Efr ch2 insurance_sr2.11

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CHAPTER 2: HEALTH INSURANCE AND FEE-FOR-SERVICE FINANCING• Analyze at least two problems related to the high

number of uninsured Americans in the United States• Explain at least one reason why the passage of

Medicare and Medicaid led to increased health costs• Point out at least two ways that financial incentives can

make consumers either more or less aware of health care costs

• Compare the cost concerns of health care providers to the cost concerns of health insurance plans

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HISTORICAL FOUNDATIONS OF INSURANCE• Financial contracts: Industrial Revolution• Wage-based economies: money when needed• Sickness funds, “company doctor”• National health plans in Europe—early 1900’s• United States: government played a very

small role

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U.S. INSURANCE HISTORY

• Great Depression: Blue Cross, Blue Shield• WWII: wage and price control regulations

exempted employee benefits• Social Security Acts of 1965: Medicare

(Title XVIII) and Medicaid (Title XIX)• Since the 1970s: cost concerns and managed

care vs. FFS

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CHARGES

• Charge: full price for good or service before reductions are applied

• Costs: expense to the provider to supply the good or service

• Reimbursement: payment for the good or service

• Third-party payor• Charge-based

reimbursement• Cost-based

reimbursement• Allowable costs • Negotiated charges• Discounted charges

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RETROSPECTIVE PAYMENT AND FEE-FOR-SERVICE FINANCING• Retrospective payment is reimbursement paid to the

provider after health care services are provided—historical– Charge-based reimbursement, in which the provider bills the

payer for the full charges of the good or service– Cost-based reimbursement, in which the payer agrees to pay

allowable costs; Medicare used until early 1980s

• Charge-based and cost-based reimbursement led to spiraling health costs– Negotiated charges; payer negotiates a reduced rate that is less

than the charge—often private health plans– Discounted charge is a non-negotiated flat fee reimbursed by

the payer that is less than the provider’s full charge—many government health plans

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RETROSPECTIVE PAYMENT AND FEE-FOR-SERVICE FINANCING (CONT’D)• Fee-for-service (FFS) reimbursement is retrospective

payment of all allowable costs meeting accepted standards of care– Physicians are typically reimbursed based on their charges

(which are often negotiated or discounted) or on some predetermined fee schedule such as the Resource-Based Relative Value Scale (RBRVS)

– Hospitals are typically reimbursed based on charges, per diem (a set amount of reimbursement per patient day), or per case

• FFS system makes consumers and providers insensitive to the costs of health care

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CASE MIX INDEX (CMI) ADJUSTMENTS• Developed by Medicare as part of Prospective Payment

System (PPS)• Inpatient CMI represents average DRG weight for all

Medicare patients treated at a specific hospital over a specific time period

• CMI for the "average" hospital is 1.0• The higher the CMI, the greater the complexity of cases

requiring more services and longer LOS• Case mix values may also be calculated for home health,

LTC, and other settings including Medicaid• CMI >1.5 is high and typical of teaching institutions that are

referred more complex cases 10


WAGE INDEX ADJUSTMENTS• Most common is the Medicare Area Wage Index (AWI) • May apply to total costs or some % of total costs • Apply to % because some portion of hospital costs may

not be affected by cost-of-living differences• Medicare assumes the wage index affects 71% of total

cost, so 29% not affected by wage variation• Medicare AWI assigned to hospitals is used to restate

costs to an index of 1.0, resulting in a unique and publicly available number for most U.S. hospitals

• Health care, especially inpatient, is labor-intensive and requires professional staff at high hourly wages 11


INFORMATION PROBLEMS

• Assume “perfect information” in economics– Choice?– Rationality?

• Consumer/patient perspective• Provider perspective• Health plan perspective

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ASYMMETRIC INFORMATION

• Assume “perfect information” in economics– Price and quality– Consumers as knowledgeable as sellers

• Asymmetric: different levels of information– Provider has more information– Consumer has more information– Implications for health plan strategies?

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ECONOMIC CONCEPT OF INSURANCEPossible unexpected event with•Catastrophic cost•“Law of large numbers”– Can’t predict individual variation, but– Can predict overall average variation (actuaries)

•Pool the risk•Pay a “small” premium in case a large outlay is needed over coverage period

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INCENTIVES

• Financial: for example, cost-sharing strategies such as deductibles

• Choice: for example, gatekeeping to limit consumers choosing specialists

• Time: for example, delays imposed by preauthorization review that reduce utilization because consumers may decide to forgo the procedure

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AGENCY RELATIONSHIP

• Related to asymmetric information• Principal delegates authority to agent• Physician: both agent and service provider• Perfect agent – medical ethics – decisions are

always in patient’s best interests

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IMPERFECT AGENCY

Imperfect Agency:• Imperfect agent information• Divergence of interests• Defensive medicine• Supplier-induced demand

Related concepts:• Conflict of interest• Authorization, utilization

review, peer review to reduce imperfect agency

• Medical necessity

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RATING THE RISK POOL

Experience rating:• Premiums are based on

prior experience with the group

• Review prior claims and predict based on utilization patterns

Community rating:• Used when Blue Cross

began• Required by HCFA for

Medicare for federally qualified HMOs

• Predictions based on average utilization from the entire community

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THIRD-PARTY TRANSACTIONS

Benefits from exchange:•Patients: risk pooling•Insurers: profits (or value and service if government sponsored)•Providers: increased demand (volume, profits)

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DEDUCTIBLES, COINSURANCE, COPAYMENT AND CAPS • Deductible: minimum threshold payment

before a plan begins to cover costs• Coinsurance: % of the cost required by the

insurer to be paid by the beneficiary• Copayment: amount of the cost required to be

paid by the beneficiary• Cap: coverage limit, often an annual or a

lifetime basis

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ADVERSE SELECTION• Problem in health insurance markets– Unpredictable risk is primary reason for insurance

coverage• Consumer more knowledgeable about expected

health care costs• High risk consumers drive out lower risk (lower

cost) consumers as premiums increase– Lower risk persons drop insurance as is too expensive

• Insurers deny coverage to high-risk consumers – pre-existing condition clauses

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ADVERSE SELECTION AND MORAL HAZARDAdverse selection:• Disproportionate share of

bad risks• Inevitable if plan covers

only a population segment• Plan design affects plan

choice

Moral hazard:• Higher utilization of covered

services• Provider self-interest may

play a role• Plan design affects moral

hazard—coinsurance, fee schedules

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SUPPLIER-INDUCED DEMAND

• Asymmetric information and agency problem• Use knowledge to influence demand • Agent is also the producer so potential for

conflict of interest

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INDUCING DEMAND VS. ADVERTISINGInducing demand:• Provider-agent uses

superior knowledge to influence demand

• Potential for conflict of interest

• Controls include utilization review

Advertising:• Paid communication from

an identified sponsor using mass media to persuade an audience

• Often targets the consumer and family

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MEDICARE PROGRAM• Enacted in 1965 for seniors; expanded in 1972 to cover

younger beneficiaries with permanent disabilities• 41 million beneficiaries: 35 million elderly, 6 million under-65

disabled• Individuals age 65+ are entitled to Medicare (Part A) if eligible

to receive Social Security– Contribute portion of payroll tax throughout working lives to get

Medicare – Pay monthly premium for Medicare Part B– Individuals eligible without regard to income or medical history

• Is a popular program with broad public support and high satisfaction levels 25


MEDICARE PARTS…

• Part A – Hospital and skilled nursing care• Part B – Physician and outpatient hospital care• Part C – HMOs/Medicare Advantage• Part D – Outpatient prescription drug

coverage began January 2006

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MEDICARE ADVANTAGE• Formerly Medicare+Choice• Plans include:– Medicare Managed Care Plans – Medicare Preferred Provider Organization Plans (PPO) – Medicare Private Fee-for-Service Plans – Medicare Specialty Plans

• Beneficiary must have Medicare Part A and Part B to join Medicare Advantage plan

• Don’t need Medigap insurance as Medicare Advantage plan covers additional benefits 27


MEDICAID• Pays for medical assistance for certain individuals and

families with low incomes• Jointly funded by the Federal and State governments• Largest source of funding for medical and health-

related services for people with limited income• State budget constraints are expected to reduce the

growth in both spending and enrollment• Recent documentation requirements (including

infants born to non-citizens) are expected to cause access problems 28


MEDICAID AND CHIP: 1 OUT OF EVERY 4 AMERICANS IN 2010• Medicaid and Children's Health Insurance

Program (CHIP) served 76 million people in 2010

• 25% of the U.S. population• Medicaid spending reached $400 billion • Covered 68 million people, including

30 million children• CHIP spent $11 billion covering 8 million

children

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CHILDREN'S HEALTH INSURANCE PROGRAM (CHIP) • Established as part of the Balanced Budget Act of 1997 to

reduce the number of children lacking health insurance• Like Medicaid, State Children’s Health Insurance Program

(SCHIP) implemented as partnership between Federal government and states

• Represents the largest expansion of children’s health coverage since Medicaid established

• State funding determined using a formula that includes estimates of the number of children eligible for SCHIP and estimate of the state’s health care costs

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MILITARY HEALTH INSURANCE PROGRAMS• Department of Defense operates TRICARE, provides

coverage for members of the military, families and survivors, and retired members and families

• Until 1990s, when cost-cutting measures including managed care options emerged, families of active-duty members and retirees of the uniformed services were in the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS)

• CHAMPUS is now part of TRICARE• Veteran’s Administration (VA): another military health

program now focusing more closely on efficiency and cost control

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INDIAN HEALTH SERVICE (IHS)

• Originated in 1787 per constitutional and treaty agreements

• Provides health services to ~1.5 million American Indians and Alaska Natives in >557 tribes in 35 states

• Per capita personal health care expenditures = $2100 for IHS users vs. $5298 for U.S. population

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DEFINED CARE PLANS• Defined Contribution, consumer-driven and self-

directed health plans and other consumer centered strategies

• Goal is to change behavior throughout the health care system, not just shift costs– Increase incentives for consumer wellness– Make consumers more sensitive to costs

• High deductible plans—can increase coverage for small employers, but also increase adverse selection

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HRAS AND FSAS

• HRAs: Health Reimbursement Arrangements – IRS provision that allows tax-free rollover from year to year of any unspent funds

• HSAs: Health Savings Account – contributions can be made by employer or employee

• Flexible Spending Accounts – pre-tax wages for selected services including dependent care that are planned, “use it or lose it”—talk to Human Resources 34

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Efr ch2 insurance_sr2.11