Financing Health Care and Health Insurance

Objectives

  • Analyze health care spending, its growth, and possible future trends.

  • Critique the concepts of health care financing and payment for health care.

  • Provide an overview of how health insurance works.

  • Outline the history of how health insurance has evolved.

  • Assess terms and characteristics of health insurance.

  • Compare and contrast the types of private health insurance.

  • Differentiate between the types of social insurance.

  • Evaluate data on health insurance coverage.

  • Describe the demographics and employment status of the uninsured.

  • Assess health care reform and changes to insurance resulting from it.

  • Explain the implications for management.

National Health Expenditures, 2018

  • Five areas account for about 80% of expenditures:

    • 33% hospital care

    • 20% physician and clinical services

    • 9% prescription drugs

    • 5% other professional, dental, and personal care services

    • 5% nursing home and continuing care

      • 3% home health

      • 3% Other professional services (includes OT, PT, SLP)

  • The remaining 20% of spending includes:

    • Administrative costs

    • Structures and equipment

    • Public health

    • Other medical products

    • Research

U.S. Health Care Spending in 2022

  • The U.S. spent 4,464.6 billion on health care in 2022.

  • Breakdown of spending:

    • Hospital care: 1,355.0 billion (30.4%)

    • Physician services: 647.7 billion (14.5%)

    • Clinical services: 237.2 billion (5.3%)

    • Home health care: 132.9 billion (3.0%)

    • Other personal health care: 734.9 billion (16.5%)

    • Prescription drugs: 405.9 billion (9.1%)

    • Nursing care facilities: 191.3 billion (4.3%)

    • Government administration: 54.2 billion (1.2%)

    • Investment: 217.8 billion (4.9%)

    • Government public health activities: 208.4 billion (4.7%)

    • Net cost of health insurance: 279.4 billion (6.3%)

Paying for Care

  • Sources of payments:

    • Out-of-pocket payments: 10%

      • Individuals with private insurance, pay for themselves, and/or copayments/deductibles

    • Private health insurance: 34%

      • Payments by individuals and employers for health insurance premium

    • Public funding

      • Medicare: 21%

      • Medicaid: 16%

Total National Spending on Health Consumption Expenditures, 2022

  • Out-of-Pocket: 471.36 billions

  • Other Third-Party Payer: 503.66 billions

  • Medicaid and CHIP: 829.24 billions

  • Private Health Insurance: 1,289.81 billions

  • Medicare: 944.32 billions

Terms in Health Insurance

  • Risk pooling

  • Forms of payment

    • Fee-for-service

    • Prepayment

  • Cost sharing

    • Copayments

    • Deductibles

    • Coinsurance

  • Policy limitations

    • Maximum out-of-pocket expenditure

    • Lifetime limits

  • Types of benefits

    • Comprehensive

    • Basic/major medical

    • Catastrophic coverage

    • Disease-specific

    • MediGap

    • Long-term care

Health Insurance Defined

  • Intent: To provide protection should a covered individual experience a health event that requires treatment.

  • Risk: Money that may be lost due to insuring people who utilize healthcare services.

    • Transfers risk from one to many (pooling the risk).

  • Cost Sharing:

    • Pool the potential risk for loss, cost of risk shared among many

    • Larger the # of healthy people, the lower the risk.

Key Health Insurance Concepts

  • Risk is transferred from the individual to the group.

  • Cost sharing of any covered losses incurred by the group members.

Health Insurance Model

  • Originally, purchased on an individual basis like car insurance

    • Protect against catastrophe

    • Routine care OOP

  • Demand for and use of health insurance changed during the second half of 20th century…

Health Insurance Changes

  • Comprehensive set of benefits

    • Hospital stays, physician care, etc.

  • Expanded role of public and private sectors provision of health insurance

  • Group health insurance as an employee benefit

    • Decreased individual insurance policies

  • Reimbursing providers expanded from paying on basis of cost to reimbursing on a prepaid basis

  • Rise in cost of healthcare

History of Major Pieces of Health Insurance Legislation

  • National Health Insurance

    • Discussed in 1930s

    • Seen as socialized medicine

    • Not enacted

  • Medicare and Medicaid enacted in 1965

  • Children’s Health Insurance Program (CHIP) legislated in 1997

    • Health insurance coverage to children of low-income families

  • Patient Protection and Affordable Care Act passed in 2010 ("Obamacare")

Characteristics of Health Insurance

  • How is health care financed?

  • How are costs controlled?

  • Types of benefits offered?

Forms of Payment

  • 2 forms of payment provide basis for all types of health insurance coverage

    • Fee-for-service

    • Prepayment

Forms of Payment: Fee-for-services

  • Based on idea that individual purchases a set of benefits and pays the healthcare provider for the services rendered

  • Provider paid?

    • By insurer or by individual (reimbursed by insurer)

      • Insured must meet deductibles/copays for their care

Forms of Payment: Prepayment

  • Insured individual pays a fixed, prespecified amount in exchange for services

  • Routine care covered in full

    • Small copayments for selected services

Cost Sharing

  • Copayments

    • Costs paid by individual at the time of service

      • Set amount

    • Used in both FFS and Prepayment

  • Deductibles

    • Required levels of payments that the individual must meet before the insurer begins making payments

    • FFS plan

  • Coinsurance

    • Insured individual pays portion of cost of care, insurer responsible for remaining

      • Percentage (20%/80%)

    • FFS

  • Premiums and Deductibles

Policy Limitations

  • Limitation of either payment by policy holder or coverage provided by insurer

  • Maximum OOP: cap to an individual's cost sharing

    • Insurer picks up remaining 100%

  • Lifetime limit:

    • Max amount policy will pay out over the lifetime of the insured individual

      • Catastrophic illness requiring costly care

Types of Benefits

  • Comprehensive

    • Physician, outpatient, hospital, surgery, rehab, Rx

  • Basic/major medical.

    • Limited to illnesses that require hospital stay, surgery

  • Catastrophic coverage

    • Sizeable deductible, lifetime limits

  • Disease specific

    • Ex. Cancer coverage

  • Medigap

    • Supplemental coverage (exclusions)

  • Long-term care

    • In-home, ALF/SNF

Other Concerns Relating to Health Insurance

  • Access/Restrictions to care

    • Choice of provider

  • Moral hazard

  • Pre-existing conditions

  • Buy-downs

  • Coordination of benefits

Private Health Insurance

  • Conventional Indemnity

    • Based on FFS

  • Managed Care

    • Seeks to manage cost, quality and access

      • Health Maintenance Organizations (HMOs)

      • Preferred Provider Organizations (PPOs)

      • Point-of-Service Plans (POSs)

      • High-Deductible Health Plans with Savings Option (HDHP/SO)

Private Health Insurance: HMOs

  • Members (paying fixed prepayment amount)

    • Enrolled

  • Eligible for care from providers and facilities aligned with HMO

    • Minor copays

  • Providers reimbursed under capitated rate

  • Contracting arrangements

    • See HMO types

Private Health Insurance: PPOs

  • Combo of indemnity insurance and managed care

  • Purchase coverage FFS basis

    • Ded/Coins/Copays

  • Pay less if seek care from network of preferred providers

    • Higher, undiscounted rate from non-preferred provider

Types of HMOs

  • Closed-panel HMO

  • Group model HMO

  • Open-panel HMO

  • Staff model HMO

  • Independent Practice Association (IPA model)

  • Network model HMO

Legislative History of Social Insurance

  • 1960: Kerr-Mills Act

  • 1965: Social Security Act

    • Title XVIII: Medicare

    • Title XIX: Medicaid

  • 1982: Tax Equity and Fiscal Responsibility Act (TEFRA)

  • 1989: Omnibus Budget Reconciliation Act (OBRA)

  • 1997: Balanced Budget Act (BBA)

  • 2003: Medicare Prescription Drug, Improvement and Modernization Act (MMA)

  • 2010: Patient Protection and Affordable Care Act

  • 2015: Medicare Access and CHIP Reauthorization Act

Eligibility for Medicare

  • Coverage is provided to:

    • Elderly citizens older than 65 years of age

    • Permanently disabled younger adults

    • Individuals with end-stage renal disease (ESRD)

    • Terminally ill patients in the end of life

  • 58.4 million people were enrolled as of 2017

Medicare “Parts”

  • Part A: Hospital Insurance (HI)

  • Part B: Supplemental Medical Insurance (SMI) (outpatient, prevention)

  • Part C: Medicare Advantage Plans (MAs)

    • Option of additional benefits - Rx

  • Part D: Prescription Drug Benefit

Medicare

  • Administered federally by CMS

  • Financed through three primary means

    • Payroll taxes (2.9%)

    • Increased cost-sharing of beneficiaries

      • Premiums

    • General revenues (federal taxes)

Sources of Medicare Revenues, 2017

  • General revenues: 41.4%

  • Payroll taxes: 37.1%

  • Beneficiary premiums: 14.3%

  • Interest/other sources: 2.2%

  • Payments from states: 1.6%

  • Taxation of social security benefits: 3.4%

Causes of Growth in Medicare Spending

  • Shift from acute to chronic care

  • Growth in hospital expenditures

  • Fee-for-service reimbursement

  • Growth in pharmaceutical costs

  • Advances in medical technology

  • Increased payments to health plans

  • Increased payments to rural health providers

  • Rising medical malpractice premiums

Medicare Spending (continued)

  • Chronic illness

    • 'sickest seniors' account for > 41% spent on traditional Medicare (2015)

      • 2/3 have multiple chronic conditions

      • 15% have at least 6 long term ailments

Efforts to Control Medicare Spending: 2010 Healthcare Reform Legislation

  • Changes to medicare advantage

  • Reducing payments for hospital readmissions

  • Changing premiums (part B, D)

  • Promoting preventative care

  • Working to reduce fraud

ACA

  • Testing new delivery mechanisms to reduce cost and improve quality

  • Bundling payments

  • Developing value-based purchasing program for reimbursing hospitals

Ongoing Medicare Program Concerns

  • Continuing expansions of benefits

  • Access to Medicare participating physicians and providers

  • Continuing increases in program spending

  • Program solvency

  • Reducing costs while increasing quality

Medicaid

  • Largest provider of social health insurance

  • Coverage to 'medically indigent'

    • Below certain poverty levels

  • Jointly funded (States and Federal)

  • Each state has authority to administer its Medicaid program

    • Variations in types of benefits

    • Wide gaps in coverage state to state

Medicaid Program Characteristics: Eligibility

  • Coverage for the medically indigent

    • TANF (formerly AFDC) and SSI recipients qualify automatically

    • Expanded coverage for pregnant women, children, and infants

    • Expanded coverage for children via CHIP

  • Expanded coverage in some states to include those with higher incomes in relation to the federal poverty level

Medicaid Program Characteristics: Benefits

  • Services mandated by federal legislation:

    • Inpatient hospital stays

    • Outpatient hospital services

    • Physician services

    • Lab and x-ray

    • Nursing facilities

    • Home health services

    • EPSDT

  • Services added at a state’s discretion:

    • Dental care

    • Mental health care

    • Drug and alcohol treatment

    • Rehabilitation

    • Preventive care

    • Prescription drugs

    • Prostheses

Medicaid Program Characteristics: Funding

  • Jointly funded by federal and state governments

    • Federal share = 50–77% of costs

    • State share = 23–50% of costs

  • “Bare bones” programs

  • “Rich” programs: offer extensive expanded eligibility and benefits

  • Program expansion was a major provision of the ACA, with 100% federal funding through 2016 and 90% through 2020

  • Enrollment now at approximately 76 million people

Importance of Medicaid

  • One of the primary funders of health care:

    • Accounts for 35% of safety-net hospital revenues

    • Provides 40% of health center revenues

    • Covers one-fourth of all behavioral health care spending nationally

    • Pays for nearly 50% of all births in the U.S.

    • Covers 50% of the costs of long-term care and support of the disabled and elderly

Ongoing Medicaid Program Concerns

  • Growth in Medicaid spending, as a result of:

    • Increases in volume

    • Increases in provider payments

  • Increasing numbers of beneficiaries as a result of:

    • Downturns in the economy

    • Rising unemployment

    • Increases in the uninsured population

    • The ACA expansion

  • Continued expansions of benefits

  • States that did not expand under the ACA

CHIP (Children's Health Insurance Program)

  • Covers children in low-income families who aren’t eligible for Medicaid.

  • Jointly funded by states and federal government.

  • The ACA increased the federal matching rate; the rate now ranges from 88% to 100%

  • As of FY 2017, 9.5 million children were enrolled.

Military Health System

  • Federal health benefits for veterans, military personnel and their family

    • Department of Defense (DOD) medical facilities

    • TRICARE Plan

    • Veteran Affairs (VA) medical facilities

    • VA Civilian Health and Medical Program (CHAMPVA)

TRICARE Characteristics: Eligibility

  • Active duty, retired military, and families covered

  • VA provides care at 1,243 health care facilities, including 172 VA medical centers and 1,062 outpatient sites

  • Two program options:

    • HMO

    • Fee-for-service

  • Contracted with companies to provide services in private sector

TRICARE Characteristics: Benefits/Funding

  • Benefits

    • Hospital care, physician services, rehabilitation, prescription medications, diagnostic tests, preventive services

    • Dental services for active duty personnel only

  • Funding

    • No enrollment fees

    • Subsidized by the federal government

    • Co-pays required (except for active duty personnel)

    • Some required to meet annual deductibles

TRICARE Concerns

  • Limited network of providers in rural areas

  • Difficult to provide care to National Guard and Reserve personnel

  • Ensuring sufficient providers for over 9 million beneficiaries

Veterans Health Administration

  • All veterans are eligible

  • Veteran Integrated Service Networks (VISNs) located in 22 regions

  • Varying benefits based on enrollment categories

CHAMPVA Coverage

  • Coverage is provided for:

    • Non-retired veterans

    • Permanently and totally disabled individuals

    • Spina Bifida Health Care Program

    • Women Vietnam Veterans Health Care Program

Health Insurance Coverage Statistics, 2018

  • Coverage by:

    • Employment-based private health insurance: 56.5%

    • Direct purchase private health insurance: 16.0%

    • Medicaid: 18%

    • Medicare: 18%

    • Military health care: 4.8%

  • Note that categories are not mutually exclusive, as individuals may be covered by more than one type of insurance.

Health Insurance Total Cost of Premiums, 2018

  • Individual Coverage

    • 6,896: All plans

    • 6,869: HMOs

    • 7,149: PPOs

    • 7,048: POSs

    • 6,459: HDHP/SO

  • Family Coverage

    • 19,616: All plans

    • 19,445: HMOs

    • 20,324: PPOs

    • 19,216: POSs

    • 18,602: HDHP/SO

Characteristics of the Uninsured, 2017

  • Most of the uninsured were between 19 and 64 years old

    • 25% were 26–34 years old

    • 20% were aged 34–44

    • Over 50% were male

    • 4 in 10 were non-Hispanic white

    • Other races made up the majority of the remaining uninsured folks

    • 14% were younger than 19 years of age

    • 1.4% were age 65 or older

  • Most of the uninsured had a high school education or less

  • The uninsured were disproportionately more likely to live in poverty

  • 1 in 3 worked in a service occupation

Utilization of the Health Care System by the Uninsured

  • Delay seeking care or forgo care altogether, thereby increasing their chances of:

    • Preventable health problems

    • Disability

    • Premature death

  • Utilize the most expensive access point to the health care system—hospital emergency departments—to obtain care

  • Do not have a primary care physician

Impact of the ACA on the Uninsured

  • As of 2020, 37 states adopted the ACA Medicaid expansion.

  • States that expanded Medicaid had an uninsured rate of 6.5% in 2017.

  • States that did not expand their Medicaid programs had a 12.2% uninsured rate.

  • Those covered have included young adults younger than age 26, who could stay on their parents’ insurance policies.

  • 27.5 million people were still uninsured in 2018.

Management and Provider Implications

  • As part of their HR activities, managers become involved in:

    • Selecting health insurance plans for employees

    • Considering benefit packages, costs of coverage, and other issues

  • As part of patient-related activities, providers need to understand:

    • Health insurance plans and coverages, including changes to Medicaid

    • Coding and billing

    • Reimbursement policies and procedures per setting, e.g., inpatient hospital vs. outpatient vs. SNF vs. home health