Issues Related to Health Care Financing

Overview of the size and growth of the health care sector

The distribution of personal health care services

Flow of Funds for Health Care Nature of Financing Decisions

Judith R. Lave, Ph. D.January 2004

Share of National Health Expenditures, By Type 2002

Total (Billions) $1,553

Total 100%

Personal Health Services 86.3

Prog. Admins + Net Cost of Health Insurance 6.8

Research & Construction 3.6

Public Health 3.3

Per Capita Expenditures $5,440

Notes on Data

Summary Information: Jan/Feb Issues of Health Affairs (K. Levit et al. Health Spending Rebound Continues. Health Affairs. 23(1), 2004.

Complete data:www.cms.gov: Search: National Health Expenditures, Click: Health Accounts. Click: Tables

Annual Percent Change in National Health SpendingSelected YearsCurrent Dollars

1970-1980 12.9%

1980-1988 10.8

1988-1993 9.3

1993-1997 5.3

1997-2000 6.2

200-2001 8.5

2001-2002 9.3

Many Definitions of Healthcare Costs

Healthcare Expenditures (p x q) Prices of Individual Services Premiums for Health Insurance Out-of-Pocket Payments % of GDP to Health Care (14.9%)

National Health Expenditures as a Percent of GDP

1970-2010

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Accelerated growth

Managed care andBBA impacts: “one-

time” effects on price and volume levels

Moderate Growth

Distribution Expenditures on Personal Health Care 2002

Prescription drugs12.1%10.4%

Nursing--home care

25.3%

Physician &Clinical Services

36.3%Hospitals

15.9%

Other healthservices

Percentage Change in Expenditures2000-20002

Category Percent Change2000-2001 2001-2002

Overall 8.5% 9.3%

Hospital Care 7.5 9.5

Physician and Clinical Services

8.5 7.7

Nursing Home&Home Health 5.8 4.9

Prescription Drugs 15.9 15.3

prem

ium

s,

gener

al ta

xes,

payro

ll ta

xes,

stat

e lo

tter

ies

Households Tax payers

The Financing of Health Care

out-of-pocket payments

fee-for-service,

budgets,

capitation

medical services

“claims”

Financing Side Reimbursement Side

Third Parties

Government Agencies

Insurance Companies

(Health Plans)

prem

ium

s,

gener

al ta

xes,

payro

ll ta

xes

Providers

(doctors, hospitals, dentists, etc.)

Patients

Employers

Employees

Nonelderly Americans With Selected Sources on Health

Insurance Coverage: 2002

Type of Coverage % of nonelderly population *

Employment-Based CoverageIndividually PurchasedPublic Medicare Medicaid Tricare/CHAMPVA No Health Insurance

64.26.7

15.92.3

11.92.8

17.3

Population: 250.8 million * Does not add up to 100% because people can have more than one source of health insurance

Sources of Supplemental Coverage: Among Non-Institutional Medicare

Beneficiaries: 1999Other* 2%

Medicare Only13%

Employer-Sponsored

33%

Medicaid11%

Medigap24%

Medicare HMOs17%

Total = 34.7 million non-institutional Medicare beneficiaries

No Standard Health Plan

Health Insurance Policies Vary With Respect to:covered servicescovered providers administrative terms under which

services are accessedmethods for paying providers

Importance of Insurance Coverage

Use of services is a function of price (which depends on insurance structure and coverage) (i.e., Claritin)

Decisions to cover or not cover certain providers/technologies/services can make or break an industry (i.e., physical therapy, mammograms, obesity surgery)

Medicare is often pace-maker on ways to pay providers

Brief Discussion of HealthCare Financing Terms

Insurance policies vary considerably. They vary with respect to which services will be covered, how much cost sharing will be borne by the policy holder, administration conditions under which consumers/patients access care, what providers will be covered, how much providers will be paid.

Private Health Insurance: Health insurance is purchased in the market by groups (either through the place of business or through professional associations) or by individuals. The premium is the price paid for the insurance policy. Under employer sponsored group health insurance plans, the cost of the premiums is paid in whole or in part by the employer.

Definitions of Terms in the Following Charts

Direct Patient Payments: This is the total amount paid out of pocket by the patient or by the patient’s family for a given service.

Private Third Parties: This is the total amount paid for a given service on the behalf of the consumer or services. This would include payments made by blue cross, blue shield, a health maintenance organization, Aetna, etc.

Public Federal: This is the total amount paid by the federal government for health care. It includes expenditures made under Medicare, Medicaid, The Veteran’s Administration, etc.

National Health Expenditures By Source of Funds Selected Calendar Years

1970-2002

32.530.929.024.0 Federal

45.944.042.637.8Public Funds

13.716.523.734.3 Out of Pocket Payments

54.156.057.362.1Private Funds

35.433.627.721.2 Private Health Insurance

5.0 5.9 5.9 6.6 Other

13.413.113.613.7State & Local

100%100%100%100%Total

2002199319801970Source of Payment

Percent of Personal Health Care Expenditures

Paid Out of Pocket

1990 2002

Total 22.6% 15.8%Hospital 4.4 3.0Physician & clinical services

20.5 10.1

Nursing Home care 40.4 25.1Dental 48.3 44.0Prescription Drugs 55.8* 30.0

*This is for 1992

Source of Payment for Personal Healthcare: Percent Distribution for Selected Services (2002)

Note: only selected sources enumerated

Medicaid(Fed & State)

Medi-care

Out of Pocket

Private Insu-rance

Total PrivateTotal

Expendi-tures

(billions)Type of Service

49.312.525.17.535.9100.0%103.2Nursing Home Care

17.60.230.047.877.7100.0%162.4Prescription Drugs (99)

5.4….44.049.593.6100.0%70.3Dental Services (99)

12.420.310.149.266.2100.0%339.5Physician Services

17.230.73.033.941.1100.0%486.2Hospital Care

17.419.315.835.855.8100.0%$1,340.2Total Personal Healthcare

GovernmentPrivate

Source of Expenditure (%)

What are some of the problems that

people have with current insurance?

Employer Sponsored Health Insurance

90% of Private Health Insurance Obtained Through Employer

Employer Share of Premium Excluded from Taxes

Employer Selects Plan Who Bears the Cost?

Economists: The Employee in lower wages Others: The Employer in lower profits

Question

What are the advantages/disadvantages of getting health insurance through the employer?

New WrinkleDefined Contribution

1. Pay same amount towards all plans offered by employer.

2. Pay employee fixed amount divided between cash and a catastrophic cap. Employee selects a plan from a network of providers.

3. Pay employee fixed amount to purchase insurance privately.

A Very Conservative Position

Decide how much you want to subsidize health care—who do you want to help?

Get rid of the incentives that encourage people to obtain their health insurance through their employers.

Eliminate the tax subsidy of employer based health insurance: treat all health insurance equally—probably with a tax credit.

Let people use their own dollars to purchase medical care/insurance—let them make their own trade-offs. (could be defined contribution)

Note: Similar to the A.M.A. position.

Selected Policies By Third Parties

Control Over Prices Government – Administered Prices

– Prospective Payment System Hospitals – “DRG’s” Nursing Home – “RUG’s” Home Health Agencies –

“HHRG” Outpatient Department –

- “APC” Rehabilitation Facilities

– “FIM-FRG”

DRG = Diagnoses Related GroupRUG = Resource Related GroupHHRG = Home Health Related GroupAPC = Ambulatory Patient ClassificationFIM-FRG = Functional Independence Measure-Function Related Group

Development of Managed Care Strongly Encouraged By Capitation

Selection of Physician/Providers who Practice Cost-Effectiveness Care

Capitation of Primary Care (Gate-Keeper and Other Providers)

Utilization Management Care management Preadmission screening Concurrent review Guidelines Disease management

Introduction of Best Practices

35.0%

27.6%

13.8%

8.4%

9.20%

6.10%

7.7%

5.1%

10.3%

25.8%

49.9%

Percent Distribution of Medicare Enrollees andProgram Payments Under Medicare: CY 1998

29.3 Million Enrollees $168.2 Billion in Program Payments

Percent of Persons Served Percent of Program Payments

$25,000 or More

$10,000-24,999

$5,000-9,999$2,000-4,999

$25,000 or More$10,000-24,999$5,000-9,999$2,000-4,999

$500-1,999

$1-499

Am

ou

nt

of

Pro

gra

m P

ay

me

nts

$500-1,999