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CHAPTER TOPICS

Need, Demand, and Utilization

The Underlying Demographic Determinants of Health Services Utilization

Fertility Trends in the United States

Mortality Trends in the United States

Specific Causes of Death for the U.S. Population

Incidence of Infectious Diseases

Lifestyle Patterns and Disease

Health, Lifestyle, and Social Structure

Measuring the Impact of Illness on Society

Access to Health Care Services

LEARNING OBJECTIVES

Upon completing this chapter, the reader should be able to

1. Trace U.S. demographic trends including births and deaths.

2. Understand correlates of mortality, especially with regard to the impact of population trends.

3. Understand disease patterns in the United States.

4. Relate lifestyle, behavior, and social pat- terns to health.

5. Appreciate cancer survival trends.

6. Understand issues of access to care.

CHAPTER 3

Population and Disease Patterns and Trends

Stephen J. Williams

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Disease patterns throughout history and the un- derlying social and demographic characteristics of our population provide empirical evidence from which to view the need and demand for health care services in the United States. The principal purposes of this chapter include the review of fundamental de- mographic, social, and economic trends in our na- tion, principally throughout the past century, and of patterns of morbidity, mortality, and other aspects of the measurement of the incidence and prevalence of disease. Analytical, epidemiologic measurement of these patterns illuminate the underlying factors that define the nature of health care services required for our nation. The chapter also presents quantitative information that reflects the impact of illness and disease on our longevity and health status. Factoring in the impact of illness and disease further enhances our appreciation for the challenges and trade-offs faced by our nation’s health care system.

An additional purpose of this chapter is to re- view population, disease, and illness trends and to relate these trends to issues of access to health care services. Access to care is a core theme throughout this book and a key health policy issue facing our nation. This chapter associates the various social, demographic, and disease patterns experienced by our nation with measures of access to health care and interpretation of these measures as a contribu- tor to the national health policy debate.

The analysis presented here first focuses on the underlying demographic trends in our society dur- ing the twentieth century. Social and economic trends that define the character of our society and relate to the need and demand for health care ser- vices are also discussed.

The next section of the chapter focuses on disease patterns experienced in the past century. Differential mortality and morbidity are presented to emphasize the importance of such variables as age, race, and sex in defining population groups at particular risk for various diseases. Ultimately, identification of risk factors and their association with various personal, sociodemographic, and physiological characteristics, and genetic markers will greatly heighten our ability to target health services to individuals in the greatest need for each category of care.

All aspects of this chapter are integrally related to virtually every other section of this book. The nature of the delivery system itself, including the settings in which services are provided, the nature of services, the technology of our system, and even the financing of care are all directly related to the underlying disease patterns that we experience.

This chapter sets the stage and forms part of the foundation of knowledge necessary for critically assessing how the health care system is structured. Our ability to measure performance within the sys- tem itself, including access to and outcomes of care, and the costs of illness, is related to these fun- damental trends as well. Ultimately, the success of the system should be measured against criteria that recognize the true needs of the population with re- gard to the physiological and psychological mani- festations of injury, illness, and disease, and their ability to obtain needed care.

In purely quantitative terms the measurable im- pacts of disease and illness offer enticing avenues for measuring the success and failures of the health care system. Such measures as years of life lost and days of disability attributable to each illness and dis- ease category provide an objective and comparative numerical assessment of the impact of these clinical and psychological problems on us individually and collectively as a society. Increasingly, the utilization of such quantitative measures facilitates the alloca- tion of resources and priorities in decision making at various points within the health care system. As the system moves increasingly to objectively mea- sure clinical care, disease impacts, and other aspects of its own operation, attention to such quantitative measures and objective indicators is paramount.

NEED, DEMAND, AND UTILIZATION

In discussions of disease patterns and their relation to the utilization of health care services, it is impor- tant to differentiate between the concepts of need, demand, and use of health care services. Need for

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health care services is defined as an interpretation of an individual’s evaluated requirements for obtain- ing professional care through the health services system. Demand for health services is a function of an individual’s actually seeking out, but not neces- sarily obtaining, health services. Demand may be a reflection of professional assessment of an individ- ual’s need for services or self-initiated desires for professional services, perhaps triggered by an indi- vidual’s perceptions of potential illness. Finally, utilization is a measure of actual use of services, as discussed later in this chapter.

The extent to which there is a correlation be- tween need, demand, and utilization is the central issue in addressing concerns of appropriateness of care, perceptions of when services should be ob- tained, and evaluation of access to health care ser- vices in our society. Many other issues related to these concepts are addressed throughout this book.

Data Sources and Quality

Morbidity, mortality, and other health status–- related data are obtained from a variety of sources. Information presented throughout this chapter and elsewhere in this book is based on such sources as national vital statistics data. National vital statistics data are collected from birth, death, and marriage certificates. Mandatory data collec- tion requirements in the United States provide the most consistent and generally highest quality data available for determining the health status of our population.

But even mandated vital statistics data collection produces information of inconsistent quality. All data should be viewed with a skeptical eye, recog- nizing the imperfections of the data collection effort. For primary demographic variables such as age, race, and sex, the quality of data recorded on the primary data source—the vital event certificate— is generally good. However, for more subjective data elements such as cause of death, the consistency and quality of data reported can vary appreciably, especially in past years, depending on the judgment of the individual, usually a physician, completing the certificate. Vital statistics data collected at the

local level are compiled by the states and the fed- eral government, and efforts are directed toward improving quality at each level.

Data on health services utilization, health status, attitudes, and other variables are often collected through national probability surveys conducted by the federal government and some private orga- nizations. The National Health Interview Survey, for example, collects data from a random probabil- ity sample of all Americans, asking questions re- garding prior health services utilization, perceived health status, mobility, and other, often somewhat subjective, self-reported variables. Recall ability, re- sponse judgments, and other complex factors affect the quality of these types of data.

Primary data collection by the federal govern- ment has even included conducting physical exam- inations on a random sample of Americans. This research effort, the National Health and Nutrition Examination Survey, provides direct observation data on various health and disease indicators. This type of examination is very expensive to conduct but does provide considerable objective useful information to the extent that those randomly selected for participation reflect national patterns in our entire population.

A third category of data collection for health ser- vices use involves the compilation of data from other sources. An example of this is the National Hospital Discharge and Ambulatory Surgery Sur- vey, conducted by the federal government, which compiles the data from a sampling of hospital dis- charges in the country. Another example is the Na- tional Ambulatory Medical Care Survey, also con- ducted by the federal government, which is based on a sample of physicians who report on the char- acteristics, diagnoses, and use of services for all pa- tients seen during a 1-week interval of time.

Private data collection includes surveys of health services use, attitudes, and costs. National organi- zations such as the American Medical Association and the Medical Group Management Association conduct surveys on medical groups, physician prac- tices, and hospital services. Various insurance com- panies, health care systems, and individual facilities also conduct surveys on patient satisfaction and

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other issues. Finally, data are collected by national voluntary accrediting agencies, health services re- searchers, and other organizations.

Health policy data analysis utilizes a variety of databases, producing more complex analyses that go beyond the descriptive nature of many of the surveys. Such analysis, by combining a variety of data and sources, allows for greater insight into the nature of health care services and population needs. For example, combining population data, longevity data, and data on the incidence and prevalence of disease allows for the analysis of the impact of various diseases on our population as measured by such variables as days lost from work, years of life lost due to mortality from specific diseases or behaviors such as smoking, and other analyses that provide a more in-depth reflection of the impact of illness and disease on our society.

It is important to recognize the sources, quality, and contingencies associated with the data that are analyzed and presented throughout this book. The book’s analytical perspective on health services is dependent on the assessment of population-based data, and the best available information is utilized for discussion purposes. Even the relatively solid data available in the United States, however, are subject to numerous limitations. Needless to say, data from many other countries in the world often lag far behind our own in this regard.

THE UNDERLYING DEMOGRAPHIC DETERMINANTS OF HEALTH SERVICES UTILIZATION

The dynamics of population are the most funda- mental determinants of the need, demand, and use of health care services. The size and age composi- tion of a population have a tremendous impact on total health services use as well as on the distribu- tion of the use of specific services. Therefore, trends in population dynamics, including population size and demographic characteristics as well as births and deaths, are a basic starting point for assessing the need for health services in a population.

Population Size and Composition

Population size, as reflected in the total number of people in a population, as well as the distribu- tion of population by age group, defined as the population pyramid, is the appropriate starting point. Table 3.1 presents the age-specific distribu- tion of the United States resident population since 1950. These data, obtained from the federal

44 PART ONE Overview of the Health Services System

Table 3.1. Resident Population: United States, Selected Years

Age Group (Population in Thousands)

Under 1–4 5–14 15–24 25–34 35–44 45–54 55–64 65–74 75–84 85 Years 1 Year Years Years Years Years Years Years Years Years Years and Over

1950 150,697 3,147 13,017 24,319 22,098 23,759 21,450 17,343 13,370 8,340 3,278 577 1970 203,212 3,485 13,669 40,746 35,441 24,907 23,088 23,220 18,590 12,435 6,119 1,511 1990 248,710 3,946 14,812 35,095 37,013 43,161 37,435 25,057 21,113 18,045 10,012 3,021 2001 284,797 4,034 15,336 41,065 39,948 39,607 45,019 39,188 25,309 18,313 12,574 4,404 2003 290,811 4,004 15,766 40,969 41,206 39,873 44,371 40,805 27,900 18,337 12,869 4,713

Total Resident

Population (Population in

Thousands)Year

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government, are based on the national census of population data. The federal government is re- quired by the United States Constitution to con- duct a census count of the population once every ten years to compile as complete a count as possi- ble of all citizens.

The United States Census of Population was most recently completed in 2000. Results of the 2000 census indicated an approximate United States population of 280 million individuals. Complete census results from the 2000 count are available in a variety of forms from the United States Bureau of the Census.

Population data between censuses and for fu- ture periods are determined through intracensual estimates and projections using prior data and adjusting for estimated population growth and migration. Intracensual data estimates are facilitated by using such available statistics as school enroll- ments, automobile registrations, and utility hookups. The original purpose of the census, of course, was to determine representation in the House of Repre- sentatives, although these data are now also used for an array of analytical, commercial, and social purposes.

The accuracy of the actual census count, of intra- censual estimates, and of demographic projections into the future is a subject of considerable debate. The mobility of the population, the lack of tracking for internal migration, and illegal migration into the country complicate the picture. The cost of data collection, analysis, adjustment, and reporting has escalated greatly as the population has grown, as well.

The United States population has grown tremen- dously during the period presented in Table 3.1. This growth is a result of two principal factors. The first of these is the rate of natural increase attributable to the higher number of births as com- pared to deaths annually in the United States, leading to additions to the total population count. The second factor is the increase in population attributable to net in-migration, which historically has accounted for nearly all of the accumulated population of the country. The current United States population is more than 302,000,000 people, double the count in 1950.

A limited selection of the detailed demo- graphic data available from the census is reflected in Table 3.2. This table presents age-specific total

CHAPTER 3 Population and Disease Patterns and Trends 45

Table 3.2. Resident Population: Age, Sex, Race, United States, 2003

Total Under 1–4 5–14 15–24 25–34 35–44 45–54 55–64 65–74 75–84 85 Years Sex and Race Population 1 Year Years Years Years Years Years Years Years Years Years and Over

Number in thousands Male 143,037 2,046 8,060 20,977 21,183 20,222 22,134 20,044 13,424 8,349 5,154 1,445 Female 147,773 1,958 7,706 19,992 20,024 19,650 22,237 20,761 14,475 9,988 7,714 3,269 White male 116,875 1,594 6,296 16,322 16,726 16,159 18,129 16,807 11,590 7,308 4,638 1,307 White female 119,474 1,525 5,999 15,488 15,658 15,310 17,813 17,034 12,263 8,576 6,859 2,950 Black or African

American male 18,190 336 1,301 3,444 3,180 2,613 2,705 2,218 1,232 711 355 96 Black or African

American female 19,958 323 1,260 3,337 3,140 2,862 3,052 2,579 1,531 999 627 247 Hispanic or

Latino male 20,599 442 1,682 3,832 3,759 4,016 3,101 1,910 991 542 261 65 Hispanic or

Latino female 19,300 424 1,611 3,659 3,235 3,363 2,815 1,908 1,097 680 380 128

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population data for the country by sex, and by race and sex for whites, blacks, and Hispanics Careful observation of these data demonstrates, for exam- ple, the substantially higher number of individuals alive at age 85 and above who are female as com- pared to male, while showing a higher population of under 1-year-old males as compared to females.

The relative size of the race and sex-specific pop- ulations is also illustrated in Table 3.2. Such data are available for numerous subgroups within the population. This type of data is also available for various geographic regions within the country al- though the data presented in these tables are aggre- gate data for the entire nation.

Comparing data for various time periods allows for ready assessment of temporal changes. For example, the increasing minority count of pop- ulation in comparison to total population over time is reflected in the data. The data present abso- lute numbers, but many of the numbers presented in the tables and other data from these sources are also used in calculating rates and ratios for more extensive analysis of demographic, disease, and other trends.

The age structure of the population is, as noted earlier, vitally important for health services purposes. The very young and the older population groups utilize considerably more health care services than other age groups. Table 3.1 also presents the age dis- tribution, and hence the structure or pyramid of the population.

An important current trend is the aging of the population. On average, the typical American is getting older. This trend is the result of increased longevity and relatively lower fertility than was ex- perienced earlier in the last century. The conse- quences of this trend are reflected in Table 3.3. Pro- jections for the older population groups over the next half century suggest substantial increases in health services utilization, assuming current tech- nology, access to care, and patterns of use. The pop- ulation aged 65 and above currently uses, on aver- age, approximately twice the health care services as the younger population. This trend in the age structure for the United States is the underlying

demographic reason for concerns over the future financial viability of the Social Security system and the Medicare program.

Projections of the aging of the population as reflected in Table 3.3 are simple to perform since changes in mortality patterns by age typically do not vary drastically over relatively short periods of time. However, the implications of these fundamen- tal demographic shifts are much more difficult to project. Our aging population of Baby Boomers appears to be healthier and more functional than predecessor generations. Their interest in an active lifestyle, social activities, and cosmetic medicines is clearly greater than that of previous generations. Preferences in housing, entertainment, behaviors, and politics are often difficult to predict. Changes in many of these parameters can have a significant impact on the scope, use, and nature of the health care system. Many dramatic changes that are now occurring in medicine and biomedical research fur- ther complicate any projections.

For example, although current demographic trends portend increases in the population of patients with Alzheimer’s and related dementias, biomedical research may allow health care pro- viders to prevent these diseases or to repair their damage. Such landmark advances would have a tremendous impact on the need for services and the cost of providing those services to an aging population.

Less invasive pharmacologically based interven- tions for various diseases might be significantly less

46 PART ONE Overview of the Health Services System

Table 3.3. Population Age Group Projections, Age 65 and Above

Year (Population in Millions)

Age Group 2000 2025 2050 2075

65 years and over 35.2 60.6 73.3 83.3 75 years and over 16.7 25.0 38.9 45.7 85 years and over 4.4 6.3 14.6 16.9

SOURCE: U.S. Social Security Administration Office of Programs: Office of the Actuary, 1993, Baltimore, MD.

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expensive to implement than current alternative surgically based interventions. Then again, the high cost of many pharmacological products may nar- row the cost gap.

The many longer-term implications of an aging population also extend to numerous economic concerns including labor force participation; the dependency ratio, which is the percentage of the population working to support the nonworking or dependent population; and impacts of economic growth rates from an aging population base. The challenge for the nation and its health care system is to create an environment that can adapt as the underlying parameters change over time with the aging of the population.

Parenthetically, many other countries in the world, especially in Europe, face an even more profound aging of their populations, so that future liabilities for social services, health care, and social security are even more serious than our own.

Enhanced longevity as a result of biomedical advances is a two-edged sword leading to longer periods of economic and social dependency, while at the same time enhancing quality of life. As the population ages, the burdens on the younger work- ing groups increase. This can have significant long term impact on social policies, taxes, politics, and everyday life.

FERTILITY TRENDS IN THE UNITED STATES

A key determinant of population that affects health services utilization is fertility. Fertility is a key deter- minant of the population pyramid, as well as of the use of services for mothers, infants, and children. Fertility eventually influences total population size and has cohort effects in all age groups as a cohort ages.

Fertility behavior is also a socioeconomic char- acteristic of population. Developing nations, for example, are typically characterized by relatively

high fertility rates, while developed, or postindus- trial, societies usually experience low fertility rates.

Fertility is a measure of reproduction. Age- specific fertility rates are the primary indicator utilized in measuring this determinant of population. Age-specific fertility rates more accurately reflect differences in fertility patterns based on age groups of mothers than do birth rates, which are a cruder measure of reproduction. Birth rates are computed as the total number of births to total population. Age-specific fertility rates are computed as the num- ber of births to women in a specific reproductive age group. The total fertility rate is the sum of all of the age-specific rates.

Table 3.4 presents age-specific fertility rates for the United States over the past half century. As for many of the other rates discussed in this chapter, age, race, sex, and other characteristics may be utilized to compute more specific rates than those presented.

Fertility, of course, differs greatly by age group, as reflected in Table 3.4. Fertility is highest for women in their twenties and generally declines thereafter as the age of the mother increases. Fertil- ity rates drop off appreciably at the higher repro- ductive ages, with little fertility in the groups above 45 years of age.

Historically, and in most societies, the reproduc- tive ages begin with the physiological marker of menarche. A variety of sociological determinants of reproductive behavior, such as marriage, combine with physiology to produce actual behavior. The reproductive ages usually end with menopause. Other physiological factors, such as voluntary ster- ilization and infertility, and sociological patterns, such as family dissolution, also have a substantial impact on reproduction. The interaction of these dynamics can be quite complex.

Technological change has impinged on our traditional concept of fertility behavior. Of course, natural and artificial means of birth control have long affected couples’ actual fertility behaviors and outcomes. Few societies in history have not been af- fected by various natural patterns of birth control, mores, and societal behaviors and other influences

CHAPTER 3 Population and Disease Patterns and Trends 47

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on fertility outcomes. Demographers have searched for populations such as the Hutterites which strive for maximum fertility to provide a glimpse into re- production potential in an uninhibited population. Many biological, economic, and social factors im- pact fertility behavior and outcomes as measured by live births.

Recent technological advances have also sug- gested the potential for significant impact on fertil- ity behavior as a result of external interventions. Such technologies as in vitro fertilization, ovum freezing and storage, and enhanced infertility treatment have led to increases in birth rates for population groups, especially older women, and have also increased the number of multiple births. Although the actual impact of these technologies on total fertility rates has not been great, the longer-term impact of these and other yet to be discovered technologies could be significant. An increased ability to determine sex, to screen for genetic disorders, and to enhance and prolong fertility could eventually profoundly impact the demographic structure of our society. The cost and acceptability of many of these interventions, however, will limit their overall impact. Fertility patterns thus far clearly have not been hugely affected by these new techniques for the popula- tion overall.

Fertility has declined in most age groups over the past 40 years, as reflected in Table 3.4. Reductions in fertility have been rather dramatic in the United States since peak fertility occurred in the mid-1950s. Some uptake in fertility rates at the higher age levels is evident in Table 3.4 for the year 2001. This increase is primarily in the 30–44 age range and minimally so above that point. Further declines in the younger age groups are also evident from this table.

Data are available by various social demographic groups as collected on birth certificates. Table 3.5 presents differential fertility rates by age group for whites and blacks. Generally, dramatically higher fertility for most age groups is evident in this table for blacks as compared to whites. Differential fertil- ity patterns combined with demographic trends in migration, population size, and other related infor- mation can provide useful data for projecting popu- lation trends in local communities and nationwide. The increasing diversity of our population is evident from these and other demographic data.

The dramatic decline in fertility that has occurred in the United States over the past 40 years is primarily the result of increases in female labor force participation, marital dissolutions, and other economic and social forces in our society. In recent years, our nation has also witnessed a delayed

48 PART ONE Overview of the Health Services System

Table 3.4. Live Births and Birth Rates by Age of Mother: United States, Selected Years

Total Age of Mother (Live Births per 1,000 Women)

Fertility 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–54 Year Rate* Years Years Years Years Years Years Years Years

1950 106.2 1.0 81.6 196.6 166.1 103.7 52.9 15.1 1.2 1960 118.0 0.8 89.1 258.1 197.4 112.7 56.2 15.5 0.9 1970 87.9 1.2 68.3 167.8 145.1 73.3 31.7 8.1 0.5 1980 68.4 1.1 53.0 115.1 112.9 61.9 19.8 3.9 0.2 1990 70.9 1.4 59.9 116.5 120.2 80.8 31.7 5.5 0.2 2001 65.3 0.8 45.3 106.2 113.4 91.9 40.6 8.1 0.5 2003 66.1 0.6 41.6 102.6 115.6 95.1 43.8 8.7 0.5

*The sum of the age-specific rates.

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average age of first marriage, reduced desired fam- ily size, delayed initiation of childbearing due to ed- ucation and employment prospects, and a number of other important social and economic factors, all of which have further reinforced the primary under- lying fertility trends.

Fertility data provide other useful insights into population behaviors as reflected in Table 3.6. In this table, percentage of women who have not had at least one live birth by attained age group is pre- sented for selected years. Since virtually all fertility is complete by age 44, the column for ages 40–44 reflect lifetime childlessness for live births to indi- vidual women. Thus about 15 percent of women in the population have no lifetime live birth experience. These data do not specifically represent pregnancy

experience, however. Also evident is the increasing age of the typical mother. The percent of women who have not had at least one live birth has increased substantially from 1960 to the present for the younger age groups in this table. Since a woman’s fertility time frame is finite, delays in live childbearing does contribute to reduced total fertil- ity in the population. Indeed, the increasing recog- nition that fertility capacity, or what is termed fecundability, decreases significantly with age has been an impetus for much of the reproductive biol- ogy research on infertility that has been conducted in recent years.

Considerable other insight into reproductive pat- terns and behaviors is available from the fertility data collected from certificates of live birth. An- other interesting component of these behaviors, nonmarital childbearing, is presented in Table 3.7. These data reflect live births to unmarried mothers based on birth certificate information. Differential patterns of nonmarital childbearing by race over time are reflected in this table. Nonmarital child- bearing has increased substantially as a percentage of all live births from 1970 to 2003. Approximately one-third of all live births today are to unmarried mothers. Differential rates reflect substantially higher percentages of live births to unmarried mothers for blacks, American Indians or Alaskan Natives, and Hispanic populations, and signifi- cantly lower percentages for Asian populations. The

CHAPTER 3 Population and Disease Patterns and Trends 49

Table 3.5. Live Births and Birth Rates by Race of Mother: United States, 2003

Age of Mother

Race 10–14 15–19 20–24 25–29 30–34 35–39 40–44 45–54 Years Years Years Years Years Years Years Years

Live births per 1,000 women Race of mother: White 66.1 0.5 38.3 100.6 119.5 99.3 44.8 8.7 0.5 Race of mother: Black or African

American 66.3 1.6 63.8 126.1 100.4 66.5 33.2 7.7 0.5 Race of mother: Hispanic

or Latino 96.9 1.3 82.3 163.4 144.4 102.0 50.8 12.2 0.7

Table 3.6. Women Who Have Not Had at Least One Live Birth, Selected Ages: United States, Selected Years

20–24 25–29 30–34 40–44 Year Years Years Years Years

Percent of women 1960 47.5 20.0 14.2 15.1 1980 66.2 38.9 19.7 9.0 2002 66.5 41.3 24.8 15.8

Total Fertility

Rate

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implications of these data relate to family forma- tion, social stability, issues of health insurance cov- erage and other economic concerns, and social and behavioral factors in child development. Generally, the poorest group within our population is single women with dependent children, so our concerns about the welfare of these mothers and their children are important considerations in the forma- tion of health and social policies.

Other societies have experienced many of the same general changes in fertility experienced by the United States in the twentieth century. The change from a high-fertility, high-mortality environment to a low-fertility, low-mortality environment is typical of most developing countries. This change is termed the demographic transition. Countries that achieve low fertility and low mortality combined with rela- tively affluent economic conditions typically experi- ence substantial social and economic change that results in permanent reversals of the underlying social factors associated with high fertility.

Abortion Trends in the United States

Reproduction may be more appropriately mea- sured in terms of conceptions rather than live births. Conceptions include spontaneous and

induced abortions as well as live and dead births. However, the empirical data to accurately count conceptions are considerably weaker than those for live births.

National data are available on therapeutically in- duced abortions. The United States experiences perhaps one million abortions annually at the cur- rent time, and an unknown number of conceptions result in spontaneous abortions, primarily in the first month of gestation. Abortion practices vary considerably from society to society and over time, and the current acceptance of abortion services in the United States dates back nationally to 1973 although some states and foreign nations had less restriction on access to such services before then.

National data on the number of medically or therapeutically induced abortions range from a little over 800,000 to approximately 1.2 million abortions per year depending on the source of the data. The availability of legal abortion services in the United States changed dramatically in 1973 with the Supreme Court decision to remove state barriers to access to care. Some erosion in access has occurred since that time, but these ser- vices are generally available in most communities. Thus far, the majority of such abortions are per- formed using suction curettage in the first trimester of gestation.

There is considerable controversy with regard to the availability of abortion services in the United States, although the relative safety of these proce- dures when performed in medical facilities is excel- lent. Abortion ratios, that is the number of abor- tions per 100 live births, is highest for the youngest group of women in the population and for those age 40 and over as well. Abortion ratios are substantially higher for black women than for Hispanic or white women. As might be expected, abortion ratios are substantially higher also for un- married women as compared to married women. In addition to impacting patterns of fertility, abor- tion is also believed to affect the percent of births that occur to high-risk women and other aspects of reproductive health.

50 PART ONE Overview of the Health Services System

Table 3.7. Nonmarital Childbearing According to Race of Mother: United States, Selected Years

Race of Mother 1970 1990 2003

Percent of live births to unmarried mothers

All races 10.7 28.0 34.6 White 5.5 20.4 29.4 Black or African American 37.5 66.5 68.2 American Indian or 22.4 53.6 61.3

Alaska Native Asian or Pacific Islander — 13.2 15.0 Hispanic or Latino — 36.7 45.0

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Technological change has affected the provi- sion of abortion services in the United States and throughout the world. Less invasive pharmacologi- cally based approaches to termination of very early term pregnancies is shifting the locus of abortion services to private physician offices and clinics without necessarily being associated with surgical procedures. Monitoring these services is extremely difficult. In addition, numerous political, economic, social, and psychological factors will continue to impact the provision of abortion services in the United States regardless of delivery mechanisms.

MORTALITY TRENDS IN THE UNITED STATES

Indicators of mortality are often used to measure a society’s health status. Trends in mortality indica- tors over time also reflect a multitude of social, eco- nomic, health services, and other underlying trends in a society. Reasonably accurate mortality data are available for the United States population and for many other nations, although in some developing countries the quality of data may be limited.

Mortality data are collected at the time of death through the mechanics of the death certificate, a responsibility of local government. State and federal agencies compile data collected locally to produce the vital statistics for the entire country. Because var- ious social and demographic variables are collected on the death certificate in addition to determinants of the cause of death, mortality data can be ana- lyzed by selected characteristics of population.

Mortality Trends for the United States

This section of the chapter presents quantitative measures of mortality for the total United States population over time. Mortality data for infants and mothers and an analysis of specific causes of

death are presented in later sections of this chapter as well. As for fertility, aggregate mortality data are generally age-adjusted to control for changes in the population age pyramid. Comparisons over time, in particular, require consideration of any substan- tial changes in the age structure of a population.

Life Expectancy

A common measure of mortality, particularly popu- lar in the mass media, is life expectancy. Life expectancy is computed from mortality data and reflects a cohort effect for estimated years of life remaining.

The life table at birth reflects the entire expected mortality experience for a population. Life tables use current age-specific mortality experience so that if a population’s mortality experience eventually im- proves or degenerates, the previously computed life table will be inaccurate. For this reason, life tables are periodically updated by insurance companies that use them to compute premiums for life insur- ance contracts. A life table presents a population’s single best reflection of mortality expectation for the entire population, although for any one individual, the life table provides only an expectation.

Life expectancy can be computed for a popula- tion at any specific age, but it is most commonly presented at birth and at age 65. Table 3.8 presents such data for selected countries in the world. Mor- tality and life expectancy data are typically pre- sented on a sex-specific basis due to the consistent and substantial differences in mortality experienced comparing males and females.

International life expectancy comparisons reveal that, for both males and females, life expectancy at birth is greatest in Japan. The United States falls somewhat short in these comparisons, which is a surprising finding for many people. However, the heterogeneity of our population and our complex social problems associated with violence, acci- dents, and infectious disease account for much of the cross-cultural deficiencies reflected in our mor- tality experience. Many Americans are surprised to

CHAPTER 3 Population and Disease Patterns and Trends 51

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see that mortality experience measured by life ex- pectancy at birth is lower in the United States than in such countries as Greece and France, perhaps owing a little to the value of red wine, paté, and olive oil!

Life expectancy at age 65 is also presented in Table 3.8 for selected countries. By age 65, past the highest-risk periods for mortality attributable to nonphysiological causes, the differences be- tween sexes are much less, as are the differences between countries. Sex mortality differentials drop by about half by age 65, reflecting the higher risk from violent accidents and lifestyle causes for indi- viduals younger than 65. The remaining differen- tial is probably attributable to physiological factors such as hormones and genetics.

International differences are similarly moderated by age 65, as many of these same causes of mortal- ity in the younger ages have been factored out of the equation. Even at 65, however, life expectancy is greatest in Japan, with females at age 65 expect-

ing to live, on average, to about age 86, a truly impressive result.

United States Life Expectancy Data

Table 3.9 presents life expectancy data for se- lected subgroups of the United States population. Again, mortality experience differs by sociodemo- graphic characteristics such as sex and race. Dramatic differences appear in these data at birth for males as compared to females and for blacks as compared to whites. As noted previously, data are available for numerous subgroups of the population, and only selected illustrative data are presented here.

At birth, females have a substantially higher life expectancy than males, a difference of more than five years of life. An equally dramatic differential is evident for whites as compared to blacks. These dif- ferences have been constant throughout modern

52 PART ONE Overview of the Health Services System

Table 3.8. Life Expectancy at Birth and at 65 Years of Age, According to Sex: Selected Countries, 1998

Country

Life Expectancy in Years

Country

Life Expectancy in Years

At Birth At 65 Years At Birth At 65 Years

Male Female Canada 76.0 16.3 Canada 81.5 20.1 Chile 72.3 15.1 Chile 78.3 18.4 Cuba 75.8 — Denmark 78.8 18.1 Denmark 73.9 14.8 England and Wales 80.0 18.7 England and Wales 75.1 15.5 France 82.4 20.9 France 74.8 16.4 Germany 80.3 19.0 Germany 74.5 15.3 Greece 80.6 18.7 Greece 75.5 16.4 Italy 82.2 20.4 Italy 75.9 16.1 Japan 84.0 22.0 Japan 77.2 17.1 New Zealand 80.4 19.5 New Zealand 75.2 16.1 Norway 81.3 19.6 Norway 75.5 15.7 Portugal 78.9 17.9 Portugal 71.7 14.3 Puerto Rico 79.3 — Sweden 76.9 16.3 Sweden 81.9 20.0 United States 73.8 16.0 United States 79.5 19.2

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United States history, as reflected in Table 3.9. At age 65, the differentials continue to exist, but as for the international comparisons, the differences are much more moderate, indicating that on a biologi- cal basis sex differences may be on the order of two to three years. Black/white differentials are also quite moderate at this point.

United States Mortality Rates

Table 3.10 presents age-specific mortality rates for the United States by selected demographic charac- teristics. These data conform to the life expectancy numbers presented earlier. As expected, mortality rates increase with age. The United States age- specific mortality rates are relatively moderate until the older ages, although notable differentials occur by sex and race. The higher mortality rate for younger black males compared to same-age-group

white males is particularly startling; these data are discussed further later in this chapter in the discus- sion of specific causes of death.

Data on differential mortality help to identify problems in society with regard to causes of illness and disease and barriers to access to health care services. Trends over time reflect progress, or lack

CHAPTER 3 Population and Disease Patterns and Trends 53

Table 3.9. Life Expectancy at Birth, at 65 Years of Age, and at 75 Years of Age, According to Race and Sex: United States, Selected Years.

Age and Year

White Black

Male Female Male Female

Remaining life expectancy in years At birth 1900 46.6 48.7 32.5 33.5 1950 66.5 72.2 59.1 62.9 1970 68.0 75.6 60.0 68.3 1990 72.7 79.4 64.5 73.6 2003 75.3 80.5 69.0 76.1

At 65 years 1950 12.8 15.1 12.9 14.9 1970 13.1 17.1 12.5 15.7 1990 15.2 19.1 13.2 17.2 2003 16.9 19.8 14.9 18.5

At 75 years 1990 9.4 12.0 8.6 11.2 2003 10.5 12.6 9.8 12.4

Table 3.10. Death Rates for All Causes According to Sex: United States, Selected Years.

Sex and Age 1950 1990 2001

Deaths per 100,000 resident population

Male All ages, age adjusted 1,674.2 1,202.8 1,029.1 All ages, crude 1,106.1 918.4 846.4 Under 1 year 3,728.0 1,082.8 749.8 1–4 years 151.7 52.4 37.0 5–14 years 70.9 28.5 19.8 15–24 years 167.9 147.4 117.0 25–34 years 216.5 204.3 143.7 35–44 years 428.8 310.4 259.6 45–54 years 1,067.1 610.3 545.1 55–64 years 2,395.3 1,553.4 1,192.7 65–74 years 4,931.4 3,491.5 2,911.5 75–84 years 10,426.0 7,888.6 6,833.0 85 years and over 21,636.0 18,056.6 16,744.8

Female All ages, age adjusted 1,236.0 750.9 721.8 All ages, crude 823.5 812.0 850.4 Under 1 year 2,854.6 855.7 613.9 1–4 years 126.7 41.0 29.5 5–14 years 48.9 19.3 14.6 15–24 years 89.1 49.0 42.6 25–34 years 142.7 74.2 66.0 35–44 years 290.3 137.9 148.2 45–54 years 641.5 342.7 316.8 55–64 years 1,404.8 878.8 754.0 65–74 years 3,333.2 1,991.2 1,890.8 75–84 years 8,399.6 4,883.1 4,760.5 85 years and over 19,194.7 14,274.3 14,429.9

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thereof, in achieving our goals for a greater quality and quantity of life.

Infant and Maternal Mortality

An oft-quoted set of data is mortality experience for infants and mothers. Table 3.11 presents interna- tional data on infant mortality. Infant mortality is measured as the number of infants who die in the first year of life per thousand live births. Related measures of mortality for infants include perinatal, postnatal, and other measures, all of which pertain to the time period before or after delivery in which the fetal or infant death occurs.

Once again, the United States falls short in inter- national comparisons of infant mortality. Hong Kong leads all nations in having the lowest infant mortality rate. The relatively poor performance of the United States population is again a function of population heterogeneity and such factors as lack of access to prenatal care; high fertility among high-risk young women; poor maternal nutrition; genetic risks; and other complex social, economic, and physiological factors. Differential infant mor- tality among United States population subgroups indicates that rates are substantially higher for blacks than for whites due to differences in access to health care, nutrition, social factors, and other variables that affect infant viability. These dif- ferences reflect underlying social and economic concerns faced by our society. Poor gestational outcomes may result in huge social and economic costs. Implications of inadequate prenatal care, nutrition, and related factors also extend to serious concerns of child intellectual development, social adaptation, and physical maintenance.

Maternal mortality, reflected in Table 3.12, has declined dramatically in the United States since 1950. In addition to the overall decline in these rates, the reduction in maternal mortality for the higher age groups is quite notable.

Again, a very significant differential exists by race. Black women have experienced a significant decline in maternal mortality since 1950, but they still have rates that are much higher than those of

54 PART ONE Overview of the Health Services System

Australia Belgium Bulgaria Canada Chile Costa Rica Cuba Denmark England and Wales Finland France Germany Greece Hong Kong Hungary Ireland Israel Italy Japan Netherlands New Zealand Northern Ireland Norway Poland Puerto Rico Romania Russia Singapore Spain Sweden Switzerland United States

5.0 4.9

13.3 5.4 7.8

11.2 6.5 4.4 5.2 3.0 4.1 4.3 5.9 2.3 7.2 5.1 5.4 4.7 3.0 5.0 6.2 4.7 3.5 7.5 9.8

18.6 17.3

2.9 3.4 2.8 4.5 7.0

Table 3.11. Infant Mortality Rates and Rankings: Selected Countries, 2002

Infant Deaths per 1,000 Country Live Births

white women. The reductions in infant and mater- nal mortality discussed in this chapter represent a real success in our national efforts to improve the quality and quantity of life. But much remains to be done to achieve optimal results for all Americans and to fully invest in the future of our children.

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SPECIFIC CAUSES OF DEATH FOR THE U.S. POPULATION

Age-adjusted death rates for selected causes of death for the U.S. population from 1950 to the present are presented in Table 3.13. Heart disease, cancer, and stroke are, of course, the three leading causes of death in the United States and have been for quite some time. Interestingly, examina- tion of equivalent data at the turn of the twentieth century would reveal a much greater prevalence of infectious as opposed to chronic diseases for the leading causes of death. Mortality attributable to

such causes as nephritis and tuberculosis, which accounted for many deaths at the turn of the cen- tury, is far less common today. Influenza and pneumonia were also very important causes of death in the early 1900s. A dramatic outbreak of influenza occurred in 1918, causing considerable mortality.

Data on selected causes of death will be pre- sented here in more detail. However, an examina- tion of Table 3.13 reveals striking declines in mor- tality attributable to diseases of the heart, cerebralal vascular disease, and for some of the other major causes of death since 1950. Results for malignant neoplasms, however, are not comparable and reflect the greater challenge faced by biomedical re- searchers in controlling and curing the ramifications of the various types of cancer.

Stretching further back into history, among the most important trends in disease patterns and causes of mortality since the early 1900s has been the shift from the predominance of infectious dis- ease to chronic disease. In approximately the early 1920s, mortality from chronic diseases, such as heart disease, cancer, and stroke, overtook mortality from infectious diseases, such as pneumonia and in- fluenza, as the principal causes of mortality in the United States. Infectious disease mortality contin- ued to decline throughout the remainder of the first two-thirds of the twentieth century, but the resur- gence of some infectious diseases such as AIDS have created an awareness that infectious disease is still an important and challenging arena in mortal- ity. While the control of infectious disease has been one of the most significant public health successes in the history of mankind, much of that success was attributable to improvements in living conditions and in the workplace as opposed to advances in biomedical research and clinical practice.

Although the predominant challenges for mor- tality are now focused on chronic diseases, our nation must remain vigilant against outbreaks of infectious disease. Morbidity and mortality asso- ciated with the epidemic of human immunod- eficiency virus illustrate the constant threat of infectious disease that we face even today. In many

CHAPTER 3 Population and Disease Patterns and Trends 55

Table 3.12. Maternal Mortality Rates for Complications of Pregnancy, Childbirth, and the Puerperium, According to Race and Age: United States, Selected Years

Race and Age

Year (Deaths per 100,000 Live Births)

1950 1970 2003

White All ages, age adjusted 53.1 14.4 6.9 Under 20 years 44.9 13.8 * 20–24 years 35.7 8.4 5.3 25–29 years 45.0 11.1 6.9 30–34 years 75.9 18.7 6.8 35 years and over 174.1 59.3 23.8

Black All ages, age adjusted — 65.5 25.5 Under 20 years — 32.3 * 20–24 years — 41.9 15.8 25–29 years — 65.2 20.7 30–34 years — 117.8 46.1 35 years and over — 207.5 104.1

*Rates based on fewer than 20 deaths are considered unreliable and are not shown.

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56 PART ONE Overview of the Health Services System

Table 3.13. Age-Adjusted Death Rates for Selected Causes of Death According to Sex: United States, Selected Years

Sex 1950 1980 2003

Age-adjusted death rate per 100,000 population Male All causes 1,674.2 1,348.1 994.3 Diseases of heart 697.0 538.9 286.6

Ischemic heart disease — 459.7 209.9 Cerebrovascular diseases 186.4 102.2 54.1 Malignant neoplasms 208.1 271.2 233.3

Trachea, bronchus, and lung 24.6 85.2 71.7 Colon, rectum, and anus — 32.8 22.9 Prostate 28.6 32.8 26.5

Chronic lower respiratory diseases — 49.9 52.3 Influenza and pneumonia 55.0 42.1 26.1 Chronic liver disease and cirrhosis 15.0 21.3 13.0 Diabetes mellitus 18.8 18.1 28.9 Human immunodeficiency virus (HIV) disease — — 7.1 Unintentional injuries 101.8 69.0 51.8

Motor vehicle-related injuries 38.5 33.6 21.6 Suicide 21.2 19.9 18.0 Homicide 7.9 16.6 9.4

Female All causes 1236.0 817.9 706.2 Diseases of heart 484.7 320.8 190.3

Ischemic heart disease — 263.1 127.2 Cerebrovascular diseases 175.8 91.7 52.3 Malignant neoplasms 182.3 166.7 160.9

Trachea, bronchus, and lung 5.8 24.4 41.3 Colon, rectum, and anus — 23.8 16.2 Breast 31.9 31.9 25.3

Chronic lower respiratory diseases — 14.9 37.8 Influenza and pneumonia 41.9 25.1 19.4 Chronic liver disease and cirrhosis 7.8 9.9 6.0 Diabetes mellitus 27.0 18.0 22.5 Human immunodeficiency virus (HIV) disease — — 2.4 Unintentional injuries 54.0 26.1 24.1

Motor vehicle-related injuries 11.5 11.8 9.3 Suicide 5.6 5.7 4.2 Homicide 2.4 4.4 2.6

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Table 3.14. Leading Causes of Death and Numbers of Deaths, Selected Ages: United States, 2003

Age and Rank Order Cause of Death Number of Deaths

Under 1 year All causes 28,025 Congenital malformations, deformations and chromosomal

abnormalities 5,621 Disorders related to short gestation and low birth weight, not

elsewhere classified 4,849 Sudden infant death syndrome 2,162 Newborn affected by maternal complications of pregnancy 1,710 Newborn affected by complications of placenta, cord,

and membranes 1,099 Respiratory distress of newborn 831 Unintentional injuries 945 Bacterial sepsis of newborn 772 Diseases of circulatory system 591 Neonatal hemorrhage 649

5–14 years All causes 6,954 Unintentional injuries 2,618 Malignant neoplasms 1,076 Congenital malformations, deformations, and chromosomal

abnormalities 386 Homicide 324 Suicide 250 Diseases of heart 264 In situ neoplasms, benign neoplasms, and neoplasms of uncertain

or unknown behavior 79 Chronic lower respiratory diseases 118 Influenza and pneumonia 147 Septicemia 77

25–44 years All causes 130,761 Unintentional injuries 29,307 Malignant neoplasms 19,250 Diseases of heart 16,850 Suicide 11,667 Homicide 7,626 Human immunodeficiency virus (HIV) disease 6,928 Chronic liver disease and cirrhosis 3,378 Cerebrovascular diseases 3,043 Diabetes mellitus 2,706 Influenza and pneumonia 1,365

(continued )

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58 PART ONE Overview of the Health Services System

Table 3.14. (continued)

Age and Rank Order Cause of Death Number of Deaths

65 years and over All causes 1,804,373 Diseases of heart 563,390 Malignant neoplasms 388,911 Cerebrovascular diseases 138,134 Chronic lower respiratory diseases 109,139 Influenza and pneumonia 57,670 Diabetes mellitus 54,919 Alzheimer’s disease 62,814 Nephritis, nephritic syndrome and nephritis 35,254 Unintentional injuries 34,335 Septicemia 26,445

developing countries, infectious disease remains a principal cause of mortality, particularly among the very young and the very old. Such diseases as the Ebola virus and other startlingly virulent infectious diseases could become a threat to developed na- tions’ populations at any time. Increased interna- tional mobility provides vectors of transmission for infectious disease that were not common years ago. And, as if the challenges of chronic and infectious disease were not enough, we now face the added threat of biological weapons in the war against ter- ror. Fear of biological agents, which we had long considered conquered in the developed countries, are with us again.

Data for Specific Causes

Table 3.14 presents actual numbers of deaths for selected subgroups and causes for the United States population. The leading causes of death for each subgroup are listed. Although much more extensive analysis is available, these data sets dra- matically demonstrate the tragic involvement of economic, social, and lifestyle factors in causing mortality in the United States. The high ranking for such causes as injuries and violence is quite strik- ing in the younger age groups. Data for the older ages present a picture more common to our typical

characterization of mortality causes in the United States.

It should also be noted that the data presented in Table 3.14 are actual numbers of deaths rather than rates or ratios, which are generally more scien- tific. The presentation of absolute numbers pro- vides a more dramatic illustration of the impact of specific causes of death in selected population subgroups.

Mortality rates attributable to selected causes are presented in the next few tables. Again, only limited data sets can be presented here; much more exten- sive statistical information is available from a variety of official governmental sources.

Table 3.15 presents data for cardiovascular mortality in the United States. The data illustrate the dramatic and generally consistent decline in mortality from this cause over time and across age groups. Data for various population subgroups based on age, sex, race, and certain other variables would reflect similar patterns. As is typical in illness and mortality data, declines have occurred for many population subgroups, but the results lead to numbers for blacks, American Indians, and some other population groups that are not nearly as low as for whites. This reduction in cardiovascular mortality is attributable to improvements in living conditions, diet, and health care services, particularly

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interventions for such events as myocardial infarc- tion and coronary occlusion, and for hypertension and high cholesterol.

Data for cerebrovascular disease-related mor- tality are presented in Table 3.16 and reflect a

CHAPTER 3 Population and Disease Patterns and Trends 59

Table 3.15. Death Rates for Diseases of the Heart, According to Sex and Age: United States, Selected Years

Year

Sex and Age

(Deaths per 100,000

Group

Resident Population)

1950 1970 2003

Male All ages,

age adjusted 697.0 634.0 286.6 Under 1 year 4.0 15.1 12.1 1–4 years 1.4 1.9 1.1 5–14 years 2.0 0.9 0.7 15–24 years 6.8 3.7 3.4 25–34 years 22.9 15.2 10.5 35–44 years 118.4 103.2 42.8 45–54 years 440.5 376.4 136.2 55–64 years 1,104.5 987.2 331.7 65–74 years 2,292.3 2,170.3 785.3 75–84 years 4,825.0 4,534.8 2,030.3 85 years

and over 9,659.8 8,426.2 5,621.5

Female All ages, age

adjusted 484.7 381.6 190.3 Under 1 year 2.9 10.9 9.8 1–4 years 1.2 1.6 1.3 5–14 years 2.2 0.8 0.5 15–24 years 6.7 2.3 2.1 25–34 years 16.2 7.7 5.7 35–44 years 55.1 32.2 18.6 45–54 years 177.2 109.9 50.2 55–64 years 510.0 351.6 141.9 65–74 years 1,419.3 1,082.7 417.5 75–84 years 3,872.0 3,120.8 1,331.1 85 years

and over 8,796.1 7,591.8 5,126.7

consistent decline over time and across age groups. Racial- and sex-specific data show similar declines as for cardiovascular mortality. Rates for whites are at lower levels at all points in time as compared to blacks.

Cancer Mortality in the United States

Among those disease categories where morbid- ity and mortality experience has been especially disappointing over the course of the last 50 years are various types of cancer. Mortality attributable to various cancers has remained fairly constant, in contrast to the dramatic declines experienced for cardiovascular and cerebrovascular disease. Fur- thermore, cancer survival rates after diagnosis gen- erally have not improved dramatically thus far.

Table 3.16. Death Rates for Cerebrovascular Diseases, According to Age: United States, Selected Years

Year

Age Group

(Deaths per 100,000 Resident Population)

1950 1970 2003

All ages, age adjusted 180.7 147.7 53.5

Under 1 year 5.1 5.0 2.5 1–4 years 0.9 1.0 0.3 5–14 years 0.5 0.7 0.2 15–24 years 1.6 1.6 0.5 25–34 years 4.2 4.5 1.5 35–44 years 18.7 15.6 5.5 45–54 years 70.4 41.6 15.0 55–64 years 195.3 115.8 35.6 65–74 years 549.7 384.1 112.9 75–84 years 1,499.6 1,254.2 410.7 85 years

and over 2,990.1 3,014.3 1,370.1

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Table 3.17 presents cancer mortality experience for the United States since 1950 by age group. As is evident from the data in this table, overall cancer mortality has actually increased over time. Increasing cancer mortality may be partially at- tributable to greater overall longevity, to genetic and environmental factors, to increased case-finding, to declines in other causes of death (leaving peo- ple more susceptible to cancer mortality), and to lifestyle issues.

Tables 3.18 and 3.19 present cancer mortality for two major categories of malignant neoplasms: breast cancer in women and lung cancer.

Breast cancer in women involves a complex array of diseases with environmental and genetic etiologies. Mortality attributable to this source of disease is significant and rises sharply with age. Even at younger ages, such mortality is important and suggests that for individuals with significant

risk factors, preventive procedures and screening might be warranted. Breast cancer mortality in women is highest in the highest age groups al- though declining mortality from other causes, particularly diseases of the heart and cerebrovascu- lar illness, at least in part, leads to higher mortality from various cancers.

Mortality attributable to malignant neoplasms of the lung and associated organs has risen sharply since 1950. Here again mortality rises with age, in this instance is significantly higher in general among males as compared to females, and has a multitude of etiologies, although the consumption of tobacco products and exposure to second-hand smoke are important risk factors in the epidemic of this form of cancer. Since the association between the consumption of tobacco products, and to a lesser extent, exposure to second-hand smoke, and the incidence and mortality attributable to lung

60 PART ONE Overview of the Health Services System

Table 3.17. Death Rates for Malignant Neoplasms, According to Age: United States, Selected Years

Year Year (Deaths per 100,000 (Deaths per 100,000

Sex and Age

Resident Population)

Sex and Age

Resident Population)

1950 1970 2003 1950 1970 2003

Male Female All ages, All ages,

age adjusted 208.1 247.6 233.3 age adjusted 182.3 163.2 160.9 Under 1 year 9.7 4.4 1.7 Under 1 year 7.6 5.0 2.1 1–4 years 12.5 8.3 2.8 1–4 years 10.8 6.7 2.1 5–14 years 7.4 6.7 2.8 5–14 years 6.0 5.2 2.4 15–24 years 9.7 10.4 4.6 15–24 years 7.6 6.2 3.4 25–34 years 17.7 16.3 8.9 25–34 years 22.2 16.7 9.9 35–44 years 45.6 53.0 30.8 35–44 years 79.3 65.6 39.1 45–54 years 156.2 183.5 127.4 45–54 years 194.0 181.5 117.1 55–64 years 413.1 511.8 386.8 55–64 years 368.2 343.2 302.3 65–74 years 791.5 1,006.8 931.7 65–74 years 612.3 557.9 635.3 75–84 years 1,332.6 1,588.3 1,695.4 75–84 years 1,000.7 891.9 1,040.1 85 years 85 years

and over 1,668.3 1,720.8 2,413.8 and over 1,299.7 1,096.7 1,381.9

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cancer is so well established, public health efforts to intervene and reduce the impact of such risk factors is clearly warranted from a health care perspective.

Cancer Survival Rates

Cancer survival rates, presented in Table 3.20, are disturbing in that, for some categories of cancer, sur- vival rates have not improved appreciably in recent years. Cancer survival is highly dependent on early detection and effective therapeutic intervention. Mass screening for various types of cancer, such as breast, cervical, testicular, and colorectal, can be beneficial for high-risk population subgroups. Popu- lation screening has complex cost-benefit trade-offs and other considerations such as test accuracy, iden- tification of population subgroups appropriate for screening, and possible interventions.

Although cancer morbidity, mortality, and sur- vival rate experience has thus far been disappoint- ing, particularly in comparison with certain other disease categories such as coronary artery and cere- brovascular diseases, prospects for the future appear

much brighter. Current biomedical research is suc- cessfully elucidating the underlying molecular and biological factors associated with the causes, devel- opment, and proliferation of various cancers. Many new pharmaceutical products are in clinical trials or have already been brought to market. An extensive commitment of our national research activity to- ward the development of additional interventions to address cancer in human populations is likely to lead to even greater successes in the coming years.

CHAPTER 3 Population and Disease Patterns and Trends 61

Table 3.18. Death Rates for Malignant Neoplasms of Breast for Females, According to Age: United States, Selected Years

Year

Age Group

(Deaths per 100,000 Resident Population)

1950 1970 2003

All ages, age adjusted 31.9 32.1 25.3

25–34 years 3.8 3.9 2.1 35–44 years 20.8 20.4 12.2 45–54 years 46.9 52.6 30.4 55–64 years 70.4 77.6 56.6 65–74 years 94.0 93.8 82.6 75–84 years 139.8 127.4 123.7 85 years

and over 195.5 157.1 189.4

Table 3.19. Death Rates for Malignant Neoplasms of Trachea, Bronchus, and Lung, According to Sex and Age: United States, Selected Years

Sex and Age 1950 1970 2003

Deaths per 100,000 resident population

Male All ages, age adjusted 24.6 67.5 71.7 All ages, crude 19.9 53.4 62.9 Under 25 years 0.0 0.1 * 25–34 years 1.1 1.3 0.4 35–44 years 7.1 16.1 6.1 45–54 years 35.0 67.5 36.5 55–64 years 83.8 189.7 136.7 65–74 years 98.7 320.8 346.6 75–84 years 82.6 330.8 525.1 85 years and over 62.5 194.0 475.1

Female All ages, age adjusted 5.8 13.1 41.3 All ages, crude 4.5 11.9 46.1 Under 25 years 0.1 0.0 * 25–34 years 0.5 0.5 0.4 35–44 years 1.9 6.1 5.1 45–54 years 5.8 21.0 24.4 55–64 years 13.6 36.8 87.1 65–74 years 23.3 43.1 204.8 75–84 years 32.9 52.4 279.4 85 years and over 28.2 50.0 221.0

*Rates based on fewer than 20 deaths are considered unreliable and are not shown.

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Data related to cancer morbidity, mortality, and survival rates are further complicated by the multi- tude of diseases that fall under this general cate- gory. Success has been and likely will continue to be uneven across different cancer sites and types. Success in treating cancer is often measured in terms of survival rates rather than outright cures, which are much more difficult to establish. Some cancers are increasingly being viewed by clinicians

as chronic diseases and an increasing array of phar- maceutical products is being utilized to help avert recurrences after cancer treatment. Compared to the research and therapeutic environment thirty years ago, the prognosis for cancer detection, control, and even cure is greater today than ever before.

Because there is a substantial lag time in the col- lection, evaluation, and dissemination of morbidity

62 PART ONE Overview of the Health Services System

Table 3.20. Five-year Relative Cancer Survival Rates for Selected Sites, According to Race and Sex: Selected Geographic Areas, Selected Years

Percent of Patients Surviving More Than 5 Years

Sex and Site

White Black or African American

1974–1976 1995–2001 1974–1976 1995–2001

Male All sites 41.9 66.5 31.3 58.4 Oral cavity and pharynx 54.3 61.1 31.2 34.3 Esophagus 4.3 16.1 2.1 8.6 Stomach 13.2 19.9 15.5 21.5 Colon 49.8 66.1 44.1 56.3 Rectum 47.8 64.5 34.1 55.0 Pancreas 3.1 4.7 1.4 2.9 Lung, bronchus 11.0 13.7 11.0 11.6 Prostate gland 67.7 99.9 58.0 96.7 Urinary bladder 74.5 84.3 54.1 69.7 Non-Hodgkin’s lymphoma 47.7 59.5 43.1 47.6 Leukemia 33.5 49.6 32.6 39.2

Female All sites 57.4 66.3 46.8 53.2 Colon 50.8 63.9 46.6 53.6 Rectum 49.7 65.9 49.3 57.0 Pancreas 2.1 4.2 3.1 5.6 Lung, bronchus 15.8 17.7 13.1 15.6 Melanoma of skin 84.8 93.5 — 78.2 Breast 74.9 89.5 62.9 75.9 Cervix uteri 69.2 74.6 63.5 66.1 Corpus uteri 88.6 86.2 60.4 61.8 Ovary 36.3 44.4 40.1 37.7 Non-Hodgkin’s lymphoma 47.3 63.3 54.1 59.1

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and mortality data, particularly for cancer, it will take considerable time before the quantitative results of current biomedical research and clinical interventions become evident in the types of data presented here. Progress for certain types of cancers is already reflected in the results presented in these tables. However, most of these success stories focus on early detection and, in some cases, surgical in- tervention. A far greater impact from pharmaceuti- cal progress and improvement in addressing more fundamental approaches to treating cancer based on an understanding of the biological causes of the disease is likely in the coming years. And, of course, as we conquer cancer as a cause of morbidity and mortality, we will see changes in the distribution of morbidity and mortality for other diseases.

Cancer Incidence Rates

Table 3.21 presents cancer incidence rates for se- lected sites for white males and white females in the United States over the latter part of the twenti- eth century. For many categories of cancer, particu- larly lung, prostate, and breast, incidence rates have increased, in some cases sharply. The extent to which increases in cancer incidence are the re- sult of increased case-finding and greater patient awareness is difficult to elucidate. There is also controversy regarding the fundamental causes of cancer and the extent to which genetic, environ- mental, behavioral, and dietary factors trigger its development. Further clarification of the causation and biological mechanisms of various cancers will be a product of ongoing epidemiologic and biomedical research.

There is increasing recognition that even with likely further biomedical advances, cancer requires a multipronged approach. The first and perhaps the most critical component is to identify the etiology of various cancers and the risk factors for individu- als. Doing so will allow for a potential reduction in the risk of developing cancer as well as identify those individuals at highest risk for various cancers as a result of their work environment, genetic com- position, or other measurable risk factors.

The second component for addressing cancer is the continued development of appropriate screen- ing and diagnostic interventions. An emphasis on an increasingly personalized approach to cancer treatment will result in more efficient and mean- ingful results for patients. The third aspect of addressing the cancer threat to our society is effec- tive interventions with measurable clinical success

CHAPTER 3 Population and Disease Patterns and Trends 63

Table 3.21. Age-adjusted Cancer Incidence Rates for Selected Cancer Sites, White Males and White Females, Selected Geographic Areas and Years

Year (Number of New Cases

Race, Sex, and Site per 100,000 Population)

1973 2000

White male All sites 364.3 561.2 Oral cavity and pharynx 17.6 15.6 Stomach 14.0 10.6 Colon and rectum 54.3 61.9 Pancreas 12.8 12.5 Lung and bronchus 72.4 75.9 Prostate gland 62.6 171.1 Urinary bladder 27.3 40.5 Non-Hodgkin’s

lymphoma 10.3 24.6 Leukemia 14.3 16.7

White female All sites 295.0 426.9 Colon and rectum 41.7 45.4 Pancreas 7.5 9.6 Lung and bronchus 17.8 50.6 Breast 84.4 140.1 Cervix uteri 12.8 8.8 Corpus uteri 29.5 25.5 Ovary 14.7 14.9 Non-Hodgkin’s

lymphoma 7.5 16.6

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rates. This includes both surgical and medical inter- ventions. Finally, the fourth aspect to addressing cancer concerns in our society is appropriate fol- low-up for patients and populations to assure that after patients are treated they receive continuing care to reduce the likelihood of recurrences and to provide a supportive environment for the physical, psychological, social, and economic ramifications of the disease. The movement toward an increas- ingly comprehensive approach to cancer not only encourages more effective interventions, but also a greater efficiency in the utilization of our technolo- gies and eventually a much more positive long-term outlook for affected patients.

Cancer remains one of the most challenging categories of disease with respect to detection and successful therapeutic intervention. Biomedical re- searchers are successfully elucidating the causes and mechanisms of various cancers, although the chal- lenges from this complex category of disease remain great. Future therapeutic interventions hold great promise. The biomedical research pipeline is produc- ing discoveries daily. However, cancer incidence rates continue to climb, and survival rates remain little improved from earlier years, based on available historical data.

Human Immunodeficiency Virus Mortality

The epidemic of AIDS can be traced back to the late 1970s with rapid progression throughout the 1980s. Mortality attributable to AIDS is reflected in Table 3.22.

Mortality attributable to the human immunodefi- ciency virus began to decline with the introduction of a variety of new drugs for treatment of patients in the mid- to late-1990s. For many patients, this disease has evolved from a death sentence to a treatable chronic infectious disease requiring a life- time of medical care and drug therapies. However, mortality attributable to this disease is still occurring and the epidemic still rages, particularly internation- ally. AIDS mortality is higher for males than for females, for the middle aged as compared to the very

young and the very old, for blacks and certain other minority groups as compared to whites and Asians, and is a particular threat to certain population sub- groups such as intravenous drug users. Increases in incidence and mortality among women, heterosexu- als, and especially black women are a growing con- cern. The dynamics of the AIDS epidemic in the United States has changed over time and is continu- ing to evolve.

Recent biomedical research has produced tremen- dous progress in treating individuals with this dis- ease. Earlier and more aggressive intervention, primarily utilizing new drug therapies, has led to a tremendous reduction in mortality. Individuals diag- nosed with this disease were, in the earlier stages of the epidemic, condemned to a shortened life expectancy. Today, many of the affected individuals can expect to live longer, although the epidemic still exacts a substantial toll from the nation. The cost and complexity of treatment combined with

64 PART ONE Overview of the Health Services System

Table 3.22. Death Rates for Human Immunodeficiency Virus (HIV) Infection, According to Age: United States, Selected Years

Year

Age Group

(Deaths per 100,000 Resident Population)

1987 1995 2003

All ages, age adjusted 5.6 16.2 4.7

Under 1 year 2.3 1.5 * 1–4 years 0.7 1.3 * 5–14 years 0.1 0.5 0.1 15–24 years 1.3 1.7 0.4 25–34 years 11.7 28.3 4.0 35–44 years 14.0 44.2 12.0 45–54 years 8.0 26.0 10.9 55–64 years 3.5 10.9 5.4 65–74 years 1.3 3.6 2.4 75–84 years 0.8 0.7 0.7

*Too small numbers to compute.

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uncertainty regarding the long-term prospects for patients suggest that this is one of the more chal- lenging health concerns our nation must face.

Other Causes of Mortality

Perhaps one of the most tragic causes of mortality and morbidity in our society is vehicular-related acci- dents. An estimated 40,000 people are killed and approximately 2,000,000 people are injured annu- ally in vehicle-related accidents, a national tragedy. Safer roads and vehicles have led to reductions in vehicular mortality over the past twenty years. The tragic toll of motor vehicle accidents is reflected in Table 3.23. Those at highest risk are males, young adult drivers, and the oldest age groups.

Mortality attributable to firearms is another inexcusable national tragedy. Table 3.24 reflects mortality rates by age group due to firearms-related accidents and violence. This includes mortality associated with suicide, homicide, police inter- vention, and accidents. Approximately 20,000

Americans are killed annually in firearms-related situations, with numerous others sustaining various injuries.

Violence in our society is also reflected in Table 3.25, which presents selected data on mor- tality attributable to homicide and legal interven- tion. These data partially overlap with firearms mortality when firearms are involved in the homi- cide or legal intervention.

CHAPTER 3 Population and Disease Patterns and Trends 65

Table 3.23. Death Rates for Motor Vehicle Crashes by Age: United States, Selected Years

Year (Deaths per 100,000

Age Group Resident Population)

1950 2003

All ages, age adjusted 24.6 15.3 Under 1 year 8.4 3.6 1–4 years 11.5 3.9 5–14 years 8.8 4.0 15–24 years 34.4 26.6 25–34 years 24.6 17.1 35–44 years 20.3 15.7 45–54 years 22.2 14.9 55–64 years 29.0 14.2 65–74 years 39.1 16.2 75–84 years 52.7 24.9 85 years and over 45.1 28.8

Table 3.24. Death Rates for Firearm-related Injuries, According to Selected Sex, Race, and Age: United States, 2003

(Deaths per 100,000

Sex, Race, and Age Resident Population)

White Male Black Male

All ages, age adjusted 16.0 35.6 1–14 years 0.7 2.1 15–24 years 19.2 87.6 25–44 years 18.1 60.5 45–64 years 19.0 18.1 65 years and over 27.4 12.1

Table 3.25. Death Rates for Homicide and Legal Intervention, According to Selected Sex, Race, and Age: United States, 2003

(Deaths per 100,000

Sex, Race, and Age Resident Population)

White Male Black Male

All ages, age adjusted 5.3 36.7 Under 1 year 8.1 17.8 1–14 years 0.9 4.1 15–24 years 10.6 84.6 25–44 years 7.7 61.0 45–64 years 4.2 22.2 65 years and over 2.7 10.9

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Another disturbing source of mortality in our society is suicide. Table 3.26 presents mortality at- tributable to suicide for males and females by age group. As is evident from the data in this table, males have a much higher suicide rate than fe- males, and suicide is not an infrequent source of mortality from the teens on upward in age, espe- cially for males. The data are particularly striking for the oldest age group of males, age 85 and above. Some of these individuals are despondent, or they themselves or their spouses face serious illness.

As we seek to improve the quality and quantity of life in this country, we have to constantly appre- ciate the considerable morbidity and mortality attributable to social, economic, lifestyle, and other nonphysiological causes. Finding answers to prob- lems of unhealthy diets and personal practices, con- sumption of alcohol, cigarettes, drugs, and other unhealthy substances, and the prevalence of social problems leading to violence in our society must be a high priority as we also seek biomedical solutions

to our physiological problems. At the same time, we also face a wide range of psychological and mental health problems that cause tremendous dis- ruption in our lives and our society; these, too, must be addressed from both biomedical and social perspectives.

INCIDENCE OF INFECTIOUS DISEASES

Our nation is now largely spared the tragedies of many of the infectious diseases that are still preva- lent throughout the world. However, not all infec- tious disease has been eradicated in this nation, and new challenges continue to surface.

Table 3.27 presents the incidence of infectious dis- ease over the latter half of the twentieth century for the United States. The decline of many infectious dis- eases that are now avoidable through immunization and vaccination is evident in this table. At the same time, the table illustrates the continuing challenge of

66 PART ONE Overview of the Health Services System

Table 3.26. Death Rates for Suicide, According to Sex and Age: United States, 2003

Sex and Age 2003

Male All ages, age adjusted 18.0 5–14 years 0.9 15–24 years 16.0 25–44 years 21.9 45–64 years 23.5 65 years and over 29.8 85 years and over 47.8

Female All ages, age adjusted 4.2 5–14 years 0.3 15–24 years 3.0 25–44 years 5.7 45–64 years 7.0 65 years and over 3.8 85 years and over 3.3

Table 3.27. Selected Notifiable Disease Cases: United States, Selected Years

Year

Disease

(Number of Cases)

1950 2003

Diphtheria 5,796 1 Hepatitis A — 7,653 Hepatitis B — 7,526 Mumps — 231 Pertussis (whooping cough) 120,718 11,647 Poliomyelitis, total 33,300 — Rubella (German measles) — 7 Rubeola (measles) 319,124 56 Tuberculosis 121,742 14,874 Syphilis 217,558 34,270 Gonorrhea 286,746 335,104

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many infectious diseases that remain, especially those associated with sexual activity.

Although not reflected in this table, the threat of terrorists using biological and chemical agents could change patterns of notifiable diseases in the future. Some biological agents such as smallpox and anthrax represent serious threats to our society if utilized by terrorists. The public health system of our nation has assumed an increasingly important role in preparing for this type of threat. The various biological agents that may be utilized by terrorist organizations have different vectors of transmission and represent a wide range of potential health ef- fects, both short term and long term. In addition, the use of biological and/or chemical agents as well as other threats such as the use of nuclear materials could have secondary health impacts in our lives. The full range of potential ramifications from all these possibilities presents a very complex array of challenges for the nation’s health and public health systems.

Likely further declines in reportable infectious diseases will occur with the use of immunizations for such diseases as chicken pox. For other diseases, such as gonorrhea, the challenge continues, particu- larly with physiologic resistance to many current drug treatments. And, of course, the AIDS epidemic dramatically illustrates the potential threat from new infectious diseases. Other particularly gruesome infec- tious diseases, such as the Ebola virus and SARS, have come to the forefront in recent years, clearly demon- strating how we can be challenged by disease even with the advancing state of our knowledge. Some, such as TB, are resistant to current treatments.

LIFESTYLE PATTERNS AND DISEASE

Numerous behaviors and lifestyle patterns affect our health. Examples discussed previously in this chapter include exposure to violence, vehicular accidents, alcohol, drugs, and infectious agents.

An excellent example of the association between disease and behavior is the consumption of tobacco products. Cigarette consumption has been associated with numerous illnesses, including car- diovascular disease, lung cancer, and oral cancer. Reduction in cigarette and other tobacco product consumption has been a national goal for 40 years.

Government policy has been directed toward reducing morbidity and mortality by intervening in people’s destructive behavior. Interventions include the use of taxation, public education, and restric- tions on product production and distribution.

A reduction in cigarette consumption in the United States has occurred during the period of aggressive intervention, as reflected in Table 3.28.

CHAPTER 3 Population and Disease Patterns and Trends 67

Table 3.28. Current Cigarette Smoking by Persons 18 Years of Age and Over, According to Sex and Age: United States, Selected Years

Percent of Persons

Sex and Age

18 Years of Age and Over

1965 2003

Males 18 years and over,

age adjusted 51.6 23.7 18–24 years 54.1 26.3 25–34 years 60.7 28.7 35–44 years 58.2 28.1 45–64 years 51.9 23.9 65 years and over 28.5 10.1

Females 18 years and over,

age adjusted 34.0 19.4 18–24 years 38.1 21.5 25–34 years 43.7 21.3 35–44 years 43.7 24.2 45–64 years 32.0 20.2 65 years and over 9.6 8.3

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Many current smokers may be consuming greater quantities of tobacco products than the typical smoker did in past years. Many of those giving up tobacco products were casual users.

The net effect on morbidity and mortality from tobacco product consumption is difficult to esti- mate. However, any reduction in use of these products is positive for the nation’s health overall, probably substantially so.

HEALTH, LIFESTYLE, AND SOCIAL STRUCTURE

The relationship between lifestyle and health is well established with regard to practices such as tobacco products consumption, as discussed previously. Numerous other lifestyle issues also significantly impact health. Alcohol consumption and illicit drug use are examples of personal decision making and patterns of behavior that have tremendous adverse effects on health and on the nation’s economy.

Alcohol consumption, beyond a moderate level, is associated with numerous physiological complica- tions including cirrhosis of the liver, various cancers, intestinal disorders, and brain function deterioration. Equally severe psychological and social complica- tions ranging from divorce to poor job performance are also common. Alcohol abuse results in illness and injury to others, including—but certainly not limited to—vehicular accidents, workplace injuries, poor fetal outcomes associated with fetal alcohol syn- drome, and spousal and child abuse.

Like alcohol abuse, illicit drug use results in a spec- trum of adverse consequences for our society. In ad- dition to many of the adverse consequences already mentioned for alcohol abuse, illicit drug use leads to high levels of violent crime, general social dysfunc- tion, and many other untoward consequences.

The implications of tobacco, alcohol, and drug abuse alone are wide-ranging and contribute to the destruction of the fabric of our society and of indi- viduals’ lives. And these three areas constitute only

a portion of dysfunctional behavior that impinges on health, with consequent increased morbidity and mortality.

The range of other behaviors that adversely affect health is tremendous. Enhanced morbidity and mortality have been associated with various complications of dietary behaviors such as elevated consumption of fat, sodium, and sugar, leading to an epidemic of obesity and associated problems. Sexual behaviors are associated with the spread of communicable diseases such as AIDS, gonorrhea, syphilis, and other sexually transmitted diseases, leading to increased levels of infertility, cancer, and other complications. Societal stress is associ- ated with deterioration of the immune system and consequent morbidity and mortality, workplace violence, marital difficulties, spousal abuse, and other problems.

Thus, the etiology of much of our morbidity and mortality can be traced to behavior, social interac- tion, lifestyle, and other nonphysiological determi- nants. Solving the primary physiological causes of illness and disease may be easier than adequately addressing these social and behavioral ones. The challenges to modify behavior are great, and the complications introduced by our modern society make the task ever-more difficult. As we move through the new century, the failure of our society in the twentieth century to adequately address the social, behavioral, and economic causes of disease and illness will continue to haunt us.

MEASURING THE IMPACT OF ILLNESS ON SOCIETY

The impact of health, disease, and illness and the measurement of these effects have tremendous power in aiding the allocation of resources and in assessing the relative importance of various dis- eases, from both human and financial perspectives. Many quantitative approaches to measuring the impact of disease and illness on human populations

68 PART ONE Overview of the Health Services System

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have been developed, some of which are illustrated in this section of the chapter to provide a per- spective on the relevance and methodologies for such efforts. Resource allocation and policy analysis exercises in particular can benefit from these approaches to quantifying the impact of disease. Such effort is not intended to draw attention away from the personal aspects of disease and illness, but rather to facilitate an analytic and objective assess- ment of the relative impact of different threats to our population. The analyses include such eco- nomic techniques as cost-benefit analysis and the illustrations presented in this section are in no way intended to comprehensively review all the tech- niques applicable to these kinds of analyses.

Measuring how people perceive their own health is one of the many approaches utilized in assessing the impact of illness and disease on a population. Although this approach can be utilized for specific disease conditions, it is also beneficial in looking at differential health status across various population groups as a means to measure the aggregate impact of illness in the population.

Table 3.29 presents self-assessed health status among selected population groups over a 10-year time period. Substantial differences in self-assessed health status, as measured by the percent of individ- uals reporting fair or poor health, is evident among different age, race, and income groups as measured by poverty status. Changes over time have not been as dramatic as these subgroup differentials. The impact of illness and disease clearly increases sig- nificantly with age and is greater for certain minor- ity groups than for whites. The difference by sex is nominal.

Another indicator of the impact of illness and disease on populations is reflected in Table 3.30. For selected causes of death the number of years of life lost to the U.S. population by population sub- group is presented. In other words, the number of years of life lost from people dying from diseases of the heart in the white population subgroup is ap- proximately 1,115 lost before age 75 for every 100,000 population under age 75. This is one of a number of indicators of the impact on longevity

from each of the listed causes of death. If this cause of death did not exist, the number of years of life that the population would live before dying from other causes of death would be higher for every 100,000 people by the indicated number of years. Years of life lost by population group and disease category provide a relative measure of the impact, almost in practical human terms, of each disease category on our life spans in this country. The rela- tive impact of each disease is also measurable for various population subgroups such as for race groups, as indicated in this table.

The impact of illness and disease can be mea- sured in other ways as well. For example, the days of disability attributable to various ailments can be estimated. Disability days attributable to influenza, arthritis, or other diseases can reflect the relative

CHAPTER 3 Population and Disease Patterns and Trends 69

Table 3.29. Self-Assessed Health Status According to Selected Characteristics: United States, Selected Years

Characteristic 1991 2001

Percent of persons with fair or poor health

Age Under 18 years 2.6 1.8 18–44 years 6.1 5.4 45–54 years 13.4 11.7 55–64 years 20.7 19.2 65 years and over 29.0 26.6

Sex Male 10.0 9.0 Female 10.8 9.5

Race White 9.6 8.2 Black 16.8 15.4 Asian only 7.8 8.1

Poverty status Poor 22.8 21.0 Near poor 14.7 15.5 Nonpoor 6.8 6.2

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70 PART ONE Overview of the Health Services System

Table 3.30. Years of Potential Life Lost before Age 75 for Selected Causes of Death, According to Race: United States, Selected Years 1980, 2001

Race and Cause of Death 1980 2001

Age-adjusted years lost before age 75

per 100,000 population under 75 years of age

Race and Cause of Death 1980 2001

Age-adjusted years lost before age 75

per 100,000 population under 75 years of age

Black Males All causes 17,873.4 12,579.7 Diseases of heart 3,619.9 2,248.9 Ischemic heart disease 2,305.1 1,260.6 Cerebrovascular diseases 883.2 491.3 Malignant neoplasms 2,946.1 2,228.4 Trachea, bronchus, and lung 776.0 557.5 Colorectal 232.3 219.6 Prostate 200.3 164.1 Chronic lower respiratory diseases 203.7 220.5 Influenza and pneumonia 384.9 152.1 Chronic liver disease and cirrhosis 644.0 181.5 Diabetes mellitus 305.3 392.6 Human immunodeficiency virus

(HIV) disease — 743.5 Unintentional injuries 1,751.5 1,133.4 Motor vehicle-related injuries 750.2 571.7 Suicide 238.0 201.5 Homicide 1,580.8 963.6

White Males All causes 9,554.1 6,941.6 Diseases of heart 2,100.8 1,115.0 Ischemic heart disease 1,682.7 773.0 Cerebrovascular diseases 300.7 175.6 Malignant neoplasms 2,035.9 1,610.2 Trachea, bronchus, and lung 529.9 427.5 Colorectal 186.8 135.0 Prostate 74.8 53.1 Chronic lower respiratory diseases 165.4 184.7 Influenza and pneumonia 130.8 72.7 Chronic liver disease and cirrhosis 257.3 164.4 Diabetes mellitus 115.7 156.2 Human immunodeficiency virus

(HIV) disease — 88.4 Unintentional injuries 1,520.4 1,049.0 Motor vehicle-related injuries 939.9 585.1 Suicide 414.5 373.5 Homicide 271.7 204.0

impact on disability as compared to mortality for each of these disease categories. Other mea- sures of the impact of disease might include days of work lost attributable to each disease category. Thus, various measures of mortality and morbidity impact for each disease or disease category by population subgroup can provide significant in- sight into broader issues of the impact of health and disease. Economists may carry these analyses further by translating these measures into financial assessments such as, for example, measuring the cost of lower productivity or reduced revenue in a production setting from these days of work lost.

Measuring the impact of disease and illness is essential in establishing national priorities for research and for delivery of health care services.

Such analyses can facilitate the establishment of cri- teria for the allocation of dollars and can measure the relative importance of disease entities in finan- cial and human terms.

ACCESS TO HEALTH CARE SERVICES

As mentioned previously, various aspects of the measurement and assessment of access to health care services are extremely important in assessing the health care system’s response to disease and illness and to the development of national health

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policy. Assessing access to health care services can facilitate the determination of the degree to which the system responds to both consumer and profes- sional assessments of need and demand for health care. Differentials in the measurement of access be- tween population groups can reflect issues of equi- table access to care and failures of the health care system to respond to perceived or actual needs on the part of consumers. Access trends over time, like- wise, can reflect changes in the functioning of the health care system and its effectiveness in address- ing the needs of the population.

The concluding section of this chapter addresses issues of access to care, a core theme of this book, particularly as reflected in utilization of care in response to perceived needs by individuals with various diseases and illnesses. Trends in access to care, like trends in disease and illness patterns, are key assessment variables in our monitoring and evaluation of the health care system over time.

Models of Access

Numerous quantitative models of health services ac- cess have been developed over the years. These mod- els typically emanate from analytical assessments based on psychological, sociological, financial and economic, or psychological perspectives and assess- ments of individual’s access to health care services. Some researchers have attempted to provide more comprehensive and integrated models of access by combining a variety of perspectives as well.

As might be expected, discipline-oriented mod- els of access to care reflect the variables typically assessed by such a disciplinary researcher. For example, sociological models of access to health care typically examine sociological variables such as population characteristics and interpersonal re- lationships and influences. Psychological models of access would focus more typically on perceptions by patients of severity of illness, health beliefs, atti- tudes and values, and health knowledge. Economic models of utilization and access typically address such factors as insurance coverage and income, health systems organization, and financing ar- rangements. Table 3.31 lists illustrative variables

typically measured by each discipline’s approach to assessing health system access.

In most instances, for the variables listed in Table 3.31, extensive and relatively expensive survey questionnaires are required to collect and process the information necessary for the conduct of the analysis. In reality, and from a practical per- spective, demographic, financial, and patient vari- ables are those that are most typically utilized in assessing access to health care on an ongoing basis. These utilization variables are usually obtained from enrolled client populations in health services plans or from large-scale national surveys con- ducted by the federal government or by other organizations.

The predictive power of many models of utiliza- tion and their ability to influence national health policy are somewhat limited. And the often high costs associated with collecting and analyzing the data limit their actual application. Newer practice information systems are facilitating data collection and analysis. These models are valuable in provid- ing a mechanism or forum through which to ana- lyze issues of access and national health policy. The conceptualization of access to care and, even in a limited analysis, the use of some discreet readily

CHAPTER 3 Population and Disease Patterns and Trends 71

Table 3.31. Discipline Oriented Models of Access to Care

Discipline Variables

Demographic Age, sex, marital status, family size, residence

Social structural Social class, ethnicity, education, occupation

Social psychological Health beliefs, values, attitudes, norms, culture

Economic Family income, insurance coverage, prices of services, provider/population ratios

Organizational Organization of physicians’ practices, referral patterns, use of ancillaries, regular source of care

Systems All or most of the above

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available measures of utilization do provide valu- able insight into access concerns that our nation faces.

As noted earlier, many complex models of access to health care have been developed, primarily by academic researchers, over the years. These include behavioral and sociological models that focus on the health behaviors of various population groups mod- ified by their environments. These environmental factors include such measures as economic well- being and perceptions of health status. Measuring many of these variables is difficult and potentially expensive on an ongoing basis. But, as noted previ- ously, these models hold great value in helping us understand how the health care system responds to consumer needs.

Many models, particularly those using sociolog- ical and economic concepts, focus on the resources available in the health care system and their orga- nizational and financial arrangements. Character- istics of the population under scrutiny are also included in many models of utilization and access. Personal characteristics include such factors as health practices and prior utilization as well as de- mographic variables. Social structure and an indi- vidual’s response to his or her environment may also be measured in the context of his or her abil- ity to cope with health problems. Interaction with other individuals, other social influences, and so- cial and cultural backgrounds may be considered as well. Health beliefs, attitudes, and knowledge have a significant effect on how an individual responds to health care needs and to signs and symptoms.

Many access models include a careful examina- tion of the availability of community and personal resources. These variables include supply measures such as the availability of physicians and hospitals. They also include individuals’ financial access to care as measured by income, health insurance, the availability of regular sources of care, and other practical considerations. Managed-care arrange- ments and other characteristics of the health care system are also considered in the development of these models.

Analysis of access to care frequently addresses professional assessments by physicians, nurses, and other health care practitioners of a patient’s signs and symptoms of illness. Some models seek to incorporate patients’ own perceptions of their health care needs, separate from professional evalu- ations. Professional assessments include quantitative assessments as a result of a physical exam or the conduct of laboratory tests. Numerous other as- pects of professional assessment may also be in- cluded in more sophisticated modeling. Of course,

72 PART ONE Overview of the Health Services System

Table 3.32. No Usual Source of Health Care Among Children, Selected Characteristics: United States, Average Annual 2002–2003

Under 18 Under 6 Years of Age Years of Age

Characteristic Percent Without Usual Source

All children 5.7 4.1

Race White 5.2 3.9 Black 6.7 3.3 American Indian

or Alaska Native * * Asian 10.3 *

Race and Hispanic origin

White, non-Hispanic 3.4 2.7 Black, non-Hispanic 6.7 3.3 Hispanic 12.1 8.3

Poverty status Poor 10.6 7.1 Nonpoor 3.3 1.9

Health insurance status Insured 3.1 2.0

Private 2.4 1.3 Medicaid 5.0 3.3

Uninsured 29.2 25.5

*Too small sample.

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professional assessment of individual needs may differ from the patient’s own perceptions of what kind of care he or she needs.

Actual Measures of Access to Care

More common measures of access to health care services are used in this section to illustrate access and to examine trends over time. Selected measures of access are presented for the usual sources of care among children, use of mammography, and dental visits for selected United States populations.

Table 3.32 illustrates the increased availability, as measured by having a usual source of care, of health care services for white as compared to minority children. Lower income individuals also have less access to care as measured by this indicator.

Finally, Table 3.33 measures access to dental ser- vices. Again, poorer people have lower access as measured by visits in the prior year. While these data do not adjust for dental health need, it is likely that lower income individuals do have poorer den- tal health.

Extensive data are available from various surveys, especially those conducted by the federal govern- ment, for tracking changes in access to care for various population groups. This information is ex- tremely valuable for national policy making and to contribute to the overall debate about the design of the health care system. Examples of current access- related issues reflected in these data would include lack of access to dental care for individuals without financial resources (a considerable percentage of the population, which is currently increasing); having no insurance coverage (or who are underinsured for

CHAPTER 3 Population and Disease Patterns and Trends 73

Table 3.33. Dental Visits in the Past Year According to Patient Characteristics: United States, 2003

Characteristic 2–17 Years 18–64 Years 65 Years of

of Age of Age Age and Over

Total 75.0 64.8 58.0 Sex Male 74.1 60.9 58.4 Female 75.9 68.6 57.7

Race White 76.0 65.9 59.8 Black 70.5 58.1 38.7 American Indian or

Alaska Native 69.9 58.0 49.2 Asian 72.9 63.6 57.4

Race and Hispanic origin White, non-Hispanic 79.4 69.3 60.9 Black, non-Hispanic 70.6 58.3 38.3 Hispanic 64.5 48.3 46.0

Poverty status Poor 65.8 44.5 37.1 Nonpoor 80.8 72.0 67.8

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health care services); and lack of adequate access to health care in the areas of long-term care and men- tal health services.

Access is a key issue that has challenged our nation’s health care system throughout history. As a nation, we have long struggled with issues of who has the right to access which health care services and under what conditions. Assuring adequate ac- cess to care is an issue that permeates all aspects of health care policy and delivery.

Managed-care organizations constantly struggle with the trade-offs involved in controlling access to care versus assuming increased costs. Social programs have long addressed issues of access. Medicare and Medicaid, as social programs, had their origins in the realization that access to health care for some population groups did not meet national social goals.

The formulation and measurement of indicators of access to care is a challenging area for health ser- vices researchers, but one that contributes substan- tially to improving the operation of the health care system. Addressing the challenges of access pro- vides a key focal point for constant analysis of the nature of the health care system and our national goals for that system. Ultimately, it is the issues of access and cost that we must successfully address to ensure that all citizens receive a level of health care services adequate for their most fundamental needs. It is also important to recognize that issues of access are intimately connected to factors associ- ated with the quality of care, with satisfaction on the part of providers and consumers, and with national, political, economic, and social goals.

SUMMARY

This chapter has traced many of the primary pat- terns of population dynamics and illness in our society during the twentieth century. A fundamen- tal understanding of these trends is essential in

interpreting the optimal structure of health services delivery systems as discussed in the remainder of this book. Understanding the relationships between these epidemiological trends and the physiological and psychological nature of the human body and of the determinants of health services utilization is important in defining the overall nature of a popu- lation’s use of health care and, in turn, forms the basis for the organization and financing, and even- tually evaluation, of that system.

REVIEW QUESTIONS

1. Describe the major trends in population demographics over the past 80 years.

2. How have fertility rates changed since the World War II?

3. What are the most important trends in mortality over the past century?

4. What disease patterns would you anticipate occurring over the next 30 years?

5. How do changes in disease incidence and prevalence translate into health care utilization patterns?

REFERENCES & ADDITIONAL READINGS

Bailey, P. G. (2005). Medicare and national coverage. Health Affairs, 24, 295–296.

Bloche, M. G. (2004). Healthcare disparities—science, politics and race. New England Journal of Medicine, 350, 1486–1488.

Cunningham, P., & Hadley, J. (2004). Expanding care versus expanding coverage: How to improve access to care. Health Affairs, 23, 234–244.

Zuckerman, S., & Shen, Y. C. (2004). Characteristics of occasional and frequent emergency department users: Do insurance coverage and access to care matter? Medical Care., 42, 176–182.

74 PART ONE Overview of the Health Services System

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P A R T

T W O

Financing and Structuring Health Care

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CHAPTER TOPICS

Health Expenditures

Health Insurance

Medicare

Medicaid

Physician Reimbursement

Initiatives in Health Care Finance

Strategies for Health Care Reform

LEARNING OBJECTIVES

Upon completing this chapter, the reader should be able to

1. Understand national health expenditures.

2. Understand governmental health plan programs.

3. Analyze provider reimbursement mechanisms.

4. Analyze health care reform.

5. Conceptualize avenues for improving health insurance plans.

CHAPTER 4

Financing Health Systems

Alma Koch

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The system for financing health services in the United States reflects the fragmentation of health care as a whole. It is a patchwork of financing mechanisms varying by sponsorship and provider type. It also reflects the age, health, and economic status of the specific patient groups that are being served. In view of the growing number of Ameri- cans who are uninsured for health care, one may say that it is a disappointing financing system. However, these observations do provide a touch point for studying the financing apparatus as it now exists. If one looks at the “system” in light of the role of tradition and the values of the American people, as well as the political philosophy of the times, the organization of health finance in the United States comes into better focus.

This chapter examines the size and scope of the health care financing system in the United States. Special attention will be paid to differences and similarities in the public and private financing com- ponents of the system, reimbursement of various provider categories, and trends that we may expect to see in the future.

HEALTH EXPENDITURES

Size of the U.S. Health Care Industry

The health care industry is the largest service em- ployer in the country. In the number of people em- ployed, the health care industry ranks second after total durable and nondurable goods manufacturing (U.S. Census Bureau, 2004–2005). In 2004, Amer- icans spent $1.878 trillion on health care, compris- ing 16 percent of the gross domestic product (GDP) and amounting to $6,280 per capita (Smith et al., 2006). The United States spends far more on health care than other industrialized countries. For example, in 2000–2001, the United Kingdom and Japan fell at the lower end of the spectrum, spend- ing 7.6 percent of their respective GDPs on health

care. Canada, France, Germany, and Switzerland, came closer to U.S. figures with 9.7, 9.5, 10.7, and 10.9 percent of their respective GDPs spent on health, with most other industrialized nations falling in the established range (U.S. Census Bu- reau, 2004–2005).

Growth in Health Expenditures

Since 1940, national health expenditures have grown at a rate substantially outpacing the gross domestic product (GDP). Table 4.1 shows that prior to World War II, only 4 percent of the GDP was devoted to health care, both public and pri- vate. By 2004, the proportion of the GDP ex- pended for health care increased by 12 percentage points. Since the onset of Medicare and Medicaid in mid-1966, national health expenditures have grown particularly rapidly, from about 6.3 percent of the GDP to the present figure. Most of this growth is explained by increased intensity in the provision of health care services, excess medical in- flation, and the aging of the U.S. population. Only a small fraction of growth in health care can be at- tributed to actual growth in the U.S. population. This brief stability in the 1990s was precipitated both by a slowdown in the rate of growth of health care spending and an upswing in overall economic growth. During the recession of the early 2000s, health care continued to grow as the economy slowed. Since 2000, health care spending has risen a whopping 2.2 percentage points, ending a six- year period of relative stability at around 13.5 to 13.8 percent of the GDP.

A variety of qualitative factors is believed to have contributed to the disproportionate growth in health care spending relative to the growth in GDP. These include (1) rapid development and dissemi- nation of medical technology that expanded the treatment of disease, (2) rising expectations about the value of health care services, (3) government fi- nancing of health care services, (4) the nature of third-party reimbursement, (5) the growth in the proportion of elderly, (6) the lack of competitive forces in the health care system to increase effi- ciency and productivity in the delivery of services,

CHAPTER 4 Financing Health Systems 77

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and (7) the maldistribution of physicians and other providers of health services.

Monetary Flow

Payment Sources

Figure 4.1 quantifies the monetary inflow (i.e., “Where it came from”) and outflow (i.e., “Where it went”) in the United States for total health spend- ing in 2004. Private health insurance finances 37 percent of all health expenditures, with out- of-pocket payment financing another 13 percent. These private sources, together with other (mostly philanthropic) sources, account for the 54 percent of all health expenditures that are privately fi- nanced in the United States. The other 46 percent is financed publicly by federal, state, or local govern- ments. The largest single public program is Medi- care (the federal social security health insurance plan for the elderly, the disabled, and other groups), followed closely in size by Medicaid (the federal/state welfare program for health care), and other government programs.

Spending for Medicare and Medicaid has been increasing even more rapidly than total national health expenditures. In 2004, Medicare and Medi- caid together comprised 35 percent of the total health care bill; in 1967 the two programs repre- sented only 15 percent of the total health care bill. Out of approximately 288 million people in the

United States in 2002, over 31 percent (91 million people) were enrolled in either or both programs. Medicare’s role was clearly most substantial for hospital care; Medicaid’s role was most prominent for nursing home care, and the growth in these two services has indubitably been spurred on by the two public programs.

Outlays

In terms of outlays, 41 percent of the money spent for health in 2004 was used to purchase hospital and nursing home services, although hospital ex- penditures, which totaled $571 billion, have dropped substantially as a proportion of health care expenditures in the past 20 years. Another 40 percent was divided among physicians’ services and other personal care items (i.e., dental services, other professional services, vision services, home health care, drugs, eyeglasses and appliances, and other miscellaneous health care services and prod- ucts). While physician services have increased slightly over the years, “other” health care costs have burgeoned. Prescription drugs, with 11 per- cent, has been on the rise in recent years. The re- maining 8 percent goes for administration and health insurance.

Personal Health Care

Figure 4.2 shows financing trends since 1950 for personal health care expenditures (PHCE), which

78 PART TWO Financing and Structuring Health Care

Table 4.1. Aggregate and Per Capita National Health Expenditures, United States, Selected Years

Year Total (Billions) Per Capita GDP (Billions) Percent of GDP

1940 $4.0 $30 $100 4.0 1950 $12.7 $82 $287 4.4 1960 $26.9 $141 $527 5.1 1970 $73.2 $341 $1,036 7.1 1980 $247.2 $1,052 $2,784 8.9 1990 $699.4 $2,689 $5,744 12.2 2000 $1,358.5 $4,729 $9,817 13.8 2004 $1,877.6 $6,280 $11,734 16.0

SOURCE: Adapted from “National Health Spending in 2004: Recent Slowdown Led by Prescription Drug Spending,” by C. Smith et al., 2006, Health Affairs, 25(1), p. 187.

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include total health expenditures minus program ad- ministration, public health activities, research, and construction. Government plus private insurance have grown enormously in the postwar era, funding about 80 percent of all PHCE. Direct payments by

patients have dropped commensurately to about 15 percent of PHCE (Smith et al., 2006).

For 2004, sources of funding for major providers of PHCE are depicted in Figure 4.3. Gov- ernment funding dominates hospital reimburse- ment with 56 percent financed by Medicare, Medi- caid, and other government programs, in that order. Another 36 percent of the national hospital bill is footed by private health insurance. Physician outlays are clearly dominated by the private sector. Private insurance, direct patient payments, and other private sources account for more than 66 per- cent of physician funding; Medicare, which in re- cent years has diminished as a financier of physi- cians’ services, picks up another 20 percent. Nursing home funding reflects the “rich man, poor man” dichotomy of the long-term care industry, wherein patients must “spend down” their assets in order to qualify for government assistance. About 70 percent of nursing home revenues are funded by direct patient payment and Medicaid. Private long- term care insurance, which was practically nonexis- tent 10 years ago, has skyrocketed to 8 percent of nursing home funding. Medicare’s share of nursing home funding is not for long-term care; Medicare pays for short-term nursing care in skilled nursing facilities for patients who can be rehabilitated.

HEALTH INSURANCE

Origins of Health Insurance

Health insurance originated in Europe in the early 1800s when mutual benefit societies arose to lighten the financial burden for those stricken with illness. The focus was on low-skilled, low-income workers who were industrially employed. (Providers in Europe wanted to keep high-skilled employees in the private medical market.) The first government health insurance program arose in Germany in 1840, mandating workers below a certain income level to belong to a “sickness fund.” The concept of health insurance as linked to employment in the in- dustrial sector persists internationally to this day.

CHAPTER 4 Financing Health Systems 79

Where It Came From

Other Government 10.7%

Medicaid 16.7%

Medicare 17.6%

Other Private 4.0%

Out-of-Pocket Payments

13.4%

Private Health Insurance

37.6%

Where It Went

Prescription Drugs 10.8%

Nursing Home /Home

Care 9.0%

Other Spending 17.0%

Administration / Insurance

7.8%

Hospital Care

32.6%

Physician Services 22.8%

Figure 4.1. The Nation's Health Dollar, 2004 SOURCE: Adapted from “National Health Spending in 2004: Recent Slowdown Led by Prescription Drug Spending,” by C. Smith et al., Jan./Feb. 2006, Health Affairs, 25(1), p. 187.

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The health insurance networks of many nations grew out of this linkage and still reflect an empha- sis on nonagricultural employment and coverage of the worker, irrespective of dependents (Roemer, 1977; Roemer, 1978).

Today in the United States, the framework of health insurance stems clearly from its European antecedents and breaks down into three categories which, in some sense, reflect employment status. Voluntary health insurance (VHI) is private health insurance usually denoting current industrial em- ployment; social health insurance (SHI) reflects participation in a government entitlement program linked to previous (or current) employment; public welfare health care programs connote lack of em- ployment, low-income employment, or the inability to gain employment stemming from a disabling condition.

Distributing Risk

Insurance is a way of pooling or distributing risk. Risk is the probability of incurring a loss. Risk stems from two kinds of occurrences: (1) unanticipated events such as fires, car accidents, or airplane crashes, and (2) anticipated events such as death, old age, and sickness. Health or, more correctly, illness is an antic- ipated event associated with old age and death.Thus, we know that illness is a likely event, but we don’t know when it will strike, to whom it will happen, or how severe it will be. Therefore, health is uncertain for the individual, but not for a group. Groups are ac- tuarially (i.e., statistically) predictable.

Moral Hazard

In the theory of insurance, it is assumed that risks are independent of each other: (1) What befalls one

80 PART TWO Financing and Structuring Health Care

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

1950 1960 1970 1980 1990 2000 2004

Out-of-Pocket

Private Health Insurance

Other Private

Government

Figure 4.2. Percentage Distribution of U.S. Personal Health Care Expenditures by Source of Funds, Selected Years SOURCE: Adapted from “National Health Spending in 2004: Recent Slowdown Led by Prescription Drug Spending,” by C. Smith et al., Jan./Feb. 2006, Health Affairs, 25(1), p. 191.

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person does not affect another, and (2) that for a single individual, risks are independent. Neither as- sumptions are true in health insurance because one person’s sickness may spread contagiously and ill- ness in one part of the body may weaken another part. These phenomena, together with the moral hazard inherent in medical care, make health insur- ance and health costs, in general, extremely volatile. Moral hazard means that, to the extent that the event insured against can be controlled, there exists a temptation to use the insurance. (The classic example of moral hazard is setting fire to a failing business in order to collect the insurance.) Health insurance usage is highly discretionary; doc- tors and patients can conspire (intentionally or not) to use the insurance. An example is where a private patient with a traditional type of policy is kept in the hospital an extra day because it would be diffi- cult or inconvenient for the family to receive the pa- tient back home on the earliest possible discharge day. In this example, the insured extra day in the hospital, at a cost of $900 or more to the carrier, saves a loss in earnings for the family, and the ex- pense is borne by purchasers of the policy, as re- flected in the price of the premium.

Benefit Structure

Because of moral hazard, health insurance usually pays less than the total loss incurred by levying out- of-pocket or direct costs on the patient. In fee-for- service provider reimbursement, these take the form of deductibles and copayments. A deductible is a sum of money that must be paid, typically every year, before the insurance policy becomes active. Deductibles have long been criticized in health in- surance for posing an impediment to first-contact care, discouraging the patient from seeking care until the condition becomes severe. Since higher costs may be incurred for more severe illness, de- ductibles have been postulated to contribute to health cost inflation, rather then stimulating parsi- monious consumer utilization. A copayment is paid as the beneficiary uses the insurance. For example, in a policy with a traditional indemnity benefit, a fixed cash amount is paid to the beneficiary per procedure or per day in the hospital (e.g., $800 for

CHAPTER 4 Financing Health Systems 81

Hospitals

Out-of- Pocket 3.3%

Private Health Insurance

35.6%

Other Private 4.9%

Medicare 28.6%

Medicaid 17.4%

Other Government

10.3%

Other Government

7.2%

Out-of- Pocket 10.0%

Private Health Insurance

48.5%

Medicaid 7.0%

Other Private 6.9%

Medicare 20.5%

Out-of-Pocket 27.7%

Private Health Insurance

7.8%

Other Government 2.5%

Medicaid 44.4%

Medicare 13.9%

Other Private 3.7%

Physicians

Nursing Homes

Figure 4.3. Personal Health Care Expenditures for Total U.S. Population by Type of Service and Source of Funds SOURCE: Adapted from “National Health Spending in 2004: Recent Slowdown Led by Prescription Drug Spending,” by C. Smith et al., Jan./Feb. 2006, Health Affairs, 25(1), p. 191.

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a one-night stay in the hospital following a hernia repair). If the hospital charges $1,100, then the pa- tient must pay a copayment of $300. Thus the pa- tient is liable for any amount in excess of the in- demnity payment. An insurance plan with a service benefit reimburses on a percentage basis and the patient pays coinsurance. Using the preceding ex- ample, the insurance plan would pay 80% or $880 of the surgeon’s charges, leaving only $220 in coin- surance to be paid by the patient. Thus, if the per- centage rate is high, the reimbursement structure of service benefits usually works to the patient’s ad- vantage compared to indemnity benefits.

Pure types of indemnity or service benefits are becoming increasingly rare. Nowadays, to control health cost inflation, there is a growing trend to- ward hybrid benefit structures, combining both ser- vice and indemnity features. A plan may, for exam- ple, pay a percentage of charges up to a specified limit, beyond which point the patient becomes re- sponsible for the balance. Preferred provider orga- nizations (PPOs) utilize this technique, often in concert with low price ceilings, to reimburse non- participating providers. Using the example again, the PPO might pay 80% up to an $800 limit on charges for a nonparticipating hospital. The plan would pay $640 and the patient would thus incur a $460 copayment. However, if the patient utilizes a hospital participating in the PPO, the plan might pay 90 percent of the discounted fee of $1,000 (i.e., a contractually determined “allowed amount” of $900), resulting in a copayment of only $100 for the patient.

Premium Determination

Due to the financial implications of choosing one type of health insurance plan over another and be- cause the possibility of moral hazard is a real one in health care utilization, health insurance plans are particularly vulnerable to the phenomenon of ad- verse selection. Adverse selection may be at work when an insurance policy experiences a higher num- ber of claims due to sickness than would be proba- ble on a random basis. If an employee is offered an alternate choice of plans, for example, a “sicker”

person or a potentially higher utilizer of health care services is likely to elect the plan with more gener- ous provisions (i.e., lower deductible, copayments, and limitations or fewer exclusions), even if the em- ployee’s share of the premium is higher. Therefore, more liberal fee-for-service plans may experience an adverse selection of sicker enrollees compared to a more restrictive managed care plan, such as a PPO, or a health maintenance organization (HMO). This may result in ever-spiraling claims for the liberal plan as costlier people join and as healthier individ- uals defect to the lower-cost alternative plans.

Because of adverse selection, most health insur- ance plans today are experience rated: The premi- ums are based on the demographic characteristics, such as age and sexual composition, of the em- ployer group or on the actual experience of the group in that plan in prior years. Community rat- ing, originated by Blue Cross and Blue Shield (the Blues), bases premiums upon the wider utilization of the defined geographic area (e.g., census tracts, city, county, etc.). Today, most fee-for-service plans are experience rated, even the Blues, which must contend with stiff price competition from commer- cial carriers. HMOs use community ratings more widely for their enrolled groups than commercial carriers, but even this is fading as HMOs face stiff price competition in the for-profit arena.

Voluntary Health Insurance

Voluntary or private health insurance (VHI) in the United States can be subdivided into three distinct categories: (1) Blue Cross and Blue Shield, (2) pri- vate or commercial insurance companies, and (3) health maintenance organizations. The respec- tive sponsorships of these types of VHI may be providers, third parties or middlemen, and patients or independent carriers. Nowadays, it is common for the Blues and commercials to own and operate HMOs and other managed care plans.

Growth and Development

The year 1929 was a landmark year for VHI. In spite of active opposition from the American Medical

82 PART TWO Financing and Structuring Health Care

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Association (AMA) to any type of health insurance from 1920 onward, both Blue Cross and the HMO movement got their start in this last pre-Depression year. Blue Cross was initiated by Baylor teachers in Dallas, Texas, who organized to provide hospital care for three cents a day. Michigan and New Jersey were next in the movement for hospital insurance. In 1934, the depths of the revenue depression for hospitals, the American Hospital Association (AHA) united these plans into the Blue Cross network. Today Blue Cross has broken away from its original AHA sponsorship, but the hospital-sponsored underpinnings remain strong in many locales (Roemer, 1977; Roemer, 1978).

In Oklahoma also in 1929, the Farmer’s Union started its Cooperative Health Association, the first HMO. Independently, in the same year in Los Angeles, two Canadian physicians founded the Ross-Loos group practice and sold the first doctor- sponsored health insurance plan with prepayment to the Department of Water and Power and Los Angeles City workers.

As these and other plans grew during the 1930s, the AMA reversed its opposition to VHI in response to dwindling physician and hospital incomes and, in 1939, the California Medical Society developed and sponsored a plan known as Blue Shield to pay doctor’s bills in a hospitalized environment (Roemer, 1977; Roemer, 1978).

By 1946, private health insurance plans were ex- periencing astronomical growth as wage and price restrictions in the post–World War II period spurred the growth of fringe benefits, especially in union- ized industries. Insurance companies, already hav- ing the inside track in sales and actuarial informa- tion in life insurance, went headlong into the health insurance business in competition with Blue Cross and Blue Shield.

Population Coverage

About 85 percent of the entire U.S. population in 2002 was covered by some type of health insur- ance, including private health insurance and public programs. In 2002, about 71 percent of the U.S. population under 65 had some form of VHI, more

than 93 percent of whom had their health insurance linked to group health policies (usually linked to employment) (U.S. Census Bureau, 2004–2005). Firms that do not offer any health benefits at all tend to be small and nonunionized, hire seasonal workers, and employ relatively large numbers of low-wage employees with no college education. About 64 percent of the elderly, who with few ex- ceptions are covered by Medicare, hold private in- surance coverage (known as “Medigap” insurance) to supplement their Medicare benefits.

An unfortunate effect of employment-linked pri- vate health insurance is that people who are least able to pay for health care have the least insurance due to lack of employment (or full-time employ- ment). The alternatives for these people are to pur- chase a nongroup or individual plan, usually a less generous and more expensive option in terms of out-of-pocket premiums, or to accept the risk of doing without any health insurance. Estimates vary, but according to the U.S. Census Bureau (2004–2005), about 15.2 percent of the total U.S. population in 2002 (44 million people) had no health insurance coverage at all, either public or private, for the entire year.

Benefits

Private health insurance coverage varies widely in terms of benefits provided, the extent of reimburse- ment for covered services, and exclusions or limita- tions. General health insurance plans are designed to provide limited protection for the most expen- sive services and usually cover inpatient hospital and physician services, and outpatient hospital ser- vices, including laboratory procedures. Limits may apply to a group of related services such as those provided during the course of a hospitalization. The most commonly covered services for the pri- vately insured are linked to inpatient hospitaliza- tion: room and board, surgeons’ and other physi- cians’ fees, and outpatient diagnostic services.

Most comprehensive health insurance policies extend basic benefits to such services as physician office visits, outpatient mental health care, pre- scribed medicines, durable equipment and supplies,

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ambulance services, and the like. Thus, they are de- signed to protect against large medical bills as well as many expenses associated with routine types of medical care. For a typical claim, the insurer typi- cally pays a specified share of total covered ex- penses (e.g., amounting to 75 percent or more of the bill). The patient pays the remainder or copay- ment. The beneficiary also pays a deductible amount—typically $300 for an individual or $600 for a family—at the beginning of each year. De- ductibles and copayments comprise the share of the expenses not covered by the health insurance plan, subject to a maximum amount known as the “out-of-pocket limit” or “stop-loss provision.” A limit of this kind may range from $1,500 to $3,000. The deductible and other provisions apply to expenses for all covered services. In contrast, Medigap plans, often purchased by Medicare en- rollees, are designed to reimburse only the de- ductibles and copayments associated with Medi- care covered services.

Hospital indemnity plans are another type of private insurance coverage that is noteworthy. Hospital indemnity plans offer specified cash pay- ments (e.g., $200 per day) for each day of inpa- tient hospitalization, regardless of the expenses ac- tually incurred. Thus, it is a type of disability insurance wherein the payment is not linked to the amount or type of medical services provided, but rather to length of the hospital stay, and the pay- ment is not generous in relation to the actual hos- pital expenses.

Prepaid Plans

HMOs and similar prepaid plans provide fairly comprehensive coverage in return for a prepaid fee, usually without deductibles and coinsurance for most services. Therefore, HMOs offer coverage against the risk of large health care financial losses. Prepaid health plans peaked in enrollment in 2000 and have been losing membership ever since. In 2003, there were about 454 HMOs in the United States, covering about 72 million people, or about one-quarter of the population (U.S. Census Bureau, 2004–2005). This compares to about 50 HMOs in

1973, prior to the passage of the HMO Act, which required employers with over 25 employees to offer a dual choice of health plans including one HMO, if one was available locally.

It was anticipated that the concept would foster incentives toward prevention and cost conscious- ness on the part of physicians who are encouraged to be frugal in the use of secondary services, partic- ularly hospitalization. However, because the pre- payment of premium did not necessarily translate into capitated provider reimbursement and tight prospective budgeting, cost-containment experi- ence is mixed due to legislative and economic in- centives that are sometimes perverse (Hillman, Welch, & Pauly, 1992).

Social Health Insurance

The U.S. government sponsors two major manda- tory social health insurance programs: (1) Workers’ Compensation for the costs and pain of suffering job-related accidents, and (2) Medicare for the elderly, disabled, and other special groups. Several states sponsor social insurance programs in the areas of temporary disability (California) or health insurance (Hawaii and Vermont).

Workers’ Compensation is offered to some ex- tent in all 50 states. It is usually the first type of so- cial insurance enacted in a nation and the vast ma- jority of nations worldwide have some form of industrial accident insurance. The first workers’ compensation law in the United States was passed by New York in 1914 in response to the tragic Tri- angle Shirt factory fire in which 146 women lost their lives. In 1950, Mississippi became the last state to enact worker’s compensation. About 80 percent of the U.S. workforce is covered to some ex- tent by worker’s compensation, leaving the remain- ing workers, many of whom are agricultural, ca- sual, and domestic workers, without coverage. Unfortunately, it is often these same people who are not covered by any type of health insurance (Roemer, 1978).

Workers’ Compensation provides two basic ben- efits: (1) cash replacement of a portion of wages

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lost due to disability and (2) payment for all or part of the medical care necessary. Workers’ compensa- tion may be underwritten by a private insurance company, a state government insurance fund, or a corporate contingency fund. Premiums are usually determined by experience rating.

In 1935, national health insurance almost be- came a reality as part of the Social Security Act. Due to strong opposition from the AMA and con- servative members of Congress, national health in- surance was scrapped from the act by President Roosevelt, who did not want to risk passage by Congress. In 1939, and every two years for several Congresses thereafter, the Wagner, Murray, Dingell national health insurance bill was proposed in Congress. The timing of this bill coincided with the growth curve of private health insurance enroll- ment, which precluded a pressing interest in na- tional health insurance. However, private health in- surance was largely sponsored by employers and thus did not serve the nonworking population, par- ticularly the aged. Nonetheless, about 50 percent of

the elderly enrolled in voluntary health insurance programs during the 1957–1964 pre-Medicare pe- riod (Roemer, 1978).

In 1957, Representative Forand of Rhode Island introduced the bill that was the precursor of Medicare (Title XVIII of the Social Security Act). On July 30, 1965, Medicare became the first entry of the federal government into the provision of so- cial health insurance rather than medical assistance (public welfare medicine) such as offered by the Kerr-Mills Act of 1960—Medical Assistance for the Aged.

Strictly speaking, only Medicare Part A—Hospital Insurance (HI)—is social health insurance. (See Fig- ure 4.4.) Part B—Supplementary Medical Insur- ance (SMI)—is neither compulsory nor funded by a trust fund. Over 82 percent of the funds for SMI comes from the U.S. general treasury and the other 18 percent comes from premiums collected from Medicare Part A recipients who elect to pay Part B premiums out of their monthly Social Security checks (Smith et al., 2006).

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SHI U.S. Trust Fund

Part A Part B Medicaid

VHI U.S. General Treasury

State Treasuries

Medicare

Each circle represents the relative size of the program in dollars.

100% 18% 59%

41%

82%

Figure 4.4. Flow of Federal and State Financing for Medicare and Medicaid, 2004

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Medicare utilizes an indirect pattern of finance and delivery, wherein the Centers for Medicare and Medicaid (CMS), a branch HCFA, contracts with independent providers. Medicare recipients also ac- cess providers independently. CMS sees to it that the provider is paid, but the providers are neither owned nor hired by the government, as in SHI sys- tems utilizing the direct pattern of delivery. Gener- ally speaking, if the private medical market is strong at the time when SHI is enacted, an indirect pattern of delivery emerges. If the market is weak, a direct financing route emerges.

Welfare Medicine

Public assistance or welfare medicine is sponsored by a plethora of federal, state, and local govern- ment programs, but the most far-reaching program is Medicaid (Title XIX of the Social Security Act). Administered at the federal level by CMS, Medicaid is financed by an average federal contribution from the general treasury of 59 percent and from state treasuries at an average contribution of 41 percent. (See Figure 4.4.) Federal matching varies from 50 to 77 percent, depending on the income of the in- dividual state (USDHHS, 2005a). General treasury funds are generated from personal income tax, cor- porate income tax, and various excise taxes and, to the extent that these taxes are borne by higher in- come individuals and organizations, Medicaid rep- resents a type of transfer payment to the poor.

The distinction between welfare medicine and social health insurance, both of which are public programs, is an important one and rests on the philosophical difference between a transfer pay- ment and entitlement. Medicaid is a transfer pay- ment “in kind,” meaning that medical services are provided as a welfare benefit in lieu of cash. Wel- fare recipients also receive cash subsidies to pay for their living expenses, but medical benefits are paid directly to the provider so that the recipients will not be tempted to spend the money on expense items other than health care. (Food stamps are an- other “in kind” benefit, providing vouchers solely for the purpose of purchasing food and groceries.)

Thus the transfer payment is a type of “relief” that government bestows upon the poor; it is a form of charity.

Social health insurance is an entitlement pro- gram, not charity. It is a right earned by individuals in the course of their employment. The funds for SHI programs are contributed by a payroll tax (for 2004, 2.9 percent of total wages—a stable percent- age for many years), which in the case of Social Se- curity is divided equally between the worker and the employer. Worker’s Compensation too is fi- nanced, at least in part, by worker contributions. When the worker retires or suffers a temporary or sustaining injury related to employment, SHI be- comes active for the worker and dependents. The fundamental aim of a compulsory government- provided or supervised SHI program is social adequacy—to provide members of society with protection against hazards so widespread as to be considered risks that individuals cannot afford to deal with themselves. Eligibility in SHI is derived from contributions having been made in the pro- gram and benefits are a statutory right not based on need. Recipients are thus entitled to the benefits of SHI. Over half the countries in the world have a SHI system for financing health care, at least for some categories of employees (Roemer, 1978).

In reference to Figure 4.4, it is interesting to note that the federal share of funding (coming from the U.S. General Treasury) for Medicare Part B has in- creased substantially in recent years, despite pre- mium increases.

MEDICARE

Medicare, the principal SHI program in the United States, provides a variety of hospital, physician, and other medical services for (1) persons 65 and over, (2) disabled individuals who are entitled to Social Security benefits, and (3) end-stage renal disease vic- tims. In 2004, Medicare financed $309 billion in health services, comprising 39 percent of all publicly

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financed health expenditures and 19.2 percent of PHCE. Medicare reimbursed 28.6 percent of all hospital expenditures, and 20.5 percent of all physician expenditures in 2004 (Smith et al., 2006).

Part A: Hospital Insurance

Ninety-nine percent of the aged population of the United States is enrolled in Part A of Medicare, Hospital Insurance (HI). Part A finances five basic benefits for the covered population:

1. Ninety days of inpatient care in a “benefit pe- riod.” (A benefit period is a spell of illness be- ginning with hospitalization and ending when a beneficiary has not been an inpatient in a hospital or skilled nursing facility for 60 continuous days. There is no limit to the num- ber of benefit periods a beneficiary can use.)

2. A lifetime reserve of 60 days of inpatient care, once the 90 days are exhausted.

3. One hundred days of posthospitalization care in a skilled nursing facility.

4. Home health agency visits.

5. Three pints of blood, as part of an inpatient stay.

Since the inception of the Medicare program, hospital insurance has required the beneficiary to participate in cost sharing. The patient is required to pay an inpatient hospital deductible in each ben- efit period that approximates the cost of one day of hospital care ($952 in 2006). Coinsurance based on the inpatient hospital deductible is re- quired for the 61st to 90th day of inpatient hospi- talization and is always equal to one-fourth of the deductible ($238 in 2006). For the 21st to 100th day of skilled nursing facility (SNF) care, the coin- surance equals one-eighth of the deductible ($119), and for the 60 lifetime reserve days, the patient pays one-half of the deductible ($476) for each day of inpatient hospitalization. As previously men- tioned, the majority of Medicare enrollees have pri- vate Medigap policies, which primarily cover some or all of the deductibles and coinsurance under

Medicare. In 2002, about 7.2 million of the aged and disabled have both Medicare and Medicaid coverage in combination (a group known as “crossovers” or “Medi-Medi”), and Medicaid usually assumes responsibility for the cost-sharing arrange- ments under Medicare (USDHHS, 2005b).

While hospital expenditures have grown enor- mously since the inception of Medicare in 1966, skilled nursing facility, home health agency, and outpatient benefits have all shifted significantly as a percent of total Medicare benefit payments. For ex- ample, in the early days of Medicare, SNF and home health care were just a sliver of total Medi- care expenditures; now they comprise 10.5 percent of the total (Smith et al., 2006).

Part B: Supplementary Medical Insurance

Ninety-four percent of Part A beneficiaries are en- rolled in Part B—Supplementary Medical Insurance (SMI). SMI was designed to complement the HI pro- gram. It provides payments for physicians, physician- ordered supplies and services, outpatient hospital services, rural health clinic visits, and home health visits for persons without Part A. SMI requires the beneficiary to meet a deductible (currently $124) each year, in addition to paying a monthly premium ($88.50 in 2006). Under “buy-in” agreements, most state Medicaid programs pay the premiums for Med- icaid enrollees who qualify to participate in SMI (USDHHS, 2005b; USDHHS, 2006a).

In recent years, Medicare Part B has widened payment for preventive services including bone mass measurements, cardiovascular screenings, col- orectal cancer screenings, diabetes screenings, glau- coma tests, Pap tests, prostate cancer screenings, screening mammograms, and flu, pneumococcal, and hepatitis B shots. Physical exams are offered on a one-time basis within the first six months that the enrollee has Medicare Part B.

Not covered by any part of Medicare Part B are dental care, routine eye examinations and eye- glasses, hearing aids or hearing exams, and long- term care services, such as custodial care in a nursing

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home. However, hospice benefits became available for persons who were terminally ill in 1983. En- rollees in Medicare can elect the hospice benefit for two 90-day periods and one 30-day period, with a subsequent extension period during the individ- ual’s lifetime.

Since the inception of Medicare, Part B has grown faster than Part A. In 2004, Part B repre- sented 44 percent of Medicare expenditures, whereas Part A (focusing on hospitals) has shrunk commensurately (Smith et al., 2006).

Part C: Medicare Advantage Plans

In 1987, Medicare added Part C, offering Medicare Risk Contracts as an option to traditional Medi- care Parts A and B. This allowed private HMOs to offer comprehensive services to Medicare enrollees in many parts of the country that had already es- tablished HMOs offering group coverage. Origi- nally known as “Medicare+Choice,” the name was changed to “Medicare Advantage” as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). Under this legislation and beginning in 2006, PPOs and other managed fee-for-service plans were added to Part C.

Medicare HMOs enjoyed rapid growth in the 1990s, but in 2000, HMO contractors began drop- ping out the program due to lack of profitability. Since 1999, the program has shrunk by 1.6 million members. In 2005, 188 Medicare Advantage con- tracts were in operation, serving 5.7 million mem- bers or 13.6 percent of Medicare beneficiaries (as compared to about 66 percent of the Medicare pop- ulation that has access to an Advantage plan). Indi- cating favorable selection, Medicare Advantage plans attract fewer beneficiaries with disabilities (7.2 percent in 2005) than traditional Medicare fee for service with 16.9 percent. The greatest penetra- tion of beneficiaries enrolled occurs primarily in the West—California, Oregon, Nevada, and Hawaii— along with Pennsylvania and Rhode Island (USD- HHS, 2005a; USDHHS, 2005b).

Part D: Medicare Prescription Drug Benefit

The centerpiece of MMA is, of course, the addition of Part D: Medicare Prescription Drug Coverage, initiated on January 1, 2006. The passage of the act in 2003 surprised health care interest groups that, despite a campaign promise from President George W. Bush, predicted that such an expansion of Medicare would never occur in a Republican- controlled Congress. While drug companies and health insurers have much to gain from this act, the real financial winners are Medicare beneficiaries, who have increasingly been burdened by the rising cost of prescription drugs.

The most interesting feature of the prescription drug benefit is the so-called “doughnut hole” or gap. After paying a $250 deductible, Medicare picks up 75 percent of next $2,000 in costs. Then comes the gap of $3,100, wherein Medicare pays nothing and the patient is liable for the whole amount out of pocket. Once the patient has reached the $5,100 threshold, Part D pays about 95 percent of drug costs. In this way, severely ill pa- tients are protected against catastrophic expenses in procuring prescription drugs. As a response, Medigap plans have reorganized their benefit struc- tures to fill the hole.

Enrollment in Part D is voluntary, and premiums are collected monthly by Medicare. However, en- rollees have a wide variety of prescription drug plans from which to choose and the premiums vary widely by plan and by region. In 2006, the average national premium is estimated by CMS to be $37 per month or $444 per year—a sizable amount of money. Thus, the private health insurance industry participates in two ways—by offering the prescrip- tion drug plans and by sponsoring Medigap.

Now in its initial stages of implementation, the Medicare Prescription Drug Benefit has been sub- ject to criticism for (1) glitches in enrollment and re- imbursement procedures, (2) overload of informa- tion and confusion for beneficiaries in choosing a private prescription drug plan, (3) unpreparedness of pharmacies, and (4) problems in enrollment for

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Medicaid buy-in (and other state-sponsored) low- income groups. However, the biggest criticism of MMA is not in the implementation, but in the actual law. MMA decrees that health insurers and govern- ments cannot negotiate volume discounts with drug companies in purchasing drugs. This was consid- ered by many to be anticompetitive and a financial give-away to the pharmacy industry.

Provider Reimbursement

Hospitals

Until 1983, Medicare operated primarily on a fee- for-service basis for physicians’ and related services, and on a cost-based retrospective basis for hospital services. Hospitals were reimbursed for any reason- able costs incurred in the provision of covered care to Medicare patients. Commencing in 1983, pay- ment rates were prospectively determined on a per- case basis. The Medicare hospital Prospective Pay- ment System (PPS), discussed in detail later in this chapter, uses diagnosis-related groups (DRGs) to classify cases for payment. Except for four major classes of specialty hospitals (children’s, psychi- atric, rehabilitation, and long-term), all hospitals must participate in PPS to qualify for Medicare re- imbursement, billing Medicare directly.

Physicians

To constrain SMI inflation, the Deficit Reduction Act of 1984 introduced the concept of “participat- ing physicians,” who are those who “accept assign- ments” for all services (i.e., claims) for all Medicare patients in that doctor’s practice, with no excep- tions. Several pecuniary and marketing incentives to participate were introduced and resulted in sub- stantial increases in assignment. Nationally, the rate of participating physicians increased from 51 per- cent in 1983 to 92 percent in 2003, amounting to 99.4 percent of all Medicare Part B claims. A non- participating physician can continue to treat Medi- care patients, accepting assignments or not on a claim-by-claim basis, but Medicare will reimburse only 95 percent of the amount given to participat- ing physicians (USDHHS, 2003).

Under Medicare Part B, physicians may elect one of two reimbursement strategies. The first is to accept the Medicare Fee Schedule (MFS) as payment in full (i.e., participating physicians accepting the assign- ment); The second is to bill Medicare directly and receive 80 percent payment from the Medicare inter- mediary. The beneficiaries are liable for the remain- ing 20 percent coinsurance, also according to the MFS. On unassigned claims, the beneficiary is addi- tionally liable for the difference between the physi- cian’s charge and the Medicare allowed charge.

Intermediaries or fiscal agents, such as Blue Cross or a commercial insurance company, that are contracted by the Medicare program to review and pay the bills, process claims. Enrollees can also join HMOs and similar forms of prepaid health care and special reimbursement provisions apply to these organizations. The Tax Equity and Fiscal Re- sponsibility Act of 1982 (TEFRA) included major revisions to the Medicare law to encourage growth in the number of HMOs and other comprehensive medical plans enrolling Medicare beneficiaries. TEFRA also set limits on Medicare reimbursements for hospital costs at the per-case level—the harbinger of DRGs under PPS.

Utilization

The average Medicare enrollee spent about $6,805 in 2004. As in any other insurance program, how- ever, utilization is uneven. A study of 1992 data showed that one-third of the enrolled population had small claims of $500 or less, and another 22 percent had no claims at all. The highest 9.8 per- cent of users had reimbursements of $10,000 or more and these enrollees consumed 68.4 percent of program payments (USDHHS, 1995). Other stud- ies have demonstrated that high Medicare reim- bursements are related to terminal illness. A seminal study by Lubitz and Prihoda (1984) found that reimbursements for persons in their last year of life averaged 620 percent higher costs than those who survived the period under study. Fuchs (1984) showed that the greatest proportion of medical care costs is incurred in the year prior to death, regardless

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of the age of natural death. For Medicare enrollees, the average reimbursement for those in their last year of life was 6.6 times as large as for those who survived at least two years. Thus, one may surmise that the principal reason why health expenditures rise with age is that the proportion of persons near death increases with age. Other studies have found a great deal of consistency over time in the utiliza- tion of health expenditures by the highest users, with the top 1 percent accounting for 20 or more percent of health care dollars (Gornick et al., 1985).

MEDICAID

Program Structure

Medicaid was enacted into law on July 30, 1965, as Title XIX of the Social Security Act, and became part of the existing federal-state welfare structure to assist the poor. Until Medicaid, there had been lit- tle federal participation in health care for the poor. This public obligation was delegated to the states as part of their police powers. Prior to Medicaid, many doctors donated their services or used a slid- ing scale of fees in treating the poor and, as a rule, hospitals admitted charity cases. However, under the purview of the states, health care for the poor varied widely from state to state and manifested all the forms of discrimination tolerated in each locale. The Kerr-Mills Act of 1960—Medical Assistance for the Aged—was the forerunner of the Medicaid model and was later subsumed under Title XIX.

Eligibility

In 2002, about 18 percent of the U.S. population (amounting to 51.5 billion people) was enrolled in Medicaid at some time during the year (Kaiser Fam- ily Foundation, 2006; U.S. Census Bureau, 2004–2005). Supported by federal grants and ad- ministered by the states, Medicaid is limited to spe- cific groups of low-income individuals and families. Medicaid is welfare medicine and thus has no strict entitlement features. (In recent years, the word

“entitlement” has been used indiscriminately, par- ticularly by politicians and the media, in reference to all social welfare programs, including Medicaid.) Recipients must prove their eligibility for Medicaid according to their income and, prior to 1976, states were even permitted to put a lien on a recipi- ent’s home or other personal property.

The program was designed to cover those groups who are eligible to receive cash payments under one of the two existing welfare programs es- tablished under Social Security: Aid to Families with Dependent Children (AFDC), now known as TANF, Temporary Aid to Needy Families, and Sup- plemental Security Income (SSI). In most instances, receipt of a welfare payment under one of these programs means automatic eligibility for Medicaid. The mandatory eligibility groups covered by Medi- caid include (1) families with children which re- ceive AFDC; (2) pregnant and postpartum women and children under 6 years of age, whose incomes do not exceed 133 percent of the Federal Poverty Level (FPL); (3) aged, blind, and disabled individu- als who receive SSI; and (4) certain other specifi- cally defined groups.

Figure 4.5 compares the distribution of Medi- caid recipients to that of expenditures by eligibility category. Needy families—adults and children— were the largest group of Medicaid recipients (72.4 percent) in 2003 but accounted for a relatively small part of the Medicaid budget (28.1 percent), which is a reflection of the relatively good health of most Medicaid children. Due largely to high uti- lization of nursing home services, 24.3 percent of total Medicaid outlays was attributable to the aged, who comprise only 9.8 percent of the Medicaid population. Outlays for the blind and disabled to- taled 42.1 percent of Medicaid expenditures, a dis- proportionately large amount as compared to the number of recipients (17.9 percent) (USDHHS, 2005a). These facts serve to dispel the conventional wisdom that families on welfare incur the lion’s share of Medicaid expense. The impoverished aged and the disabled (which includes the mentally retarded) have no alternative but to expend large per capita amounts in the Medicaid program.

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States may choose to provide Medicaid to cer- tain “optional eligibility groups. Most of these optional groups share characteristics of the mandatory groups (parents and children, aged, blind, and disabled), but the income eligibility ceil- ings are higher (e.g., 1.33 to 1.85 times the federal poverty level of $16,090 for a family of three in 2005). “Medically needy” persons comprise an- other optional group—those who “spend down” their income and wealth, due to medical bills, to the medically needy standard. Under federal guidelines, states set income and asset levels for cash assistance and medical eligibility. Because there is considerable variation in the coverage of optional groups by the states and in income stan- dards across Medicaid jurisdictions, the degree to which programs cover the poverty population varies considerably.

Benefits Provided

Services

Title XIX of the Social Security Act mandates that every state Medicaid program provide specific basic health services:

■ Hospital inpatient care ■ Hospital outpatient services ■ Certified nurse practitioner services ■ Laboratory and X-ray services ■ Nursing facility services for those aged 21 and

older ■ Home health services for those eligible for nurs-

ing services ■ Physicians’ services ■ Family planning services and supplies

CHAPTER 4 Financing Health Systems 91

100%

80%

60%

40%

20%

0% Recipients Expenditures

Aged

Blind /Disabled

AFDC-Type Adults

Children under 21

Other

Figure 4.5. Distribution of Medicaid Recipients and Expenditures by Eligibility Category, 2003 SOURCE: 2005 CMS Statistics, U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, retrieved March 20, 2006 from http://www.cms.hhs.gov/MedicareMedicaidStatSupp/downloads/2005_ CMS_Statistics.pdf

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■ Rural health clinic services ■ Early and periodic screening, diagnosis, and

treatment for children under 21 years of age ■ Nurse midwife services ■ Certain federally qualified health center services ■ Medical and surgical services furnished by a

dentist

States may determine the scope of services of- fered (e.g., limit the days of hospital care or the number of physician visits covered) and provide a number of other elective services. The most com- monly covered optional services include

■ Clinic services ■ Nursing services in a care facility for the aged

and disabled ■ Intermediate care facility services for the men-

tally retarded ■ Inpatient psychiatric services ■ Optometrist services and eyeglasses ■ Prescribed drugs ■ Prosthetic devices ■ Dental care

Administration

Medicaid operates primarily as a vendor payment program. Payments are made directly to providers of service for care rendered to eligible individuals. With certain exceptions, a state must allow Medi- caid recipients freedom of choice among participat- ing providers of health care. Managed care plans, which are foremost among the exceptions, usually hold the ability to restrict freedom of choice to con- tracted providers.

Methods for reimbursing physicians and hospi- tals vary widely among the states, but providers must accept the Medicaid reimbursement level as payment in full. Payment rates must be sufficient to enlist enough providers so that comparable care and services are available to the Medicaid popula- tion as are available to the general population in the area. Notwithstanding, Medicaid physician

reimbursement rates are usually less generous than those of Medicare.

In long-term care facilities, individuals are re- quired to turn over income in excess of their per- sonal needs and maintenance needs of their spouses (the monetary level being determined by the state) to help pay for their care. States may re- quire cost sharing by Medicaid recipients, but they may not require the mandatory eligible to share costs for mandatory services. As noted previously, most state Medicaid programs have buy-in agree- ments with Medicare in which Medicaid assumes the responsibility for the Medicare cost sharing for persons covered under both programs (Gornick et al., 1985; Waldo, 1990).

States participate in the Medicaid program at their option. All states except Arizona (which has a demonstration project of capitated health delivery that excludes long-term care services) currently have Medicaid programs. The District of Columbia, Puerto Rico, Guam, the Northern Marianas, and the Virgin Islands also provide Medicaid coverage.

The states administer their Medicaid programs within broad federal requirements and guidelines. These requirements allow states considerable dis- cretion in determining not only eligibility, also but covered benefits and provider payment mecha- nisms. Some states also include in the Medicaid program persons known as “state-only” enrollees, who do not meet federal requirements and hence do not qualify for federal matching funds. As a re- sult of state options and policy decisions, the char- acteristics of Medicaid programs vary considerably from state to state. Medicaid expenditures also vary widely across the states and states’ benefit mix of- ferings change frequently.

Growth of Medicaid

From 1980 to 2004, Medicaid expenditures grew almost twelvefold, exceeding growth in Medicare, which grew by ninefold over the same period. A dis- proportionately large share of this growth took place in the 1990 to 1995 period. During this time, Medicaid recipients as a percent of the total civilian

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population rose by 35 percent, which was princi- pally attributable to an expansion of those covered in the mandatory eligible groups. In 2005, about 57 million people received Medicaid benefits at some point within the year, with an average monthly en- rollment of 45 million (USDHHS, 2005a).

Providers

Hospital care (inpatient and outpatient) accounted for a much smaller proportion of 2004 Medicaid expenditures (33.9 percent) than Medicare hospital outlays (52.9 percent). Home health care and nurs- ing home care—including skilled nursing facilities, intermediate care facilities, and intermediate care facilities for the mentally retarded (i.e., ICF/MR)— commanded 23.8 percent of Medicaid expendi- tures for 2004 (Smith et al., 2006).

Medicaid continues to be the largest payer of long-term care services, financing 46 percent of total U.S. nursing home care in 2004. Although growth in spending for nursing facility care has slowed considerably in recent years, since the early 1970s Medicaid has funded the lion’s share of all public spending for nursing home care. Compared with other services that Medicaid provides, Medi- caid payments for long-term care are also the most costly per user. In 2002–2003, 66 percent of all U.S. nursing home residents received Medicaid as their primary payer source, spending close to $28,000 per year for nursing home care. For ICF/MR beneficiaries, the payment averaged a whopping $92,789. In 2002, the highest growth rates in payments were for ICF/MR care and pre- scription drugs (Kaiser Family Foundation, 2006; USDHHS, 2005a).

State Spending

Since 1975, Medicaid has been fastest growing component of aggregate state spending. In 2002, Medicaid spent $213.5 billion (or $3,947 per en- rollee) of combined federal and state funds for ven- dor payments for personal health care. New York paid the highest dollar amount per enrollee ($7,505) and California paid the lowest ($2,472). Across the

board, Medicaid pays providers poorly—only about 71 percent of what Medicare pays—for all services, with three states paying less than half of what Medi- care pays (Kaiser Family Foundation, 2006).

Cost Containment

To curtail Medicaid growth, cost-containment initia- tives began in early 1980s. During this time impor- tant experiments were launched in prepaid managed health care; utilization review; case management; reimbursement via diagnosis-related group (DRGs); and new services for the elderly, disabled, and per- sons with AIDS. In 1990, Congress enacted careful and selective expansion of Medicaid coverage, par- ticularly for low-income (and pregnant) women and children. Currently, the focus is on shifting Medicaid funding from the federal coffers to state budgets and encouraging states to model their systems using principles of managed care. Today, more than 60 per- cent of Medicaid enrollees are covered by some type managed care, although the range varies from 0 to 100 percent of enrollees among the states (Kaiser Family Foundation, 2006).

PHYSICIAN REIMBURSEMENT

Paying the doctor traditionally calls upon one of three reimbursement mechanisms: fee-for-service, prepayment, or salary. Health insurance plans, ei- ther public or private, may utilize any or all of the three reimbursement types. According to Reinhardt (1985), there is no optimal system for paying the doctor.

Fee for Service

Fee for service (FFS) is widely used throughout the world for paying the doctor and is typically the physician’s preferred mode of payment. In FFS, the unit of remuneration is the medical act, either a service or a procedure. In the days before health

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insurance for physician reimbursement was wide- spread, most physicians had a sliding fee scale wherein the poor paid lower fees than wealthier pa- tients. With the advent of health insurance in both the public and private sectors, physician payment became more regulated and physicians adopted one schedule of charges for all payers, whether they were individuals or third parties. By the 1980s, however, fees schedules began to vary widely by the type of health plan or insurance organization, pub- lic or private.

One the advantages of fee-for-service reimburse- ment is that the remuneration adjusts automatically for case complexity, linking the provider’s reward closely to the output of services. The billing system, in turn, provides a great deal of “transparency” of the physician’s profile of practice. The ease with which patients may change physicians in a tradi- tional fee-for-service system enables them to di- rectly exercise considerable economic clout over practitioners (Reinhardt, 1985).

Indemnity

Insurance policies that reimburse on a fee-for- service basis offer payment either by indemnity or service benefits or by fixed fees. Indemnity payment stipulates a certain dollar value per procedure, usu- ally according to a “table of allowances.” These al- lowances may vary widely among insurance plans. In traditional indemnity, the provider can charge anything above the stipulated allowed amount and collect the remainder directly from the patient. Often, the table of allowances is based on a “relative value scale,” in which each procedure is rated according to a point system—relative value units (RVUs)—that reflects the relative technical dif- ficulty and time cost of the procedure, with each point worth so many dollars. The dollars amount per RVU (known as the conversion factor) may also vary widely among insurance plans. This type of system is easy to administer and update for infla- tion and changing practice patterns, but no provi- sion is made by the insurer to protect the patient from outlandish charges.

Service benefits pay a percentage per procedure, usually 80 percent of “usual, customary, and rea- sonable” (UCR) fees. In this scheme, the UCR fee schedule protects the carrier from unlimited liabil- ity in the wake of high charges and may also give the patient information about reasonable fee norms. UCR means that the fee is “usual” in that doctor’s practice, “customary” in that community, and “reasonable” in terms of the distribution of all physician charges for that service in the commu- nity. The latter is commonly expressed as a per- centile (e.g., the policy will pay up to the 75th percentile).

Hybrid fee-based systems came into vogue with the advent of PPOs, combining features of both in- demnity and service reimbursement for cost con- tainment. In a hybrid system, the intermediary contracts with the participating physician (or provider) to accept a discounted version of the UCR table of allowances. The plan considers these “allowed amounts” to be the maximum covered ex- penses. For a participating provider, the PPO will typically pay 90 percent of the allowed amount for most procedures, with the remaining 10 percent paid by the patient as coinsurance. This arrange- ment protects both the intermediary by effectively capping the reimbursement (as in an indemnity payment) and the patient by limiting the liability for the difference beyond 10 percent of the allowed amount.

Fixed Fees

In some reimbursement plans, physicians can only charge, and will only be paid, according to fixed fees, usually with little cost or no sharing on the part of the patient (e.g., $10.00 per physician of- fice visit). If the provider accepts the plan, then the fee schedule must be accepted. This arrangement exists in Medicaid plans in a number of states, and many private plans also stipulate fixed fees in order to protect the patient and to contain costs. Many HMO plans also mandate fixed fees, espe- cially for specialists contracted with the health plan.

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Prepayment

In prepayment or capitation, the person served, rather than the medical act, is the unit of remu- neration. The capitation payment takes care of reimbursement for a stipulated length of time, usu- ally per month. Using capitation as a reimburse- ment methodology, HMOs have encouraged physi- cians to form networks linked to hospitals and have also spurred the popularity of independent practice associations (IPAs), in which the participating physicians actually sponsor and administer the HMO. Advantages to prepayment are that it is ad- ministratively simple, it facilitates advance global budgeting, and it gives physicians incentive to con- trol the cost of medical treatments. If patients are allowed to switch primary care physicians from time to time, they still retain some economic clout over physicians (Reinhardt, 1985).

Salary

Salary is payment to the doctor for time consump- tion, irrespective of the units of service or the number of patients. On a large scale, salaried practice almost always takes place in a highly organized network like the National Health Service in Great Britain. On a smaller scale in the United States, urban public hos- pitals that serve indigent populations often have large attending staffs that are salaried. Countries in which salaried practices are common rarely include specialists in this payment mechanism. Instead, gen- eral practitioners or primary care providers have a “panel” of patients in the community. Advantages to salaried reimbursement for physicians are that it is administratively simple, the medical treatments se- lected are not influenced by relative profitability, and it encourages cooperation among physicians. Fur- thermore, salaries facilitate advance budgeting for health expenditures (Reinhardt, 1985).

Monitoring

All payment mechanisms have faults and each must be monitored for abuses. In FFS, the incentives are

for overwork by the physician and overutilization by the patients. FFS fosters unnecessary or duplica- tive service to the point where the high volume of services may actually affect the quality of care ad- versely. Unfortunately, in the United States, mal- practice suits have encouraged defensive medicine, wherein overutilization and extra fees are simply passed on to the consumer in higher insurance rates. Also, if fees for all procedures do not stand in constant proportion to costs incurred, the choice of treatment may favor more profitable procedures. For these and other reasons which foster inflation, fee-for-service reimbursement is very difficult to budget in advance.

In prepayment, on the other hand, underutiliza- tion must be monitored because the incentive is to decrease costs and services provided against rev- enues from capitation payments. In many prepay- ment schemes, any cost savings realized are dis- tributed to the participating physicians, which may be an inducement to cut costs too far. In HMOs where only the primary care physicians are capi- tated, there also exists the incentive to excessively refer patients to specialists. Likewise, capitation gives physicians incentives for “dumping” patients with complex, costly conditions onto other providers. Finally, the administrative system for pre- payment yields little insight as to the transparency of the physician’s practice profile. As a result, HMOs may mandate that physicians submit monthly encounter data on patient visits and/or procedures delivered as a condition of participation in the health plan.

In salaried practice, incentives favor underwork or seeing too few patients. Doctors literally “get paid by the hour,” resulting in no inducement to- ward higher volume. Unless the salary is linked to output and patient satisfaction, patients lose eco- nomic clout over the physician, who, in turn, may render care as an act of noblesse oblige. Like capi- tation, salaried practice gives little transparency as to the physician’s practice profile (Reinhardt, 1985).

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INITIATIVES IN HEALTH CARE FINANCE

Factors in Health Care Inflation

The implementation of Medicare and Medicaid in 1966 heralded a 50-year era of unprecedented health care cost inflation. In a seminal article, Aaron (1993/94) attributes the continually rising costs of health care to three main factors:

1. The technological transformation of medical care, including new diagnostic techniques and new methods of treatment.

2. The demand of consumers for low-benefit care.

3. The lack of budget limits on hospitals and fee controls on physicians.

He also notes that high administrative costs, com- pensation for medical malpractice, and bad health habits of the populace are not important factors in the rising costs of care.

Cost Containment Measures

In the 1970s, the federal government experimented with a number of programs and reimbursement methods to contain health care costs. Major pro- grams included (1) the establishment of reasonable cost limits for hospitals; (2) the initiation of state and local networks of health planning agencies, along with the “certificate-of-need” procedure for augmenting capital plant and equipment; (3) the establishment of the Professional Standards Re- view Organization (PSRO) program to review care and to eliminate unnecessary hospital days for fed- erally funded patients; and (4) the encouragement of the growth of HMOs to promote the use of pre- ventive services and to decrease the utilization of hospital inpatient care. It can safely be said that the programs of the 1970s were unsuccessful in con- taining health care costs.

Early in the 1980s, during the Reagan adminis- tration, legislative efforts to change the monetary in- centive system in health care began in earnest. While the 1980s witnessed considerable flux in health care financing, along with inducements to reduce over- utilization, cost-containment efforts showed mixed results (Rice, 1992). Furthermore, they held painful consequences for many groups of people. To this day, the balance between reasonable costs and equi- table access has not yet been struck. Managed care, particularly capitated prepaid care, holds better in- centives for efficiency, productivity, and management coordination. Yet, even with more closely managed utilization, better quality management, and the con- tinual expansion of government programs, universal access to health services remains illusive.

Procompetition

Early in the 1980s, Enthoven (1981) and other health economists exposited strategies of procom- petition that were meant to restrain health care costs by creating competitive market conditions via direct incentives both for consumers and employers that purchase group health insurance policies. Among these strategies were the imposition of a “tax cap” on employer income tax deductions for health insurance expenses, raising the threshold for individual income tax deductions, and offering multiple choices by employers in health insurance plans. While the threshold for personal income tax deductions for medical out-of-pocket expense was raised to 7.5 percent of gross income, the other strategies, while not formally enacted, had a pro- found effect on the thinking of health policy makers. The programs of the 1980s reflect this conservative philosophy and, in most cases, the scorecards for their success are mixed, at best.

Beginnings of the Prospective Payment System

The Tax Equity and Fiscal Responsibility Act (TEFRA), signed into law in September 30, 1982 (and enacted the next day), set limits on Medicare reimbursements on a per-case basis for hospital

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costs and also placed a limit on the annual rate of increase for Medicare’s reasonable costs per dis- charge. TEFRA was expected to reduce Medicare reimbursement by 4.5 percent in real dollars over the ensuing three years. Due to the fast enactment of the Prospective Payment System (PPS) one year later, it was difficult to evaluate the impact of the act. However, TEFRA was the harbinger of prospec- tive payment and a number of features of the latter program were borrowed from it. These features were part of the Section 223 limits on hospital costs. They included (1) grouping hospitals by bed size and size of locale, (2) wage adjustments by lo- cality, and (3) an adjustment for case-mix index. Today, most hospitals that are excluded from the Medicare Prospective Payment System are reim- bursed according to TEFRA regulations.

The Section 223 limits were calculated accord- ing to a complicated formula whereby the labor- related component for the hospital region, adjusted by a geographic wage index, was added to a re- gional nonlabor component. The product was then multiplied by a case-mix index, specific to each hos- pital. These figures were all specified by the Health Care Financing Administration (HCFA) and the U.S. Department of Health and Human Services and published in the Federal Register. The formula used to calculate the Section 223 limits was sub- stantially retained for figuring reimbursement rates for the Prospective Payment System.

HCFA developed institutional-specific case-mix indexes based on a diagnosis-related group (DRG) system designed at Yale University. The DRG clas- sification system sorts patients into uniform, clini- cally compatible groups that have been categorized on the basis of traditional resource use by patients with similar diagnoses. The original Yale DRGs were modified to reflect variation solely in Medi- care cases. For each hospital, HCFA used a 20 per- cent sample of the Medicare billing forms submit- ted for calendar year 1980. Using the 10,167 ICD-9-CM diagnosis codes from these claims and each hospital’s Medicare cost report, HCFA devel- oped the case-mix index. In essence, this case- mix index was intended to compare a particular

hospital’s case-mix with that of all other hospitals in the nation. Table 4.2 shows how five hypotheti- cal hospitals with five DRGs, each varying in vol- ume by hospital, can calculate their case-mix in- dexes, which reflect the relative severity of each hospital’s caseload. Hospital D, with 62.5 percent of its cases in the high-weighted DRG 3, claims the highest case-mix index of 1.6031. This contrasts with Hospital A that, with almost 70 percent of its cases in the low-paying DRGs 2 and 4, holds a case-mix index of 0.8900. Extending this calcula- tion to all cases in all hospitals participating in PPS, the average case-mix index always equals 1.0000. The dollar amount ascribed to a DRG of 1.0000 is recalculated on a yearly basis.

The Prospective Payment System

The Prospective Payment System (PPS) was enacted on October 1, 1983, two years ahead of schedule. The Social Security Amendments of 1983 initiated the new system and contained provisions to base payment for hospital inpatient services on predeter- mined rates per DRG. In 2003, out of a total of 6,051 hospitals in the United States, 75 percent were participating in PPS. The remaining 1,514 hospitals in the United States still participate in Medicare under the TEFRA reimbursement ar- rangements (USDHHS, 2003). These “exempt or not yet transitioned to PPS” hospitals include psy- chiatric facilities, long-term facilities, children’s hos- pitals, critical access facilities, short-term hospitals, and other special medical facilities that have an approved waiver.

PPS represents a major departure from the traditional reimbursement system—cost-based reimbursement—in that payment bears no direct relationship to length of stay, services rendered, or costs of care. For a given discharge, a hospital with actual costs below the designated PPS rate for a given DRG is permitted to keep the difference in payment. If discharge costs exceed the payment level, the hospital is required to absorb the loss. Payments for hospital-based physician services

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(e.g., radiology, anesthesiology, pathology, etc.), which previously had been reimbursed according to a cost-based fee system, are included in the hos- pital’s PPS rate. Nowadays, these physicians are re- imbursed by Medicare via Part B, billing Medicare directly for their services. Other costs—capital de- preciation expense, direct medical education costs, and costs associated with serving a “disproportion- ate share” of the poor—are exempt from PPS provi- sions and have their own payment formulas, which mimic the formulas used for DRGs.

Standardized Payment Amount

PPS pays a standardized amount for each DRG. Standardized amounts are updated each year by CMS. This amount is further divided into two components—a labor-related amount and a non- labor-related amount. To compute the payment amount for a DRG of 1.0000, the labor-related amount is multiplied by a wage index, specific to each locality, and the product is added to the non-

labor-related amount. For the 2006 fiscal year, for example, a hospital in Los Angeles is subject to a large urban labor-related amount of $3.297.84, times a wage index of 1.1660, plus a non-labor- related amount of $1,433.63. Thus, the DRG pay- ment for a hospital in Los Angeles is $5,278.91. This “final” figure is adjusted by a number of factors including a capital depreciation factor and an ad- justment factor for certain high-cost patient cases known as “outliers.” Hospitals may also qualify for indirect medical education for serving a dispropor- tionate share of low-income patients, and add-on payments for the acquisition of new technology.

DRG Weights

The DRG weight classifications originally used in TEFRA were updated for use in PPS using a stratified sample of 400,000 medical records drawn from pa- tient discharges in 332 hospitals during the last half of 1979. To date, 550 DRGs have been developed, expanding on the original 467 principal diagnoses. A

98 PART TWO Financing and Structuring Health Care

Table 4.2. Calculation of Medicare Case-Mix Indexa

DRG Weighted Expected

Total Cost per Case-Mix Hospital DRG 1 DRG 2 DRG 3 DRG 4 DRG 5 (Percent) Case ($)b Indexc

A 2.5 27.3 10.5 41.5 18.2 100 1660.40 0.8900 B 21.0 0.9 30.1 2.0 46.0 100 2401.30 1.2872 C 40.6 5.0 2.3 47.2 4.9 100 1346.30 0.7227 D 5.1 18.4 62.5 10.0 4.0 100 2990.70 1.6031 E 30.4 65.0 1.0 1.6 2.0 100 929.00 0.4980

Average proportion for all hospitals 19.92 23.32 21.28 20.46 15.02 100 1865.54 —

DRG cost weight $1000 $800 $4100 $1500 $2000 — — aAdjusted to make these five DRGs hypothetically represent all 356 Medicare DRGs. bFor hospital A, calculated as follows:

0.25(1000) � 0.273(800) � 0.105(4100) � 0.415(1500) � 0.182(2000) � $1660.40 cFor hospital A, calculated as $1660.40 divided by $1865.54 � 0.8900.

SOURCE: Tax Equity and Fiscal Responsibility Act of 1982, Management Strategies for Health Care Providers, 1982, New York: Deloitte Haskins & Sells.

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contracted fiscal intermediary, such as Blue Cross or a commercial insurer, assigns a DRG from a bill sub- mitted by the hospital for each case. Using classifica- tions and terminology consistent with the ICD-9-CM and the Uniform Hospital Discharge Data Set, the intermediary assigns the DRG using the Grouper Program (an automated classification algorithm), which compares information contained in the bill with appropriate DRG criteria. Criteria include the patient’s age, sex, principal and secondary diagnoses, procedures performed, and discharge status. (Fig- ure 4.6 presents a schematic diagram of the Grouper Program.) For all but a few DRGs that require

clarification by the hospital before the payment amount is determined, the intermediary determines the payment amount and pays the hospital.

Outliers

Bills for “outliers,” which result in extra payment for the hospital above the standard DRG rate, require special consideration. In the 2005 fiscal year (FY), 4.1 percent of the pool of total DRG payments is reserved for outliers. The hospital must identify cost outliers and request payment. (It is important to note that the classification of DRGs depends largely on the principal diagnosis, which may not

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be the diagnosis consuming the most resources, thus making the discharge an outlier.)

For a discharge to be considered as an outlier, the rules are very stringent. For FY 2005, CMS set the outlier threshold to equal the prospective pay- ment rate for the DRG (including adjustments) plus $25,800 in extra documented costs (Deloitte & Touche, 2005a).

Expansion of PPS

A clear incentive in the PPS system was for hospi- tals to expand services beyond inpatient care, thus increasing and unbundling reimbursement from Medicare. Outpatient care provided ample oppor- tunities for marketing expansion, including disease- specific ambulatory programs, satellite clinics, fam- ily planning activities, chemical dependency treatment, and laboratory or other ancillary ser- vices. Post-acute hospital care provided more op- portunities, including skilled nursing, rehabilita- tion, home health services, and other services which facilitate earlier discharge of patients. All these services grew enormously, providing addi- tional sources of revenue for hospitals in the post- PPS period.

Gradually, CMS saw the wisdom of using PPS- style reimbursement methods for a wide array of providers. Today, Medicare uses standardized amounts, relative weights, geographic labor in- dexes, and case-mix grouping techniques for inpa- tient rehabilitation facilities, skilled nursing facili- ties, long-term care hospitals, home health agencies, hospices, and all types of outpatient hos- pital procedures and ambulatory surgery centers.

Long-Term Results of PPS

The implementation of PPS demonstrates the un- predictability of results stemming from changes in health finance. The major deleterious incentives an- ticipated in the early days of PPS included (1) mul- tiple, unnecessary admissions of the same patient for a set of related procedures resulting in more dis- crete DRG payments—a practice known as churn- ing; (2) skimming more profitable, less severely ill patients in each DRG, or dumping high-cost pa-

tients; and (3) reducing length of stay, tests, and procedures per admission to dangerously low lev- els, increasing mortality and morbidity.

Empirical findings as to the validity of these as- sertions have shown few ill effects of PPS or are in- conclusive due to the rapidly changing nature of the health care sector. Prior to PPS, hospital admis- sions had been falling for all payers for a number of years and once PPS was enacted, Medicare admis- sions went down as well. In the year immediately following the enactment of PPS, hospital admis- sions declined by more than 11 percent, reversing the steady rise in Medicare admissions in the years prior to PPS. By 2002, hospital discharges per 1,000 enrollees fell to 315, down from 347 in 1985 While anecdotal evidence of skimming and dumping have surfaced, widespread usage of these practices by hospitals for Medicare patients has not been documented (DesHarnais et al., 1987; Guterman & Dobson, 1986; Guterman et al., 1988; USDHHS, 2003).

Length of stay has been falling for Medicare since the inception of the act. Under the PPS sys- tem, an even steeper decline in average length of stay (down 17 percent for the first three years of PPS), combined with reduced admissions, has re- sulted in declining inpatient volume nationwide. Reduced length of stay has been achieved through shorter stays across the board, rather than efforts aimed specifically at patients who have the longest stays (i.e., the most severely ill). From 1990 to 2002, length of stay continued to decline from 9.0 days per admission to 5.9 days. These phenomena indicate that PPS has been effective in encouraging hospitals to become more efficient in the provision of inpatient care (USDHHS, 2003).

The Medicare Case-Mix Index increased sharply and the percentage of hospital days spent in special care units increased after the implementation of PPS, possibly due to more judicious selections of candi- dates for inpatient hospitalization. Other studies of severity of illness at admission and discharge also show increases in the post-PPS period.The discharge of patients “quicker and sicker” has fostered rapid growth in the use of skilled nursing and subacute

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facilities. Home health agency services, which en- joyed rapid growth through 1997, have since been in retrenchment due to reduced Medicare reimburse- ment rates under PPS (USDHHS, 2005b).

A number of criticisms have been levied against the incentives inherent in the DRG system. To the extent that individual DRGs reflect procedures ac- tually performed rather than diagnoses, the choice of treatment may vary according to the “profitabil- ity” of that DRG and treatment decisions may not be made on purely clinical grounds. In a similar vein, physicians, in their clinical notes, and medical records administrators, in abstracting data for the DRG grouper program, might call on coding strategies to ensure DRG creep to higher-level, revenue-enhancing diagnoses.

Financial Performance

Hospitals have generally fared well financially under PPS, but the distribution of results is uneven. The spate of hospital bankruptcies that were pre- dicted at the inception of PPS has not taken place, but acquisitions and mergers have been rampant in the health care industry in recent years.

PPS appears to have decelerated the rate of in- crease in Medicare inpatient hospital expenditures. Although outpatient payments, which are excluded from PPS, have mushroomed, total Medicare benefit payments are increasing at a slower rate due to the sharp decline in growth of Part A payments. Hospi- tal inpatient expenditures comprise about 40 per- cent of Medicare payments—only slightly more than total SMI payments in 2002 (USDHHS, 2003).

Medicare Physician Reimbursement

From 1975 to 1990, Medicare’s total payments for physician services grew at a faster rate than pay- ments for hospital services. By 1990, physician ser- vices reached a high of almost 23 percent of total Medicare spending. Over the same period, hospital care dropped as a drastically as a share of total Medicare expenditures.There was general agreement that physician payment under Medicare needed to

be revised. In 1990, Congress directed the admin- istration to study physician payment reform when it established Medicare’s DRG-based prospective payment system for hospital care.

Resource-Based Relative Values

On January 1, 1992, Medicare initiated a new sys- tem for reimbursing physicians using a resource- based relative-value (RBRV) scale. This payment method divides resources needed to produce physi- cian services into three components: physician work, practice expenses, and malpractice insurance costs. For each procedure, each of the three compo- nents is characterized by a numerical value repre- senting its relative contribution to the expenses in- curred in delivering the service (Table 4.3). In addition, as shown in Table 4.4, the relative values of the three components are each adjusted for geo- graphic cost/price variations. The total units drive the fee, which is derived by multiplying the total units by a conversion factor. The final fee is thus a geographically weighted summation of the three components of the RBRVs times the conversion factor or each unit of service. For 2006, the conver- sion factor is $36.18 per unit (Deloitte & Touche, 2005b; Hsiao et al., 1988a; Hsiao et al., 1988b).

For surgery, the RBRV payment schedule also es- tablishes a uniform definition of “global surgery” to ensure that identical payments are made for the same amount of work and resources expended in furnishing specific surgical services on a nation- wide basis. The initial evaluation or consultation by a surgeon is paid separately from the global surgery package. The global fee includes all preoperative visits and all medical and surgical services related to a procedure, covering a 90-day postoperative pe- riod for all visits by the primary surgeon.

Simulations done by the Harvard University de- velopers of the new reimbursement system (Hsiao et al., 1988a) showed that certain types of physi- cians would be financial winners and losers under RBRVs. Pathologists, radiologists, thoracic sur- geons, cardiovascular surgeons, and ophthalmolo- gists stood to lose, whereas physicians specializing in evaluation and management, such as internists,

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family practitioners, and immunologists would gain considerable amounts over their previous Medicare earnings.

Hsiao (1992) later published an article criticiz- ing HCFA for setting the monetary conversion fac- tors at unreasonably low levels and that Medicare continued to reimburse invasive services with more units than research justified, according to the RBRVs actually assigned in the Medicare Fee Schedule. This practice by CMS continues to this day, and now most types of physicians are feeling the pinch of restricted Medicare fees, which are down more than $2.00 per unit since 2001.

STRATEGIES FOR HEALTH CARE REFORM

National Health Insurance

National health insurance (NHI) is a concept that has been espoused by many for more than 70 years for containing health care costs and for providing

universal access for the U.S. population. NHI came close to becoming part of the Social Security Act of 1935, and numerous bills, representing a spec- trum of schemes, have been introduced and seri- ously debated by most congressional sessions ever since. In the mid-1970s the issue of NHI became so heated that both political parties introduced some bills that were strikingly similar. NHI bills ran the gamut from expanding Medicare to new population groups (e.g., children under 5 years of age) to a national health service (NHS) concept like that of Sweden or Great Britain where the government owns the hospitals and pays the doctors directly.

When President Carter was elected in 1976, many in the health arena assumed that NHI would be an eventuality in a Democratic administration, but early on, it was evident that Carter took little in- terest in health issues. In the 1980s and early 1990s, the Reagan and Bush administrations were active in introducing cost-containment measures, such as PPS and RBRVs for Medicare, but until the Clinton administration, no serious consideration was given to sweeping reform of the entire system.

102 PART TWO Financing and Structuring Health Care

Table 4.3. Relative Value Units Used in the Medicare Fee Schedule: Selected Procedures, 2006

Physician Practice Malpractice Description Work Expense Insurance Total Units*

Appendectomy 9.99 4.32 1.31 15.62 CABG, arterial, four or more 37.44 18.34 5.42 61.20 Cesarean delivery 17.34 7.85 4.12 29.31 Colonoscopy 2.82 5.09 0.26 8.17 Hysterectomy and vagina repair 15.74 7.79 1.91 25.44 Knee arthroscopy/surgery 8.18 5.05 1.25 14.48 Magnetic Resonance Image, jaw joint 1.48 11.72 0.66 13.86 Psychiatric treatment, 45–50 min 1.86 0.60 0.04 2.50 Repair detached retina 14.82 11.33 0.73 26.98 Repair inguinal hernia 8.56 4.08 1.13 13.77

*Total units reflect the hypothetical number of RVUs existing in an area where all three GPCIs are 1.000.

SOURCE: Medicare Physician Fee Schedule, 2006, U.S. Department of Health and Human Services (USDHHS), Centers for Medicare & Medicaid Services. Retrieved on March 20, 2006, from http://new.cms.hhs.gov/ PhysicianFeeSched/PFSRVF/itemdetail.asp?filterType=none&filterByDID=-99&sortOrder=ascending&itemID= CMS057575

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American Medical Association

An unprecedented issue of the Journal of the Amer- ican Medical Association ( JAMA) appeared in May 1991. The entire issue was devoted to health sys- tem reform proposals, a subject traditionally anath- ema to organized medicine. Most proposals called for a revised system administered by private insur- ers with employer/employee premium sharing, sup- plemented by some form of government financing for nonworking individuals and families. With few exceptions, the proposals called for universal ac- cess to health care and for the provision of health insurance to all employees. Looking to the political left, it was interesting that no plan advocated a

national health service model. On the right, only one of the plans called for increased privatization and freedom of choice.

In what can only be called a courageous edito- rial, Lundberg (1991, p. 2566), then the editor of the JAMA, summed up the findings:

Although there may be consensus that our society must provide basic medical/health care for all of our people, we seem not to be close to a consensus on how to do it. Virtually all comprehensive health care pro- posals involve major legislation of some sort. Since consensus means “general agree- ment or unanimity; group solidarity in

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Table 4.4. Geographic Practice Cost Indexes (GPCIs) Used to Weight the Components of RBRVs: Selected Cities and Areas, 2006

Locality Physician Work Practice Expense Malpractice Insurance

Arizona 1.000 0.992 1.069 Atlanta, GA 1.010 1.089 0.966 Birmingham, AL 1.000 0.846 0.752 Boston, MA 1.030 1.329 0.823 Chicago, IL 1.025 1.126 1.867 Colorado 1.000 1.014 0.803 Dallas, TX 1.009 1.062 1.061 Detroit, MI 1.037 1.054 2.744 Houston, TX 1.016 1.014 1.298 Iowa 1.000 0.868 0.589 Los Angeles, CA 1.041 1.156 0.954 Miami, FL 1.000 1.046 2.269 Minneapolis-St. Paul, MN 1.000 1.005 0.410 New Orleans, LA 1.000 0.946 1.197 New York, NY (Manhattan) 1.065 1.298 1.504 Puerto Rico 1.000 0.698 0.261 San Francisco, CA 1.060 1.543 0.651 Seattle, WA 1.014 1.131 0.819 Vermont 1.000 0.968 0.514 Washington DC, Area 1.048 1.250 0.926

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sentiment or belief,” it is unlikely that, ei- ther as a society or as a profession, we will ever reach a true consensus on how to pro- ceed, so we must not wait for one. To pass federal legislation requires only a simple majority in both houses of Congress plus presidential approval.

The Clinton Health Security Plan

Health care reform became one of the hottest do- mestic political issues of the early 1990s. Pressures for reform came from a wide variety of groups in- cluding providers, the elderly and disabled, labor unions, state and local governments, and insiders within the Washington establishment. Even the health insurers and managed care organizations called for change. The two main targets of discon- tent were (1) the growing numbers and financial burden of uninsured and underinsured Americans, and (2) the high cost of health care that eroded American competitiveness in the international marketplace.

In response to these pressures, President Clinton introduced the President’s Health Security Plan (White House Domestic Policy Council, 1993), which was largely the work of a task force headed by Hillary Rodham Clinton. The plan was subject to a great deal of criticism (and negative television advertising) from a large number of wealthy special interest groups, with the result that the plan died in Congress within a few months.

The essence of the plan was to create regional health alliances (i.e., health insurance purchasing cooperatives), wherein various competing insur- ance plans would be offered, at various premium supplements, to all participating employers and thus their employees. The model was based, in part, on the California Public Employees Retirement Program (CalPERS) health insurance, which had been quite successful for more than a decade in containing costs, maintaining quality, and offering a wide range of comprehensive traditional and managed care plans to its members. The Clinton plan would also have created a separate risk pool for the uninsured.

Perhaps the ultimate reason that the Health Se- curity Plan failed was that its implementation de- pended on global prospective budgeting for health care at a national level, the moneys from which would be dispersed to state budgeting agencies and then on to the regional alliances. Many influential opinion makers maintained that the United States had no viable administrative apparatus whereby such complex prospective budgeting could take place. They predicted that a large and costly new government bureaucracy would emerge.

The irony of the failed outcome of the Clinton plan is that, in many regions of the country, such health alliances have emerged within the private sector, spurred by consolidation of health plans and providers into large health systems and man- aged care plans.

President Clinton, in the face of his defeated plan, was active in pushing health reform legisla- tion incrementally, based on the research con- ducted for the Health Security Act. Among areas of federal legislative reform enacted late in the Clinton administration were (1) increasing the portability of health benefits from one employer to another, (2) encouraging growth for Medicare managed care plans, (3) expansion of mental health benefits in health plans so that they are comparable to physi- cal health benefits, and (4) incentives to form Health Savings Accounts (HSAs).

HSAs, drawing the greatest amount of conserva- tive political approval, are similar in concept to In- dividual Retirement Accounts, offering income-tax- exempt trusts to pay for qualified medical expenses. Individuals and families have to purchase high-deductible health plans that meet federal spec- ifications. Yearly deductibles (e.g., $2,000 per fam- ily per year) are subject to annual out-of-pocket ex- penses of $10,200 per family (not including the price of the health insurance premium). In return, families get to deduct $5,250 in income taxes. In 2005, more than 1 million Americans were cov- ered by HSAs. In 2006, HSAs—touted as a method for reducing the numbers of the uninsured—are proposed for growth by the George W. Bush Administration (AHIP, 2005a, AHIP, 2005b).

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Medicaid Reform

The Welfare Reform Act of 1996 placed new restric- tions on eligibility for AFDC, SSI, and other federally funded welfare programs, including Medicaid. Fur- thermore, greater discretion was given to the states as to how to organize and enact welfare programs. Chief among the provisions was that Medicaid be delinked from cash assistance programs and that states be required to redetermine Medicaid eligibility for all welfare recipients. Another new federal provi- sion was that states may deny Medicaid and cash as- sistance to current legal immigrants. Legal immi- grants who arrive after the bill is enacted are subject to a five-year waiting period before they become eli- gible for means-tested programs. (This provision held cost-cutting opportunities for states with high rates of immigration, like California and Texas.)

SCHIP

In 1997, President Clinton was successful in passing one expansion of publicly funded health care as part of welfare reform—the State Children’s Health Insur- ance Program (SCHIP), which provided states with $40 billion in federal funding over 10 years to ex- pand coverage for low-income children. SCHIP pro- vides a capped amount of funds to states on a match- ing basis. Implementation of SCHIP is meant to reduce the number of low-income children lacking in- surance coverage, even if they earn too much to qual- ify for Medicaid. Unlike previous expansions, which built upon existing Medicaid programs, states can set up separate programs to serve SCHIP enrollees. States that choose to participate have greater flexibil- ity in designing benefit packages and may impose some cost sharing, resembling private insurance plans more than Medicaid.The majority of states take advantage of SCHIP. In 2004, SCHIP funded $6.6 billion in separate state programs and Medicaid ex- pansions, covering 6.2 enrollees. (USDHHS 2005b.)

The Uninsured

Health reform cannot be discussed without ad- dressing the growing plight of the uninsured. For

the entire year of 2002, approximately 15.2 per- cent of the U.S. population, comprising about 44 million people, was not covered by health insur- ance, either public or private. This percentage is up from 1987, when about 12.9 percent of the popu- lation was uninsured for health care. Groups that predominate among the uninsured are Hispanics and, to a lesser extent, African Americans; those 18 to 24 years old; and those with low household incomes. The South and the West are also dispro- portionately represented, with the highest concen- trations of uninsured (accounting for more than one-third of the total) in California, Texas, and Florida. Although uninsurance cuts across all in- come levels, the majority of the uninsured were poor or in the lower-middle income bracket. (U.S. Census Bureau, 2004–2005) (A detailed account of the uninsurance issue will be presented in the fol- lowing chapter.)

International Comparisons

A great deal of interest in recent years has been fo- cused on the reasons U.S. health spending is so much higher than that of other industrialized na- tions, even those with much older populations and universal access to care (Reinhardt, Hussey, & Anderson, 2004). When compared with the 29 countries in the Organization for Economic Cooperation and Development (OECD) from 1990–2002, U.S. per capita health spending ex- ceeded other countries by huge margins. At the high end of per capita outlays, Switzerland spent only 68 percent of the U.S. amount, and Canada and Germany each spent 57 percent. In the lower half of the OECD spectrum, Japan and the United Kingdom spent only 44 and 41 percent, respec- tively, on per capita health care.

Reinhardt and colleagues (2004) give five major factors that are driving U.S. health spending: (1) the high level of GDP per capita in the United States; (2) the comparatively high price of health services; (3) the lower supplies of health profes- sionals, facilities, and equipment in the United States; (4) administrative complexities and costs;

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and (5) the unwillingness of Americans to ration care. Furthermore, in an update of the article, Anderson and colleagues (2005) debunked the popular misconception that the costs associated with malpractice litigation are responsible for high U.S. health care costs, as compared to the OECD countries.

SUMMARY

Financing health services in the United States in- cludes a plethora of institutions and activities. The growth of employer-based private health insurance has stimulated unprecedented growth in health ex- penditures and biomedical advancement for the na- tion in the postwar era. The advent of Medicare and Medicaid in 1966, heralded a period of even more rapid growth, along with unbridled inflation, that persists to this day.

Inequities in access to health care (once thought to be alleviated by Medicare and Medicaid along with the extensive provision of voluntary health insurance for employed groups) have not been resolved. Universal health coverage has not been realized, and a substantial and growing percent of the U.S. population go uninsured. State revenues have grown at rates slower than state-funded health care costs, inducing across-the-board reductions and more restrictive eligibility requirements for state Medicaid programs. The Prospective Payment System, the new Medicare Fee Schedule for physi- cians, selective contracting, and managed care plans have demonstrated short-lived successes in stalling the continued growth in health care spend- ing. However, health care expenditures as a percent of GDP continue to grow with no end in sight. Fur- thermore, effective means for identifying and moni- toring the adequacy and appropriateness of health care have not been developed.

The cry for health care reform resounds in all sectors of the U.S. economy. While most policy makers agree on universal access, they are far from an agreement on how to finance the system, reim- burse the providers, and impose cost controls. Whatever transpires in the future is likely to revolve

around the fundamental politic of health finance: private versus public, entitlement versus social wel- fare, and fee for service versus prepayment.

This chapter has provided a historical and methodological framework for understanding and analyzing health care finance in the United States today. Many of the principles that have been pre- sented apply to financing health systems world- wide, no matter how turbulent the future of health care proves to be.

REVIEW QUESTIONS

1. Describe the size of the U.S. health care industry in financial terms, and discuss the growth in health care expenditures.

2. Describe the flow of finance in health care in the United States, referring specifically to payment sources and outlays for health care services.

3. Describe the three main types of health insurance in the United States, referring specif- ically to voluntary health insurance, social health insurance, and welfare medicine.

4. Briefly describe Medicare Parts A, B, C, D. 5. Briefly describe the Medicaid program. 6. Discuss the methods of physician reimburse-

ment in the United States. 7. Provide an overview of the prospective pay-

ment system. 8. Describe the resource-based relative-value

scale payment method.

REFERENCES & ADDITIONAL READINGS

Aaron, H. J. (1993/1994, Winter). Paying for health care. Domestic Affairs, 23–78.

AHIP Center for Policy and Research. (2005a). Sum- mary: Number of HSA plans exceeded one million in March 2005. Retrieved May 4, 2005, from http:/www.ahipResearch.org.

AHIP Center for Policy and Research. (2005b). Com- parison of tax-advantaged health care spending

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accounts. Retrieved January 11, 2005, from http:/www.ahipResearch.org.

American Medical Association. (1984) Diagnosis-related groups (DRGs) and the prospective payment system. Chicago: American Medical Association.

Anderson, G. F., Hussey, P. S., Frogner, B. K., & Waters, H. R. (2005). Health spending in the United States and the rest of the industrialized world. Health Affairs, 24(4), 903–914.

Deloitte Haskins & Sells. (1982). Tax Equity and Fiscal Responsibility Act of 1982: Management strategies for health care providers. New York: Deloitte Haskins & Sells.

Deloitte & Touche. (2005a, August 4). CMS Final FY 2006 inpatient PPS update includes 3.7-percent increase, DRG revisions, post-acute-care transfer policy expansion, and other significant changes. Washington Commentary, pp. 1–23.

Deloitte & Touche. (2005b, November 7). CMS issues final FY 2006 physician fee schedule update con- taining 4.4-percent payment reduction. Washington Commentary.

DesHarnais, S., Kobrinski, E., Chesney, J., et al. (1987). The early effects of the Prospective Payment System on inpatient utilization and the quality of care. Inquiry, 24, 7–16.

Enthoven, A. (1981). The competition strategy; status and prospects. New England Journal of Medicine, 304, 109–112.

Fuchs, V. R. (1984). “Though much is taken”: Reflec- tions on aging, health, and medical care. Milbank Memorial Fund Quarterly, 62, 143–166.

Gornick, M., Greenberg, N. J., Eggers, P. W., et al. (1985). Twenty years of Medicare and Medicaid: Covered populations, use of benefits, and program expenditures. Health Care Financing Review (Ann. Suppl.), 13–59.

Guterman, S., Dobson, A. (1986). Impact of the Medi- care Prospective payment system for hospitals. Health Care Financing Review, 7, 97–114.

Guterman, S., Eggers, P. W., Riley, G., Greene, T. F., & Terrell, S. A. (1988). The first 3 years of Medicare prospective payment: An overview. Health Care Fi- nancing Review, 9(3), 67–77.

Hillman, A. L., Welch, W. P., & Pauly, M. V. (1992). Contractual arrangements between HMOs and primary care physicians: Three-tiered HMOs and risk pools. Medical Care, 30(2), 136–148.

Hsiao, W. C., Braun, P., Becker, E. R., et al. (1992). Results and impacts of the resource-based relative value scale. Medical Care, 30(11), NS61–NS79.

Hsiao, W. C., Braun, P., Dunn, D., Becker, E. R., DeNicola, M., & Ketcham, T. R. (1988a). Results and policy impications of the resource-based relative-value study. New England Journal of Medicine, 319(13), 881–888.

Hsiao, W. C., Braun, P., Yntema, D., & Becker, E. R. (1988b). Estimating physicians’ work for a resource- based relative-value scale. New England Journal of Medicine, 319(13), 835–841.

Journal of the American Medical Association. (1991, May 15), 265(19), May 15.

Kaiser Family Foundation. (2006). State health facts. Retrieved February 26, 2006, from http:// www. statehealthfacts.org/cgi-bin/healthfacts.cgi.

Lubitz, J., & Prihoda, R. (1984). Use and costs of Medi- care services in the last two years of life. Health Care Financing Review, 5, 117–131.

Lundberg, G. D. (1991). National health care reform: An aura of inevitability is upon us. Journal of the American Medical Association, 265(19), 2566–2567.

Neuschler, E. (1990). Canadian health care: The implica- tions of public health insurance. Washington, DC: Health Insurance Association of America.

Reinhardt, U. E. (1985). The compensation of physi- cians: Approaches used in foreign countries. Quality Review Bulletin, 11, 366–377.

Reinhardt, U. E., Hussey, P. S., & Anderson, G.F. (2004). U.S. health care spending in an interna- tional context. Health Affairs, 23(3), 10–25.

Rice, T. (1992). Containing health care costs in the United States. Medical Care Review, 49(1), 19–65.

Roemer, M. I. (1977). Comparative national policies on health care. New York, Marcel Dekker.

Roemer, M. I. (1978). Social medicine: The advance of organized health services in America. New York, Springer.

Smith, C., Cowan, C., Heffler, S., Catlin, A., & National Accounts Team. (2006). National health spending in 2004: Recent slowdown led by prescription drug spending. Health Affairs, 25(1), 186–196.

U.S. Census Bureau. Statistical abstracts, 2004–2005. Retrieved February 6, 2006, from http:// www.census.gov/prod/www/abs/statab.html.

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U.S. Department of Health and Human Services. (USDHHS), Centers for Medicare & Medicaid Services. (2003). Data Compendium. Retrieved February 27, 2006, from http://www.cms.hhs.gov/ DataCompendium/02_2003_Data Compendium .asp#TopOfPage.

U.S. Department of Health & Human Services (USDHHS), Centers for Medicare & Medicaid Ser- vices. (2005a). 2004 Medicare & Medicaid statisti- cal supplement. Retrieved February 26, 2006, from http://www.cms.hhs.gov/MedicareMedicaidStatSupp/ 05_2004%20Edition.asp#TopOfPage.

U.S. Department of Health & Human Services (USDHHS), Centers for Medicare & Medicaid Services. (2005b). 2005 CMS statistics. Retrieved February 6, 2006, from http://www.cms.hhs.gov/ MedicareMedicaidStatSupp/downloads/2005_CMS _Statistics.pdf.

U.S. Department of Health and Human Services (USDHHS), Centers for Medicare & Medicaid

Services. (2006a). Medicare & you. Retrieved February 1, 2006, from http://www.medicare.gov/ publications/pubs/pdf/10050.pdf.

U.S. Department of Health & Human Services. (USDHHS), Centers for Medicare & Medicaid Services. (2006b). Medicare physician fee schedule. http://new.cms.hhs.gov/apps/pfslookup/step0.asp.

U.S. Department of Health and Human Services (USDHHS), Health Care Financing Administration, Office of Research and Demonstrations. (1995, February). Medicare and Medicaid statistical supple- ment. Health care financing review. (HCFA Pub. No. 03348), Vol. 17.

Waldo, M. O. (1990). Addendum: A brief summary of the Medicaid program. Health care financing review (Ann. Suppl.), 12, 171–172.

The White House Domestic Policy Council: The presi- dent’s health security plan. (1993). New York: Times Books.

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CHAPTER TOPICS

Principles of Insurance

Health Insurance in the United States

Health-Related Insurance Programs

Health Plan Benefits Design

Managed Care

The Future of Health Insurance

The Uninsured

The Prospect of National Health Insurance

LEARNING OBJECTIVES

Upon completing this chapter, the reader should be able to

1. Understand the history, structure, and role of health insurance.

2. Appreciate the commercial health insurance industry.

3. Differentiate various health insurance provi- sions, terms, conditions, and product types.

4. Understand related insurance products.

5. Analyze the appropriate role of managed care in the nation’s health care system.

6. Understand the variety of arrangements included under the term managed care.

7. Appreciate the roles of all key players, especially the consumer, in managed care.

8. Understand the underlying mechanisms of managed care.

9. Appreciate the challenges facing this industry in the future.

109

CHAPTER 5

Private Health Insurance and Managed Care

Alma Koch

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The United States is clearly the world leader in financing health services using the private health insurance (PHI) vehicle. In 2004, PHI financed 35 percent of the nation’s health care dollar, cover- ing, to some extent, almost 85 percent of the popu- lation. PHI is by far the most comprehensive source of medical care financing for working Americans and it plays a pivotal role in influencing the direc- tion and structure of the United States medical care system.

Since 1980, managed care has insinuated itself on all health insurance products in the private sec- tor. Today, even the most generous indemnity-type plans require prior review of elective hospital ad- missions (this being the minimum intervention in the managed-care process). Employee health bene- fits and managed care are inextricably linked for a large (but shrinking) majority of working American families. The possibility of uninsurance is a real threat to many workers who may experience either periods of unemployment or jobs that do not offer health insurance benefits at all. Thus, a clear under- standing of private health insurance and managed care is becoming essential, not just for health policy makers and health executives, but also for everyday people as they look at careers and families, evaluate the health insurance options available to them (if any), and prepare for their retirement.

PRINCIPLES OF INSURANCE

Risk is the possibility of a loss. Thus it is the risk that one insures against. Insurance is a mechanism for managing the financial exposure to risk via two basic principles: (1) transferring risk from an indi- vidual to a group, and (2) sharing losses on some equitable basis by all members of the group. De- pending on the purchaser’s tolerance for risk and on one’s ability to withstand the economic conse- quences of an actual loss, the amount and type of insurance required can vary widely.

When health insurance began in the United States, it was purchased to protect an individual from an expensive loss requiring hospital care. As PHI evolved to cover more people and a wider va- riety of medical expenses, it began to hold certain violations of the principles of insurance.

■ The loss is supposed to be something out of the ordinary, as well as something to be avoided. Ill health, however, is a commonplace event for most people, and in many cases the loss being insured against is not necessarily an event to be dreaded (e.g., a routine visit to the doctor).

■ Losses are supposed to be independent events: from person to person and from one event to another within the same person. In contrast, the very nature of infectious illness (or, in the ex- treme, an epidemic) implies a great degree of de- pendency among insured losses.

■ The loss should be of such financial magnitude that it is unrealistic to budget for it. First dollar medical plans violate this tenet. Vision care in- surance, for example, skates the edge of this in- surance principle.

Because of these principles, health insurance has evolved into a fundamentally different product than most other forms of insurance. And many health care observers have noted that these unique characteristics of health insurance, when added to the economic structures of the medical care market- place, have made health insurance a chief con- tributor to the continuing growth of health expen- ditures in the United States. Ironically, the presence and growth of health insurance in the 1950s and 1960s provided a financial foundation for much of the medical industry that now fuels es- calating costs. The presence of health insurance, in itself, creates a situation that stimulates demand and increases medical care prices, thereby raising the cost of health care and encouraging even greater insistence on more comprehensive cover- age (Whitted, 2001).

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HEALTH INSURANCE IN THE UNITED STATES

Modern private group health insurance started in 1929, when Dallas teachers contracted with Baylor Hospital to cover certain hospital expenses, thereby starting the first Blue Cross plan. During the 1930s and 1940s, health insurance coverage grew slowly, in terms of both the insured population and the types of coverage offered. In 1940, private insurers provided some form of health protection to 12 mil- lion people, less than 10 percent of the population. After World War II, a series of legal and tax incen- tives for both employers and employees provided inducements to purchase comprehensive health in- surance benefits. In 1942, only 37 insurers wrote group health insurance coverage; by 1951, this number had climbed to 212. By 1950, the number of people covered by the nation’s health insurers had climbed to nearly 77 million, or 53 percent of the U.S. population. Fueled by the strong union gains of the 1950s and 1960s, collectively bar- gained employee benefits packages quickly became the norm throughout American industry (Congres- sional Budget Office, 1991; Feldstein & Friedman, 1977; Greenspan & Vogel, 1980).

In 1960, 123 million Americans held some type of health insurance, generating about $5 billion in payments and accounting for nearly 21 percent of total personal health care expenditures. (See Table 5.1.) The 1960s were a boom time for the health insurance industry with coverage expanded to an additional 36 million Americans and payments tripled to $15 billion—more than 23 percent of total United States personal health care expenditures. This expansion was coincidental with the inception of Medicare and Medicaid in 1965, giving substan- tial impetus to the notion that affordable access to the health care system was a right for Americans.

The 1970s witnessed another 29 million Americans added to the roster of the health insured

population along with new forms of health insur- ance products (principally dental and prescription drug insurance). By 1980, health insurance paid 29 percent of the nation’s personal health care bill. Although the 1980s saw proportionately slower growth in the proportion of people with PHI, by 1990, PHI expenditures more than tripled to $202 billion. By 2004, PHI and employee benefit pro- grams were responsible for financing nearly almost 38 percent of all personal medical care expendi- tures (PHCE).

Table 5.2 describes health insurance coverage from 1984 to 2003 among those under 65 years of age. The privately insured are contrasted with Medicaid beneficiaries and the uninsured. (Few Medicare enrollees are under age 65 and thus are excluded from the table.) PHI, including health benefits obtained through work, has been in steady decline in terms of the percentage of the population obtaining it. While Medicaid has expanded, partic- ularly for those under 18 years, so has the percent of the population over 18 that is uninsured. Whites are more likely to be privately insured than any

CHAPTER 5 Private Health Insurance and Managed Care 111

Table 5.1. Private Health Insurance (PHI) as a Health Financing Mechanism for Personal Health Care Expenditures (PHCE), Selected Years

PHI Expenditures PHI Expenditures Year ($ Billions) (Percent of PHCE)

1960 5.0 21.0 1970 14.8 23.0 1980 62.0 29.0 1990 201.8 33.4 2000 398.7 35.1 2004 658.5 37.6

SOURCE: Adapted from Statistical Abstracts, 2004– 2005; U.S. Census Bureau, retrieved February 24, 2006, from http://www.census.gov/prod/www/abs/ statab.html and “National Health Spending in 2004: Recent Slowdown Led by Prescription Drug Spending;” by C. Smith et al., 2006, Health Affairs, 25(1), 186–196.

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other racial or ethnic group, and they are more likely to receive group coverage through work. Blacks are more disproportionately represented in Medicaid than any other group, whereas Hispanics are far more likely to be uninsured. Although their numbers are relatively small, Native Americans are overrepresented in Medicaid and among the uninsured.

Methods for Categorizing Health Insurance

Most health insurance today is a combination of true insurance against illness and other employee benefit products, such as disability income. One

method characterizes health insurance according to the typical combination of products. The principal insurance vehicles that provide benefits associated with ill health are (1) basic employee benefits, including medical, dental, vision, and prescription drug benefits; (2) disability insurance—short- and long-term insurance offered as part of many em- ployee benefit programs, as well as compulsory tem- porary disability insurance mandated by five states; and (3) workers’ compensation. Employers pay partially or wholly for each category of insurance, with basic employee benefits reimbursing most of the expenditures attributed to health insurance.

The second major method for categorizing health insurance is by the type of organization

112 PART TWO Financing and Structuring Health Care

Table 5.2. Private Health Insurance Coverage among Persons under 65 Years of Age, According to Selected Characteristics: United States, Selected Years 1984–2003

Private Private Insurance No Health Insurance Obtained through Insurance

Total Workplace Medicaid Coverage

Characteristic 1984 2003 1984 2003 1984 2003 1984 2003

Number in millions Total 157.5 173.6 141.8 159.3 14.0 30.9 29.8 41.6

Percent of population Total 76.8 68.9 69.1 63.3 6.8 12.3 14.5 16.5

Age Under 18 years 72.6 63.0 66.5 58.6 11.9 26.0 13.9 9.8 18–44 years 76.5 67.7 69.6 62.2 5.1 7.4 17.1 23.5 45–64 years 83.3 77.3 71.8 70.0 3.4 5.3 9.6 12.5

Race White only 79.9 71.5 72.0 65.6 4.6 10.4 13.6 16.0 Black or African American 58.1 54.9 52.4 51.5 20.5 23.7 19.9 18.4 American Indian/

Alaska Native 49.1 45.0 45.8 40.5 28.2 18.5 22.5 35.0 Asian 69.9 71.4 59.0 62.1 8.7 8.0 18.5 18.2 Hispanic or Latino 55.7 41.9 52.0 38.9 13.3 21.8 29.5 34.7

SOURCE: Control and Health United States, 2005, U.S. Department of Health and Human Services, Centers for Dis- ease Prevention, National Center for Health Statistics, 2005, Hyattsville, MD: U.S. Department of Health and Human Services, pp. 379–385.

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sponsoring the coverage. First among such spon- sors are the approximately 500 to 800 for-profit in- surance carriers that comprise the commercial health insurance industry. Second, Blue Cross and Blue Shield plans also sponsor basic employee health benefits but traditionally enjoy a nonprofit tax status from that of the commercials. (However, the Tax Reform Act of 1986 removed the federal tax exemption for some Blue Cross and Blue Shield organizations engaged in providing commercial- type insurance.) Third, health maintenance organi- zations (HMOs) also offer health insurance, al- though not according to the same legal strictures as either the Blues or the commercials. HMOs are not guaranteeing to reimburse the insured for medical expenses. Rather, their obligation to the insured is more direct: to actually provide medical services to them. A fourth major entity in furnishing health in- surance is employers (primarily large corporations) that self-fund or partially self-fund employee bene- fits for workers and their families. Although declin- ing in importance, unions are a fifth type of health insurance sponsor. Finally, corporations and unions sometimes jointly sponsor and administer Taft- Hartley health and welfare funds.

The final method for categorizing health insur- ance is by funding mechanism: (1) fully insured, (2) partially insured, and (3) self-funded or self- insured. All three funding alternatives are used by pri- vate medical and dental plans (Park, 2000). Which type of funding is most attractive to an employer is primarily a function of the size of its employee popu- lation and the employer’s degree of risk aversion.

Full Insurance

The standard, fully insured program remains the principal funding mechanism for the millions of small and medium-size businesses that form the foundation of employment for most Americans. For employers with more than 5,000 employees, pure self-funding is actuarially viable because medical expenses are relatively predictable. With 100 per- cent self-funding, employers basically choose some organization (an insurer or third-party administra- tor) to administer their medical benefits program

and perform claim adjudication. Thus, the em- ployer pays two types of employee benefits ex- penses: (1) medical service claim expenses submit- ted to the administrator for reimbursement and (2) an administrative fee (or “retention”). This fee can be computed as a per capita charge, a percent of claim payments, or a transaction-related fee.

Partial Insurance

Many employers, particularly those with 500 to 5,000 employees, are reluctant to assume the fi- nancial risk of a full self-funding. For them, partial self-funding is usually the funding mechanism of choice. The most common type of partial funding is the “minimum premium plan” that allows the em- ployer to self-fund claim expenses up to a certain predetermined maximum amount, after which an insured policy assumes financial liability. Another variant of self-funding involves the purchase of stop-loss insurance for individual enrollees who ex- ceed their maximum allowable out-of-pocket pay- ments. The point is that the employer pays directly for all medical claims, except for those that exceed a predetermined threshold.

Self-Insurance

Self-insurance has been one of the principal trends in health insurance since the late 1970s. One in- ducement for self-funding is that the employer avoids the risk charges, various administrative fees, and profits paid to the insurer and rolled into the premium. Also, because self-funding is technically not insurance, employers can avoid the taxes as- sessed by states on premium revenue (usually amounting to several percentage points).

Perhaps the biggest enhancement of self-funding, the Supreme Court ruled in June 1985 that the 1974 federal Employee Retirement Income Secu- rity Act of 1974 (ERISA) exempted states from regulating self-funded group medical programs (Blumenthal, 2006; Rublee, 1985). The most im- portant advantage of this preemption is the ability of employers to avoid state mandates to cover particular services (e.g., fertility treatment, mental

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health coverage, etc.) and make it easier for them to design new benefit packages. Thus, self-funding not only provides financial savings for large employers, but also permits the employers significantly greater flexibility in designing benefit plans and establish- ing employee cost-sharing responsibilities. By 2005, 54 percent of all covered workers (and 82 percent of workers in firms of 5,000 or more em- ployees) were either partially or completely self- funded by their employers.

The Commercial Health Insurance Industry

There are several ways to describe the commercial health insurance industry. Perhaps the most funda- mental distinction is between mutual and stock insurers. Mutual insurance companies, such as Pru- dential and Liberty Mutual, are essentially owned by their policyholders, in contrast to stock insur- ance companies, such as Aetna and United Health- Care, which are owned in the more traditional corporate fashion by stockholders.

Commercial health insurance companies are either “multiline” carriers or “single-line” insurers. Multiline insurers offer life insurance as well as other property/casualty products (e.g., auto, home- owners, worker’s compensation, business liability, etc.). Many multiline insurers also operate a range of financial services, particularly in the pension and investment areas. In contrast, single-line health in- surers offer health insurance and related employee benefits (e.g., disability insurance).

With the hundreds of companies that participate in writing health insurance policies, the commercial health insurance industry is lightly concentrated, with the top 10 largest health insurers accounting for about 18 percent of all private health insurance revenues in 2003.

Blue Cross and Blue Shield Plans

As noted earlier, Blue Cross initiated the modern era of private health insurance in 1929. Throughout

the early portion of their history, Blue Cross plans focused attention on insurance for hospital costs, and Blue Cross itself was closely affiliated with the American Hospital Association. In 1939, Blue Shield began offering medical insurance protection for physicians’ services. Blue Shield was affiliated with the American Medical Association because of its focus on insuring physician expenditures.

Since the 1960s, many Blue Cross and Blue Shield plans (known as “the Blues”) have merged their activities, becoming essentially a single insur- ance entity in a state. By the 1980s, however, a number of Blues Cross and Blue Shield plans di- vorced themselves from each other, and in a few cases became bitter rivals within some states. Today, 64 Blue Cross and Blue Shield organizations oper- ate in all 50 states and U.S. territories.

In recent years, the national Blue Cross and Blue Shield Association has become more aggressive about coordinating resources of individual plans (e.g., in the area of centralized claims processing). This cooperation has been necessary in order to compete effectively with large national commercial insurance companies, especially in procuring the business of employers that operate in more than one state. The Blue Cross and Blue Shield Associa- tion also developed a national HMO network for the same reason.

Unlike commercial insurance companies, which are regulated in most states by a state insurance de- partment, most Blue Cross and Blue Shield plans are subject to special enabling state legislation. In addition to the close affiliations of the Blues with hospital and physician providers, the Blues have differentiated themselves historically from commer- cial insurers by establishing premium levels using a community rating methodology (in contrast to the experience rating most often used by commercial insurers) (Hall, 2001).

Another area of differentiation historically be- tween the Blues and commercial insurers is the Blues’ adoption of service benefits (i.e., percentage reim- bursement for the total expense of covered benefits) rather than the indemnity benefits used by com- mercial insurers (i.e., payment of a fixed monetary

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amount for a covered claim). Today, however, many commercial insurers offer service or hybrid bene- fits, especially in their managed-care products.

One final point of distinction for the Blues is their traditional reluctance to underwrite quite as rigidly as commercial carriers, particularly with re- spect to refusing coverage for entire industry groups or for individuals. In some states, the Blues are the only health insurer of any significant size. All these historical differences between the Blues and commercial insurers, however, are rapidly disappearing.

The 1990s witnessed profound changes in the structure and organization of Blue Cross and Blue Shield plans. The number of Blues plans decreased steadily due to mergers between Blue Cross and Blue Shield on the state level, and Blues plans throughout the country are cooperating to market and administer their services (such as claims pro- cessing) jointly on a regional level. In addition, many Blues plans have already converted, or are se- riously planning to convert, to for-profit status. In some cases, Blues plans are only spinning off for- profit subsidiaries, but the rationale is primarily to gain access to capital markets by selling stock to fi- nance the investments in managed-care initiatives. It is likely that the Blues will continue to emphasize managed care with greater zeal than has histori- cally been the case.

Health Maintenance Organizations

HMOs have been in existence for more than 75 years, since 1929, when the Ross-Loos Clinic in Los Angeles was founded. However, one can argue that the true roots of prepaid group practice began at the Mayo Clinic in the late 1800s.

Beginning with Kaiser’s coverage of the health needs associated with workers building the Grand Coulee Dam in the 1930s, HMOs grew relatively slowly until the Nixon administration sparked new interest in capitated prepaid plans with the passage of the HMO Act of 1973. This act required em- ployers with more than 25 employees to offer an

HMO option if a local, federally qualified HMO was available. The legislation also required employ- ers to contribute toward the HMO premium of its employees an amount equal to that contributed toward indemnity plan premiums—the so-called “equal contribution” rule.

In the 1990s, HMO growth slowed somewhat, due to several factors. The emergence of competing managed-care delivery systems, such as preferred provider organizations (PPOs) and point-of-service (POS) plans, provided employers with cost-effective, middle-of-the-road medical benefit plan options. Principal among the attractions to employers of these managed-care options is the enhanced em- ployee freedom of choice regarding providers, particularly physicians. In addition, the wave of enthusiasm for HMOs regarding their success for cost containment was tempered when many HMOs’ premiums reached levels as high as those of commercial insurers and the Blues. Finally, due to the financial and liability consequences of deal- ing with potentially insolvent HMOs, some em- ployers substantially trimmed the number of HMOs offered to employees, particularly begin- ning in 1995 when the dual-choice mandating provision of the HMO Act of 1973 no longer applied to employers due to legislative amend- ments enacted in 1988. This same legislation also permitted greater employer flexibility in determining their required contributions to HMO premiums (Whitted, 2001).

Unlike the commercial carriers and the Blues that offer reimbursement for health care outlays, HMOs actually guarantee the provision of covered health services. Historically, like the Blues, HMOs have generally relied on community rating, rather than experience rating, to set premiums. (Indeed, the HMO Act of 1973 required federally qualified HMOs to price insurance by community rating.) Due to competitive pressures, HMOs are being pressured to engage in experience rating, which has been permitted since 1989 via amendments to the HMO Act of 1973. Another distinction be- tween HMOs and their pure insurance colleagues is that HMOs are often regulated by an entirely

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different set of statutes and organizations than ei- ther commercial insurers or the Blues.

Not only can HMOs be freestanding organiza- tions, but the Blues and commercial insurers also own and operate HMOs. Although the earliest large HMOs (such as Kaiser, the Health Insurance Plan of New York, and Group Health Cooperative of Puget Sound), as well as some of the newer, well-respected HMOs (such as the Harvard Community Health Plan in Boston), were organized as not-for-profit entities, many of the newer, rapidly expanding HMOs (such as United HealthCare) and most of the commercial insurance company-sponsored HMOs are for-profit organizations.

Private Health Insurance as a Financing Mechanism

Private health insurance is made up of the three principal entities just described (commercial carri- ers, the Blues, and HMOs plus self-funded plans). The importance of PHI as a source of financing for personal health care expenditures has increased slowly, but steadily.

As noted earlier, PHI began with coverage prin- cipally for hospital and physicians’ services. In 1960, virtually all the total net PHI payments were devoted to these two types of health care. PHI has grown in importance as a source of financing for physicians’ services. The largest percentage impacts of health insurance financing have occurred in the areas of dental services, nonphysician professional services, and pharmaceuticals. PHI for these ex- penses was negligible until about 1970, and even at that time, reimbursements from PHI were less than 7 percent of total payments in each of the three categories.

As political debates in the United States con- tinue regarding health insurance, there has been considerable argument and criticism about the overhead generated by the PHI mechanism (Woolhandler & Himmelstein, 1991). From 1960 to 2000, the total overhead costs of PHI averaged about 12 percent of premiums, ranging from about 9 to 16 percent. This total includes administrative

costs, taxes, profits, and other nonbenefit expenses (Lemieux, 2005). The full cost of PHI administra- tion to Americans—including insurers’ administra- tive costs, net additions to reserves, rate credits and policyholder dividends, premium taxes, and carri- ers’ profits or losses—is estimated to be about 15 percent of total national health expenditures. None of this includes the formidable “hidden” costs to providers for filing claims, collecting data on quality of care, and submitting various financial re- ports to insurers.

Although there is no denying that some govern- ment health insurance programs such as Medicare deliver benefits at far less administrative cost per dollar of reimbursement than the PHI industry, health insurance by itself is not always a profitable business for insurers. This is particularly true at the high end of the market, where self-funded adminis- trative-services-only customers generate relatively narrow profit margins for most group insurers. In- deed, the health insurance industry suffered a net underwriting loss (the difference between premi- ums and claims paid) in many years since 1976. Health insurance is beneficial for many insurers be- cause it serves as a vehicle for selling other, more profitable products (such as life insurance) and be- cause health insurance premiums generate revenues via investment income (Whitted, 2001).

HEALTH-RELATED INSURANCE PROGRAMS

Individual Coverage

A number of health insurance entities (including commercial carriers and the Blues) offer insurance coverage for individuals and their families (Pauly & Percy, 2000). Some of the nation’s largest commer- cial accident and health insurers sell few or no individual policies.

Ordinary individual policies for basic medical (hospital and physician) coverage are extraordinarily

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expensive. This is because of adverse selection: Insurers assume that the individual knows some- thing that the insurance plan doesn’t about future health needs. Therefore, the insurer adds on pre- mium for underwriting the additional risk. Policy premiums can easily reach $5,000 per year, even for HMO plans with extensive cost-sharing provi- sions. In addition, underwriting guidelines for indi- vidual policies have become increasingly stringent; so many people who might wish to purchase cover- age are not able to do so (Saver & Doescher, 2000). In some states, the only recourse for such in- dividuals is through high-risk state insurance pools. Many states have enacted broad-based pools for uninsurable individuals to provide some protection (Rogal & Gauthier, 2000).

A large dollar amount of individual insurance sold is supplementary in nature. Medigap insur- ance, usually sold as individual policies, are supplementary to basic Medicare Parts A, B, and D. Supplementary insurance policies pick up reim- bursement for the many expenses and amenities that the primary plan does not cover (or covers only with significant cost sharing).

Demand for individual medical policies dimin- ished with the enactment of COBRA (the Consoli- dated Omnibus Budget Reconciliation Act of 1985). Under this statute, employers with 20 or more employees must extend group health care coverage to former employees after they leave their jobs (voluntarily or not) and for dependents of em- ployees following events such as death or divorce. Employers can charge a premium equal to the average cost of group health insurance for that employer.

Group Coverage

Table 5.2 on page 112 shows that in the United States employment is the principal source of insur- ance protection against medical and income losses associated with both on- and off-the-job illness and injury. The United States is the only major industri- alized country in which voluntary, employment- based health plans are the primary source of health

insurance for its citizens. Through sponsorship by a large number of different groups including employ- ers, unions, employer/union Taft-Hartley plans, and multiple-employer trusts and other arrangements, about 63 percent of all Americans receive their health insurance protection via employer-based group coverage (down from 69 percent in 1984).

The rapidly accelerating costs associated with medical care and the tax-exempt nature of em- ployee medical benefits have stimulated the expan- sion of group health coverage. For workers of medium-size employers, medical insurance protec- tion is a commonplace benefit, and for large em- ployers, health insurance is an almost universal benefit for full-time workers. But small employers tend to provide meager health insurance benefits, if they provide them at all.

HEALTH PLAN BENEFITS DESIGN

Today’s core PHI health benefits consist primarily of medical and dental coverage. Larger employers may offer separate plans for coverage of prescrip- tion drugs, vision services, and (increasingly) long- term care. In addition, all health benefits can be bundled under one general medical plan. In 2004, more than 70 percent of PHI expenditures went toward hospital care and physician services.

The Indemnity Design

The indemnity plan, reimbursed by fee for service, is the oldest form of health insurance design. For most major types of providers (e.g., hospitals, physicians, nonphysician providers, laboratory and radiology services, etc.), traditional indemnity group policies hold benefits for enrollees that are somewhat uniform, but with different cost-sharing provisions for employees. The most generous plans (but also the type of plan rapidly losing favor with employers) are called “major medical” or base plans.

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Under these arrangements, there is first-dollar cov- erage for hospitals and sometimes physicians, then more limited payments for other services (e.g., re- quiring 20 percent employee coinsurance). Perhaps the biggest disadvantage of base/ major medical plans is that many do not place any upper limit on the expenses borne by the patient in a calendar year.

Comprehensive Design

Today, the most prominent type of medical benefit plan—the comprehensive design—retains little, if any, first-dollar coverage. A comprehensive design usually has a relatively small annual deductible (e.g., $200) that pertains to all medical expenses; then it reimburses the patient a fixed percentage (usually 80 percent) of all medical claims that ex- ceed the deductible, up to a maximum out-of- pocket patient expense (e.g., $2,000 per insured person). When the patient reaches this out-of- pocket maximum, 100 percent of all subsequent expenses are borne by the medical plan. Both base/major medical and comprehensive plans sometimes place lifetime maximums of $1 million or more on the total amount of benefits that will be paid to any individual.

Capitation Design

The benefit structure of medical plans offered by HMOs that receive their revenues by capitation is more comprehensive than in fee-for-service indem- nity programs (although there are notable excep- tions, particularly regarding the coverage of psychi- atric and substance abuse illnesses). Second, the more generous HMO plans usually have no de- ductibles. Third, instead of coinsurance, HMOs feature fixed-dollar copayments for selected ser- vices such as physician office visits ($5 to $15 per visit) and medications ($5 to $10 per prescription). Finally, HMOs have traditionally displayed greater attentiveness to fostering health promotion and preventive services than indemnity insurers. Such covered expenses in HMO benefit plans include

immunizations, well-child care, and annual physi- cal examinations.

High-Deductible Health Plans

Although there are several types of high-deductible health plans (HDHPs) enabled by federal legisla- tion, Health Savings Accounts (HSAs)—created as part of the Medicare Modernization Act of 2003— is the one of greatest interest to employers. HSAs give consumers financial incentives to choose their health care providers and manage their own health expenses. HSAs must be coupled with a high- deductible health plan (HDHP) to cover current and future health care costs. Under this arrange- ment, employers may create a tax-exempt trust cre- ated exclusively to pay for qualified medical ex- penses for employees who choose this option. Any unspent funds can be carried over by to subsequent years (Claxton et al., 2005).

Up to 100 percent of employee contributions are tax deductible, which holds significant financial ad- vantages for people who can afford the direct costs. For 2005, employee deductibles must be at least $1,000 for self-only and $2,000 for family cover- age, up to a maximum of $2,650 for a self-only ac- count and $5,250 for a family. The maximum out- of pocket expense (i.e., deductible and copayments, not premiums) that can be incurred by an enrollee is $5,100 for self-only and $10,200 for a family. For the employer, contributions are excludable from gross income and not subject to payroll taxes, also holding financial advantages (AHIP, 2005b).

In 2005—less than 1 year into the program— the number of HSA plan enrollees topped 1 million. Although the group market is growing at a faster pace than the individual market, 54 percent of those covered by HSAs in 2005 are enrolled as in- dividuals. About 37 percent of these individuals re- port that they were previously uninsured. In the small group market, 27 percent of policies were as- sociated with small companies that did not previ- ously offer coverage.

More than half of people covered by HSAs were age 40 or older. HSAs were meant for this group of

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affluent, employed middle-aged people who can take the risk of incurring high expenses for freedom of choice among providers under an indemnity plan. The tax benefits for this group are also substantial, yielding added incentives for growth in HSAs.

Dental Plans

Private insurance for dental expenses was not gen- erally available until the 1970s. In 2004, dental in- surance reimbursed nearly 50 percent of all dental services. Plan designs for dental insurance gener- ally follow a comprehensive design. Usually there are three tiers of benefits. For preventive services (e.g., semiannual prophylaxis and routine dental X-rays), coverage is often 100 percent, without an annual deductible. For the two remaining benefit tiers, there is a small annual deductible ($50 to $100) per insured person) the patient must satisfy before any benefits are paid. Restorative services (such as amalgams), removable prosthetics, oral surgery, endodontics (such as root canals), and pe- riodontics are then paid with relatively standard coinsurance (usually 80 percent). Expensive elec- tive services such as crowns, inlays, and fixed pros- thetics are reimbursed at only 50 percent by the dental plan. Cosmetic dentistry may be excluded from coverage entirely. Orthodontic services usu- ally receive a limited lifetime benefit (e.g., $1,000), unless special orthodontic coverage is elected. Unlike medical benefits, dental plans are more restrictive in terms of annual limits on reimburse- ment. Dental HMOs (DMOs) and Delta Dental Plans offer broader services with fewer cost-shar- ing requirements than indemnity dental plans (Whitted, 2001).

Vision Plans

Insurance for vision care was first introduced by private insurers in 1957. Many health care observers believe that vision care is a prime exam- ple of what should not be covered by an insurance program, as vision care is relatively inexpensive

for most Americans. For those covered for vision services, benefits generally include periodic exam- inations, eyeglasses, and contact lenses. With the advent of managed care, vision care may be avail- able as a “carve-out” benefit, sometimes with a separate deductible. These vision care programs are usually offered in conjunction with large, national chains of vision care products, offering enrollees substantial discounts on these products if they are purchased through the preferred providers (Whitted, 2001).

Prescription Drug Plans

In 2004, PHI financed almost 48 percent of total prescription drug expenditures in the United States. In order to take advantage of managed-care cost sav- ings, prescription drug benefits are often a carve-out of the regular medical benefit program. Coverage assumes one of two forms. In the traditional fash- ion, prescription drugs are simply a covered expense under the medical benefit plan. There may be indi- vidual copayments per prescription ranging from an average of $10 for a generic to $35 for a nonpre- ferred branded drug. Nearly all types of prescription drugs are eligible for reimbursement, with common exceptions being certain injectibles (except insulin), contraceptives, and experimental drugs. Prescrip- tion drugs for acute conditions (e.g., antibiotics) may be covered in part by the regular medical plan, with maintenance drugs available through mail order. Mail-order plans permit employers and em- ployees to take advantage of steep discounts and some drug use review, while offering the conve- nience of home delivery. Mail-order programs have been particularly well received by older employees and retirees. The latest trend in pharmacy programs, however, is a full carve-out program for all prescrip- tion drugs, a feature that may or may not include a mail order companion product.

Long-Term Care Coverage

Long-term care (LTC) insurance has grown dramat- ically in recent years. In 2002, 104 companies sold

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more than 900,000 policies out of a cumulative 9.2 million policies sold since its inception in 1987. Approximately 80 percent of all LTC policies have been sold through the individual market, and about 70 percent of all individual policies remain in force (AHIP, 2004).

In 2002, the employer-sponsored group market surged to almost one-third of all policies sold. A large portion of this growth can be attributed to the launching of the LTC insurance program for federal employees. About 5,600 employers offer group LTC insurance to their employees, retirees, or both. For most of these plans, the employer contributes nothing to the premium (AHIP, 2004). However, for employers that do contribute to the premium, there are significant tax deductions and, for their beneficiaries, benefits are tax free up to specified limits (Pincus, 2000).

Unlike the service benefits of most group medi- cal and dental plans, long-term care insurance is largely an indemnity product, offering a fixed daily reimbursement payment for LTC services. Invari- ably, all plans cover nursing homes, assisted living facilities, home health care, hospice care, respite care, and alternate care services. Other common benefits include case management and homemaker or chore services, certain medical equipment, sur- vivor benefits, and caregiver training (AHIP, 2004).

Retiree Medical Coverage

For active employees between the ages of 65 and 70, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) required employers’ group health insurance plans to remain the primary payers, with Medicare retaining only secondary coverage. In 1984, legislation further stipulated Medicare as the secondary payer for aged spouses of workers under age 65. These statutes are just two examples of how the federal government has shifted fiscal responsi- bility for the financing of medical care from gov- ernment to the private sector.

Since the early 1990s, employers have been reevaluating the financial wisdom of providing continuing health insurance to retirees, particularly

for those under 65 who have taken early retirement (and therefore are ineligible for Medicare). This re- thinking of retiree medical coverage has occurred because the unrelenting growth in health insurance benefits, which is two or three times as rapid as the increase in other costs of doing business, has forced employers to cut funding for retiree medical expenses.

Furthermore, for employers with significant numbers of retirees (such as automakers and insur- ance companies themselves), early retiree medical costs can significantly raise an employer’s overall average financial liability for medical benefits. These pressures will strengthen with the flood of baby boomers now entering their sixties.

Regulations by the Financial Accounting Stan- dards Board in 1993 (referred to as FASB 106) mandated that employers must accrue retiree health care liabilities as an expense against earn- ings from the date an employee is hired until that employee becomes eligible for benefits. With this accounting change, employers had to ac- knowledge the mounting burden of all medical benefits (not just retiree obligations) on employ- ers’ overhead expenses. For retirees under age 65, benefit protection is often the same as that for active employees. For retirees over age 65, em- ployers’ liability is diminished significantly be- cause the group health insurance plan becomes secondary to Medicare coverage. For both groups, however, employers are reconsidering their fund- ing options.

As a result of these combined forces, most em- ployers are reexamining the wisdom of providing medical coverage for retirees. Among all firms with 200 or more workers that offer health insurance to active workers, only 33 percent offered retiree health benefits in 2005, as compared to 1988, when 60 percent offered such benefits (KFF & HRET, 2005). Several large U.S. employers have attempted, in high court and with considerable success, to rescind long-standing retiree health in- surance programs entirely. Less draconian ap- proaches to cut costs in this area include (1) not to offer retiree medical coverage for new hires, (2) to

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link coverage with length-of-service requirements, and (3) to require retirees to contribute a larger share of the costs of medical expense benefits.

The most fundamental choice facing most em- ployers is whether to switch to a defined-contribution program, like pensions. This limits employers’ fu- ture liabilities by making them more predictable (like pension benefits) and clearly places most of the concern over the ultimate magnitude of medi- cal care cost escalation squarely on retirees. If defined-contribution programs for retiree medical benefits become the norm, retirees will need to be much more concerned about issues of plan design and cost containment than they have in the past. Active employees will also be required to assume more responsibility for funding their retiree medi- cal benefits far ahead of when they will be in- curred, just as workers must plan to ensure that they will retain enough retirement income via pen- sion benefits and individual investment plans (Whitted, 2001).

Disability Insurance

Serious illness or injury for the employee creates financial hardship due to both the high costs of medical care and the loss of income. Thus, dis- ability insurance is one of the oldest forms of health-related insurance. In contrast to the dis- ability programs available through Social Security for long-term or permanent loss of income via disability, private insurance has focused on the short to medium term. Unlike most health insur- ance, disability insurance pays indemnity bene- fits, not service benefits. Neither short- nor long- term private disability programs reimburse for expenses associated with medical services. For decades, temporary disability insurance programs (including medical expense reimbursement) have been mandated by states such as Rhode Island, California, Hawaii, New Jersey, New York, and Rhode Island. These state-sponsored social health insurance programs, in turn, may contract with commercial carriers for health insurance services or managed care.

Short-Term Programs

Coverage for loss of income due to illness can be available to workers through two avenues: (1) sick leave or salary continuation benefits or (2) short- term disability insurance. While sick leave benefits usually replace all or most of an ill employee’s wages, reimbursement is often limited to no more than a few weeks, at best. Eligibility for sick leave and accrued sick leave days are usually related to an employee’s length of service.

Short-term disability programs protect workers for only relatively brief periods. Many short-term disability insurance plans have an employer length- of-service requirement, or waiting period, for em- ployees before they are eligible for coverage (usually three months or less). Also, there is usually a short elimination period (1 to 7 days) between the onset of disability or illness and the date when benefits begin to be paid. In the most generous short-term income protection employee benefits, short-term disability benefits commence as soon as sick leave is used up, so that the ailing worker has no front-end gaps in income.

Long-Term Programs

Long-term disability insurance is often entirely employer-financed. Like short-term coverage, long- term disability insurance maintains a waiting pe- riod before employees are eligible for coverage. Plan participants may have an elimination period of six months.

In order to induce workers to return to the job and because long-term disability payments can be exempt from both state and federal taxation, bene- fits are paid at rates usually in the range of 50 to 67 percent of a worker’s wages, subject to maxi- mums. Due to the existence of Social Security disability programs, most long-term disability poli- cies include provisions that permit benefits to be reduced commensurate with the amount of Social Security disability benefits paid. This provi- sion is analogous to the coordination-of-benefits feature common in most medical and dental insur- ance policies.

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Workers’ Compensation Insurance

Like Medicare, workers’ compensation insurance is a social insurance program. Workers’ compensa- tion was the first type of broad-coverage, health- related insurance plans in the United States. Worker’s compensation programs were enacted by nine states in 1911, and by 1920, all but six states had inaugurated such a program (Workers’ Com- pensation, 1991). Today, there are 55 workers’ compensation programs in operation, one in each of the 50 states as well as in Puerto Rico, the Dis- trict of Columbia, and the Virgin Islands. There are also two special federal workers’ compensation programs covering government employees, long- shoremen, and harbor workers. In addition, there are unique occupational illness and injury pro- grams for coal miners suffering from pneumoco- niosis (black lung disease) and railroad workers.

Workers’ compensation insurance is compulsory for most private employment, except in a very few states. This protection provides workers and their families with three types of benefits: (1) indemnity cash benefits to help replace lost wages, (2) medical expense reimbursement, and (3) survivors’ death benefits. Despite generally broad-based coverage, many state workers’ compensation programs do not cover domestics, agricultural workers, and casual laborers. Initially focusing on workplace injuries, workers’ compensation programs are in- creasingly being pressured financially by the long- term effects of occupational illness.

In most states, employers purchase workers’ compensation insurance through private commer- cial insurers. In some states, however, commercial insurance is not permitted and the state assumes re- sponsibility for the program. Each state establishes its own regulatory mechanisms, eligibility rules, benefit schedule, and funding alternatives.

Since 1980, the percentage of total medical ex- penditures that are reimbursed by workers’ com- pensation has been increasing slowly, but steadily. This trend is due both to states’ restrictions on cash compensation benefit levels and to the higher

growth rate of medical care when compared to wages. Nearly all employee medical plans contain provisions that exclude coverage for medical care for work-related accidents, in order to avoid dupli- cate payments by both the medical plan and work- ers’ compensation.

Workers’ compensation expenses are accelerat- ing like the costs of medical care in general. Thus, it is no surprise that many managed care techniques are now being modified for workers’ compensation programs. However, some states mandate a higher degree of freedom for employees in their choice of providers than would be tolerated in managed care plans. Thus, some of the most aggressive transference of managed-care techniques from the employee benefits arena to workers’ compensa- tion is occurring in those states that provide em- ployers with unilateral physician selection powers (Whitted, 2001).

MANAGED CARE

Although the term “managed care” has become in- creasingly familiar to anyone involved with health care in the United States, there are two major mis- understandings with regard to the term and its use. First, the term is sometimes used as though all forms of managed care are the same, or that managed care were a single organizational structure that functions like a tightly unified entity Unfortunately, nothing could be further from the truth. Managed care covers a wide variety of organizational forms, and in any one of the organizational forms, there are three or four separate subunits that make up the whole.

The second misunderstanding with regard to managed care often involves the impact of the ar- rival of managed care on the American health care system. Sometimes, managed care is discussed as if it were merely one more change in the way health insurance is organized and in the way that providers of health services are paid. Frequently, managed care is described as yet one more technical

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The Structure of Managed Care

The structure of managed care includes at least four tiers of players: (1) the purchaser or ultimate payer for health care; (2) the health insurance plans, including HMOs; (3) the providers of care (i.e., hospitals, physicians, and others involved in the direct delivery of personal health care); and (4) the patients receiving health care.

The purchaser of managed care is generally one of three groups: employers who purchase private health insurance for their employees, the federal Medicare program, or state Medicaid programs. Health insurance plans are licensed by individual states to offer medical benefits coverage that is bought by the purchasers. Health insurance plans design the benefit packages, market the plans, en- roll the beneficiaries, arrange for the provision of health care services, and monitor the results. The providers of care are licensed health care profes- sionals, organizations, and institutions that actually deliver the needed health care services to the indi- vidual beneficiaries under the terms of insurers’ benefit packages. The patients are the individuals who are covered by health insurance plans and re- ceive health services from providers. It has been suggested that a fifth important component part of the managed-care structure might be the health in- surance brokers, as an increasingly high percentage of health insurance (particularly that provided by employers) is arranged through the technical and organizational assistance of brokers.

In many instances of managed care, these four (or five) components are separate organizational units, linked together by negotiated contracts. In HMOs, such as the Kaiser-Permanente Health Plan, the insurance and provision of care functions are seemingly joined together in a single organiza- tion that appears to be both the insurer and the entity providing services. In most other managed- care arrangements, this is not the case, and it is more useful to consider the insurance and the pro- vision of services functions as organizational sub- units that can be either more loosely or more tightly linked together.

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Table 5.3. Objectives of Managed Care

■ Enhance cost containment ■ Implement some forms of rationing ■ Promote administrative and clinical efficiency ■ Reduce duplication of services ■ Enhance appropriateness of care ■ Promote comprehensive contracting mechanisms ■ Manage care processes by managing provider and

consumer behavior

innovation in what has become an increasingly specialized field of insurance.

Unfortunately, viewing managed care as merely a new set of technical changes misses the point that managed care has brought about a major change in the way health care in the United States is delivered by providers and utilized by patients. It should be understood that although the technical changes in- cluded in managed care are very interesting, it is much more important to realize that the structural and policy changes in American health care are being promulgated by managed care.

What Is Managed Care?

It is virtually impossible to provide a definition of managed care that satisfies all participants in all cir- cumstances because the applications of the term are so wide and varied (Fox, 1997; Miller & Luft, 1994). One definition might be, “Managed care is an organized effort by health insurance plans and providers to use financial incentives and organiza- tional arrangements to alter provider and patient behavior so that health care services are delivered and utilized in a more efficient and lower-cost man- ner.” This definition includes the central principles of managed care: It is an organized effort that in- volves both insurers and providers of health care; it uses financial incentives and an organizational structure in reaching its goal; and its purpose is to increase efficiency and reduce health care costs (Drake, 1997). Table 5.3 outlines the major objec- tives in managed care.

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How Managed Care Works

The process of making managed care work begins with certain important decisions made by the pur- chaser or employer (Enthoven & Singer, 1996). With these decisions, the purchaser must decide how many and what type of health insurance plans are to be offered to employees and how much the organization will pay in employee premiums. Today, purchasers are offering fewer health insur- ance plans and are paying a defined dollar contri- bution to each employee’s premium, irrespective of which plan the beneficiary chooses, with the employee paying any difference.

Specifically, purchasers must decide whether they wish to give their beneficiaries a wide-open range of choices of providers or whether they wish to limit, in some fashion, the choices available to the beneficiaries. Figure 5.1 shows the continuum of managed care. The more restrictive plans may yield lower costs, but with a limited choice of providers and with greater controls on consumer behavior. Purchasers must also decide whether they want to have their beneficiaries in a plan that pays providers on a fee-for-service basis or by capitation, that is, a fixed amount per person per month (PMPM). Given these choices, the purchasers usually find themselves choosing between a preferred provider organization (PPO) or a health

maintenance organization (HMO). The PPO allows the recipient of health insurance a wider choice of providers and pays those providers on a modified fee-for-service basis; the HMO offers a more con- strained range of providers and usually pays the provider organization on a PMPM basis.

Types of Managed-Care Plans

The two main types of managed-care plans offered to purchasers are preferred provider organizations (PPOs), and health maintenance organizations (HMOs) and point-of-service (POS) plans. These plans differ significantly in their major characteristics.

Preferred Provider Organizations

The PPO is essentially a fee-for-service type of health plan that allows a beneficiary to use a wide range of providers (or select from a narrower list of providers) that have agreed to give the purchaser a discount on regular fees. If the beneficiary chooses to use a provider on the preferred list, the plan, the provider, and the beneficiary all benefit. The health plan has generally contracted a discounted rate from participating provider’s for their services. (A 20 percent discount is not uncommon.) In other words, the health plan uses its purchasing power to extract a lower price. In return, the providers hope

124 PART TWO Financing and Structuring Health Care

Indemnity Group or

Staff HMO Model

IPA HMO

Point-of- Service

PPO

More Cost Control and Less Choice of

Provider

Less Cost Control and Greater Choice of

Provider

Figure 5.1. Continuum of Cost Control in the U.S. Health Care System

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that the health insurance plan’s members will choose them more frequently because they are now put on a special list of “preferred providers” avail- able to the health plan’s members.

Members benefit by choosing a preferred provider because their share of the cost (i.e., de- ductibles and coinsurance) is substantially reduced. A common coinsurance rate for members using a preferred provider is 10 percent of the also reduced contracted fee or “allowed amount” by the health plan. In other words, financial incentives are used to create a network that potentially benefits payers, providers, and enrollees.

For purchasers, the PPO is an attractive option because they are not forcing their beneficiaries to limit their provider choices or change their behav- iors if they do not want to. However, if members do go outside of the preferred group, they will pay higher coinsurance rates on discounted maximum allowances per service.

Health Maintenance Organizations

Table 5.4, which outlines HMO plans by type and over time, shows that the number of HMO plans and their enrollment peaked around the year 2000 (with more than 30 percent of the population in HMOs). Enrollment has been in retrograde ever since, shifting since 1980 from the group practice model to the IPA and mixed models. Medicaid HMOs (often contracted to the private sector) have seen strong growth since 1990. Today, HMO plans are prominent in the Northeast and the West.

The HMO type of managed-care plan holds many significant differences from PPOs plans. In- deed, the differences are so major that it is confus- ing to describe them under the same general head- ing of managed care, as though both are closely related and are only minor variants of each other.

The HMO type of managed-care plan has a number of important premises built into its frame- work. The HMO depends on the fact that the health plan has developed a contract with a group of physicians to take total responsibility for a list of enrolled patients. The HMO form of managed care depends on an individual choosing to sign up with

one particular group of physicians and then to re- ceive virtually all medical care—both primary and specialty—through that group of physicians, either directly or by referral. That particular group of physicians, in return, is paid a fixed fee per patient (capitation rate) that the group agrees to take on for total responsibility for health care. In the PPO, medical providers are paid fee for service and take

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Table 5.4. Health Maintenance Organizations (HMOs) and Enrollment, According to Selected Characteristics, 1980–2004

HMO Plans and Enrollment 1980 1990 2000 2004

Plans Number All plans 235 572 568 412

Enrollment Number of persons in millions Total 9.1 33.0 80.9 68.8

Percent of population enrolled in HMOs

Total 4.0 13.4 30.0 23.4

Percent of HMO enrollees Model type

Individual practice association 18.7 41.6 41.3 35.8

Group 81.3 58.4 18.9 22.2 Mixed — — 39.9 42.0

Federal program Medicaid 2.9 3.5 13.3 20.8 Medicare 4.3 5.4 8.1 7.1

Geographic region Northeast 3.1 14.6 36.5 30.1 Midwest 2.8 12.6 23.2 18.7 South 0.8 7.1 22.6 16.0 West 12.2 23.2 41.7 34.4

SOURCE: Health United States, 2005, U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Health Statistics, 2005, Hyattsville, MD: U.S. Department of Health and Human Services, p. 391.

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no coordinating control for the total health of the enrollee.

In HMOs, the linkages between the health plan, the providers, and members are tighter and more formal. Just as in the PPO form, the three partici- pants (health plan, providers, and patients) form a network of mutual benefit, but it is based on differ- ent principles. The health plan benefits because it is able to limit its financial exposure by prepaying the provider group a fixed amount per member per month (PMPM) for taking care of the enrolled pop- ulation. The plan knows that no matter how much care the provider is required to give enrollees, the health plan will not be required to make any addi- tional financial payments. From the provider’s point of view, these prepaid contractual arrange- ments provide a steady stream of revenue, whether individual patients seek care or not. The provider organizations are able to plan on a more financially stable and long-term basis than they could if they were in a PPO plan (that depends on individual choices). The patient benefits as well, as there are usually small deductibles, if any, and low or no co- payments for each class of service (e.g., physician visit, laboratory tests, etc.). The patient knows, therefore, that once the premium is paid each month, there will be little or no additional fees required.

Providers have a wide variety of contractual arrangements that they may make with managed- care plans. Hospitals, for example, may agree to contract with PPOs and offer substantial discounts when PPO members are actually admitted or treated at contracting hospitals. On the other hand, hospitals may also contract with HMOs to provide hospital care for an enrolled population on a PMPM basis. Hospitals may, in turn, agree to take part in joint contracting efforts involving physician groups, independent practice associations (IPAs), or other medical care organizations that agree to take on an enrolled population via capitation, with the revenues being divided by mutual agreement be- tween the physician organization and the hospital.

For their part, physicians have a variety of ways to take part in managed-care health plans, either

singly or in larger groups. With PPOs, individual physicians or groups can simply contract with the health plan to take PPO members on a discounted fee-for-service basis. This type of arrangement is or- ganized around individual patients making individ- ual visits to a doctor and implies no long-term com- mitment between the physician and the health plan, or between the physician and an individual patient. By contrast, when physicians are faced with HMOs, their decisions are more critical be- cause they have much broader and much longer- term implications.

In 2001, 88 percent of all physicians partici- pated in at least one managed-care contract, ac- counting for 41 percent of average practice rev- enue. This was up sharply from 1998, when only 61 percent of physicians contracted for 23 percent of practice revenue (Kaiser Family Foundation, 2004). Physician relationships with HMOs vary widely according to state licensure laws and market conditions. But three HMO models—the IPA, the group model, and the staff model—are the most common forms of collaboration.

Table 5.5 shows the shifting that has taken place in since 1996 in the type of managed-care plans se- lected by covered workers. Traditional indemnity plans have continued to wane in availability by employers and selection by workers. This trend, coupled with the movement out of HMOs, has

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spurred the enormous growth of PPOs, which now cover more than 60 percent of workers. POS plans, which offer some freedom from the strictures of HMOs (and resemble PPOs if the member goes out of network), have maintained about 15 percent of the market.

The IPA Model. In the IPA, the physician in practice voluntarily joins a collaborative group of physicians, all of whom are in independent practice and all of whom join the IPA in order to be able to take part in large contracts with HMOs. In the IPA, the physician remains in independent practice and agrees to care for those patients whom the IPA at- tracts and assigns to that physician. The physician in practice usually has many other patients who come from other sources, some of whom may be paid for on a fee-for-service basis and others for whom payment may be from other managed-care arrangements, including HMOs. The IPA allows individual physicians the benefits of independence, multiple sources of patients, and involvement in other contracting arrangements. The individual physician may also be an owner of the IPA, but that is not usually a necessary condition of the physician’s involvement with the IPA as a provider of care.

When IPAs first began to appear, it was believed that they might merely be a transitional form of medical organization that might gradually give way to tighter forms of group practice and staff model HMOs, but that has not been the case, as the IPA model holds great flexibility for physicians who may structure their financial revenues as they see fit. The longer IPAs are in existence, the more tightly they are organized and managed. However, the fundamental model of physicians in indepen- dent private practice who voluntarily join a collab- orative contracting group remains the same.

The Group Model. Physicians also participate in HMOs by organized medical groups and having the groups contract with HMOs to provide care to an enrolled population. In this form of involvement in managed care, a physician chooses to become a formal member of an organized medical group that

practices together, shares premises, and may share patients and revenues. The formal contract with the HMO is between the medical group and the HMO, not with individual physicians. In other words, by joining a specific medical group, the physician is ac- cepting the HMO contract. HMOs may prefer this type of arrangement, as the internal discipline of an organized medical group is usually much tighter than that of an IPA, with large numbers of doctors who work in separate locations. On the other hand, in the group model, medical groups may contract with multiple HMOs, so no one HMO holds undue influence.

The Staff Model. Although less popular than other organizational arrangements, the physician may decide to join a staff model HMO that actually employs its own physicians. In this model, the doc- tor decides to become directly associated with the HMO itself. In effect, the physician is becoming a salaried member of a larger corporation that, in turn, directly owns and operates hospitals, clinics, and other institutional providers in its market. In some instances, due to state medical practice laws, physicians may actually form a partnership that, in turn, contracts exclusively with the HMO (e.g., the Permanente Medical Group contracts exclusively with the Kaiser HMO corporation).

In summary, it can be seen from this brief review that managed care is not a unified monolithic orga- nization, but rather a series of separate subunits, linked together by a series of decisions, contracts, and administrative structures. The result is a wide variety of managed-care activities and operations, subject to lower prices for enrollees and providers as freedom of choice in health care decision making diminishes. Therefore, in discussing issues related to managed care, it is important to specify which type and level of the managed care is actually being addressed, as the details and outcomes of such dis- cussions may vary greatly.

Point of Service Plans

In general, point of service plans combine elements of both HMOs and PPOs. Usually the HMO is the

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platform plan in which the POS member obtains most health care. However, if the member chooses to receive care outside of the HMO provider group, then the beneficiary is exposed to higher cost sharing in the form of deductibles and copay- ments/coinsurance. If the member goes out of the HMO to a PPO provider contracted with the plan, fees will be subject to PPO allowed amounts. But if the member receives care from a provider that has no contract with the health plan, there is no limit to the fees that the provider can charge. Average pre- miums for POS plans lie, not surprisingly, between HMO and PPO premiums, but employee premium contributions for POS plans exceed those of PPOs (KKF & HRET, 2005).

Areas of Management in Managed Care

Managed care implies at least some management of the health care process. There are some functional areas of health care management, as well as certain concepts, and principles that are generally common to all types of managed-care programs. Areas of management in managed care include (1) provider contracting and network management, (2) utiliza- tion management, (3) quality management, (4) gen- eral administration (i.e., financial management and operations management), (5) health information systems, and (6) sales and marketing management.

Contracting in Managed Care

With the exception of staff model HMOs that em- ploy their own physicians, managed care consists of a series of separate organizational entities that are linked only by legally negotiated systems of contracts. Contracts are a series of legally binding documents that set the terms and boundaries for everything that happens within the managed-care structure. Therefore, the negotiation of proper con- tracts and the clear understanding of all the details in the contracts by all parties is essential for the long-term success of managed-care plans. At the present time, the negotiation and creation of con- tracts between the various parties in managed care

are challenging and uncertain. Unfortunately, many clinical professionals in health care are not used to the negotiating and contracting process and, as a result, pay less attention to it than they should.

Probably the least informed and prepared party in the managed-care contract structure is the person covered by the health insurance policy. If the health insurance policy is considered a contract between the health plan and the enrollee, it is very impor- tant that the beneficiary understand what is in that contract. There is growing concern for methods of better education and preparation of patients in the interpretation of their managed-care plan, as well as an increased interest in discovering ways in which enrollees or the public can take a more active part in the actual negotiation with purchasers or providers of better contracts for themselves. One of the most interesting and potentially important areas of future activity in managed care is the pos- sible increase in the power of groups of patients as members of the managed-care structure.

Utilization Management

Because the main objective of managed care is to reduce the unnecessary use of services and to pro- vide health care in a more efficient fashion, utiliza- tion management of health services is central to the successful implementation of managed care. Con- trol of costs, utilization, and, to an extent, con- sumer behavior depend heavily on influencing provider behavior, especially physician behavior. Table 5.6 lists common managed-care practices de- signed to control physicians. There are numerous considerations involved in influencing physicians, ranging from careful selection of efficient partici- pating providers (known as “economic credential- ing”) to strict utilization review processes and con- trols on both providers and beneficiaries.

The control of the utilization begins with deci- sions that are made by the purchaser in regard to what services should be included in the benefits package. Increasingly, the range of services in- cluded as benefits is being narrowed by purchasers who are ever-more anxious to limit their financial exposure. Many times, health plans find themselves

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blamed for not paying for certain health care services when the actual decision to limit such ser- vices has been made by the purchaser in designing the benefit package.

Health plans frequently require the provider to report on the use of expensive services such as in- patient care and high-technology diagnostic and treatment services. The basic contract between the insurance organization and the providers fre- quently stipulates the nature and extent to which providers must review their own utilization of ser- vices and provide summary data. Because medical groups are increasingly being paid on a capitation basis and are at risk for the financial consequences of high utilization, it is logical that the most active and aggressive control of utilization occurs within the medical group or IPA itself (Kerr, 1996). Thus, the utilization control processes used within the medical group or IPA can become increasingly stringent.

At the heart of any utilization control system is the concept of the primary care physician (PCP) or “gatekeeper.” The gatekeeper concept rests on the idea that one physician—usually a PCP in family practice, general internal medicine, general pedi- atrics, or, for some women, obstetrics/gynecology— is responsible for providing all of the primary care for the patient. The PCP also determines when re- ferrals to specialists are needed and then provides oversight and coordination for the use of the specialists on an ongoing basis. The gatekeeper

concept is designed to control the patient’s use of expensive resources, to reduce the patient-initiated use of specialty physicians, and to ensure overall coordination of care.

Placing the PCP in the position of gatekeeper is increasingly being seen as a potential source of con- flict of interest for physicians playing this role. If the primary care physician aggressively seeks to en- sure that the patient has all possible diagnostic pro- cedures and specialists’ opinions, that PCP may also be draining the IPA or medical group’s total fi- nancial pool under capitation. The PCP realizes very quickly that the more aggressively the patient’s interests are pursued, the less advantageous it may be to the physician financially. The subject is one of serious concern to physicians and medical organizations.

Education of Enrollees

If managed care is to succeed in its goals, it is im- portant that the insured be told very specifically what managed care is and what it is not. Because the use of health services under a managed-care arrangement may be quite different from fee-for- service health plans (and from other managed-care plans), it is important that patients be instructed about what services are covered and how care can be obtained. Often the purchasers leave it to the health plans to inform the enrolled members about the details of their health benefits, as well as the ad- ministrative procedures to which members must adhere in order to access benefits. Unfortunately, many managed-care plans fall woefully short in in- structing their members about how their plans function. It is clear that if managed care is to suc- ceed, a better job of information exchange and education must be done by both purchasers and managed-care plans alike.

Information Systems and Outcome Measures

One of the central characteristics of all forms of managed care is the absolute necessity of advanced information systems that will provide more accurate

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Table 5.6. Influencing Physician Behavior in Managed-Care Practices

■ Feedback and comparisons to the norm using quantitative data

■ Physician recruitment and selective contracting policies ■ Socialization to group goals and philosophy ■ Positive rewards such as money, benefits, on-call prefer-

ence, and leave time ■ Promotion of teamwork and quality management ■ Financing and reimbursement incentives ■ Efficiency and productivity enhancements

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and timely data on the utilization of services and on the quality/outcomes of those services. Under fee-for-service health plans, including PPOs, the key information that is collected comes from claims data (i.e., actual transaction data listing providers’ requests for reimbursement for specific items of ser- vice for each enrollee). Claims data allow great transparency of what goes on at the provider- patient interface. (Claims data usually reveal very little about the technical quality of the services pro- vided or the outcome of those services on the health status of the patient.) Under HMO capita- tion reimbursement, on the other hand, the type of detail contained in claims data for enrollees, their services, and procedures are no longer collected, yielding no transparency of the provider’s practice profile and clinical choices. Because of this, many capitated plans require providers to submit peri- odic encounter data that resemble claims. Unless audited, these encounter data may be of lesser ac- curacy than claims data.

Whatever data are collected, they must be com- bined and statistically analyzed to produce mean- ingful information on quality of care and actual health outcomes. The necessity of sophisticated health information systems is further heightened by the purchasers’ requirements for detailed reports— often using standardized formats such as the HEDIS (Health Plan Employer Data and Informa- tion Set) collected from health plans on the appro- priateness and quality of services provided. Like- wise, managed-care plans are requiring provider groups and health systems to gather and report more sophisticated information on utilization, quality, and outcomes. These reports are used by health plans to evaluate providers better and to re- port back to the purchasers on the quality of ser- vices for which they are paying.

Only a small portion of the data being gathered at the present time is being utilized to its maximum potential. However, it is clear that health informa- tion systems will advance very quickly, given available and developing information technology and the increasing demands for more and better health data.

Capitation

Central to the HMO type of managed-care program is the concept of capitation, the payment of a PMPM fee to physicians or hospitals in exchange for their assumption of responsibility to provide a comprehensive of services as needed. In contrast to the fee-for-service form of reimbursement, capita- tion provides entirely different incentives to those providing care. Under fee-for-service, the more ser- vices that are provided, the more the provider is paid. Under capitation, the fewer services that are provided, the more funds there are left over for the provider. The incentive embedded in capitation is, therefore, for the provider to be more efficient and frugal in the use of health services in order to retain more revenue.

Within IPAs or medical groups, capitation can also be used to reimburse individual physicians in different ways. For example, it is quite common for an IPA to reimburse primary care physicians on a per capita basis but then reimburse specialists on a modified fee-for-service basis.

Risk Sharing

Of increasing importance and interest in managed care is the use of risk-sharing pools. These vary widely, but in general, they involve the establish- ment of a pool of money from which certain ser- vices are paid for throughout the year. Funds re- maining at the end of the year are then divided, either between the providers and the health plan or between the physicians and hospitals with which they have joined in a collaborative effort.

Risk pools provide an incentive to reduce uti- lization, particularly with regard to hospitalization, specialty referrals, and high-technology diagnostic and treatment services. The extent to which risk pools are effective in reducing use and saving money is not clear. It is also unclear whether risk pools (together with capitation payments) result in under use of needed services. The greatest fear in managed care, both on the part of patients and of providers, is that the incentives to control overuse of health services will now lead to underutilization

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and denial of needed services, with the resulting decline in the health status of the covered popula- tion. Indeed, of all of the questions involved in managed care, this is the most critical to monitor.

THE FUTURE OF HEALTH INSURANCE

Several important issues must be considered with regard to the future development of private health insurance and managed-care programs. Among the important issues are consolidation among health plans, the impact of managed care on the provider system, Medicare and Medicaid managed care, managed behavioral health care, conflicts of inter- est, and protection of the public.

Consolidation among Health Insurance Plans

As managed care matures, one phenomenon that is developing rapidly is consolidation among health insurance plans. Consolidation measures how much of the industry is controlled by how many companies. For example, if the top five companies account for a high percentage of the total business (e.g., 70 or 80 percent), then the industry is highly consolidated. Every year sees more and more of the nation’s health insurers merging with or acquiring other health insurers in what can only be described as a major change in the health care financing landscape.

This consolidation of health insurance providers and plans is a concern for several reasons. Fore- most is the possibility that health plans will be- come so large that they have an unfair advantage in dealing with both purchasers and providers. The larger a health insurance plan becomes, the higher its financial assets and the more enrolled lives it controls. This means that the financial leverage among the plans may become unduly strong, making it difficult for an even balance among

purchasers, health plans, and providers to exist. In their defense, health plans very frequently say that they must consolidate because purchasers and providers are themselves consolidating into larger bargaining units; the plans must consolidate if they are not to be overwhelmed by the larger size and strength of their negotiating partners.

Consolidation that reduces the number of health plans controlling the market also reduces the com- petitive nature of the marketplace, which in itself may be a bad outcome for purchasers and the pub- lic. Healthy competition among providers of any service is critically important to the success of any market-oriented industry. This is no less true when considering the health insurance industry. A pur- chaser who goes into the marketplace seeking health insurance and confronting a limited choice of health insurance plans is less able to engage these plans in a dialogue on price and quality of services. If a purchaser is confronted with a wide variety of plans, health insurers would have to work harder to compete for the business.

Consolidation may also result in the reduction of variation among health plans, their product lines, utilization of services, and rules of procedure in bidding for contracts. In other words, uniformity in products and procedures may translate into higher profits. At a time when everyone is trying to learn about managed care and when there still seems to be considerable experimentation in insur- ance products, consolidation may preclude the op- portunity to learn exactly what are the best forms of managed care for our various subpopulations. Ex- perimentation may prematurely be ended before we have had a chance to learn the lessons that should be learned.

Obviously, there are major antitrust and monopoly issues to be considered in regard to con- solidation. The formal legal and regulatory mech- anisms in this area move so slowly that significant reshaping of the health insurance industry (partic- ularly in the managed-care sector) is likely to occur before any formal governmental protections are able to come into effect (Kuttner, 1997). Also, because there are very few legal or regulatory

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precedents in the health insurance/managed-care sector, those formal governmental protections may be even slower to come into effect than in a well- established industry.

Impact of Managed Care on the Provider System

Because managed care is really a series of subunits that are linked together by a series of legal, con- tractual, and organizational mechanisms, a change in any one subunit tends to bring about changes in other subunits. This means that any change in the methods for financing health care through health insurance (such as the growth of capitated reim- bursement mechanisms) will cause changes in the provider system as well.

In practice, what has happened among providers has been a growth of new organizational forms and new operating principles with regard to the provi- sion of care in response to change on the financing side (Table 5.7).This has led to the growth in the size of physician groups, an increase in joint ventures of physician groups and hospitals, and a drive for in- creased efficiency of operation. Consequently, an

overall rethinking about the most appropriate orga- nizational structure for the delivery of personal health care services is now taking place.

This rethinking may have both positive and neg- ative effects. On the positive side, the reorganiza- tion of the provider system may lead to greater effi- ciency and better effectiveness of that system and, therefore, to better patient care with improved outcomes. This scenario suggests that the previous organizational structure of health care under a fee- for-service stimulus may not have been the most efficient or effective and that managed-care-driven changes in the delivery system are a distinct improvement.

On the negative side, the drive for increased efficiency of operation, the emphasis on providing fewer services, and the overwhelming concern about economic issues may all serve to dampen or reduce the humane and compassionate aspects of health care as it was previously delivered in the United States. Under this scenario, the provider system for health services in the United States may become more coldly efficient and effective in an organizational sense, but less satisfactory in a personal and psychological sense to the people receiving services.

A point to remember here is that changes in the way in which health care providers are paid are not merely financial or economic in nature. They also drive organizational changes, and those organiza- tional changes may be either for the better or the worse, depending upon how they develop.

Medicare and Medicaid Managed Care

Although much has been said about the impact of managed care in reducing health care for employers and private health insurance, the major impact of managed care may actually be felt in the two major public sector programs: Medicare and Medicaid. The impact on each of these programs may be quite different, given the different nature of the con- stituencies they serve and the specifics of their financing.

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Table 5.7. Provider Concerns in Managed Care

■ Enter into contracts carefully ■ Know practice strengths and weaknesses ■ Use clinical protocols and other control guidelines ■ Establish performance goals and measures of success

or failure ■ Ensure that management information systems are

adequate ■ Continually monitor results and respond to information ■ Reduce inpatient utilization ■ Be cost conscientious ■ Emphasize primary care ■ Monitor and manage risk ■ Maintain provider relationships ■ Enhance consumer controls and satisfaction

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With Medicare expenditures increasing at a rapid rate and anticipating the baby boomers, the Health Care Financing Administration (HCFA) had wanted to have approximately half of all Medicare beneficiaries enrolled in managed-care programs (HMOs and PPOs) by the year 2007. HCFA felt that managed care should play a major part in the long-term solution of Medicare’s financial woes.

The implications for patients served under Medi- care are potentially good and bad (Wagner, 1996). On the positive side, Medicare beneficiaries may ac- tually receive more benefits and services and may also have their patterns of care and the outcomes of that care more closely monitored and controlled. In other words, Medicare beneficiaries may actually get more appropriate care in managed-care plans and have more confidence in that care than in tra- ditional Medicare.

On the negative side for Medicare beneficiaries is the effect of consolidation among provider orga- nizations and medical groups. Medicare beneficia- ries in managed care may find that solo-practice physicians are becoming a thing of the past, re- placed by comparative supermarkets of physicians whose hallmarks include efficiency of a less per- sonal kind. Moving into a Medicare managed-care program may mean that elderly Medicare patients have less time with their physicians as well as less personal connection to them.

Private companies that contract to Medicare do so to make a profit. In 2001, several corporate providers determined that federal capitation rates were inadequate to provide Medicare managed- care services in certain of their markets. Subse- quently, these companies let their contracts with HCFA expire, leaving more than 500,000 HMO patients in these localities with no other option but traditional Medicare (with less comprehensive ben- efits and higher out-of-pocket costs). Whether this represents a realignment of the marketplace is un- clear. Less-concentrated population centers and particularly rural areas have been hardest hit. The availability of adequate numbers of contracting providers and the capability to achieve a critical mass in enrollments, coupled with relatively low

federal capitation rates, will continue to be factors determining the geographic reach of the Medicare managed-care program.

In the same fashion, Medicaid programs around the country are moving very rapidly to use man- aged care for their recipients’ care, and it seems clear that the impact on Medicaid recipients will also be quite marked, if different from the impact on Medicare beneficiaries. In the case of Medicaid, changes from the increased use of managed care are more likely to be positive than negative.

In the past, Medicaid recipients generally re- ceived their care in a somewhat random and scat- tered fashion from local governmental hospitals, clinics, and emergency rooms; interested physi- cians; and a wide variety of free clinics and other community organizations. There was usually very little cohesion among the providers and very little coordination in the patterns of care being given.

Under managed care, Medicaid recipients have a firm and formal connection with a medical group or medical provider and are required to have a des- ignated PCP as the coordinator of all their services. Required services are provided on a regular basis and will be monitored for outcomes. For the first time, Medicaid recipients have the ability to access continuous care from a single provider network. In a very real sense, managed care presents a great op- portunity to improve the quality of care received by Medicaid recipients across the country.

Mental Health and Managed Care

One of the most interesting areas of managed care, and also one of the most rapidly expanding, is the implementation of managed care for mental and behavioral health services. Over the years, the gen- eral criticism of traditional mental health services has been that they are unstandardized, poorly su- pervised, and without any meaningful measures of outcomes. There was also an excessive use of ex- pensive inpatient mental health services, stemming from the availability of health insurance payments for such services.

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The shift to managed care in mental health ser- vices is causing significant concern among both pa- tients and providers of mental health services and is also forcing patients and providers to learn a new set of procedures and policies for delivery of care. Rather than offer a wide-open patient-initiated se- lection of mental health practitioners, the managed behavioral health plans require beneficiaries to first use a triage process that attempts to determine the severity of the problem, the most appropriate form of treatment, and a connection to the most appro- priate type of practitioner (e.g., psychiatrist, social worker, etc.). This means that the patient is no longer free to pick the practitioner of his or her choice and begin therapy at will. Now all those pre- vious forms of behavior are organized, controlled, and monitored for treatment outcomes by the man- aged mental health organization itself.

From the patient’s point of view, this means that there are more formal and supervised systems of determining the severity of the initial problem and a much more standardized process for initializing and continuing care. Also, there is a deliberate at- tempt on the part of the managed-care organiza- tion to determine the credentials of the mental health practitioners before they are accepted as providers by the plan. For their part, providers of mental health services may now find themselves dependent upon the managed-care plan for a flow of initial patients and then limited in their ability to provide care by the number of encounters that are authorized. Mental health practitioners see this as an imposition on their independence and their clinical judgment, and, for the most part, mental health professionals are not very positive or sup- portive in their views about managed mental health programs.

Conflict of Interest in Managed Care

One of the most important issues facing managed care in the future is the question of conflict of inter- est among the various participants in any type of managed care system (Gray, 1997). The conflict is

centered around the need to reduce the use of vari- ous health services, products, and procedures. The economic survival and prosperity of all the major players in managed care depend upon the imposi- tion of tight controls on the use of health services, with the implication that services have been overused in the past and that this overusage must be eliminated.

Although there is general agreement that many types of health services have been overused in the past, it is not always specifically clear which of those services qualify as “unnecessary” and, there- fore, need reduction. The application of across-the- board methods to reduce the use of health services will affect both those services that may have been overused and overprovided in the past as well as those services that may not have been overused and overprovided. The net result may be that all health services utilization may be reduced, both those ser- vices that needed reduction and those that did not. The end result may be that patients who need some services may not get them in the future.

For the most part, purchasers/payers and health insurance plans have been unwilling to concede or even discuss the possibility of a conflict of interest affecting their participation in managed care, but in- creasingly physicians have been more vocal about the difficult situation in which they find themselves. Indeed, because physicians are directly involved with their patients on a face-to-face basis, it is very likely that the issues of conflict of interest will be most ap- parent in this part of any managed-care system. It is also very obvious that the discussion of conflict of in- terest in managed care will most likely be led by physicians, as it is there that the stresses and strains are felt most acutely (Kerr, 1996). For physicians, medical ethics versus economic pressures will be the focus of this discussion, but it certainly will not end there. Conflict of interest is rampant throughout the entire managed health care structure.

Protection of the Public

A final issue of importance to the future of man- aged care is the development of better mechanisms

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for the protection of patients and in the public in- terest. In recent years, it appears that individual pa- tients and the public in general are somewhat at the mercy of a managed-care structure that is consoli- dating very rapidly at the purchaser, the health plan, and the provider systems levels (Bodenheimer, 1996). The only part of the managed-care structure that is not consolidating (and, therefore, not gain- ing clout in the marketplace) is that of individual enrollees and the public in general.

For most individuals who must make their way through the managed-care system in a relatively un- aided fashion, the complexities of managed care leave them vulnerable and relatively unprotected. From the time when purchasers/payers select a health insurance plan under which the employees will be covered (sometimes without choice or op- tions and other times with options that are not clearly explained), the individual is at a significant disadvantage because of the relative lack of informa- tion, experience, and sophistication in consuming medical services. Later, in dealing with individual health insurance plans and their consumer service departments, the individual is also at a disadvan- tage, as one is dealing with a health plan staff mem- ber who is more experienced and knowledgeable about the details of the health plan’s operation. The plan employee may also have been given the specific direction to constrain or reduce the utilization of ser- vices and may have the best interest of the health plan uppermost in mind. The utilization review process, for example, may not be clearly described to the enrollee and may be implemented in widely varying forms with different medical outcomes.

All these circumstances tend to make members of managed-care health plans suspicious and dis- trustful even when the plans and the physicians are actually doing as much as they can to provide ap- propriate service. The sense of vulnerability among individuals, when they are confronted with the de- tailed machinations of managed care, may make them feel that they have fewer options and less in- fluence over their care than they really hold.

One response to this sense of isolation and vul- nerability among members of managed-care plans

has been the passage of a series of legislative and regulatory efforts by Congress, state legislatures, and state regulatory departments to protect the in- terests of the public. Statutes mandating the mini- mum number of days that a woman may remain in the hospital after a normal delivery, for example, raise serious raise serious questions about their wis- dom of legislating the details of personal care. Nevertheless, until people organize to protect them- selves from this apparent imbalance of power, and until purchasers and managed-care plans do much more in the way of direct communication and as- sistance to patients and the public, the only channel of recourse available to the public will be through the rule of law.

THE UNINSURED

According to the U.S. Census Bureau, 45.8 million people in 2004 were without health insurance of any kind, up from 45.0 million in 2003. From 1987 to 1998, the uninsurance rate (12.9 percent in 1987) either increased or was unchanged from one year to the next. After peaking at 16.3 percent in 1998, the rate fell for 2 years, then increased for 3, hopefully stabilizing at 15.7 percent of the U.S. population in 2004.

“Forty-five million Americans are uninsured, and each one of these uninsured people is a tragedy waiting to happen” (Kennedy, 2005). It is unfortu- nate that after decades of relentless debate and dis- cussion, the United States continues to battle the issues surrounding uninsurance. The nature of the problem, in addition to the characteristics of the uninsured, has been examined in countless pieces of literature. However, the problem has re- mained the same: There are far too many Americans living without health insurance coverage.

Minorities account for 50 percent of the 45 mil- lion uninsured Americans. Kennedy (2005) reports that, at any given point in time, approximately 32 percent are Hispanics, 20 percent are African

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Americans, and 18 percent are Asians/Pacific Islanders.

The uninsured population is generally character- ized by three main groups: the working uninsured, the nonworking uninsured, and the medically unin- surable. Many assume that the uninsured are poor and unemployed. However, statistics continuously disprove this assumption. In 2004, roughly 63 per- cent of the total uninsured population had an in- come above the federal poverty level (Porter, 2005). More importantly, 8 out of 10 uninsured individu- als are in fact members of families participating in the workforce. As a result, this group constitutes more than 50 percent of the total uninsured popu- lation. These individuals are generally low-wage earners employed by organizations that do not offer health insurance. While the incomes earned by this group are typically above the poverty level, private health insurance continues to be a finan- cially unattainable alternative (Wilensky, 1989).

The nonworking uninsured comprise the second largest group of the uninsured. Incomes for these individuals typically fall below the federal poverty level, and many are ineligible for state Medicaid

programs. Additionally, this group tends to experi- ence longer periods without any form of employ- ment (Wilensky, 1989).

The medically uninsurable constitute the smallest percentage of the uninsured population. These indi- viduals have preexisting health conditions that pre- vent them from obtaining insurance through the pri- vate market. Health plans often confront them with exorbitant premiums, copayments, and deductibles. Consequently, their families endure unrelenting fi- nancial distress that may ultimately result in bankruptcy. This group also has a considerable im- pact on health care providers since much of the care they receive is mostly uncompensated. Thus, it is clear these individuals will be less likely to procure health insurance, placing an economic burden on our health care system (Wilensky, 1989).

The offering of health insurance by the employer is closely related to the size of the organization. Fig- ure 5.2 shows that less than 50 percent of firms with fewer than 10 workers offer group health insurance. As firm size grows, so do the number that offer PHI, but even among the largest firms, not all offer this benefit. A federal survey on employer-sponsored

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health insurance estimates that only 43.2 percent of establishments with fewer than 50 workers offer health insurance. Furthermore, the trend is down- ward. In 2000, 69 percent of all firms offered health benefits, and by 2005, that figure had di- minished to 60 percent. Reasons cited by firms for not offering health insurance are that (1) premiums are too high, (2) the firm is too small, and (3) em- ployees are covered elsewhere (KFF & HRET, 2005; USDHHS, 2003).

In 1999, the Institute of Medicine (IOM) issued a six-volume report on the uninsured U.S. population. The IOM found the presence of health insurance coverage to be one of the most significant factors in generating access to health care services. Despite the existence of free community clinics and other insti- tutions offering discounted services, it is clear that the uninsured continuously experience reduced ac- cess to medical care (Wolman and Miller, 2004). Not surprisingly, the committee concluded that adults who lack coverage have worse health out- comes stemming from inadequate treatment for chronic diseases and higher age-specific mortality rates, as compared to their insured counterparts. The study found that urban areas serving large uninsured populations offer relatively fewer services (such as mental health and trauma care) when compared to urban areas with larger insured populations.

The figure 45 million uninsured represents only a snapshot in time and does not reflect the number of people who constantly move in and out of insurance coverage. Extensive survey research examined the stability of health insurance coverage in the United States from 1996 to 1999. Despite the tremendous number of uninsured Americans, relatively few were found to be continuously uninsured during this time period. Almost 85 million Americans under the age of 65 were uninsured for a minimum of one month throughout the 4-year period. This figure greatly surpasses the current estimate of 45 million. How- ever, only 10 million individuals were continuously uninsured. Therefore, most of the participants who were uninsured in 1996 had one or more changes in coverage during this time period (Short and Graefe, 2003).

Table 5.8 provides a summary of coverage pat- terns among the uninsured. The “repeatedly unin- sured” proved to be the most common among the seven patterns observed. This group accounted for 33 percent of the study population. The second largest group, comprising about 19 percent, fol- lowed the “single gap in coverage” pattern and were usually uninsured for 12 months or less. This gap

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Table 5.8. Percentage Distribution of the Uninsured by Total Months Uninsured over 4 Years, According to Coverage Patterns, U.S. Population Under Age 65, 1996–1999

Number of Months Uninsured

Percent of Persons in Coverage Pattern

Millions 1–4 5–12 13–24 25–48

Total persons uninsured 84.8 24 22 19 35

Coverage pattern Always uninsured 10.1 0 0 0 100 Transition into

coverage 9.9 24 22 23 31 Transition out of

coverage 7.3 24 20 19 37 One gap in

coverage 15.9 64 22 10 5 Temporary

coverage 4.8 0 4 8 87 Frequent

changes 8.5 64 22 10 4 Repeatedly

uninsured 28.2 4 33 34 30

NOTE: Row percentages might not sum to 100 because of rounding.

SOURCE: P. F. Short and D. R. Graefe, 2003. “Battery- Powered Health Insurance? Stability In Coverage of the Uninsured,” by Health Affairs, 22, pp. 244–255.

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was largely attributed to changes in Medicaid/ SCHIP and employer insurance. Interestingly, the individuals who remained uninsured for the longest period of time manifested the “temporary coverage” pattern. These people, who were initially uninsured, experienced only one movement into coverage and subsequently remained uninsured for the duration of the study. Roughly, 87 percent were uninsured for more than 24 months.

The results of this study highlight the complexity of uninsurance in the United States. The variety in the different coverage patterns among the unin- sured suggest that simply expanding coverage may not be an appropriate solution to the problem. The results do indicate, however, that efforts to target pockets of the uninsured with incremental coverage reforms must target the right people at the right time in order to even begin to reduce the uninsured population. Moreover, policymakers may also want to explore options that increase stability in cover- age (Short and Graefe, 2003).

While relatively small incremental changes have been made, the number of uninsured individuals continues to rise. A lack of consensus among policy makers proves to be a major obstacle in establish- ing health care reform. Current policy initiatives typically support expansions of the current financ- ing system. More specifically, strategies revolve around the establishment of refundable tax credits, the expansion of federal and state programs, and the expansion of employer-based insurance cover- age (Cubanski, 2004).

THE PROSPECT OF NATIONAL HEALTH INSURANCE

According to Reinhardt (2003), neither moral sen- timents among U.S. political leaders, economic self- interest among those who would ultimately pay for universal health insurance, nor political pressure from the uninsured will provide a sufficiently strong imperative to move the country toward

universal coverage anytime soon. Despite the decades of persistent debate over how to solve the problem of uninsurance, the United States is still the only Western industrialized nation without na- tional health insurance (Quadagno, 2004). Many would contend that universal coverage, under some form of national health insurance, is the best ap- proach to insuring the uninsured. However, the twentieth century revealed at least 10 failed at- tempts to achieve a national health insurance pro- gram (Davis, 2001).

The IOM Committee report on uninsurance con- cludes with the committee’s vision for achieving universal coverage and provides specific strategies to accomplish this goal. These include expanding Medicaid and SCHIP through the distribution of tax subsidies, instituting individual and employer mandates, and establishing a national single-payer health insurance system. Inherent in all these strategies are major shortcomings that threaten major stakeholders in the current health insurance system including private health plans, providers, states, and—considering the continuing pressure of health inflation—the entire U.S. economy. The gen- eral public may stand to lose as well, in terms of ac- cess to health services and satisfaction with care. It is clear these and other barriers (i.e., surrounding the benefit package and the wide geographic varia- tions in practice patterns) will continue to preclude the adoption of a U.S. national health insurance policy in the near future (Chollet, 2005; Newhouse & Reischauer, 2004).

It is clear the United States has failed to reduce the rising number of uninsured Americans. Despite the wide variety of proposals, a lack of consensus among policy makers has proven to be the driving force behind this relatively unchanged crisis. It will take strong political leadership and a clear commit- ment from the federal government to resolve the issue of uninsurance. The sheer complexity of American health insurance dynamics has intensi- fied the issue with the growth of the working unin- sured population. As a result, the uninsured will continue to burden families, communities, and so- ciety. The prospect of universal coverage will essen- tially remain a vision of the future.

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SUMMARY

Health insurance in the United States defines most individuals’ health care systems. The complexity of insurance programs and arrangements is huge. The mechanisms that are included under these plans are undergoing constant revision and modification as the nation’s health systems evolve. Most change in recent years, since the introduction of today’s popular managed-care plans, has been evolution- ary. Revolutionary change is possible, but unlikely although the political and cost pressures are con- tinuing to mount, potentially eventually forcing a radical redesign of health care plans in this nation.

REVIEW QUESTIONS

1. What is insurance, and why is it used? 2. How does private health insurance violate

the standard principles of insurance? 3. Describe the three methods for categorizing

health insurance in the United States. 4. Briefly describe the differences among the

commercial insurance industry, the Blues, and HMOs.

5. What is managed care? List the main objec- tives of managed care.

6. Briefly describe PPO and HMO plans. 7. List the common managed-care practices de-

signed to influence physician behavior. 8. Describe the role of the gatekeeper. 9. Describe the impact of managed care on

both the Medicare and Medicaid programs. 10. Discuss the conflict of interest inherent in

managed care. 11. Briefly describe the characteristics of the

uninsured population in the United States.

REFERENCES & ADDITIONAL READINGS

America’s Health Insurance Plans (AHIP). (2004). Long-term care insurance in 2002. Washington, DC. Retrieved May 4, 2006, from http://www.ahipresearch/org.

America’s Health Insurance Plans (AHIP). (2005a). Comparison of tax-advantaged health care spending accounts. Retrieved January 11, 2006, from http://www.ahipresearch/org.

America’s Health Insurance Plans (AHIP). (2005b). Number of HSA plans exceeded one million in March 2005. Washington, DC. Retrieved May 4, 2006, from http://www.ahipresearch/org.

Blumenthal, D. (2006). Employer-sponsored health insurance in the United States—origins and Implications. New England Journal of Medicine, 355(1), 82–88.

Bodenheimer, T. (1996). The HMO backlash . . . righteous or reactionary? New England Journal of Medicine, 335, 1601–1604.

Chollet, D. (2005). Insuring the uninsured: Finding the road to success. Frontiers of Health Services Management, 21, 17–27.

Claxton, G., Gabel, J., Gil, I., Pickreign, J., Whitmore, H., Finder, B., Rouhani, S., Hawkins, S., & Rowland, D. (2005). What high-deductible plans look like: Find- ings from a national survey of employers, 2005. Health Affairs, Web Exclusive (W5), 434–441.

Congressional Budget Office, Congress of the United States. (1991). Rising health care costs: Causes, implications, and strategies. Washington, DC: U.S. Government Printing Office.

Cubanski, J. (2004). Is incremental change working? Or is it time to reconsider universal coverage? Issue Brief (Commonwealth Fund), 711, 1–8.

Davis, K. (2001). Universal coverage in the United States: Lessons from experience of the 20th century. Journal of Urban Health, Bulletin of the New York Academy of Medicine, 78, 46–58.

Drake, D. (1997). Managed care: A product of market dynamics. Journal of the American Medical Associa- tion, 277, 311–314.

Enthoven, A., & Singer, S. (1996). Managed competi- tion and California’s health care economy. Health Affairs, 15, 40–57.

Feldstein, M., & Friedman, B. (1997). Tax subsidies, the rational demand for insurance, and the health care crisis. Journal of Public Economics, 7(2), 155–178.

Fox, P. (1997). An overview of managed care. In P. Kongstvedt (Ed.), Essentials of managed health care. Gaithersburg, MD: Aspen Publishers.

Gray, B. (1997). Trust and trustworthy care in the managed care era. Health Affairs, 16, 34–49.

Greenspan, N. T., & Vogel, R. J. (1980). Taxation and its effects upon public and private health insurance and

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medical demand. Health Care Financing Review, 1(4), 39–46.

Hall, M. A. (2001). The structure and enforcement of health insurance rating reforms. Inquiry, 37, 376–388.

Kaiser Family Foundation. Trends and indicators in the changing health care marketplace. Retrieved January 16, 2006, from http://www.kff.org/insurance/ 7031/print-sec6.cfm.

Kaiser Family Foundation and Health Research Educational Trust (KFF & HRET). (2005). Employer health benefits: 2005 annual survey. Retrieved March 12, 2006, from http://www.kff.org/insurance/7315/index.cfm.

Kennedy, E. M. (2005). The role of the federal govern- ment in eliminating health disparities. Health Affairs, 24, 452–458.

Kerr, E. (1996). Quality assurance in capitated physi- cian groups. Journal of the American Medical Associ- ation, 276, 1236–1239.

Kuttner, R. (1997). Physician-operated networks and the new anti-trust guidelines. New England Journal of Medicine, 336, 386–391.

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T U R N E R - H O W A R D , T O N I - C L Y S A 5 9 4 0 B U

Chapters 3 & 4

CHAPTER 3: Population and Disease Patterns and Trends

NEED, DEMAND, AND UTILIZATION
THE UNDERLYING DEMOGRAPHIC DETERMINANTS OF HEALTH SERVICES UTILIZATION
FERTILITY TRENDS IN THE UNITED STATES
MORTALITY TRENDS IN THE UNITED STATES
SPECIFIC CAUSES OF DEATH FOR THE U.S. POPULATION
INCIDENCE OF INFECTIOUS DISEASES
LIFESTYLE PATTERNS AND DISEASE
HEALTH, LIFESTYLE, AND SOCIAL STRUCTURE
MEASURING THE IMPACT OF ILLNESS ON SOCIETY
ACCESS TO HEALTH CARE SERVICES
SUMMARY
REVIEW QUESTIONS
REFERENCES & ADDITIONAL READINGS

williams12890_1418012890_00.05_chapter04.pdf

PART TWO: Financing and Structuring Health Care

CHAPTER 4: Financing Health Systems

HEALTH EXPENDITURES
HEALTH INSURANCE
MEDICARE
MEDICAID
PHYSICIAN REIMBURSEMENT
INITIATIVES IN HEALTH CARE FINANCE
STRATEGIES FOR HEALTH CARE REFORM
SUMMARY
REVIEW QUESTIONS
REFERENCES & ADDITIONAL READINGS

Chapters 4 & 5

PART TWO: Financing and Structuring Health Care

CHAPTER 4: Financing Health Systems

HEALTH INSURANCE
MEDICAID
PHYSICIAN REIMBURSEMENT
INITIATIVES IN HEALTH CARE FINANCE
STRATEGIES FOR HEALTH CARE REFORM
SUMMARY
REVIEW QUESTIONS
REFERENCES & ADDITIONAL READINGS

williams12890_1418012890_00.06_chapter05.pdf

CHAPTER 5: Private Health Insurance and Managed Care

PRINCIPLES OF INSURANCE
HEALTH INSURANCE IN THE UNITED STATES
HEALTH-RELATED INSURANCE PROGRAMS
HEALTH PLAN BENEFITS DESIGN
MANAGED CARE
THE FUTURE OF HEALTH INSURANCE
THE UNINSURED
THE PROSPECT OF NATIONAL HEALTH INSURANCE
SUMMARY
REVIEW QUESTIONS
REFERENCES & ADDITIONAL READINGS