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CHAPTER 16:

Health Insurance II: Medicare, Medicaid, and Health Care Reform

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Health Insurance II: Medicare, Medicaid, and Health Care Reform

16.1 The Medicaid Program for Low-Income Families

16.2 What Are the Benefits of the Medicaid Program?

16.3 The Medicare Program

16.4 What Are the Effects of the Medicare Program?

16.5 Long-Term Care

16.6 Health Care Reform and the ACA

16.7 Conclusion

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Introduction: The Patient Protection and Affordable Care Act

The Patient Protection and Affordable Care Act (ACA) makes five fundamental changes to the U.S. health care system. • It bans insurers from • denying coverage because of pre-existing conditions, • charging different prices based on health status.

• It mandates all U.S. residents be covered by health insurance. • It requires federal government to subsidize health insurance

coverage for the poor. • It takes actions to lower health care costs. • Creates Health Insurance Exchanges. • Expands public health insurance.

President Trump and the Republican Congress took a set of legislative and regulatory actions that have weakened the law’s impact.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Health Insurance, II: Medicare, Medicaid, and Health Care Reform

This chapter focus on Medicare, Medicaid, and health care reform.

• Medicare: Federal program, funded by a payroll tax, that provides health insurance to all elderly over age 65 and disabled persons under age 65.

• Medicaid: Federal and state program, funded by general tax revenues, that provides health care for poor families, elderly, and disabled.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

The Medicaid Program for Low-Income Families

• Medicaid: Federally mandated, state administered. • Serves low-income families, with different income

thresholds in different states.

• Children’s Health Insurance Program (CHIP): Program introduced in 1997 to expand eligibility of children for public health insurance beyond the existing limits of the Medicaid program, generally up to 200% of the poverty line.

• Generous coverage: Little cost sharing, low premiums.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Who Is Eligible for Medicaid?

• National eligibility rules: o Everyone 18 or younger, up to 100% of the poverty line o Children under age 6, pregnant women, 133% of the

poverty line • In most states, eligibility extends further for both children and

pregnant women: a typical state covers both groups up to 200% of the poverty line.

• There was a massive expansion of the Medicaid program put in place by the ACA, which extended eligibility to all families, regardless of family structure, below 138% of the federal poverty line. o As of 2018, 17 states have opted out of this expansion.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

The Medicaid Program for Low-Income Families

• What Health Services Does Medicaid Cover? o Required to cover physician and hospital care. o States also cover dental and prescription drugs.

• How Do Providers Get Paid? o Payment set by states. o In most states, Medicaid reimbursement is low. o Many physicians refuse to see Medicaid patients.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

What Are the Benefits of the Medicaid Program? • The Medicaid program is enormous:

• Spending of $565.5 billion in 2018 and is growing at an average rate of 7.7%.

• The goal of this program is to : • Provide financial protection against medical expense

• Evidence support the consumption smoothing effect of Medicaid • improving the health of the poor.

How? Results -> next slide

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

How Does Medicaid Affect Health? Evidence

• Health Care Utilization and Health

o Medicaid: o Only 10−25% of newly eligible people actually signed up o Crowd-out of private health insurance is 20−50% crowd out. o Overall, still substantially reduces the number of uninsured, so

expansions may affect the utilization of health care services.

o Medicaid eligibility increases preventive care and reduces infant mortality.

o Medicaid improves health overall.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

How Does Medicaid Affect Health? Evidence

• Cost-Effectiveness

o It cost Medicaid roughly $1 million per infant life saved through its expansions. o This is much lower than the cost of many alternative government

interventions designed to save lives => Cost effective.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

How Medicare Works

Medicare: • Largest public health insurance program in the United States. • Administered at the federal level. • All U.S. citizens who have worked and paid payroll taxes for ten

years and their spouses are eligible. • Ineligible citizens can purchase Medicare coverage at its full

cost.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Medicare Is Really Three Different Programs

• Medicare Part A: Part of the Medicare program that covers inpatient hospital costs and some costs of long-term care; financed from a payroll tax.

• Medicare Part B: Part of the Medicare program that covers physician expenditures, outpatient hospital expenditures, and other services; financed from enrollee premiums and general revenues.

• Medicare Part D: Part of the Medicare program that covers prescription drug expenditures.

(Medicare Part C, also known as Medicare Advantage, is an option for private insurance.)

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

APPLICATION: The Medicare Prescription Drug Debate

• For basic Part D plans, individuals receive coverage for: o None of the first $250 in drug costs each year. o 75% of costs for the next $2,250 of drug spending (up to

$2,500 total).

o 0% of costs for the next $3,600 of drug spending (up to $5,100 total).

o 95% of costs above $5,100 of drug spending. • Poor insurance design intended to garner political support. May

have adverse effects on utilization.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Medicaid and Medicare

Medicaid Medicare

Eligibles Families on welfare Low-income children, pregnant women Low-income elderly, disabled

Retirees and spouses 65 and older Certain disabled individuals under 65 People with kidney failure (requiring dialysis or transplant)

Premiums None Hospital coverage: none Physician coverage: $134 per month Prescription drug coverage: Variable

Deductibles/copayments None (or very small) Hospital coverage: $1,340 deductible for benefit period Physician coverage: $183 deductible, 20% coinsurance Prescription drug coverage: Variable

Services excluded None (or very minor) Prescription drugs (until 2006), routine checkups (until 2010), dental care, nursing home care, eyeglasses, hearing aids, Immunization shots

Provider reimbursement Very low Moderate (but falling)

Table 16-2

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

What Are the Effects of the Medicare Program?

• Despite broad support, there is surprisingly little evidence that the Medicare program actually improves the health of the elderly.

• Medicare provides valuable risk protection: consumption smoothing alone worth half the cost.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

The Prospective Payment System

• In 1983, Medicare switched from a retrospective to a prospective payment system.

• Prospective Payment System (PPS): Medicare’s system for reimbursing hospitals based on nationally standardized payments for specific diagnoses. o Diagnoses for hospital admissions grouped into 467

“Diagnosis Related Groups,” or DRGs. o Each DRG receives a fixed payment, depending on cost of

national cost of treatment and local expenses.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Empirical Evidence on the Move to the PPS

• Prospective payment reduced utilization. • Health did not suffer. • But health care costs soon resumed their rapid rise.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Problems with PPS

Why didn’t the PPS solve the long-run cost growth problems of the Medicare program? • Medicare was paying a fixed price per diagnosis, but the choice

of a diagnosis is something the hospital has some control over when patients are admitted.

• Almost half of the DRG designations are based not purely on diagnosis but also on the actual treatment used for the patient.

• It reimburses hospitals per admission, providing incentive to raise hospital admissions.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Evidence: Short Stays in Long-Term Care Hospitals

• An unintended effect of moving to PPS for hospitals was a shift toward more use of other types of facilities that were exempt from this system.

• Long-term care hospitals have become the fastest growing and highest-paid providers of post-acute care (care delivered after hospitalization) in the Medicare program.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Evidence: Short Stays in Long-Term Care Hospitals

• To remedy this situation, in October 2002 the government introduced a PPS system for long-term care hospitals that was to be phased in over several years.

• To discourage the transfer of short-stay patients to these facilities, the system included a reduction in payments for patients discharged before a threshold length of stay (that varied by condition).

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Lesson: The Difficulty of Partial Reform

• Just as with designing optimal insurance systems for workers, designing optimal reimbursement systems for providers reflects a trade-off. • Retrospective reimbursement systems do not provide

sufficient incentives to control medical costs. • A purely prospective system, which we have not yet

achieved, might lead providers to cut care too much in order to make money.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Medicare Part C: Managed Care

Starting in 1985, the federal government allowed Medicare enrollees a choice of Medicare HMOs as well. • Managed care gives providers an incentive to reduce costs and

are reimbursed at 95% of Medicare average.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Medicare Part C: Managed Care

Do Medicare HMOs save money?

• Medicare reimburses at 95% of average cost . . . • but low-cost individuals may be drawn to HMOs . . .

• in which case the government ends up overpaying for their coverage.

• The government lowered payments to HMOs in 1997. • HMO’s dropped Medicare lines of business

ex cost is 1000 reimbursement byMedicare 950

reimbursed toHMO Actualcostof Hmo patient may be only

800

relativelyhealthy GovtthroughMedicare was reimbursing HMO's too

much

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Issues specific to Medicare

There is a number of issues regarding Medicare

- How much to reimburse HMOs?

- How to deal with Medigap externalities?

- How to deal with long term care costs?

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Should Medicare Move to a Full Choice Plan? Premium Support • The problem with managed care reimbursement is determining

how much to pay insurers.

• Premium support is an alternative.

• Premium support: A system of full choice among health care plans for Medicare enrollees whereby they receive a voucher for a certain amount that they can apply to a range of health insurance options (either paying or receiving the difference between plan premiums and the voucher amount).

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Gaps in Medicare Coverage

• Individuals fill these coverage gaps in Medicare in one of three ways: o Low-income individuals have Medicaid. o About 16% of all Medicare-eligible retirees over 65 have

health insurance from their former employers. o Many retirees buy individual “Medi-gap” policies from

insurance companies. • These three means of filling the gaps in Medicare coverage

exert a negative financial externality on the Medicare program. ex Doc's visit 10 for patient 90 for Medicare without Medigap patient decides Not togo seedoc with Medigap the

co pay is covered patientgoes to the doc Medicare has to reimburse O

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Long-Term Care

• Long-term care is not covered by Medicare and represents 8% of all health care costs. o Long-term care: Health care delivered to the disabled and

elderly for their long-term rather than acute needs either in an institutional setting (a nursing home) or in their homes.

• Delivered mainly in institutional care (nursing homes) and by nurses and other aids in home health care.

• Medicaid covers long-term care, but to become eligible, individuals must first spend all their assets.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Health Care Reform and the ACA

There has been an historical impasse over national health insurance. • Some argue for a single-payer system, in which:

o Government-provided health insurance for all. o Guarantees full coverage. o Low administrative costs. o Eliminates inequality in care. o Eliminates adverse selection. o Straightforward to control costs by budgeting.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Health Care Reform and the ACA

• Public system also has disadvantages: o Dramatically increases government expenditures. o Budgeting is a blunt instrument.

o May not allow doctors to use a technology that is worth its high cost. o Severe political hurdles from health insurance companies.

What are the challenges faced by other public health care systems in the World? o The example of France

o Sustainability is an issue o Coverage is not full and is being restricted

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Rising Health Care Costs

• Sustainability is an issue because of rising health care costs. • Since 1950, the price index for medical care has risen by 2.1

percentage points more per year than inflation • Much of the rapid rise in spending has been quality-improving

technological change.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

The Affordable Care Act

• In 2010, President Obama signed into law the Affordable Care Act, based on the Massachusetts health reform.

• Adopts the “three-legged stool” of prior Massachusetts’ reform: o Prices are community rated, not health specific. o Individuals are mandated to buy insurance. o Medicaid expanded, with subsidies for lower-income

people. • Expected to cost $1 trillion over the next decade. • Includes substantial efforts to control costs.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Early Evidence on the Effects of the ACA

• In 2014, CBO projected that these reforms will lead to 26 million newly insured residents by 2019.

• The CBO also projected that the spending cuts and revenue increases in the ACA will more than offset the new spending under the ACA so that the law will reduce the deficit by more than $100 billion over the first decade and more than $1 trillion over the next.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Projected Impacts of the ACA and Early Evidence on Its Effects

Early evidence on the effects of the ACA appears to support the contentions of the CBO analysis. • The number of uninsured in the United States has fallen by

about 20 million, with the uninsurance rate declining by more than one-third.

• Other studies suggest that this coverage has also improved access to care and self-reported health, decreased emergency room use, and increased use of preventive care.

• Cost growth since the passage of the ACA has been historically low, at a rate of 1.4% in 2013.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

The ACA Runs Into Trouble

• The Trump administration and Congress took actions that significantly weakened the ACA. o Foremost of these actions is the repeal of the individual

mandate.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Learn by Doing: Practice Question 1

Which of these is true concerning Medicaid?

a) Many physicians are unwilling to accept Medicaid patients.

b) Medicaid covers only basic health needs.

c) Medicaid does not provide for the elderly who qualify for Medicare.

d) While Medicaid provides consumption-smoothing benefits, it does not do much to improve the health of low-income individuals.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Learn by Doing: Practice Question 1 (Answer)

Which of these is true concerning Medicaid?

a) Many physicians are unwilling to accept Medicaid patients. (correct answer)

b) Medicaid covers only basic health needs.

c) Medicaid does not provide for the elderly who qualify for Medicare.

d) While Medicaid provides consumption-smoothing benefits, it does not do much to improve the health of low-income individuals.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Learn by Doing: Practice Question 2

Which of these is FALSE concerning Medicare?

a) Medicare uses a prospective payment system.

b) Medicare does not cover all elderly citizens.

c) Medicare has premiums on physician visits and prescription drugs.

d) Medicare covers many benefits not provided by private-sector insurance plans.

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Learn by Doing: Practice Question 2 (Answer)

Which of these is FALSE concerning Medicare?

a) Medicare uses a prospective payment system.

b) Medicare does not cover all elderly citizens.

c) Medicare has premiums on physician visits and prescription drugs.

d) Medicare covers many benefits not provided by private-sector insurance plans. (correct answer)

CHAPTER 16: Health Insurance II: Medicare, Medicaid, and Health Care Reform

Conclusion

• The ACA greatly reduced the number of uninsured. The law was significantly scaled back by President Trump and Congress.

• Further reform is needed to expand coverage and control costs. • Cost control is the biggest challenge of health care systems

in OECD • The trend for public health care systems has been to reduce

coverage to remain sustainable