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Chapter 8

Healthcare Financing

Introduction

Unlike countries that have universal healthcare systems, payment of healthcare services in the US is derived from

out-of-pocket payments from patients who pay entirely or partially for services rendered;

health insurance plans, such as indemnity plans or managed care organizations;

public/ government funding such as Medicare, Medicaid, and other government programs;

and health savings accounts

Did you know that?

Nearly 60% of Medicare enrollees are female which corresponds to the longer life expectancy of a U.S. female.

Medicare and Medicaid are the two largest government sponsored health insurance programs in the U.S.

Approximately 84% of the U.S. population is covered by some form of health insurance.

Introduction

The Center for Medicare and Medicaid Services projects that health services will consume nearly 20% of the GDP by 2016.

According to CMS 2007 statistics, U.S. health care expenditures increased 6.1 percent compared to 6.7 percent in 2006.

Total health expenditures reached $2.2 trillion which translates to 16.2% of the gross domestic product.

Since 1970, health care spending has grown 2.5% faster than the rest of the U.S. economy.

Average Annual Growth Rates for Nominal NHE and GDP for Selected Time Periods

Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.hhs.gov/NationalHealthExpendData/ (see Historical; NHE summary including share of GDP, CY 1960-2008; file nhegdp08.zip).

National Health Expenditures per Capita and Their Share of Gross Domestic Product, 1960-2008

5.2% 7.2% 9.1% 12.3% 13.5% 13.5% 13.6% 14.3% 15.1% 15.6% 15.6% 15.7% 15.8% 15.9% 16.2%

Causes of rising costs

The increase in health care spending can be attributed to three causes:

1) When prices increase in an economy overall, the cost of medical care will increase and even when prices are adjusted for inflation, medical prices have increased;

2) as life expectancy increases in the U.S., more individuals will require more medical care which means there will be more health care expenses; and

3) as health care technology and research provides for more sophisticated and more expensive procedures, there will be an increase in health care expenses.

Who pays?

Payment of health care services is derived from

1) out of pocket payments from patients who pay entirely or partially for services rendered,

2) health insurance such as indemnity plans or managed care organizations,

3) public/government funding such as Medicare, Medicaid and other government programs and

4) health spending accounts (HSAs).

Health Insurance

Much of the burden of health care expenditures has been borne by private sources—employers and their health insurance programs have borne much of the cost.

In 2007, approximately 60% of Americans (180 million) has private health insurance coverage.

Not just you and your doctor

There are three parties involved in providing health care: the provider, the patient and the fiscal intermediary such as a health insurance company or the government.

HEALTH CARE SPENDING BY SERVICE TYPE

In 2007, hospital spending was nearly $700 billion, physician and clinical services was $480 billion and other professional services such as chiropractors, optometrists and podiatrists was $62 billion.

Dental services were $95 billion and community center and school spending was $66 billion.

Home health care services were $59 billion which was an increase of 11% from 2006.

Nursing home spending was $131 billion, prescriptions drugs was $227 billion and medical equipment w as $61 billion.

Hospital spending accounted for the largest percentage of national health care expenditures with physician and other services, prescription drugs and nursing and home health the next three largest.

COSTS: Distribution of National Health Expenditures, by Type of Service, 2008

Note: Other Personal Health Care includes, for example, dental and other professional health services, durable medical equipment, etc. Other Health Spending includes, for example, administration and net cost of private health insurance, public health activity, research, and structures and equipment, etc.

Source: Kaiser Family Foundation calculations using NHE data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at http://www.cms.hhs.gov/NationalHealthExpendData/ (see Historical; National Health Expenditures by type of service and source of funds, CY 1960-2008; file nhe2008.zip).

HEALTH CARE SPENDING BY MAJOR SOURCES OF FUNDS

In 2007, Medicare spending was $431 billion which is an increase of 7.2% from 2006.

Medicaid spending was $329 billion which was a slight decrease from 2006.

Private health insurance premiums grew 6% while benefit payments decreased because of a decline in spending on prescription drugs.

Out of pocket payments grew 5% in 2007 which was a result of prescription drugs costs, nursing home services and medical equipment.

Out of pocket spending accounted for 12% of national health spending in 2007 which has declined over the past 10 years

HEALTH CARE SPENDING BY AGE AND GENDER

These numbers correlate with the fact that the longer we age, the more chronic conditions occur which result in higher spending and that female life expectancy is higher than male life expectancy,

Distribution of Average Spending Per Person by Age, 2006

	Average Spending Per Person
Age (in years)
<5	$1,508
5-17	1,267
18-24	1,441
25-44	2,305
45-64	4,863
>64	8,776
Sex
Male	$3,002
Female	3,886

Notes: Includes individuals without any spending in 2006.

Source: Kaiser Family Foundation calculations using data from U.S. Department of Health and Human Services, Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey (MEPS), 2006.

Characteristics of the Uninsured, 2008

Family Income

Family Work Status

Total = 45.7 million uninsured

1 or More Full-Time Workers

66%

Workers

19%

Part-Time

Workers

14%

Age

55-64

30-54

43%

19-29

30%

0-18

18%

The federal poverty level was $22,025 for a family of four in 2008. Data may not total 100% due to rounding. SOURCE: KCMU/Urban Institute analysis of 2009 ASEC Supplement to the CPS.

Nonelderly’s Health Insurance Coverage by Family Poverty Level, 2008

50.2 M

46.0 M

41.5 M

125.1 M

Number

Under 100%

100% - 199%

200% - 299%

300% +

NOTES: Data may not total 100% due to rounding. The Federal Poverty Level for a family of four in 2008 was $22,025 (according to the U.S. Census Bureau’s poverty threshold). Family size and total family income are grouped by insurance eligibility. SOURCE: Kaiser Commission on Medicaid and the Uninsured/Urban Institute analysis of 2009 ASEC Supplement to the CPS.

2015 Federal Poverty Guidelines

Uninsured Nonelderly vs. All Nonelderly, by Family Work Status, 2008

Two full-time workers

One full-time worker

Only part time

No workers

45.7 Million

262.8 Million

NOTES: Data may not total 100% due to rounding. SOURCE: Kaiser Commission on Medicaid and the Uninsured/Urban Institute analysis of 2009 ASEC Supplement to the CPS.

Average Annual Health Insurance Premiums and Worker Contributions for Family Coverage, 2005-2010

Note: The average worker contribution and the average employer contribution may not add to the average total premium due to rounding.

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2005-2010.

$10,880

$13,770

$1,284 Worker Contribution Increase

47%

20%

27%

Average Health Insurance Premiums and

Worker Contributions for Family Coverage, 1999-2009

Note: The average worker contribution and the average employer contribution

may not add to the average total premium due to rounding.

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2009.

$5,791

128% Worker Contribution Increase

131% Premium Increase

$13,375

Average Monthly Worker Premium Contributions Paid by Covered Workers for Single and Family Coverage, 1999-2010

*Estimate is statistically different from estimate for the previous year shown (p<.05).

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2010.

Average Annual Worker and Employer Contributions to Premiums and Total Premiums for Family Coverage, 1999-2010

* Estimate is statistically different from estimate for the previous year shown (p<.05).

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2010.

$5,791

$6,438*

$7,061*

$8,003*

$9,068*

$9,950*

$10,880*

$11,480*

$12,106*

$12,680*

$13,375*

$13,770*

HEALTH INSURANCE AS A PAYER FOR HEALTH CARE SERVICES

Like life insurance or homeowner’s insurance, health insurance was developed to provide protection should a covered individual experience an event that required health care.

Health Insurance as a Payer

In the 1960s, President Johnson signed Medicare and Medicaid into law which protects the elderly, disabled and indigent.

President Nixon signed into law the Health Maintenance Act of 1973 which focused on effective cost measures for health delivery which was the basis for the current Health Maintenance Organizations (HMOs).

Also, in the 1980s, diagnostic related groups or (DRGs) and prospective payment guidelines were established to provide guidelines for treatment.

Health Insurance as a Payer

health coverage program was proposed during Clinton’s administration in the 1990s, it was never passed.

In 2005, Massachusetts proposed mandatory health coverage for all citizens so it may be that universal health coverage may begin at the state level.

Health Insurance as a Payer

The Consolidated Omnibus Budget Reconciliation Act (COBRA) was passed to provide health insurance protection if an individual changes jobs.

In 1993, the Family Medical Leave Act (FMLA) was passed to protect an employee if there is a family illness. They can receive up to 12 weeks of unpaid leave and their health insurance during this period.

Also, in 1996, the Health Insurance Portability and Accountability Act (HIPAA) were passed that provided stricter confidentiality regarding the health information of individuals.

Types of Health Insurance

Health insurance, particularly employer provided health insurance, is the primary source for payment of health care services in the U.S.

Administrative costs are estimated at $120 billion annually.

There are approximately 850 health insurance companies that contract with millions of employers to provide coverage.

Healthcare Spending By Type

In 2010, hospital spending accounted for nearly 36% of personal healthcare expenditures, prescription drugs for 12%, physician care for 24%, and nursing care and continuing care communities for 7%.

In 2010, private health insurance paid 46.4% of total personal health care, the federal government 34%, state and local governments 11%, and out-of-pocket payments 15%.

Healthcare Spending By Type

In 2011, private health insurance premiums on a per enrollee basis grew only 3.2%, which was a decrease from 4.6% in 2010.

Out-of-pocket payments grew 2.8% in 2011 to $307.7 billion, which was a result of higher cost sharing for healthcare services (CMS, 2013c).

In 2011, Medicare spending was $554 billion, 21% of national health spending, and grew 6.2%, an increase from 4.3% in 2010.

Healthcare Spending By Type

The spending increase is attributed to skilled nursing facility and physician service reimbursements.

Medicaid spending was $407.7 billion (2.5%), a decrease from a 5.9% growth rate in 2010.

This was due to a slower enrollment rate in Medicaid in 2011.

Hospital

According to CMS, hospital spending increased 4.3% to $851 billion compared to a 4.9% growth in 2010.

There was slower growth in 2011 due to price growth slowdown and less use of hospital services.

Medicaid spending for hospital use decreased while Medicare and private health insurance hospital spending and physician spending increased.

Clinical and Other Professional Services

Private health insurance and Medicare spending on clinical services increased in 2011 because there was an increase in clinical service usage by consumers with a 4.3% growth rate from 2010, which had experienced a 3.1% growth rate.

Spending on specialty care such as chiropractic services, podiatry, and optometry increased nearly 5% compared to a growth rate of 4.6% in 2010.

Clinical and Other Professional Services

Dental services increased 3% in 2011, which was a slight increase of 0.3% from 2010.

Out-of-pocket spending for dental services, which accounts for 40% of dental spending, increased 4.1% in 2011, compared to a growth rate of 0.7% in 2010.

Home Healthcare and Nursing Care/Continuing Care

Home health-care agency spending slowed from a 5.3% growth rate in 2010 to a 4.5% growth rate ($74.3 billion) in 2011.

In 2011, Medicare and Medicaid spending for home health care, which account for over 80% of home healthcare spending, increased slightly from 2010.

Nursing care and continuing care spending increased 4.4% in 2011 compared to 3.2% in 2010.

These statistics can be attributed to Medicare spending, which increased in 2011 to 16.5% compared to 7.2% growth in 2010.

Prescription Drugs

Prescription drug spending grew nearly 3% in 2011, a stark increase from a growth rate of 0.4% in 2010.

The difference in the growth rates were due to prescription drug price increases for brand name drugs, although consumers are continuing to purchase more generic drugs.

Healthcare Spending by State

In 2009, the highest per capita of personal healthcare spending was the District of Columbia at $10,349, compared to a low of $5,031 in Utah.

The states with the highest Medicare spending per enrollee were New Jersey and Florida.

Conclusion

As healthcare expenditures continue to increase, the major focus of the healthcare industry is cost control in both the public and private sector.

Retrospective reimbursement methods for healthcare services, which means that a provider submitted a bill to a health insurance company that automatically reimbursed the provider, had no incentive to control costs in health care.

Conclusion

The establishment of a prospective reimbursement system for Medicare—developed based on care criteria for certain conditions regardless of provider costs—was an incentive system for providers to manage how they were providing services

Medicare

Part A: Hospitalization insurance

Part B: Medicare Part B is a supplemental health plan to cover physician services. It is financed 24% from enrollee premiums and 76% from federal treasury funds.

Part C: Medicare Advantage: It covers all services in Parts A and B. It is voluntary and available when an individual enrolls in Parts A and B. This program was designed to move Medicare patients into more cost-effective health insurance programs such as HMOs or PPOs.

Medicare

Part D: Prescription Drug Plan: Affordable drugs

Medigap or Medicare Supplemental Plan: Medsup plans cover copays, deductibles, and coinsurance, which can be very expensive. Medicare has created 10 medsup plans that vary by state.

Medicaid

Title XIX of the Social Security Act

Provides health insurance to the medically indigent.

It is a welfare program that is administered at the state government level.

The program serves 45 million low-income Americans. Medicaid spending varies based on the status of the U.S. economy.

It is not a federally mandated program, however, all states have Medicaid except Arizona.

Medicaid

The ACA created Community First Choice as an optional Medicaid benefit, which focuses on community health services to Medicaid enrollees with disabilities.

This will enable consumers to receive care at home or at community health centers rather than going to a hospital or their facility.

PACE

Also authorized by the Balanced Budget Act of 1997, Program of All-Inclusive Care for the Elderly (PACE) is a comprehensive healthcare delivery system funded by Medicare and Medicaid.

The PACE model focuses on providing community-based care and services to people who otherwise need nursing home levels of care.

Their philosophy is that seniors with chronic care needs are better served in the community when possible.

Children’s Health Insurance Program (CHIP)

Authorized by the Balanced Budget Act of 1997, and codified as Title XXI of the Social Security Act, the State Children's Health Insurance Program (SCHIP), now Children's Health Insurance Program (CHIP), was initiated in response to the number of children who are uninsured in the United States.

Government - Hospital Reimbursement

In 1982, Congress passed the Tax Equity and Fiscal Responsibility Act (TEFRA) and the Social Security Amendments of 1983 to manage Medicare cost controls.

There was a mandate to hospitals for a prospective payment system (PPS) to establish reimbursement rates for certain conditions.

Each DRG group represents similar diagnoses of diseases that are expected to have similar use of hospital services.

Government - Hospital Reimbursement

The amount of reimbursement is set per discharge of a patient.

CMS reimburses hospitals per admission and per diagnosis, which is based on a DRG—a prospective payment system for hospitals established through the Social Security Amendments of 1983.

Government Resource-Based Relative Value Scale Reimbursement

Medicare developed a new initiative of RBRVS to reimburse physicians according to a relative value assigned to a service.

This reimbursement is divided into three components: physician work, practice expenses and malpractice insurance.

Medicare pays a flat fee for physician visit and is based on the Healthcare Common Procedure Coding System which is used to code professional services.

The RBRVS, implemented in 1992, has become a standard Medicare Part B reimbursement method

Government Reimbursement Resource Utilization Group (RUG)

This type of prospective payment systems for skilled nursing facilities, used by Medicare, provides for a per diem based on the clinical severity of patients.

A classification system called resource utilization group (RUG), which is a type of DRG, was designed to differentiate patients based on how much they use the resources of the facility.

As the patient’s condition changes, the rate of reimbursement changes.

Government Reimbursement Home Health Resource Group (HHRG)

Implemented in October 2000, the home health resource group (HHRG), which is a prospective payment used by Medicare, pays a fixed predetermined rate for each 60 day episode of care, regardless of the services.

All services are bundled under a home health agency.

The HHRG uses 80 distinct groups to classify patients’ condition

CMS Innovation: 4 Models

1: The Bundled Payments Initiative: Link payments that multiple service beneficiaries receive during an episode of care.

2 and 3: Retrospective bundled payment arrangement where actual expenditures are reconciled against a target price for an episode of care.

4: Model 4 involves a prospective bundled payment arrangement, where a lump sum payment is made to a provider for the entire episode of care.

Table 8-1

7.8%

5.5%

4.8%

7.2%

12.7%

10.8%

6.6%

7.1%

9.5%

10.6%

10%

12%

14%

1970s1980s1990s2000-20081970-2008

GDPNHE

$148

$356

$1,100

$2,814

$4,295

$4,522

$4,789

$5,150

$5,564

$5,973

$6,327

$6,701

$7,071

$7,423

$7,681

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

196019701980199019981999200020012002200320042005200620072008

NHE as a Share of GDP

Physician/

Clinical

Services

21.2%

Hospital Care

30.7%

Other Personal

Health Care

12.9%

Nursing Home

Care, 5.9%

Prescription

Drugs

10.0%

Home Health

Care, 2.8%

Other Health

Spending

16.5%

400% FPL

and Above

10%

200-399% FPL

23%

100-199% FPL

29%

<100% FPL

38%

20%

89%

45%

29%

12%

42%

71%

18%

29%

35%

PrivateMedicaid/PublicUninsured

12%

27%

55%

52%

19%

14%

12%

UninsuredAll Nonelderly

$8,167

$9,773

$2,713

$3,997

20052010

Worker Contribution

Employer Contribution

Chart1

2005	2005
2010	2010

Employer Contribution

Worker Contribution

8167

2713

9772.6814

3997.1688

Sheet1

	Employer Contribution	Worker Contribution
2005	8167.0000	2713
2010	9772.6814	3997.1688

$4,247

$9,860

$1,543

$3,515

19992009

Employer Contribution

Worker Contribution

Chart1

1999	1999
2000	2000
2001	2001
2002	2002
2003	2003
2004	2004
2005	2005
2006	2006
2007	2007
2008	2008
2009	2009
2010	2010

Single Coverage

Family Coverage

$39*

$58*

$75*

$149*

$178*

$201*

$222*

$248*

$273*

$333*

129

135

149

178

201

222

226

248

57.8197

273.4412

280

293

333

Sheet1

	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Single Coverage	27	28	30	39	42	47	51	52	58	60	65	75
Family Coverage	129	135	149	178	201	222	226	248	273	280	293	333

Chart1

2010	2010
2009	2009
2008	2008
2007	2007
2006	2006
2005	2005
2004	2004
2003	2003
2002	2002
2001	2001
2000	2000
1999	1999

Worker Contribution

Employer Contribution

$3,997*

$3,281*

$2,973*

$2,661*

$2,412*

$2,137*

$1,787*

$9,860*

$9,325*

$8,508*

$8,167*

$7,289*

$6,657*

$5,866*

$5,269*

$4,819*

3997

9773

3515

9860

3354

9325

3281

8824

2973

8508

2713

8167

2661

7289

2412

6657

2137

5866

1787

5269

1619

4819

1543

4247

Sheet1

	2010	2009	2008	2007	2006	2005	2004	2003	2002	2001	2000	1999
Worker Contribution	$3,997	$3,515	$3,354	$3,281	$2,973	$2,713	$2,661	$2,412	$2,137	$1,787	$1,619	$1,543
Employer Contribution	$9,773	$9,860	$9,325	$8,824	$8,508	$8,167	$7,289	$6,657	$5,866	$5,269	$4,819	$4,247