiums.

R·sk Rating

Premiums are determined by the actuarial assessment of �isk, or risk rating, that adjusts premiums to reflect health status. Three different methods have been used to determine premiums: experience rating, community rating, and adjusted commu­ nity rating.

Experience rating is based on . a group's own medical claims experience. Under this method, premiums differ from group to gr�up because different groups have different risks. For example, people working in various industries are exposed to various levels and types of hazards, people in certain occupations are more susceptible to certain illnesses or injuries, and older groups represent higher risks than younger groups. High-risk groups are expected to incur high utilization of medical care services, so these groups are charged higher premiums compared to preferred or favorable risk groups. The main issue with experience rating is that it makes premiums unaffordable for high­ risk groups.

Community rating spreads the risk among members of a larger population.

Private Health Insurance 247

Premiums are based on the utilization experience of the entire population cov­ ered by the same type of health insurance. Under pure community rating, the same rate applies to everyone regardless of age, gender, occupation, or any other indica­ tor of health risk (Goodman and Mus­ grave, 1992). For example, a person who is employed in a hazardous occupation would pay the same premium as someone who does not. When premiums are based on community rating, the good risks­ that is, healthy people-actually subsidize the insurance cost for the poor risks. In other words, costs shift from people in poor health to people in good health and make health insurance less affordable for those who are healthy.

Adjusted community rating, also known as modified community rating, is a middle-of-the road approach that over­ comes the main drawbacks of experience rating and pure community rating. Under this method, price differences take into account demographic factors such as age, gender, geography, and family composi­ tion, while ignoring other risk factors. The ACA requires the use of adjusted com­ munity rating to determine premiums for individuals and small groups.

Cos Shar9ng

In addition to paying a share of the cost of premh.�ms through payroll deduc­ tions, insured individuals pay a portion of the actual cost of medical services out of their own pockets. These out-of-pocket expenses take the form of deductibles and copayments and are incurred only if and when medical services are used. A deductible is the amount the insured must first pay each year before any ben­ efits are payable by the plan. For example,

248 Chapter 6 Health Services Financing

suppose a plan requires the insured to pay a $ 1 ,000 deductible. When the insured receives medical care, the plan starts pay­ ing only after the cost of medical services received by the insured has exceeded $ 1 ,000 in a given year. Many plans now allow the insured to use primary care and wellness services without having to pay a deductible.

The second type of cost sharing is a copayment, or coinsurance for some ser­ vices. A copayment is a flat amount that the insured must pay each time health ser­ vices are received-for example, $25 each time the patient sees a primary care physi­ cian. Coinsurance is a set proportion of the medical costs that the insured must pay out of pocket. For example, an 80/20 coinsurance means that the plan pays 80% of the costs for a certain product or ser­ vice; the insured pays the remaining 20%.

In case of a catastrophic illness or injury, the deductible and copayment/ coinsurance amounts can add up to a sub­ stantial sum. Hence, health plans generally have an annual maximum limit on out-of­ pocket cost sharing. Once the maximum cost sharing amount has been reached, the plan pays 100% of any additional expenses.

The rationale for cost sharing is to control utilization of health care services. Since insurance creates moral hazard by insulating the insured against the cost of health care, making the insured share in the cost promotes more responsible behavior in health care utilization. A com­ prehensive study employing a controlled experimental design conducted in the 1970s, commonly referred to as the Rand Health Insurance Experiment, demon­ strated that cost sharing had a material impact in lowering utilization, without any significant negative health consequences.

Experts now generally agree that cost sharing reduces utilization. Nevertheless, even though moral hazard does exist and results in frivolous and inefficient services, the expensive health . care procedures needed in case of serious illness become affordable only with insurance (Nyman and Trenz, 2016).

Covered Services The services covered by an insurance plan are referred to as benefits. Each health insurance plan spells out in a contract both covered and noncovered services. A typi­ cal disclaimer included in most contracts states that only "medically necessary" ser­ vices are covered, regardless of whether such services are provided by a physician. The ACA mandated that all health plans must include certain "essential health benefits:' Services such as eyeglasses and dental care are generally not covered by health insurance; vision and dental insur­ ance plans can be purchased separately. The services most commonly excluded are those not ordered by a physician, such as self-care and over-the-counter products. Other services commonly excluded from health insurance coverage include cos­ metic and reconstructive surgery, work­ related illness and injury (covered under worker's compensation), rest cures, genetic counseling, and the like.

Types of Private Insurance

Group I nsurance

Group insurance can be obtained through an employer, a union, or a professional organization. A group insurance pro­ gram anticipates that a substantial number of people in the group will purchase insur­ ance through its sponsor. Because risk

is spread out among the many insured, group insurance provides the advantage of lower costs than if the same type of cover­ age was purchased in the individual insur­ ance market.

Unlike monetary wages, health insu­ rance benefits provided through an employer are not subject to income tax. Consequently, a dollar of health insur­ ance received from the employer is worth more than the same amount received in taxable wages or an after-tax dollar spent out of pocket for medical care. In this way, the U.S. government's tax policy provides an incentive to obtain health insurance as a benefit that is largely paid by the employer.

Starting in the 1950s, major medical insurance became widely available in the United States. This type of insurance was designed to cover catastrophic situations that could subject families to substantial financial hardships, such as hospitaliza­ tion, extended illness, and expensive sur­ gery. Since the 1970s, health insurance plans have become comprehensive in coverage and include basic and routine physician office visits and diagnostic ser­ vices. The ACA required the inclusion of preventive and wellness services as part of the essential health benefits. Hence, health insurance today is an anomaly to the fun­ damental purpose of insurance. Compre­ hensive coverage has also increased the cost of health insurance.

Self-I nsurance In a self-insured plan (also called self­ funded plan), the employer acts as its own insurer instead of obtaining insurance through an insurance company. Rather than pay insurers a dividend to bear the risk, many employers simply assume the risk

Private Health Insurance 249

by budgeting a certain amount to pay the medical claims incurred by their employ­ ees. In 2019, 61 % of all covered workers with employer-based insurance-80% in large businesses employing 200 or more workers and 17% in small businesses­ were enrolled in self-insured plans ( Clax­ ton et al., 2019, p. 171).

Self-insured employers can protect themselves against any potential risk of high losses by purchasing reinsurance,

also called stop-loss coverage, from a private insurance company. Being self­ insured gives employers a greater degree of control than purchasing regular insur­ ance. The business can contract with an experienced insurance company as the third-party administrator to manage costs and pay claims.

The movement toward self-insurance was spurred by government policies. Self­ insured private employers are exempt from a premium tax that insurance companies must pay, the cost of which is passed on to customers through higher premiums. Further, the Employee Retirement Income Security Act (ERISA) of 1974 exempts private self-insured plans from certain mandatory benefits that regular health insurance plans are required to provide in many states. Self-insured plans also avoid other types of state insurance regulations, such as reserve requirements and con­ sumer protection requirements. Because of these plans' many advantages, employ­ ers that are large enough to make it feasible for themselves have viewed self-insurance as a better economic alternative. Notably, the ACA did not affect self-insured plans, so they have remained immune from certain ACA mandates, such as the one requiring health plans to include essential health benefits.

250 Chapter 6 Health Services Financing

Individual Private Health Insurance Individually purchased private health insurance (nongroup plans) has been a relatively small, but important source of coverage for some Americans. In 2019, approximately 6% of the covered U.S. population had nongroup private insurance (Claxton et al. , 2019, p. 171). The family farmer, the early retiree, the self-employed person, and the employee of a business that does not offer health insurance-all of these people tend to rely on individual health insurance. In the past, for underwriting purposes, the risk indicated by each individual 's health status and demographics was taken into account. Consequently, high­ risk individuals were unable to obtain privately purchased health insurance. This barrier was eliminated by provi­ sions in the ACA.

anaged Care Plans MCOs, such as health maintenance orga­ nizations (HM Os) and preferred provider organizations (PPOs), emerged in the 1980s in response to the rapid escala­ tion of health care costs. At first, man­ aged care plans differed from, and were less expensive than, the plans offered by traditional insurance companies. How­ ever, several factors over time converged around MCOs, and traditional insurance companies eventually began offering man­ aged care plans. Today, the vast majority of health insurance takes the form of man­ aged care plans. In 2019, among busi­ nesses that offered health insurance to their workers, 49% offered PPO plans and 26% offered HMO plans (Claxton et al. , 2019, p. 77).

High-Deductible Health Plans and Savings Options Hig h-deductible healt h pl ans (HDHPs)

combine a savings option with a health insurance plan that carries a high deductible. In 2019, the average annual deductible for a single HDHP plan was $2,486, compared to $1,200 for an H MO plan. In 2019, HDHPs covered 30% of all workers in employment-based plans, up from just 4% in 2006 (Claxton et al., 2019, pp. 83, 107). Because of their high deductibles, premiums for HDH Ps are lower than those for other types of health plans.

Savings options give consumers greater control over how to use the funds. Hence, these plans are also referred to as cons um er -directed healt h pl ans .

There are two main types of HDHPs/ savings options, which are subject to different guidelines under U.S. tax law: health reimbursement arrangements (HRAs) and health savings accounts (HSAs) (EXHIBIT 6·1).

Short-Term COBRA Coverage When people change jobs and move to a different employer, they may encounter a waiting period before their new health insurance starts. This waiting period is limited to .90 days or less under the ACA. Other individuals may face temporary unemployment after separating from a job. Some people leave the workforce before age 65, so they do not qualify for Medicare. To address these kinds of short­ term coverage gaps, Congress passed the Consolidated Omnibus Budget Reconcili­ ation Act (COBRA) of 1985, which allows workers to keep their employer's group

Private Health Insurance 251

EXHIBIT 6-1 Key Differences Between a Health Reimbursement Arrangement and

a Health Savings Account1

Health Reimbursement

Arrangement (HRA)

Established solely by the employer. Self­ employed individuals cannot establish an HRA. The account is owned by the

employer.

Having an HDHP is not mandatory. Employers may offer HRAs in addition

to or in place of health insurance, which may include an HDHP. Funds are used for deductibles, copayments, insurance

premiums, and other medical and related expenses authorized by the Internal Revenue Service.

Funded solely by the employer;. employees

are not allowed to contribute. There is

no limit on the amount of contribution. Contributions are tax free.

An employer may offer an HRA to a retiree even after age 65, or allow a.retiree or

terminated employee to keep an existing

HRA. Conversely, an employer may terminate the account.

Health Savings Account (HSA)

Established by the individual. The employer can

assist in establishing an HSA. The account is owned by the employee.

The individual must have a "qualified health plan" that meets federal standards and is an HDHP. The minimum annual deductible for

2021 was $1,400 for a single plan ($2,800 for a family plan). For 2021, the maximum annual

out-of-pocket expenses for deductibles and copayments were capped at $7,000 for a single

plan ($14,000 for a family plan). Funds can not be used for HDHP premiums.

The individual must fund the HSA. Employers

may contribute, but are not required to do so. The maximum contribution for 2021, which is fully tax deductible, was $3,600 for a single plan

($7,200 for a family plan). Enrollees who are 55 years and older can contribute an extra $1,000 to either plan.

The individual must be younger than age 65 and not have any other health insurance (dental,

vision, and long-term care insurance do not count). When a person becomes eligible for

Medicare at age 65, the remaining balance in an

HSA can be used, but no funds can be added.

1 An employer may offer an HRA and an HSA. In this case, funds from the HRA can be used to pay the premiums for an HDHP,

which is required with the HSA. Data from Mengle, R. 2020. HSA contribution limits and other requirements. Available at: https://www.kiplinger.com/personal-finance/insurance/

hea lth-insurance/hea lth-savings-accounts/601 41 5/hsa-li m its-and-minimums. Accessed November 2020.

coverage for 18 months after leaving a job. The individuals are required to pay the full cost of insurance plus a 2% administra­ tive fee, which many people cannot afford.

Extended coverage beyond 18 months is available for someone who becomes disabled-but again affordability becomes an issue for many.

252 Chapter 6 Health Services Financing

Medi gap Medig ap, also called Medicare Supple­ ment Insurance, is private health insur­ ance that can be purchased only by those enrolled in the original Medicare program-a program that has high out­ of-pocket costs (discussed later in the "Medicare" section), especially when a beneficiary is hospitalized or receives care in a skilled nursing facility. Medigap plans cover all or a portion of Medicare deductibles and copayments/ coinsurance. Federal law requires that only standard­ ized plans be sold, with each contain­ ing uniform benefits to help consumers decide which plan best suits their needs. Ten federally approved standard plans exist, but not all states have all the plans available. Medigap plans do not cover extended long-term care, vision care, dental care, hearing aids, or private-duty nursing. Premiums vary according to the plan selected and the insurance company selling the plan.

Private Insurance Under the Affordable· Care Act Under the ACA, health insurance was expanded through three primary avenues:

• Effective September 2010, insurers were mandated to enroll young adults until the age of 26 under their par­ ents' plans. This part of the law helped mainly nonpoor young adults gain insurance coverage (Berger, 2015; Han et al. , 2016).

• The government established state­ based health insurance exchanges (also called "marketplaces") through which individuals. could purchase private insurance meeting the ACA criteria. These plans are called ((quali­ fied health plans:' The Web-based exchanges were meant to create competition among insurers offer­ ing ACA-compliant plans. Premium subsidies, in the form of tax credits, were made available to people with incomes between 100% and 400% of the federal poverty level (FPL), 1 pro­ vided they did not qualify for Med­ icaid or employment-based coverage. These subsidies played a critical role in the public's embrace of the ACA. People with incomes up to 250% of FPL also became eligible for reduc­ tions in

. cost sharing (deductibles and

copayments) if they purchased a silver plan. 2 The cost-sharing reductions were passed on to the insurers in the form of subsidies.

• The federal government offered monetary incentives to the states to expand the state-based Medicaid programs.

By 2016, an estimated 20 million uninsured adults had gained health insur­ ance coverage because of the ACA from all three sources just described; this fig­ ure stayed stable at least through 2018 (McMorrow, et al. , 2020). Much less publi­ cized, however, was the fact that 6 million people lost the insurance they previously

1 The 100% FPL was an annual income of $26,200 for a family of four in 2020 (higher in Alaska and Hawaii).

2 Base� on . their actuarial value, four tiers of plans (bronze, silver, gold, and platinum) are

specified m the ACA. The silver plan theoretically covers 70% of the cost of medical care.

had (Manchikanti et al. , 2017). In 2016, 12.7 million individuals were enrolled in plans sold through the exchanges (Uberoi et al. , 2016). These figures-gains in insur­

ance ·as well as exchange enrollments-fell far short of projections by the Congressio­

nal Budget Office (CB 0) that there would be a total coverage gain of 32 million, out of which 21 million people would be enrolled in the exchanges in 2016 ( CBO, 2010). Overall, exchange premium subsi­ dies have produced 40% of the coverage gains, with expansion of states' Medicaid programs leading to the other 60% (Frean et al. , 2017).

The AC.N.s employer mandate for pro­ viding job-based health insurance went into effect in 2015. This mandate applied to employers with 50 or more full-time equivalent (FTE) workers. Often ref erred to as a pl ay-or -pay mandate, it required employers to either provide their employ­ ees with health insurance (play) or pay a penalty for not doing so. The mandate was intended to prevent employers from drop­ ping health insurance coverage for their workers.

The ACA also included an individual mandate that required all legal residents of the United States to have health insurance, or else pay a penalty tax. This mandate was aimed primarily at pushing people-espe­ cially healthy individuals-into buying coverage through the exchanges if they did not qualify for any other health insurance. The purpose was to balance high users of health care services with those who would use much less. In any event, the individual mandate did not have a notable effect on coverage gains (Frean et al. , 2017). In subsequent health reform efforts under the Trump administration, most Ameri­ cans supported the idea of eliminating

Private Health Insurance 253

the individual mandate (Kirzinger et al. , 2017). Effective 2019, the penalty was eliminated.

Economic events, such as the recession of 2008 and job losses because of business interruptions during the COVID- 19 crisis in 2020, can affect the stability of insur­ ance coverage ( Gai and Jones, 2020). The ACA did not address the issue of short­ term insurance interruptions. In the first 10 years after the passage of the ACA, 25% of the U.S. population experienced at least one uninsured spell in a given two-year period. Gai and Jones (2020) also observed an increased probability of reduced access to care and a decrease in the use of preventive services among people with insurance gaps. Nevertheless, such interruptions did not seem to affect people's health status and health behavior, such as weight control.

Effects of the Affordable Care Act The ACA has not only reduced the rate of uninsurance, but also improved afford­ ability of coverage, especially for low- to middle-income people. Some evidence also suggests that among those individuals who gained insurance through the ACA, there is a greater likelihood of having a usual source of care (Blumenthal et al. , 2020). Access to health care has been uneven, however, with access for Medic­ aid beneficiaries being hampered by the relatively small networks of providers who take this insurance. Those who obtain insurance via the exchanges or who have employer benefits have faced high out-of­ pocket costs. This is because of increased regulations and other costs faced by insur­ ers who must cover services called "essen­ tial" that not everyone needs.

254 Chapter 6 Health Services Financing

Enrollment shortfalls in the exchanges have also limited insurer participation in low-enrollment geographic areas. Con­ sequently, the expectation of competi­ tion was not quite realized. As a result, marketplace premiums were 50% ( $180) higher, on average, in areas with monopo­ list insurers, compared to those with more than two insurers (Parys, 2018). Changes in insurer participation and plan avail­ ability also negatively affected the market­ places' ability to provide a stable source of health care (McKillop et al. , 2018).

Private Insurance Under Trump's Health Care Reform In 2017, the Republican-controlled Con­ gress failed to carry out President Trump's campaign promise to "repeal and replace Obamacare:' Then, in 2018, the Democrats gained control of the U.S. House of Repre­ sentatives, which dampened any prospects that Congress might work with the Trump administration to reform the ACA (which the Democrats had helped create). In the remainder of his term, Trump made some progress on this front by offering alterna­ tive solutions to some of the burdensome rules in the ACA.

Small businesses had found it particu­ larly difficult to off er health insurance to their employees. In 2018, the administra­ tion loosened certain requirements in association health plans (AHPs). The new rules would allow any group of people, such as small businesses and the self­ employed, to enroll in an AHP. The rules crafted by the U.S. Department of Labor (DOL) were designed to make health insurance more affordable by eliminating certain ACA rules, such as those pertain­ ing to "essential health benefits:' The CBO

estimated that millions of people would switch their coverage to more affordable and more flexible AHP plans and save thousands of dollars in premiums. It also estimated that 400,000 previously unin­ sured people would gain coverage under AHPs (DOL, 2018). In March 2019, a fed­ eral judge struck down the program just before it was ready to go into effect, indi­ cating that it violated the ACA. The court's decision was on appeal at the time of this writing.

In 2018, the Trump administration wrote new rules that would allow people to enroll in affordable short-term health plans for up to 36 months. This type of coverage is exempt from the definition of individual health insurance under the ACA; hence, the ACA mandates do not apply. This offering was also tested in the courts, and a federal judge as well as an appellate court ruled in favor of the administration.

Cost-sharing subsidies to insurers were eliminated effective 2018 because they were not explicitly appropriated by the ACA legislation. Even after the Trump administration cut the subsidy payments, insurers remained legally obligated to pay them to qualifying enrollees in silver plans. To compensate for the additional costs to the insurers, many states allowed them to place the entire cost of subsidies onto the silver plans, a practice known as silver loading (Drake and Anderson, 2020), which made the premiums go up for silver plans only. This made zero-dollar premium plans (essentially free plans after premium tax credits) more attractive to qualified consumers. Such was the case in the least expensive bronze plans. The rush to zero-dollar premium plans caused a 14.1 % increase (200,000 enrollees) in

Trends in Employment-Based Health Insurance 255

marketplace enrollment among indi­

viduals with incomes of 151 % to 200% of FPL These plans will be a feature of

the marketplaces indefinitely (Drake and

Anderson, 2020).

In January 2020, the individual cov­

erage HRAs took effect. Under the new rule, employers can pay as much as they want toward workers' individual plans on a pretax basis. Employees must enroll in an ACA-compliant individual plan or Medicare to receive the funds. The federal government projected that

800,000 employers would offer individual

coverage HRAs to more than 11 mil­

lion workers in the subsequent 5 years

(Livingston, 2020a) .

Private Insurance and the COVID-19 Pandelnic The major U.S. health insurers joined Medicare and Medicaid in waiving all copayments to treat COVID-related illness, even though this gesture was not required by any legislation. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the federal gov­ ernment reimbursed providers at Medi­ care rates for treating uninsured patients (King, 2020). Also, telemedicine was cov­ ered for medical consultations between patients and their doctors. As the pan­ demic continued at the time of this writ­ ing, however, a dilemma with far-reaching consequences has emerged. Estimates sug­ gest that between 2 7 million and 50 mil­ lion people in the United States may have lost employer-based health coverage and become uninsured because of business lockdowns and closures. Although most would be eligible to purchase health cov­ erage through the exchanges, some may

find coverage unaffordable even with sub­ sidies (Livingston, 2020b ).

� Trends in Employment­ Based Health Insurance

Employers are the main source of health insurance in the United States; they pro­ vide health benefits for about 153 mil­ lion people, or approximately 46% of the U.S. population. Most workers are offered health coverage at work, and most of the workers who are offered coverage take it . Some workers may not be covered by their own employer for any of several reasons: Their employer may not off er coverage, they may not be eligible for the benefits offered by their firm, they may elect to receive coverage through their spouse's employer, or they may refuse cover­ age from their employers (Claxton et al . , 2019, p. 65).

TABLE 6·1 shows, by employer size, the percentage of U.S. employers that offered health insurance and the percentage of workers who were covered from 2005 to 2019 (i.e., pre-COVID data). Over the 14-year span included in the table, fewer small employers offered coverage, and a smaller proportion of their employ­ ees were covered. For large employers, a slight uptkk in the offer rates was noted, yet the proportion of workers covered declined. The exact reasons for these trends are not quite clear, although one report has suggested that more than 5. 7 million small-business employees or self­ employed workers are enrolled in the ACA marketplaces and that more than half of all ACA marketplace enrollees

256 Chapter 6 Health Services Financing

TABLE 6-1 Trends in Employment-Based Health Insurance, Selected Years

Workforce Size •••• Percentage Small employers ( <200 workers) 59 68 56 56 of employers offering health Large employers (200+ workers) 97 99 98 99 insurance

All employers 60 69 57 57

Percentage of Small employers (<200 workers) 65 63 61 60 workers covered

Large employers (200+ workers) 67 63 63 61

All employers 68 63 63 61

Data from Kaiser Family Foundation. 2019. Employer health benefits: 2019 annual survey. San Francisco, CA: Author.

are small-business owners, self-employed individuals, or small-business employees (Chase and Arensmeyer, 2018). In small businesses, 70% of workers prefer higher wages instead of health insurance. In addi­ tion, the percentage of workers who take advantage of health insurance when it is offered is lower among lower-wage earn­ ers, younger workers, and those employed in for-profit businesses (Claxton et al. , 2019, pp. 63, 69). Furthermore, those who qualify for Medicaid have little or no incentives to take up employer-based insurance ( Capatina, 2020).

Premium Costs in Employment­ Based Plans The cost of family plans has increased more rapidly than the cost of single­ insured plans. Employers have passed on slightly more of the costs to their employ­ ees for family plans, but not for single plans (TABLE 6·2). Between 2010 and 2019, the increase in premiums far exceeded the

rise in the Consumer Price Index (a mea­ sure of inflation), which was 17.5% (U.S. Bureau of Labor Statistics, 2020).

Cost Sharing in Employment­ Based Plans The most common forms of cost sharing are deductibles and copayments (or coinsur­ ance) that enrollees must pay when using health care services. Excluding HDHPs, in 2019, the average annual deductible was $1,655 for a single plan. For family plans, the deductibles ranged between $2,805 for HMO plans and $4,779 for HDHPs. In 2019, the average copayment amount was $25 (or 18 % coinsurance) for primary care visits and $40 (or 19% coinsurance) for spe­ cialist visits (Claxton et al., 2019).

� Public Health Insurance Since 1965, government financing has played a significant role in expanding health care services, mainly to those who

Public Health Insurance 257

TABLE 6·2 Trends in Premium Costs, Selected Years

Total annual Single plan 4,024 5,049 6,251 7,188 42.4 premiums costs

(dollars) Family plan 10,880 13,770 17,545 20,576 49.4

Employer Single plan 84.8 82.2 82.9 82.7 43.3 contribution (%

of tota I cost) Family plan 75.1 71.0 71.8 70.8 49.0

Employee Single plan 15.2 17.8 17.1 17.3 38.2

contribution (%

of total cost) Family plan 24.9 29.0 28.2 29.2 50.5

Data from Kaiser Family Foundation. 2019. Employer health benefits: 207 9 annual survey. San Francisco, CA: Author.

otherwise would not be able to afford them. Today, a significant proportion of health care services in the United States are supported through public programs; they cover more than one-third of the U.S. population (see Figure 6-2). This section discusses the financing, eligibility requirements, and services covered under the various public health insurance pro­ grams and the effects of the ACA on these services.

Public financing supports categori­ ca I programs, each of which is designed to benefit a certain category of people. Examples are Medicare for the elderly and certain disabled individuals, Medicaid for the indigent, Department of Defense programs for active service members and their families, and VA health care for war veterans. Even though the government finances public insurance, for the most part, health care services are obtained through the private sector. An exception is

the VA program, in which the financing, insurance, delivery, and payment func­ tions are largely integrated.

Medicare The Medicare program, also ref erred to as Title 18 of the Social Security Act, finances medical care for three groups of people: (1) persons 65 years and older, (2) disabled individuals who are entitled to Social Security benefits, and ( 3) people who have end-stage renal disease (ESRD-perma­ nent kidney failure, requiring dialysis or a kidney transplant). People in these three categories can enroll regardless of their income status.

Shortly after its creation in 1967, the Medicare program had 19.5 million benefi­ ciaries (National Center for Health Statistics [NCHS], 1996, p. 263). In 2019, Medi­ care covered 61.2 million beneficiaries­ a more than threefold increase in a little

258 Chapter 6 Health Services Financing

more than 50 years. The number of ben­ eficiaries has continued to increase mainly because of the aging of the U.S. popula­ tion, but also because of the two additional categories of people that were added after the program had been created for the elderly. In 2019, 14% of the beneficiaries were younger disabled individuals ( Cen - ters for Medicare and Medicaid Services [CMS], 2020a).

Medicare is a federal program oper­ ated under the administrative oversight of the Centers for Medicare and Medic­ aid Services, a branch of the Department of Health and Human Services (DHHS). Because it is a federal program, eligibil­ ity criteria and benefits are consistent throughout the United States.

The Balanced Budget Act (BBA) of 1997 established an independent federal agency, the Medicare Payment Advisory Commission (MedPAC), to advise the U.S. Congress on various issues affecting the Medicare program. MedPAC's statutory mandate includes analysis of payments to health care providers participating in Medicare, access to care, and quality of care.

For almost 30 years after its inception, Medicare had a dual structure comprising two separate insurance programs referred to as Part A and Part B. It has since become a four-part program.

Part A: Hospital Insurance Part A, the Hospital Insurance (HI) por­ tion of Medicare, is a true entit l em ent

program. Throughout their working lives, people contribute to Medicare through spe­ cial payroll taxes; hence, they are entitled to Part A benefits regardless of the amount of income and assets they may have at age 65. The employer and the employee share

equally in financing the HI trust fund. All working individuals, including those who are self-employed, pay the mandatory taxes. Since 1994, all earnings have been subject to Medicare tax.

To qualify for Part A, a person or the person's spouse must have worked, earned a minimum specified amount, and paid Medicare taxes for at least 40 quarters (10 years) to earn at least 40 credits. People who have earned less than 40 credits can get Part A by paying a monthly premium.

Part A covers inpatient services for acute-care hospitals, psychiatric hospitals, inpatient rehabilitation facilities, skilled nursing facility (SNF) services, home health visits, and hospice care. Following is an overview of the type of benefits pro­ vided under Part A:

1. A maximum of 90 days of inpa­ tient hospital care is allowed per benefit period. Once the 90 days are exhausted, a lifetime reserve of 60 additional hospital inpatient days remains. A ben­

efit period is a spell of illness beginning with hospitalization and ending when a beneficiary has not been an inpatient in a hospital or an SNF for 60 con­ secutive days. The number of benefit periods is unlimited. These rules apply to acute-care �ospitals and inpatient rehabili­ tation facilities.

2. A total of 90 days of care per spell of illness is allowed for treatment in a psychiatric inpa­ tient facility, with a 60-day lifetime reserve. Lifetime use is limited to 190 days of treatment.

3 . Medicare pays for up to 100 days of care in a Medicare-certified

SNF, subsequent to inpatient hospitalization for at least 3 consecutive days, not including the day of discharge. Admission to the SNF must occur within 30 days of hospital discharge.

4. Medicare pays for home health care obtained from a Medicare­ certified home health agency when a person is homebound and requires intermittent or part-time skilled nursing care or rehabilitation. Medicare defines "intermittent" as skilled nurs­ ing care that is needed or given either for fewer than 7 days a week, or daily for less than 8 hours each day for up to 21 days (CMS, 2017).

5. For terminally ill patients, Medi­ care pays for care provided by a Medicare-certified hospice.

A deductible applies to each benefit period (except to home health and hos­ pice), and copayments are based on the duration of services (except for home health). EXHIBIT 6·2 gives specific details on the Part A program for 2020.

Part B: Suppl ementary Medical Insurance Part B, the supplementary medical insur­ ance ( SMI) portion of Medicare, is a voluntary program financed partly by gen­ eral tax revenues and partly by required premium contributions. Beneficiaries bear approximately 2 7% of the cost of pre­ miums (CMS, 2020a); this share has increased from 25% in 2015. Since 2007, Part B premiums have been income based, as required by the Medicare Prescription Drug, Improvement, and Modernization

Public Health Insurance 259

Act (MMA) of 2003 . Those beneficia­ ries whose incomes exceed a threshold amount pay a higher premium, known as the Income-Related Monthly Adjustment Amount (IRMAA). In 2020, the income threshold that triggered IRMAA was $87,000 per year ($174,000 per couple). The intent of the MMA legislation was to reduce tax-financed premium subsidies for higher-income individuals. Hence, for example, an individual earning more than $500,000 in 2020 paid $491.60 in monthly premiums, whereas someone earning less than or equal to $87,000 paid $144.60 (CMS, 2019a).

Almost all persons entitled to HI also choose to enroll in SMI ( 92 % in 2019) because they cannot get similar coverage at the same price from private insurers. The main services covered by SMI are listed in EXHIBIT 6·3. Part B also covers limited home health services under cer­ tain conditions.

Effective January 2011, the ACA pro­ vided for an annual physical exam (called a wellness exam) for all Part B enrollees, without any cost sharing. The main pur­ pose of the wellness exam is to do a risk assessment and develop an individualized prevention plan.

Part C: Medicare Advantage Part C is, in reality, not a new benefit pro­ gram because it does not add specifically defined new services. Instead, it provides some additional choices of health plans, with the objective of channeling a greater number of beneficiaries into managed care. The BBA of 1997 authorized the Medicare+Choice program, which took effect on January l, 1998. Medicare+Choice was renamed Medicare Advantage (MA) under the MMA of 2003 . Beneficiaries

260 Chapter 6 Health Services Financing

EXHIBIT 6-2 Medicare Part A Financing, Benefits, Deductible, and Copayments for 2020

Financing The Hospital Insurance trust fund is financed by a payroll tax of 1.45% from the employee and 1.45% from the employer on all income. Self-employed individuals must pay the full 2.9%. As of 2013, single taxpayers earning $200,000 or more and married couples earning $250,000 or more have been required to pay an additional 0.9%, as mandated by the ACA.

Premiums: None (Those who do not qualify for premium-free coverage can buy coverage at a

monthly premium of up to $458.)

Deductible: $1,408 per benefit period

Benefits

Inpatient hospital (room, meals, nursing care, operating room services, blood transfusions,

special care units, drugs and medical supplies, laboratory tests, rehabilitation therapies, and

medical social services)

Skilled nursing facility (after a 3-day hospital

stay)

Home health services (part-time skilled nursing care, home health aide, rehabilitation

therapies, medical equipment, social services, and medical supplies)

Hospice care

Inpatient psychiatric care (190-day lifetime limit)

·

Copayments

None for the first 60 days (benefit period) $352 per day for days 61-90 (benefit period or spell of illness in psychiatric facilities)

$704 per day for days 91-150 (nonrenewable lifetime reserve days) 100% of costs after 150 days

None for the first 20 days in a benefit period $176 per day for days 21-100 in a benefit

period

None for home health visits 20% of approved amount for medical equipment

A small copayment for drugs

Same as for inpatient hospital

Noncovered Services ·

Long-term care Custodial services Personal convenience services (televisions, telephones, private-duty nurses, private rooms when not

medically necessary)

Data from Centers for Medicare and Medicaid Services. Medicare costs at a glance. Available at: https://www.medicare.gov/your-medicarecosts/

medicare-costs-at-a-glance. Accessed July 2020; Centers for Medicare and Medicaid Services (CMS). 2020a. 2020 annual report of the boards of

trustees of the federal hospital insurance and federal supplementary medical insurance trust funds. Available at: https://www.cms.gov/files/

document/2020-medicare-trustees-report.pdf. Accessed July 2020.

Financing

Public Health Insurance 261

The general tax revenues of the federal government (approximately 73%) and monthly premiums paid

by persons enrolled in Part B (approximately 27%).

Standard premium:

Income-adjusted premium 1:

Deductible:

Coinsurance:

Physician services Emergency department services

Outpatient surgery

$144.60 per month $202.40 to $491.60 per month

$198 annually 80/20

Main Benefits

Diagnostic tests and laboratory services

Outpatient physical therapy, occupational therapy, and speech therapy

Outpatient mental health services Limited home health care under certain conditions

Ambulance

Renal dialysis Artificial limbs and braces Blood transfusions and blood components

Organ transplants Medical equipment and supplies Rural health clinic services

Annual physical exam

• Wellness exam

• Preventive services (as medically needed): alcohol misuse screening and counseling, bone mass measurement, mammography, cardiovascular screening, Pap smears, colorectal cancer screening,

depression screening, diabetes screening, glaucoma tests, HIV screening, nutritional counseling for diabetes and renal disease, obesity screening and counseling, prostate cancer screening, sexually

transmitted infections screening, shots (flu, pneumococcal, hepatitis B), and tobacco use cessation counseling

Dental services

Hearing aids

Noncovered Services

Eyeglasses (except after cataract surgery) Services not related to treatment or injury

1 For single beneficiaries whose annual incomes exceed $87,000. Data from Centers for Medicare and Medicaid Services. Medicare costs at a glance. Available at: https://www.medicare.gov/your-medicare­

costs/medicare-costs-at-a-glance. Accessed July 2020.

262 Chapter 6 Health Services Financing

have the option to remain in the original Medicare fee-for-service program, and if the CMS has contracted with an MCO that serves a beneficiary's geographic area, the beneficiary has the option to join the Medicare Advantage plan. If they join the plan, the beneficiaries receive both Part A and Part B services through the MCO. Prescription drugs under Part D are also included if offered by the MCO.

The proportion of Medicare benefi­ ciaries covered by MA plans has risen rap­ idly. In 2004, 12.8% of beneficiaries were enrolled in such plans. The enrollment rate was 37.5% in 2019 and was expected to reach 40% in 2020 (CMS, 2020a). The rising enrollments are reflected in the share of Medicare expenditures devoted to MA plans (see Figure 6-4 later in this chapter), which were up from 27% in 2015 to 34% in 2020.

Premiums for MA plans are in addi­ tion to those paid to Medicare for Part B coverage, but some MA plans offer zero­ dollar premium plans. As an incentive to enroll, beneficiaries get additional benefits that are not available in the original Medi­ care plan, and there is no need to purchase Medigap coverage. MA plans may offer dental and vision coverage, for example. Part C enrollees also have lower out-of­ pocket costs. Hence, Part C is a cost­ eff ective option for many beneficiaries. Although beneficiaries enrolled in MA plans might appear to be receiving fewer postacute services than those in traditional Medicare (Skopec et al. , 2020), MA enroll­ ees actually experience shorter lengths of stay and better outcomes for postacute care than those in traditional Medicare (Cao et al. , 2020). Similarly, compared with traditional Medicare beneficiaries, MA beneficiaries have lower health care utilization without any compromise in

their care satisfaction and health status. Hence, MA plans may be delivering health care more efficiently (Park et al., 2020).

MA plans receive prospective, capi­ tated payments (i.e. , based on enroll­ ments) from the HI and SMI Part B trust fund accounts. Payments are based on benchmarks that range from 95% to 115% of local fee-for-service Medicare costs, with bonus amounts payable to plans meeting high quality-of-care standards (CMS, 2020a).

Special Needs Plans. The MMA of 2003 required that Medicare Advantage include special needs plans. These plans were first offered in 2005 to meet the spe­ cial needs of people who were institution - alized (e.g. , in nursing homes), enrolled in both Medicare and Medicaid, or had chronic or disabling conditions. Medicare Advantage Special Needs Plans (MA-SNP) are available in limited areas, and not all plans cover all special needs situations.

Part D: Prescription Drug Coverage Part D was added to the existing Medi­ care program under the MMA of 2003 and was fully implemented in 2006. Part D is available to anyone who has cover­ age under Part A or Part B. This prescrip­ tion drug. program requires payment of a monthly premium to Medicare, which is in addition to the premium paid for Part B. Certain low-income beneficiaries are automatically enrolled without having to pay a premium. As of January 2011, the ACA imposed an IRMAA, such that people in certain income categories pay higher premiums.

Coverage is offered through two types of private plans approved by Medicare.

Public Health Insurance 263

EXHIBIT 6-4 Medicare Part D Benefits and Individual Out-of-Pocket Costs for 2020

Premiums

Deductible

Established by the plan, plus IRMAA (if applicable)

$435 annually

Three levels of benefits and out-of-pocket costs beyond the $435 deductible:

Initial coverage

Coverage gap

Copayments/coinsurance are paid by the beneficiary. After total payments by the plan

and the beneficiary have reached $4,020, the coverage gap (also called the "doughnut hole") kicks in.

Beneficiary pays no more than 25% of the cost of drugs.

Coverage gap ends when the beneficiary has spent $6,350 out of pocket (for brand­

name drugs, the manufacturer's discount also counts toward out-of-pocket spending).

Catastrophic level Beneficiary pays a small coinsurance (about 5%) or copayment.

The Extra Help Program

A special part of the Medicare drug coverage program called Extra Help is designed to serve people

who have low incomes and savings. This group of beneficiaries includes those who receive Medicaid or

Supplemental Security Income. For those who qualify, the out-of-pocket costs are minimal.

Data from Centers for Medicare and Medicaid Services. Costs for Medicare drug coverage. Available at: https://www.medicare.gov/drug­

coverage-part-d/costs-for-medicare-drug-coverage. Accessed July 2020.

Stand-alone prescription drug plans (PD Ps) that offer only drug coverage are used mainly by those who want to stay in the original Medicare fee-for-service program. In contrast, Medicare Advantage Prescrip­ tion Drug plans (MA-PDs) are available to those persons who are enrolled in Part C if the MCO pr.ovides prescription drug coverage-and most do.

The premiums for Part D are estab­ lished by each plan; the additional income-based IRMAA, if applicable, is established by and paid directly to Medi­ care. For 2020, the monthly IRMAA ranged between $12.20 and $76.40. The Part D program also requires payment of a deductible, following which a basic level of coverage becomes available. After that, a coverage gap, or ((doughnut hole;' requires the beneficiary to pay the full cost of drugs (at a discount) until a

defined level of spending is reached. This gap is then followed by a catastrophic level of coverage (EXHIBIT 6·4). Special provisions in the program are design

. ed

to help low-income enrollees by keeping their out-of-pocket costs to a minimum. Under the ACA, all Part D drugs must be covered under a manufacturer discount agreement with the CMS. The beneficia­ ries receive discounts on drugs while in the coverage .gap.

Medicare Out-of-Pocket Costs Medicare carries relatively high deduct­ ibles, copayments, and premiums (see Exhibits 6-2, 6-3, and 6-4). Eyeglasses, dental care, and many long-term care services are not covered, and there is no limit on out-of-pocket expenses, except that all MA plans have cost-sharing limits

264 Chapter 6 Health Services Financing

TABLE 6-3 Medicare: Enrolled Population and Expenditures in Selected Years

1970 1980 1990 2000 .. I

2010

Population Covered (in Millions)

20.4 28.4 34.3 39.7 47.7 61.2

Expenditures (in Billions)

$7.5 $36.8 $111.00 $221.8 $522.9 $796.2

Proportion of Total U.S. Health Care Expenditures

10.0% 14.5% 15.5% 16.4% 20.2% 20.9%1

Average Annual Increase in Expenditures from the Previous Year Shown

17% 12% 7% 9% 4.8%

1 Projected total national health care expenditures for 201 9: $3,81 4.6 billion.

Data from National Center for Health Statistics (NCHS). 201 2. Health, United States, 2012. Hyattsville, MD: U.S. Department of Health and Human

Services. pp. 323, 356; Centers for Medicare and Medicaid Services (CMS, 2020a). 2020 annual report of the boards of trustees of the federal hospital

insurance and federal supplementary medical insurance trust funds. p. 1 0. Available at: https://www.cms.gov/files/ document/2020-medicare-trustees­

report.pdf. Accessed July 2020.

( $6, 700 when in-network providers are used). The t.raditional Medicare program has no out-of-pocket maximums. Hence, most Medicare beneficiaries are left with high out-of-pocket costs, which repre­ sent an important share of their incomes. Medicaid (provided the beneficiary quali­ fies), employer retirement benefits, and purchase of Medigap plans (discussed previously) are some of the ways that indi­ viduals may pay for most of these out-of­ pocket costs.

Medicare Enrol led Popul ation and Total Expenditures Medicare consumes more than one-fifth of the United States' national health expen­ ditures. Data on enrolled population and

expenditures appear in TABLE 6·3. During the 2010-2019 period, Medicare expendi­ tures grew at an annual rate of 4.8%, a vast improvement over the 9% growth rate dur­ ing the 2000-2010 decade.

' Over the same

period, total national health expenditures grew by 4.4% annually. Policies driven by the ACA have been largely credited with this improvement.

Medicare Financing and Spending for Services Data on Medicare financing and spend­ ing appear in FIGURE 6·3 and FIGURE 6·4.

General taxes fund most of the Medicare expenditures, followed by payroll taxes. Since 2017, expenditures for MA plans have exceeded the payments to hospitals.

FIGURE 6-3 Sources of Medicare financing,

2019.

Data from Centers for Medicare and Medicaid Services (CMS). 2020a. 2020 Annual report of the boards of trustees of the federal hospital insurance and

federal supplementary medical insurance trust funds. Available at: https://

www.cms.gov/files/document/2020-medicare-trustees-report.pdf.

Accessed July 2020.

Administration 1.3%

FIGURE 6-4 Medicare spending for services, 2019.

Data from Centers for Medicare and Medicaid Services (CMS). 2020a. 2020 Annual report of the boards of trustees of the federal hospital insurance and

federal supplementary medical insurance trust funds. Available at: https://

www.cms.gov/files/document/2020-medicare-trustees-report.pdf. Accessed July 2020.

Public Health Insurance 265

Medicare Trust Funds Medicare has established two main trust funds: The HI trust fund provides the money pool for Part A services, and the SMI trust fund provides the money pool for Parts B and D. Each trust fund accounts for its own incomes and expen­ ditures. Taxes, premiums, and other revenues are credited to the respective trust funds, and payments for services to Medicare recipients and adminis­ trative costs are the only purposes for which disbursements from the funds can be made.

TABLE 6·4 compares the trust fund results for 2015 and 2019. While defi­ cit spending (expenditures exceeding revenues) increased in the HI fund, the surplus in the SMI fund increased. Numerous factors affect the solvency of these trust funds. For example, future Medicare expenditures depend on the size of the population eligible for benefits, changes in the volume and intensity of services, and medical price inflation. The future HI trust fund income depends on the size of the workforce and the level of workers' earnings. These factors depend, in turn, on future birth rates, death rates, labor force participation rates, wage increases, and many other economic and demographic factors affecting Medicare (CMS, 2020a). The performance of the funds shown in Table 6 -4 does not include any assumptions related to the effects of the COVID-19 pandemic. Even without the effects of the pandemic, the HI trust fund is expected to run out by 2028. Once the trustees incorporate the effects of COVID-19 on payroll tax revenue and other factors in their 2021 report, the situation is likely to go from bad to worse (Brady and Brady, 2020).

266 Chapter 6 Health Services Financing

Assets at the beginning of year

Revenues

Expenditures

Difference between revenues and expenditures

Assets at the end of year

2015

$197.3

275.4

278.9

-3.5

1 93.8

2019 2015

$200.4 $369.0 $ 1 04.3

322.5 369.0 472.3

328.3 368.8 467.9

-5.8 0.2 4.4

1 94.6 69.5 108.8

Data from Centers for Medicare and Medicaid Services (CMS). 201 6. 2016 Annual report of the boards of trustees of the federal hospital insurance and

federal supplementary medical insurance trust funds. Available at: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and­

Reports/Reports TrustFunds/Downloads/TR2016.pdf. Accessed July 2020. Centers for Medicare and Medicaid Services (CMS, 2020a). 2020 annual report

of the boards of trustees of the federal hospital insurance and federal supplementary medical insurance trust funds. p. 1 0. Available at: https://www.cms.

gov/files/document/2020-medicare-trustees-report.pdf. Accessed July 2020.

Medicaid Medicaid, also referred to as Title 19 of the Social Security Act, was originally designed to finance health care services for the indigent. Hence, Medicaid is almost entirely a taxpayer-financed program and is the largest source of health insurance for the low-income population in the United States. Since its inception, Medicaid has been a m eans-tested program, mean­ ing that eligibility depends on people's financial resources. Each state administers its own Medicaid program under federal guidelines.

Medicaid is jointly financed by the federal and state governments. The federal government provides matching funds to the states based on the per capita income in each state. By law, federal matching­ known as the Federal Medical Assistance

Percentage (FMAP)-cannot be less than 50% of total state Medicaid program costs. Wealthier states have a smaller share of their costs reimbursed by the federal gov­ ernment and vice versa.

Rules for Medicaid Eligibility Three main categories of people are auto­ matically eligible for Medicaid: ( 1) fami­ lies with children receiving support under the Temporary Assistance for Needy Fam­ ilies (TANF) program; (2) people receiv­ ing Supplemental Security Income (SSI), which includes many elderly, blind, _ and disabled individuals with low incomes; and (3) children _ and pregnant women whose family income is at or below 133% of the FPL. States, at their discretion, have defined other "medically needy" catego­ ries based on people's income and assets.

1he most important of these groups are

individuals who are institutionalized in nursing or psychiatric facilities and indi­ viduals who are receiving community­ based services but would otherwise be eligible for Medicaid if institutionalized. All of these people have to qualify based on income and assets, which must be below the threshold levels established by each state.

Dually Eligibl e Benefi ciaries Approximately 9 million people are dually eligible beneficiaries-that is, low-income elderly and disabled young adults who are entitled to Medicare, but also become eligible for some level of assistance under Medicaid. Medicare pays covered dually eligible beneficiaries' medical services first, because Medicaid is generally the payer of last resort. Medicaid may cover medical costs that Medicare does not cover or covers only partially. Coverage for dually eligible beneficiaries varies by state. Each year, the CMS releases eligibil­ ity standards for dually eligible beneficia­ ries (CMS, 2020b).

Medicaid U nder the ACA Expansion of the Medicaid program was a major feature of the ACA. It originally mandated, under penalty, that all states cover any legal U.S . resident younger than age 65 with income up to 138% of the FPL, starting January 2014. In 2012, the U.S. Supreme Court struck down this mandate, giving states the option to either expand or not expand their Medicaid programs without any penalty from the federal government. Federal matching funds at 100% for newly eligible individuals were authorized for 3 years (2014-2016), with

Public Health Insurance 267

a gradual reduction of this rate each year to 90% in 2020. In spite of this financial incentive, in 2016, 19 states had not par­ ticipated. By 2020, however, the number of nonparticipating states had dropped to 14. Overall, more than 14 million people gained insurance through Medicaid under the ACA (Medicaid and CHIP Payment and Access Commission [MACPAC] , 2020). Medicaid has now become the sec­ ond largest source of insurance coverage in the United States, after employer-based coverage (see Figure 6-2). As expected, between 2013 and 2018, total Medicaid costs in expansion states grew by 24% compared to nonexpansion states; most of the increased costs were paid by the federal government (Gruber and Sommers, 2020).

Regarding access to care, an analysis of nationally representative data suggested that Medicaid expansion was associated with a modest improvement in access to primary care without an increase in emer­ gency department (ED) use ( Gotanda et al. , 2020). However, another national study concluded that following full imple­ mentation of the ACA, there was a sig­ nificant increase in ED patients, and this increase appeared to be primarily associ­ ated with expansion of Medicaid ( Orgel et al. , 2019). One goal of the ACA was to reduce utilization of costly ED visits.

Community health centers (CHCs) have played . an important role in ensur­ ing access to health care for other Med­ icaid patients, because the ACA provided increased payments to CHCs. Because CH Cs are not evenly distributed, a few studies have found evidence consis­ tent with provider capacity constraints (McMorrow et al. , 2020). Apart from issues with geographic distribution, CHCs face increasing difficulty in acquiring the

268 Chapter 6 Health Services Financing

necessary primary care workforce; as a result, many cannot accommodate more patients (Rieselbach et al ., 2019).

Some evidence suggests that benefi­ ciaries in Medicaid-expansion states had an increased likelihood of having a doc­ tor and a decreased likelihood of having difficulty affording medical care. How­ ever, there · is no evidence of changes in self-reported well-being (Kobayashi et al., 2019). Improvements in mental health have been evident, but similar improve­ ments in physical self-reported health among low-income Americans have not been confirmed (Griffith and Bor, 2020).

Issues with Medicaid The main problem with Medicaid is the paltry reimbursement for providers. In consequence, many physicians and some other providers do not serve Medicaid­ covered patients. Medicaid reimburse­ ment is a fraction of what is paid by Medicare and private insurers. Despite this discrepancy, the U.S. Supreme Court ruled in Armstrong v. Exceptional Child Center, Inc . . that Medicaid providers do not have the right to seek relief in fed­ eral courts to · force states to pay higher reimbursement (Huberfeld, 2015). Under the ACA, payments to Medicaid provid­ ers were brought up to Medicare levels, but only temporarily. Hence, the issue of physician participation is an ongoing chal­ lenge for this program.

Another critical issue with Medicaid is churning-that is, the constant exit and reentry of beneficiaries in this system as their eligibility changes. Churning occurs because many beneficiaries have incomes that may fluctuate from one month to another. Some evidence indicates that such coverage disruptions declined in

states that expanded Medicaid under the ACA (Goldman and Sommers, 2020).

Medicaid Enrol l m ent and Spending Because of the churning phenomenon dis­ cussed in the previous section, the enroll­ ment figures for Medicaid do not remain stable. Hence, the CMS furnishes quar­ terly reports on enrollments. In the third quarter of 2019, Medicaid enrollment had grown to 74.8 million (CMS, 2019c), rep­ resenting 35% growth in the number of enrollees since December 201 3 (55 .4 mil­ lion), just before the ACA Medicaid policy went into effect (Snyder and Rudowitz, 2014).

Total Medicaid spending between 2013 and 2018 increased by 34.2%. In 2018, total Medicaid spending amounted to $597.4 bil­ lion, of which 62 % was paid by the federal government and the rest by state govern­ ments (CMS, 2019b). FIGURE6-S summarizes the spending on the various Medicaid-cov­ ered services.

Children's Health Insurance Program CHIP, codified as Title 21 of the Social Security Act, was initiated under the BBA of 1997 in response to the plight of uninsured children whose families' incomes exceeded the Medicaid thresh­ old levels, which made them ineligible for Medicaid coverage. These children were estimated to number 10. 1 million­ nearly one-fourth of all uninsured per­ sons-in 1996.

CHIP offers federal funds in the form of set block grants to states. To cover children up to 19 years of age, a state can expand its existing Medicaid program,

Public Health Insurance 269

Miscellaneous 4.8%

Prescription drugs 5.0%

Administration 10.8%

6.0%

FIGURE 6·5 Medicaid spending for services, 20 1 8.

Data from Centers for Medicare and Medicaid Services (CMS). 2020c. The hospital value-based purchasing (VBP) program. Available at: https://www.cms.gov/

Medicare/Quality-lnitiatives-Patient-Assessment-lnstrumentsNalue-Based-Programs/HVBP /Hospital-Value-Based-Purchasing. Accessed July 2020.

establish a separate program for children, or use a combined approach. Federal law requires that ineligibility for Med­ icaid be established before approval for CHIP coverage. Each state establishes its own eligibility criteria for CHIP, which must comply with the federal . guidelines. Income eligibi�ity levels range from 170% to 400% of FPL. Thus, children in many families that do not qualify for Medicaid can be enrolled in CHIP. CHIP does not cover parents or adults, except for certain low-income pregnant women. Enrollment in 2018 was 9.6 million.

Similar to the case with Medicaid, CHIP financing is shared between the fed­ eral and state governments. To keep the program financially strong, federal match­ ing funds are 15 percentage points higher than what they are for Medicaid.

Although CHIP has had a significant impact in reducing the number of unin - sured children, approximately 4.3 mil­ lion children still did not have any health

insurance coverage in 2018, as there were decreases in Medicaid and CHIP enroll­ ments (Berchick and Mykyta, 2019). Growth in the overall economy is believed to be the main factor that improved fami­ lies' economic condition and made people ineligible for public assistance.

Health Care for the Military The U.S. Department of Defense (DOD) operates a large and complex health care program, known as the Military Health System (MHS), that provides medical ser­ vices to active-duty and retired members of the armed forces, their dependents, sur­ vivors, and former spouses. This program has also been extended to National Guard/ Reserve members. The system is managed by the Defense Health Agency. The Uni­ formed Services University of the Health Sciences not only educates and develops health professionals, scientists, and leaders for the MHS, but also provides operational

270 Chapter 6 Health Services Financing

support to medical units around the world. Changes have been proposed to the current system that will require military health care facilities to focus on provid­ ing medical care to active-duty person­ nel only, but their implementation was postponed because of the COVID-19 pandemic. These changes will move non­ uniformed beneficiaries to the TRICARE network, which will result in outsourcing health care for at least 200,000 patients (Kime, 2020).

TRICARE is the health care program for uniformed service members, retir­ ees, and their families around the world. Beneficiaries may obtain health care either through DOD's medical facilities or through services purchased from civilian providers. TRICARE offers several. differ­ ent health insurance plans, including den­ tal plans, and different options depending on whether the eligible beneficiaries live in the United States or overseas. For retirees age 65 and older, TRICARE offers a plan that works in conjunction with Medicare. Service members who separate from ser­ vice due to a service-connected injury or illness may be eligible for VA benefits and certain TRICARE benefits. TRICARE­ and VA-eligible beneficiaries can choose to use either their TRICARE or VA ben­ efits for each separate episode of care.

·veterans Health Administration The Veterans Health Administration (VHA), the health services branch of the U.S. Department of Veterans Affairs (VA), operates the largest integrated health ser­ vices system in the United States. This sys­ tem encompasses more than 1 ,250 health care facilities, including hospitals, outpa­ tient clinics, community living centers

(nursing homes), and various other facili­ ties (VHA, 2020). In 2020, VHA had a budget of almost $84 billion, employed almost 338,000 full-time equivalent staff, and provided medical services to 9. 8 million veterans (VA, 2020). Its Office of Research and Development focuses its research activities on health issues that affect veterans. The system actively engages in medical education l through affiliations with academic health systems.

The VA MISSION Act (VA Maintain­ ing Systems and Strengthening Integrated Outside Networks Act) of20 18 was passed to give U.S. veterans greater access to both VHA-operated health care facilities and community-based health care and to provide assistance to family caregivers. Investment in this program will surpass $2 1 billion, signaling a commitment to increase and streamline non-VHA care provided through the VHA (Kelley et al., 2020). The objective is to reduce wait times and improve overall access to health care for veterans.

The organizational units within the VA system comprise 1 8 geographically dis­ tributed Veterans Integrated Service Net­ works (VISNs). Each VISN is responsible for coordinating the activities of the hos­ pitals, outpatient clinics, nursing homes, and other facilities located within its jurisdiction. A report by the Government Accountability Office (GAO, 20 19) found that the VHA needed to improve its over­ sight of the performance of each VISN. At a very basic level, VHA also lacked a com­ prehensive policy that defined VISN roles and responsibilities.

The VHA also operates the Civil­ ian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA), which covers dependents

of permanently and totally disabled veter­ ans. The VHA shares the cost of covered health care services and supplies with eli­ gible beneficiaries.

Indian Health Service The federal program administered by the Indian Health Service (IHS), a division of the DHHS, provides comprehensive health care services directly to members of federally recognized American Indian and Alaska Native (AIAN) tribes and their descendants. AIANs, as citizens of the United States, are eligible to partici­ pate in all public, private, and state health programs available to the general popu­ lation. However, for many Indians, IHS­ supported programs are the only source of health care, especially in isolated areas. The IHS provides health care services through its own hospitals, health centers, and health stations as well as through ser­ vices purchased from private providers. IHS services are administered through a system of 12 area offices and 1 70 IHS and tribally managed service units. The latter are operated under the Indian Self­ Determination and Education Assistance Act of 1975, which provides tribes with the option of exercising their right to self-determination by assuming control and management of programs previously administered by the federal government (IHS, 2020).

� The Payment Function In the health care context, insurance com­ panies, MCOs, Blue Cross/Blue Shield, and the government (for Medicare and

The Payment Function 271

Medicaid) are referred to as third-party payers, with the other two parties being the patient and the provider. The payment function has two main facets: (1) deter­ mination of the methods and amounts of reimbursement for the delivery of ser­ vices and ( 2) actual payment after services have been rendered. The set fee for each type of service is commonly referred to as a charge or rate. Technically, a charge is a fee set by the provider, which is akin to a price in general commerce. A rate is a price set by a third-party payer. An index of charges listing individual fees for each type of service is ref erred to as a fee

schedule. In general, to receive payment for services rendered, the provider must file a claim with the third-party payer. For the sake of simplicity, in this section, we refer to the determination of rates as ((reimbursement" and to the payment of claims as ((disbursement:'

Historically, providers have preferred the fee-for-service method, but it has now largely fallen out of favor with pay­ ers because it leads to cost escalations. The Medicare program, in particular, has been at the forefront of devising innovative reimbursement methods; private payers often follow suit. Today, numerous reim­ bursement methods exist and are used for different types of services. Physicians, dentists, optometrists, therapists, hospi­ tals, nursing facilities, and so on may be paid according to different reimburse­ ment mechanisms. Trends in reimburse­ ment have shifted toward value-based payments that reimburse providers for quality of care and cost-efficiency. The emergence of innovative payment mod­ els will be driven by value of health care to patients and payers, based on reducing adverse events, adopting evidence-based

272 Chapter 6 Health Services Financing

care standards to improve outcoll}es, improving patient experience, and increas­ ing transparency of care (CMS, 2020d).

Fee for Service Fee for service is the oldest method of reimbursement and is still in existence, although its use has been greatly reduced. This payment method is based on the assumption that health care is provided in a set of identifiable and individually distinct units of services, such as examina­ tion, x-ray, urinalysis, and a tetanus shot, in the case of physician services. For sur­ gery, such individual services may include an admission kit, numerous medical supplies (each accounted for separately), surgeon's fees, anesthesia, anesthesiolo­ gist's fees, recovery room charges, and so forth. Each of these services is separately itemized on one bill, and there can be more than one bill. For example, the hos­ pital, the surgeon, the pathologist, and the anesthesiologist may bill for their services separately.

Initially, providers established their own fee-for-service charges and insurers passively paid the claims. Later, insur­ ers started to limit reimbursement to a usual, customary, and reasonable (U CR) amount. Each insurer determined on its own what the UCR charge should be, through community or statewide surveys of what providers were charging. If the actual charges exceeded the UCR amount, then reimbursement from insurers was limited to the UCR amount. Providers would then balance bill-that is, ask the patients to pay the difference between the actual charges and the payments received from third-party payers.

The main problem under fee-for­ service arrangements is that providers have

an incentive to deliver additional services that are not always essential. Providers can increase their incomes by increasing the volume of services. However, dentists, therapists, and some physicians continue to receive payment according to the fee-for­ service model.

Bundled Payments Fee for service essentially pays for unbun­ dled services. A bundled fee, also referred to as package pricing, includes several related services in one price. For example, optometrists sometimes advertise pack­ age prices that include the charges for eye exams, frames for eyeglasses, and correc­ tive lenses. The various prospective pay­ ment methods of reimbursement are also examples of bundled payments. Package pricing reduces the incentive for providing nonessential services, thereby reducing provider-induced demand. Some evidence indicates that bundled payment methods, especially when they are prospectively set, are effective in reducing health care spending without significantly affecting quality of care (Hussey et al., 2012).

Medicare has pioneered a bundled payment mechanism that pays providers a single sum for a given episode. S ome episodic models are still being explored, but the most extensive one includes all services during hospitalization and sub­ sequent delivery of postacute services, such as rehabilitation and nursing home care. Incentives to share cost savings with Medicare are also incorporated (Tanen­ baum, 2017). The theory behind episodic payments is that various providers col­ laborating to deliver services to a patient through an entire episode will result in coordinated care, improved quality, and lesser cost.

Resource-Based Relative

Value Scale Under the Omnibus Budget Reconcilia­ tion Act (OBRA) of 1989, Medicare dev­ eloped a reimbursement mechanism to pay physicians according to a "relative value" assigned to each physician service. The resource-based relative value scale (RBRVS) was implemented in 1 992. Sub­ sequently, third-party payers adopted the RBRVS system.

RBRVS incorporates relative value units (RVUs) based on the time, skill, and intensity (physician work) it takes to provide a service. Hence, RVUs reflect the resource inputs-time, effort, and expertise-needed to deliver a service. RVUs are established for different types of services that are identified by codes. The Healthcare Common Procedures Coding System (HCPCS) includes the Current Procedural Terminology ( CPT) codes (Level I) as well as Level II codes for services, such as supplies, equipment, and devices .

In addition to RVUs associated with physician work, separate RVUs are included for the cost of practice (over­ head costs), malpractice insurance, and geographic cost variations. A conver­ sion factor (CF) is then used to establish a Medicare Physician Fee Schedule (MPFS)-a price list for physician ser­ vices, based on which individual payments are made when physicians file their claims. To attract �ore physicians to health pro­ fessional shortage areas (HPSAs ), a 10% bonus is added for physicians practicing in the shortage areas (MedPAC, 20 1 9h).

In the past, the main issue with the RBRVS system was that it continued to incentivize volume rather than quality. To address this problem, the RBRVS payment

The Payment Function 273

rates are adjusted further under the qual­ ity payment program (QPP).

Qua ·ty Paymen Program Under the Medicare Access and CHIP Reauthorization Act (MACRA) of 20 15, Medicare implemented a QPP. MACRA payment adjustments are designed to give providers added incentives for delivering high-quality, cost-efficient care. Clinicians can opt to participate in one of two dif­ ferent pathways . The first option is the advanced alternative payment models (A-AP Ms) for qualifying participants. The criteria for participation are deter­ mined by the CMS. From 20 19 through 2024, clinicians who qualify for A-APMs receive incentive payments of 5% for each year that they qualify. Clinicians who do not qualify for A-APMs fol­ low the path of the Merit-based Incen­ tive Payment System (MIPS). Under MIPS, annual payment increases or decreases apply based on the clinician's performance in four categories: quality, cost, clinical practice, and improvement activities.

Medicare Shared Savings Program Under the ACA, a Medicare Shared Sav­ ings Program (MSSP) was created just for accountable care organizations (ACOs). ACOs are groups of providers, such as physicians and hospitals, that have agreed to be held accountable for the cost and quality of health care for a group of ben­ eficiaries. Under the ACA, any cost sav­ ings achieved through these arrangements are shared in the form of bonuses between participating ACOs and Medicare. Benefi­ ciaries do not enroll in ACOs, but rather

274 Chapter 6 Health Services Financing

are assigned to them by Medicare. The beneficiaries are free to obtain services outside the ACO, but if they choose to go outside the ACO, the ACO remains responsible for the spending. This pro­ vides an incentive to the ACO providers to keep their enrollees satisfied so they will stay with the ACO providers.

MSSP has shown modest success in cost savings and quality improve­ ment. ACO quality is evaluated in four domains: patient/ caregiver experience, care coordination/patient safety, preven­ tive health, and clinical care for at-risk populations. Demonstration projects are under way for a second ACO reimburse­ ment program, called Next Generation (NextGen), which started in 20 1 6 (Med­ PAC, 20 1 9a).

M naged Care Approaches MCOs have concentrated on three main approaches to payment. The first is the preferred-provider approach,· which may be regarded as a variation of fee for service. The main distinction is that an M CO con­ tracts with certain "preferred providers" and negotiates discounts off the charges to establish fee schedules.

In the second approach, which is called capitation, the provider is paid a set monthly fee per enrollee, which is sometimes ref erred to as a per mem - ber per month (PMPM) rate. The fixed monthly fee (PMPM rate x number of enrollees) is paid to the provider regard­ less of how often the enrollees receive medical services from the provider. Capi­ tation removes the incentive for provid­ ers to increase the volume of services to generate additional revenues. It also makes providers prudent in providing only necessary services.

Salary, combined with productivity­ related bonuses, is the third payment method used by some MCOs that employ their own physicians.

Cost-Plus Reimbursement Cost-plus reimbursement was the traditional method used by Medicare and Medicaid to establish per diem (daily) rates for inpatient stays in hos ­ pitals, nursing homes , and other insti­ tutions. Under the cost-plus method, reimbursement rates for institutions are based on the total costs incurred in operating the institution. The institu­ tion is required to submit a cost report to the third-party payer. Complex for­ mulas are developed, designating cer­ tain costs as "nonallowable " and placing cost ceilings in other areas. These for­ mulas are used to calculate the per diem reimbursement rate, also referred to as a per patient-day (PPD) rate. T he pay­ ment method is called cost-plus because, in addition to the total operating costs, the reimbursement formula takes a por­ tion of the organization's capital costs into account in arriving at the PPD rate. Because the reimbursement methodol­ ogy sets rates after evaluating the costs retrospectively (by looking back), this mechanism is broadly referred to as ret­

rospective reimbursement. Under the cost-plus system, total

reimbursement is directly related to length of stay, services rendered, and cost of providing the services. Provid­ ers have an incentive to provide services indiscriminately, which in turn drives up costs. There is little motivation for efficiency and cost containment in the delivery of services. Paradoxically, health care institutions can increase

their profits by increasing costs under

such a system. Because of the perverse financial incen -

tives inherent in retrospective cost-based reimbursement, this approach has been largely replaced by various prospective reimbursement methods. Nevertheless, criti­ cal access hospitals located in certain rural areas and Medicare-certified hospices are still reimbursed under the cost-plus pay­ ment system.

Prospective Reimbursement In contrast to retrospective reimburse­ ment, in which historical costs are used to determine the amount to be paid, prospective reimbursement is for­ ward-looking and uses certain established criteria to determine the amount of reim - bursement in advance, before services are delivered. Prospective reimbursement not only minimizes some of the abuses inherent in cost-plus approaches, but also enables providers, such as Medicare, to better predict future health care spending. In addition, it provides strong incentives to health care organizations to reduce costs. The organization makes a profit only if it can keep its costs below the pro­ spective reimbursement amount. Inability to control costs jeopardizes the organiza­ tion's financial health.

Medicare has been using the prospec­ tive payment system (PPS) to reimburse inpatient hospital acute-care services under Medicare Part A since 1 983 . Subse­ quently, the BBA of 1 997 mandated imple­ mentation of a PPS for hospital outpatient services and postacute-care providers, such as SNF s, home health agencies, and inpatient rehabilitation facilities. The pro­ spective reimbursement methodologies can differ rather substantially according

The Payment Function 275

to the type of service that an organization provides.

Case-Mix-Based Reimbursement Case mix is an aggregate of the severity of conditions requiring clinical intervention. Case-mix categories are mutually exclu­ sive and differentiate patients accord­ ing to their extent of resource use. On a case-mix index, higher score categories include patients who have more severe conditions than those in lower score cat­ egories . A comprehensive assessment of each patient's condition determines the case mix for an organization. Patients who require similar levels of services are then categorized into groups that are relatively uniform according to resource consump­ tion. To a large extent, case mix is reflected in MS-DRGs and MS-LTC-DRGs, which are discussed later in this chapter. Reim - bursements to SNFs, inpatient rehabilita­ tion facilities, and home health agencies are based primarily on case mix.

cute-Care Hosp·tal Payment S ste Overview of DRG-Based Reimburse­ ment. The PPS for acute-care hospital inpatient reimbursement was enacted under the Social Security Amendments of 1983 . The predetermined reimbursement amount is set according to diagnosis­ related groups (DRGs). Each DRG con­ solidates principal diagnoses that are expected to require similar amounts of hospital resources in the delivery of care.

The primary factor governing the amount of reimbursement is the type of case (a DRG classification), but other fac­ tors are also taken into account, such as geographic differences (e.g., wage levels

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276 Chapter 6 Health Services Financing

in various areas, location of the hospital in an urban versus rural area), whether the institution is a teaching hospital (i.e., has residency programs for medical gradu­ ates), and whether the hospital treats a disproportionate share of low-income patients. The last provision was authorized by Congress to give extra financial support to "safety net" hospitals (called dispropor­ tionate share hospitals), which are mainly located in inner cities and rural areas, and serve a large number of poor people. Additional payments are also made for cases that involve extremely long hospital stays or are extremely expensive, which are referred to as outliers.

The hospital receives a predetermined fixed rate per discharge (i.e. , per case) based on the patient's DRG classification and the adjustment factors just men­ tioned. The bundle of services consists of whatever medical care the patient requires for a given principal diagnosis. The fixed payment rates give providers financial incentives to reduce costs.

Refined Medicare Severity DRGs. In 2007, the CMS adopted a refined DRG­ based PPS method that includes patient severity to better reflect hospital resource use. The new system has 335 base DRGs, most of which are further split into two or three Medicare severity diagnosis­ related groups (MS-DRGs) based on co morbidities (secondary conditions) or complications (developed during hospi­ tal stay). This new payment system had 759 MS-DRGs in use in 2020. Each MS­ DRG carries a relative weight that reflects how costly it is expected to be to care for a patient in a given MS-DRG category relative to other categories . Final per­ discharge payments are derived through

a series of adjustments, such as for use of new technology that results in substantial clinical improvement, and value-based incentives for certain outcome measures, such as patient experience, safety, and efficiency. Also added to the reimburse­ ment is 65% of bad debts resulting from patients' nonpayment of deductibles and copayments (MedPAC, 20 1 9b).

Because DRG-based payments fur­ nish a financial incentive for hospitals to keep the length of stay as short as possible, the ACA required reductions in payments to hospitals that incurred excessive read­ missions of Medicare-covered patients for selected conditions. The objective is to prevent facilities from discharging patients too soon. An unplanned readmission to an acute-care hospital within 30 days of dis­ charge is the standard applied. In addition, there is a penalty for patients who develop hospital-acquired preventable medical con - ditions (MedPAC, 20 1 9b). To date, the success of these two ACA initiatives in achieving the expected results is uncertain (Blumenthal and Abrams, 2020).

Readmission rates and hospital­ acquired conditions are part of a broader value-based purchasing/payment (VBP) program that was started in 2013 . This program created quality-based adjust­ ments of up to 1 % to Medicare reimburse­ ment for acute-care hospitals. Research shows that the V BP program did not improve measures of clinical process or patient experience, nor was it associated with significant reductions in mortality (Figueroa et al. , 20 1 6; Ryan et al., 20 17). Hence, VBP programs present unforeseen challenges, which are likely to be over­ come as both payers and providers gain more experience with what works and what does not work.

inpatient Psychiatric DRG-Based payment

Inpatient psychiatric facilities are either freestanding hospitals or specialized units within acute-care hospitals. On aver­

age, Medicare beneficiaries account for

approximately one-fourth of discharges

in inpatient psychiatric facilities. These facilities are paid a per diem rate rather than a case-specific rate, based on one of 17 psychiatric MS-DRGs. Base rates are established by using national average daily costs for routine, ancillary, and capital costs, updated for inflation. The base rates are adjusted for certain factors that also apply to acute-care hospitals (MedPAC, 201 9c).

Long-Term Care Hospital Payment System Long-term care hospitals (LTCHs) are paid in three different ways.

1 . For postacute care following stay in an intensive care unit (ICU) and for ventilator­ dependent patients, Medicare uses a PPS system, just as it does for hospitals.

2. Per-discharge payment rates are set according to Medicare severity long-term care diag­ nosis-related groups (MS-LTC­ DRGs).

3. For discharges that do not meet the preceding criteria, the reim - bursement is the lower of either the acute-care rate under the hospital PPS or the cost of car­ ing for the patient.

Patients are assigned to MS-LTC-DRGs based on their principal diagnosis, secondary

The Payment Function 277

diagnoses, procedures, age, sex, and dis­ charge status (MedPAC, 20 1 9e).

Outpatient Services Payment Systems Hospital-Based Outpatient Services. In August 2000, Medicare's Outpatient Prospective Payment System (OPPS) was implemented to pay for services provided by hospital outpatient departments. The ambulatory payment classification (APC) divides all outpatient services into groups based on clinical and cost similarities. With few exceptions, all services within an APC have the same payment rate. In addition, the CMS has created new tech­ nology APCs to cover emerging tech­ nologies. Expensive drugs and biologics are paid separately. The reimbursement rates are adjusted for factors such as geo­ graphic variations in wages, as well as for outpatient services delivered by certain cancer centers and children's hospitals. APC reimbursement takes the form of a bundled rate that includes services such as anesthesia, certain drugs, supplies, and recovery room charges in a packaged price established by Medicare (MedPAC,

· 201 9f). Outpatient surgeries, such as those performed in ambulatory surgery centers, are also paid according to APC groups.

Payment for Outpatient Rehabilita­ tion. Outpatient therapy is performed in various settings, such as nursing homes, hospital outpatient departments, outpa­ tient rehabilitation facilities, and home health care. The unit of payment is each individual outpatient therapy service. All services are classified according to the Healthcare Common Procedure Coding System (HCPCS). Most physical therapy

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278 Chapter 6 Health Services Financing

and occupational therapy HCPCS codes are defined in 1 5-minute increments; speech therapy is an exception. Each HCPCS code is associated with RVUs, discussed previously. To determine the rate paid to the provider, the sum ofRVUs is multiplied by a dollar-amount conver­ sion factor. When annual per-beneficiary spending exceeds a certain amount, ther­ apy providers must certify to Medicare that the therapy services are medically necessary (MedPAC, 20 19g).

Skilled , _ ursing Facility Payment System First implemented in 1998, the PPS pro­ vides for a per diem prospective rate based on the intensity of care needed by patients in an SNF. More recently, the PPS underwent some major revisions that were implemented in October 2019. The new payment system is called the Patient Driven Payment Model (PDPM) because it incorporates many aspects of a patient's condition in establishing payments. The revised methodology essentially removes the incentive to provide extensive reha­ bilitation services that have been found to be of questionable value, and to put more emphasis on nontherapy ancillary prod­ ucts, such as drugs, ventilator devices, and the like. Thus, resource allocation is shifted to medically complex patients. Six components-nursing, physical therapy, occupational therapy, speech-language pathology, nontherapy ancillaries, and room and board-are summed to estab­ lish the daily rate (MedPAC, 2020).

The Minimum Data Set (MDS) is the instrument used to perform a com­ prehensive assessment of each resident admitted to an SNF. It consists of a core set of screening elements that assess the

resident's clinical, functional, and psy­ chosocial needs. The resident is then clas­ sified into a resident group for each of the five case-mix-adjusted components (room and board is not adjusted). Addi­ tional adjustment are made for geographic differences in labor costs (Acumen, 2018).

Payments to Inpatient Rehabilitation Facilities Since 2002, inpatient rehabilitation facili­ ties-that is, rehabilitation hospitals and distinctly certified rehabilitation units in general hospitals-have been reimbursed according to case-mix groups (CM Gs). Under this system, the patient is assigned to a CMG based on the primary reason for rehabilitation, age, functional status, cog­ nitive status, and comorbidities. Medicare rules require that no less than 60% of the total patient population in such units have one of 1 3 specified conditions that require intensive rehabilitation, such as stroke, amputation, burns, or hip fracture (Med­ PAC, 20 1 9d).

Payment for Home Health Services PPS for home health agencies was adopted in 2000. Until 2020, Medicare had paid a predetermined rate for each 60-day epi­ sode of home health care. Since 2020, a 30-day unit of payment has been imple­ mented under a patient-driven group­ ings model (PDGM), as required by the Bipartisan Budget Act of 20 18. Medi­ care no longer includes the number of therapy visits provided in an episode as a payment factor, under the theory that therapy services were overdelivered when that model was used for reimbursement. Instead, the PDGM system assigns 30-day periods of care to one of 432 case-mix

groups. Case-mix assignment is based on five factors: early or late period of care, whether the patient enters home health care from an acute or postacute source or from the community, principal diagnosis, functional impairment, and comorbidity (CMS, 2020c).

Disbursement of Funds After services have been delivered, some agency must perform the administrative task of verifying and paying the claims received from the providers. Disburse­ ment of funds (claims processing) is carried out in accordance with the reim - bursement policy adopted by the par­ ticular program. Commercial insurance companies and MCOs may either have their own claims departments to process payments to providers or outsource this function. Self-insured employers typically contract with a third-party administra­

tor (TPA) to process and pay claims. The TPA may also monitor utilization and per­ form other oversight functions. The gov­ ernment contracts with third parties in the private sector to process Medicare claims; these so-called Medicare Administrative Contractors are private insurers. For Med­ icaid, each state has established billing codes and claim submission procedures.

� National Health Expenditures

In 20 18, national health expenditures (NHE )-also referred to as health care spending-in the United States amounted to a little more than $3 .65 trillion, or an average per capita spending of $ 1 1 , 160 for each American (CMS, 2020e). NHE repre­ sented 1 7.7% of the U.S. gross dom.estic

National Health Expenditures 279

product (GDP) (CMS, 2020£), where the GDP is the total value of goo ds and ser­ vices produced in the United States and is an indicator of total economic produc­ tion, or total consumption. Hence, 1 7. 7% of GDP refers. to the share of the total economic output consumed by health care products and services in 2018.

TABLE 6·5 provides NHE data and com­ parisons with GDP for selected years. Over the decades, growth in both NHE and GDP has moderated, but NHE have continued to outpace the growth in GDP. The slower growth of NHE in recent years compared to previous decades undoubtedly reflects cost - containment efforts undertaken by various payers, notably the federal government for Medicare spending, which represents more than one-fifth ofNHE.

The cost to the federal government of Medicaid expansion and ACA-driven mar­ ketplace subsidies and reforms was $128 billion in 2019-considerably less than the $172 originally projected by the CBO. This is a result of lower growth in health care costs generally, lower premiums in the marketplaces, and lower enrollment in the marketplaces (Blumenthal et al., 2020).

Three factors are major contributors to the growth in health care expenditures: ( 1) general population growth and aging; (2) intensity of service utilization, includ­ ing moral hazard; and ( 3) prices for prod­ ucts and services. Increasing prices may account fo� more than 50% of the rise in health care expenditures (FIGURE 6·6).

Differences Between National and Personal Health Expenditures National health expenditures are an

aggregate of the amount a nation spends

ii

280 Chapter 6 Health Services Financing

TABLE 6-5 U.S. National Health Expenditures and Growth (selected years)

1960 $27.2 5.0

1970 74.6 6.9

1980 255.3 8.9

1990 721.4 12.1

2000 1,369.7 13.3

2010 2,596.4 17.4

2020 (projected) 4,014.2 18.7

$146

355

1, 108

8,404

12,490

Average Annual Percent Growth

from Previous Year Shown

10.6 7.1

13.1 10.3

11.0 7.6

6.6 5.6

6.6 3.8

4.9 4.4

Note: The actual 2020 data for both NHE and GDP may turn out to be quite different than those projected by CMS. Data from Centers for Medicare and Medicaid Services (CMS). 2020e. National health expenditure data, historical. NHE summary, including share of GDP, CY 1960-2018 (ZIP). Available at: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/

NationalHealthAccountsHistorical. Accessed July 2020; Centers for Medicare and Medicaid Services (CMS). 2020g. National health expenditure data,

p rojeded. Available at: https://www.cms.gov/Resea rch-Statistics-Data-and-Systems/S tatistics-Trends-a nd-Reports/Nationa I Hea lthExpendData/

NationalHealthAccountsProjected. Accessed July 2020.

FIGURE6-6 Contributors to the growth in health

care spending.

Data from Bindman, A. B. 2020. Rising prices and health care "empires:'

Journal of the American Medical Association 323, no. 9: 815-816.

for all health services and supplies, public health services, health-related research, administrative costs, and investment in structures and equipment during a calendar year. The proportional distribution of NHE into the various categories of health services in the United States appears in TABLE 6-6.

Personal health expenditures, which are a component of national health expen­ ditures, comprise the total spending for services ·and goods related directly to patient care. Personal health expenditures constitute the amount remaining after subtracting from NHE all of the spending for research, structures (e.g., construction, additions, alterations) and capital equip­ ment, administrative expenses incurred

NHE

Personal health care

Hospital care

Physician and clinical services

Dental services

Nursing home care

Other professional services

Home health

Prescription drugs

Other personal health care

Medical products and equipment

Government administration and net cost of private health

insurance

Government public health activities

Investment

Noncommercial research

Structures and equipment

Total NHE (billions)

Personal health expenditures (billions)

National Health Expenditures 281

100.0 100.0

84.5 84.3

31.7 32.7

19.8 19.9

4.0 3.7

5.4 4.6

2.7 2.8

2.7 2.8

9.7 9.2

5.0 5.3

3.5 3.3

7.1 8.4

2.9 2.6

5.5 4.8

1.9 1.4

3.6 3.3

$2,596.4 $3,649.4

$2,194.6 $3075.5

Data from Centers for Medicare and Medicaid Services (CMS). 2019. National health expenditure data. NHE tables (historical). Available at: https://www.

cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.

Accessed July 2020.

282 Chapter 6 Health Services Financing

in private and public health insurance programs, and costs of government public health activities. Between 20 10 and 20 18, there were notable increases in the share of total spending for hospitals and govern­ ment administration and net cost of pri­ vate health insurance. The latter reflects the administrative costs of health insurance under the ACA. During the same period, notable decreases occurred in expendi­ tures for dental services; nursing home care; prescription drugs; and investment in research, structures, and capital equip­ ment. In 20 18, approximately 53% of the money spent on the delivery of health care services was attributed to private sources, and 47% to public sources (CMS, 20 1 9b).

The Nation's Health Care Dollar F G E 6-7 provides a comprehensive pic­ ture of where U.S. national health care dollars come from (revenues), including both private and public sources, and how they are spent (expenditures). For sources of funding, between 20 15 and 20 1 8, there were small increases in Medicare and private health insurance payments, and corresponding decreases in Medicaid and out-of-pocket payments. During the same period, payments for hospital care increased slightly, with a corresponding decrease in expenditures for prescription drugs. These changes generally reflect post-ACA health care delivery operations.

� COVI D-19 and Health Care Financing

Although the COVID-19 pandemic origi­ nated in 20 1 9 in China, the United States was hit hard by this highly infectious

disease in 2020. The pandemic claimed thousands of lives in the United States, especially among the elderly and people with chronic conditions. According to one simulation model, if 20% of the U.S. population were to get infected, there could be a median of 1 1 .2 million hospi­ talizations, 2. 7 million ICU admissions, 1 .6 million patients requiring a ventila­ tor, 62.3 million hospital bed-days, and $163.4 billion in direct medical costs over the course of the pandemic (Bartsch et al., 2020). Although it is highly unlikely that such a dire scenario will materialize, the simulation predicts that direct medical costs could exceed $10.6 billion based on an infection rate of 1 .3% of the U.S. population. Even after recovery from COVID-19, patients remain at risk for lung disease, heart disease, frailty, and mental health disorders that may require long-term treatments (Jiang and McCoy, 2020). Moreover, early cost estimates do not account for mass vaccination of the U.S. population.

Indirect health care costs are also asso­ ciated with the government-mandated shutdowns imposed in an effort to control the spread of the coronavirus and with the ensuing economic crisis. Adverse health consequences of these events are also a reality. For example, social isolation is associated with poor mental health, and co-occurring mental health problems are risk factors for opioid overdose (Ataiants et al., 2020). Notably, the opioid epidemic cost the United States $2.5 trillion in the four-year period from 20 1 5 to 20 18 (American Presidency Project, 20 1 9), so exacerbation of this crisis carries its own costs. Likewise, the job losses, financial uncertainty, closures of morn-and-pop businesses, and riots in many cities in 2020

COVID-19 and Health Care Financing 283

Where it came from

Government public health activities

3% � Investment

5%

Other third-party payers and programs1

8%

Medicaid (Title XIX) /"" federal

10% Medicaid (Title X IX)

state and local 6%

VA, DOD, and CH IP (Title XIX and Title XXI)

4%

Where it went

Government administration and net cost of health insurance

8% Dental services and other professionals

7% \---,..-..'!"I- lnvestment3

5%

Nursing care facilities and continuing care

retirement communities

Prescription drugs -....... , 9% "

5%

Government public health � activities

3% _...__ Home health care

3% � Medical goods4

4%

Other health, residential, and personal care5

5%

Total National Health Expenditures= $3,205.6 Billion

FIGURE6'-7 The U.S. health dollar, 2018.

1 Includes work-site health care, other private revenues, Indian Health Service, worker's compensation, general assistance, maternal and child

health, vocational rehabilitation, Substance Abuse and Mental Health Services Administration, school health, and other federal and state

local programs.

2 Includes copayments, deductibles, and any amounts not covered by health insurance.

3 Includes research and structures and equipment.

4 Includes durable and nondurable goods.

5 Includes expenditures for residential care facilities, ambulance providers, medical care delivered in nontraditional settings (such as

community centers, senior citizens centers, schools, and military field stations), and expenditures for Home and Community Waiver

programs under Medicaid.

Note: Numbers may not add to 100 because of rounding.

Data from Centers for Medicare and Medicaid Services (CMS). 2019c. National health expenditure data. NHE tables (historical). Available at: https://www.cms.

gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical. Accessed July 2020.

284 Chapter 6 Health Services Financing

were certain to have both economic and health consequences. These costs will not be known for some time, and the projected health care costs for 2020 and beyond are likely to be revised upward.

Job losses translate into not only the loss of personal income, but also the loss of health insurance for many people. Most of the newly uninsured may be eligible for Medicaid, CHIP, or subsidies under the ACA. However, about 5. 7 million people likely will not qualify for subsidized insur­ ance (Livingston, 2020b ). For these indi­ viduals, buying health insurance may be unaffordable.

In March 2020, President Trump signed the Families First Coronavirus Response Act. This law mandated that all insurance plans-private or public-cover the cost of a coronavirus test and any related out-of­ pocket costs for medical services. Third­ party payers across the nation stepped up to alleviate patients' financial burden.

A sudden mandate on March 14, 2020, from the U.S. Surgeon General urged a widespread cessation of all elective surgery across the country under a likely scenario that hospitals would be overwhelmed with COVID-19 patients. The expected scenario did not materialize, but the mandate has left many hospitals and physician practices under severe financial strains.

� Summary Financing is the lifeblood of any health care delivery system. At its most funda­ mental level, it determines who pays for health care services and for whom. At a secondary level, financing determines who produces which types of health care services. Hence, financing affects both the demand and supply sides of the health care equation.

A significant amount of financing is attributed to the government, mainly to provide health insurance or direct services to defined categories of people. Because most publicly financed services are obtained in the private sector, the govern­ ment has a sizable interest in setting (and limiting) the amount of reimbursement to providers .

The ACA significantly reduced the number of uninsured Americans, mainly through the expansion of Medicaid pro­ grams (even though some states did not implement it) and, to a lesser extent, by facilitating the creation of health insur­ ance marketplaces, known as exchanges, for the private purchase of health insur­ ance. Federal subsidies were made avail­ able to people with incomes between 1 00% and 400% of the FPL. Even so, the largest source- of health insurance in the United States remains employer-based programs, which did not show any growth in cover­ age under the ACA.

The financial stability of Medicare trust funds has improved somewhat, but they are still headed toward insolvency unless the trend can be reversed. In an effort to reduce costs and improve qual­ ity of care under the Medicare system, the ACA implemented value-based reim­ bursement programs. These programs have not achieved the expected savings.

Between 2010 and 20 18, there were notable increases in the share of total spend­ ing that went to hospitals and government administration and the net cost of private health insurance. Decreases in expenditures occurred in dental services; nursing home care; prescription drugs; and investment in research, structures, and capital equipment.

The COVID-19 pandemic has had seri­ ous economic and health consequences. Job losses have increased the size of the

uninsured population. Serious after effects

for health care expenditures, financial

� Test Your Understanding

Terminology access entitlement

Test Your Understanding 285

constraints for providers, and social costs can be expected.

plan adjusted community experience rating play-or-pay

rating fee schedule preexisting condition

balance bill gross domestic product premium

beneficiary (GDP) prospective benefit period group insurance reimbursement benefits high-deductible health rate capitation plans (HDHPs) reinsurance case mix insurance relative value units categorical programs insured (RVUs) charge insurer retrospective churning means-tested program reimbursement claim Medicare Physician risk coinsurance Fee Schedule (MPFS) risk rating community rating Medigap self-insured plan consumer-directed moral hazard third-party administrator

health plans national health (TPA) copayment expenditures third-party payers cost-plus reimbursement outliers underwriting deductible personal health expenditures value-based payments

Review Questions 1 . What is meant by health care

financing in its broad sense? How does financing affect the health care delivery system?

2. Discuss the general concept of insurance and its general principles. Describe the various types of private health insurance options, pointing out the differences among them.

3. Discuss how the concepts of pre­ mium, covered services, and cost sharing apply to health insurance.

4. What is the difference between experience rating and community rating?

5. What is Medicare Part A? Discuss the financing and cost-sharing fea­ tures of Medicare Part A. Which benefits does Part A cover? Which benefits are not covered?

6. What is Medicare Part B? Discuss the financing and cost-sharing fea­ tures of Medicare Part B. Which main benefits are covered under

286 Chapter 6 Health Services Financing

Part B? Which services are not covered?

7. Briefly describe the Medicare Advan­ tage program.

8. Briefly explain the prescription drug program under Medicare Part D.

9 . What are Medicare trust funds? Dis­ cuss the current state and the future challenges faced by the Medicare trust funds.

1 0 . How did the Supreme Court's rul­ ing on the ACA affect Medicaid? How did the ACA affect the Med­ icaid program in terms of coverage and cost?

1 1 . What provisions has the federal gov­ ernment made for providing health

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1 5 . Discuss the prospective payment system under DRGs.

16. Distinguish between national health expenditures and personal health expenditures.

1 7. What are the effects of COVID- 19 on health insurance and financing?

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