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Objectives • Learn about U.S. health care financing • Identify different payers for health care • Private insurance • Public insurance • Employers • Citizens • Discuss insurance, reimbursement methods, and their effects on health care
U.S. Health Care Financing • Financing: includes two functions • Payment for delivery of services • Purchase of health insurance • U.S. health care delivery financing is very complex • Health insurance is the most common avenue for receiving care • Health care financing through various public and private sources ultimately aggregates into national health care expenditures
Who Pays for Health Care? • Employers? The U.S. Government? • Employers and the government are the primary financiers of health care in the U.S. • Private and government insurance plans pay the bulk of health care costs • Patients? American Citizens? • Patients often directly pay a relatively small portion of the costs of services received • Americans indirectly finance health care through employment and taxes • Payment to providers of care is handled in numerous ways
The Sandwich Guy I’ve started a sandwich shop! My sandwiches cost me$4.50 to make on average I’ll charge $5 for each sandwich to cover my costs and wages
You Guys Are In the Mood For a Great Sandwich! Everything is going okay… Folks are buying sandwiches, and I’m making 50₵ on each sandwich But things could be better… Some of you don’t have $5 to spend on a sandwich! Some of you would like to eat sandwiches more often, but your budget limits the number of times you can eat out
Health Insurance: Basic Concepts • Insurance is a mechanism for protection against risk • Risk = possibility of substantial financial loss • Insured = individual protected against risk by insurance • Also referred to as enrollee or beneficiary • Insurer = insuring agency that assumes risk • Also referred to as underwriter • Underwriting = technique for evaluating, selecting, classifying, and rating risks • Premium = amount charged for insurance coverage
Health Insurance: Four Principles • Four fundamental principles underlying the concept of insurance • Risk is unpredictable for the individual insured • Risk is generally predictable for a group or population • Insurance provides a mechanism to transfer or shift risk from the individual to the group by pooling resources • Actual losses are shared on some equitable basis by all members of the insured group
Health Insurance & Cost Sharing • Cost sharing = insured assumes part of the risk • Three types of cost sharing • Premium cost sharing • Insured workers pay 15% for single plans, 26.5% for family • Payroll deductions • Deductible • Amount insured pays before plan benefits are payable • Usually paid on an annual basis • May have separate deductibles for hospitalization, outpatient • Copayment • Amount paid out of pocket each time health service provided • Includes co-insurance, which is the ratio of cost sharing • Marginal vs. Total Cost
Health Insurance & Cost Sharing • Cost sharing example • Bob pays $400 each month in insurance premiums • His plan requires a $500 deductible • His plan also offers 80:20 coinsurance • The ratio of cost sharing = coinsurance • The dollar amount paid = copayment • Stop-loss provision of $1,500 • Maximum out-of-pocket liability incurred per year
Health Insurance & Cost Sharing • Why do we have cost sharing? • Reduces misuse of insurance benefits • Control utilization of health care services • Addresses moral hazard by making the insured more responsible for health care costs • Promotes responsible behavior in health care utilization
Private Insurance • Recall the history of health insurance • Five types • Group insurance • Self-insurance • Individual private insurance • Managed care plans • High-deductible health plans
Group Insurance • Obtained through employers, unions, or professional organizations • Sponsors purchase insurance for participants • Spreads out risk and costs of health care across a substantial number of people
Change is in the Air… A number of you work for TU… …RIGHT NEXT to The Sandwich Guy! You sure would love to eat the sandwiches there more often during lunchtime. Trinity wants to keep you as good employees, and they know you love sandwiches. They worry you’ll start thinking about working elsewhere.
Here Comes Mr. Private Insurance He’s got a special deal to offer TU “If your employees just pitch in $20/month, they’ll receive a “membership” into the Healthy Appetite Club!” …sounds like a “premium”… …what’s the catch?
The Healthy Appetite Club In addition to your $20/month premium… You pay for your first sandwich (…$5 deductible) After that, you pay only 20% of retail price on sandwiches! (…$1 copayment) After you eat 6 sandwiches in a month, the rest of your sandwiches that month are FREE (…$30 maximum out-of-pocket liability) It would have cost $30 for 6 sandwiches With a membership, you start saving LOTS of money once you’ve eaten 7 or more sandwiches Your incentive is to EAT MORE SANDWICHES!!! (…sounds like moral hazard…we’ll revisit that…)
Behind the Scenes… Mr. Private Insurance approaches me: “Here’s the deal Sandwich Guy… I’ve got these TU employees signed up as members, and they’re ready to eat sandwiches. I’ll include you in my “club” so they get a great deal by eating sandwiches at YOUR shop… …BUT instead of paying you $5 for a sandwich, I’m going to pay you $4.75 each time I pay for one of my members’ sandwiches. Don’t like it? I’ll be happy to go across the street and make The Sandwich Dude a participating restaurant of my club.” (my biggest competitor!) …how can I refuse???
Now I’ve Got a Problem… I was making 50₵ for each sandwich Now I’m only getting $4.75 for a lot of the sandwiches being purchased… …I’m not making as much per sandwich! But I have an incentive to sell more If I have the power, I might increase the price of my sandwiches for other customers to make sure I earn income to provide for my family. But think about what this implies.
Self-Insurance • Some employers are big enough they can self-insure by budgeting a certain amount of money to pay for employees’ medical claims • Provides employers with greater degree of control • Protected from risk of high losses by purchasing reinsurance from private insurance companies • Exempts them from many state insurance regulations
Individual Private Insurance • Rather than spread out risk across a group of participants, premium price and eligibility is determined based upon individual health status and demographics • Barrier for high-risk individuals • Who pays for individual private insurance? • Self-employed • Employees whose employer doesn’t offer insurance • Early retirees • ACA – Public insurance exchanges or Marketplace?
How Can I Get In On This??? A few of you are getting annoyed…your friends keep bragging about the deals they get on sandwiches, and you want in! You call up Mr. Private Insurance and ask if he’ll help you get a discount on your sandwiches…
How Can I Get In On This??? To one of you, he says: “Okay, can I get a list of your favorite foods and how often you eat out at local restaurants?” He figures there’s NO WAY he’ll have to pay much for sandwiches, so he lets you in on the deal by paying $25/month for his bargain rates
How Can I Get In On This??? To another, he says: “Okay, can I get a list of your favorite foods and how often you eat out at local restaurants?” But this time he’s worried he might have to pay more than he’d like based on his prediction of your eating habits He’ll let you in on the deal too, but you have to pay $30/month… …AND you’ll pay $1.50/sandwich after the 1st sandwich… …AND you won’t get free sandwiches until the 10th sandwich.
How Can I Get In On This??? To the third one of you, he says: “Okay, can I get a list of your favorite foods and how often you eat out at local restaurants?” But he KNOWS you love sandwiches and will eat at The Sandwich Guy all the time… …so he refuses to let you in on his deal. You’ve been denied coverage!
Managed Care Plans • Like health insurance, they assume risk in exchange for insurance premiums • Contract with a network of providers to assume responsibility for delivering care to enrollees • Patients expected to stay in-network for care • Higher out-of-pocket expenses incurred for going out-of-network • Monitor utilization, adopt a variety of different reimbursement methods
High Deductible Health Plans • Also referred to as consumer-driven health plans • Link personal savings account to insurance • HDHP/Health Reimbursement Arrangement (HRA) • HRA funded by employer • Funds reimburse insured for qualified medical expenses, including premiums • HDHP/Health Savings Account (HSA) • Employers may contribute, but are not required • Funds belong to account holder and accumulate • Benefits of tax exemption & tax-deductible contributions
Public Insurance • Recall the creation of Medicare & Medicaid • Public insurance financed by government; services purchased from private providers • Some exceptions – for example, V.A. • Medicare Part A • Medicare Part B • Medicare Part C • Medicare Part D • Medicaid • SCHIP
Medicare • Finances care for: • Persons 65 years and older (84%) • Disabled individuals entitled to Social Security benefits (regardless of age) • Persons with permanent kidney failure (end-stage renal disease, regardless of age) • Administered by Centers for Medicare and Medicaid Services (CMS) • “Of all government programs, Medicare poses the single greatest future challenge to taxpayers” (p. 139)
Medicare • Economic Rational • Because employer-provided insurance isolated retirees, Adverse Selection was a real threat • Can think of Medicare (and Medicaid) as a response to market failure • Cost based reimbursement lead to increased utilization, DRG prospective payment rearranged incentives – a form of capitation
Medicare • Elderly spend an average of 22% of annual income on out-of-pocket health expenses • Deductibles, copayments, noncovered services • 20% of beneficiaries qualify for Medicaid • Picks up expenses not covered by Medicare • 25% of beneficiaries privately pay for supplemental insurance policies • “Medigap” policies, covering all or a portion of Medicare deductibles & copayments
Medicare Part A • Hospital Insurance • Inpatient hospital services, skilled nursing facilities, home health, hospice • Funded by a tax of 2.9% of earnings paid by employers and workers (1.45 each) • ACA increases payroll tax by .9 percentage points for high income taxpayers (more than $200,000 for an individual) • Accounts for about 36% of total Medicare spending • About 46 million enrollees
Medicare Part B • Supplemental Medical Insurance • Physician, outpatient, home health, and preventative services • Funded by general revenues and beneficiary premiums – set to cover 25% of spending in the aggregate. Higher income pay higher premiums • Accounts for about 27% of total spending • About 42.4 million enrollees
Medicare Part C • Medicare Advantage (formerly Medicare+Choice) • Allows beneficiaries to enroll in a private insurance plan • These plans receive payment from Medicare • Accounts for about 24% of spending • 11.5 million enrollees • Evidence suggests these plans have achieved cost savings over traditional plans • Less “cream-skimming” than under Medicare +Choice • ACA lowers payment to these payers
Medicare Part D • Recently implemented (2006) • Voluntary program, requiring monthly premium • Two types of private plans • Stand-alone prescription drug plans (PDPs) • 17.7 million or 28% of enrollees • Offer only drug coverage • Available to those staying in the original Medicare fee-for-service program • Medicare advantage prescription drug plans • 9.9 million or 21% of enrollees • Available to those who want to obtain all health care services through MCOs participating in Medicare Advantage (Medicare Part C) • ACA removes “doughnut hole” and puts in place income-related premium similar to the Part B premium
Services Not Covered By Medicare • Vision care • Eyeglasses • Dentures • Hearing aids • Routine physical exams • Many preventive services • Long Term Care
Medicaid • Jointly financed by federal and state governments • Federal government provides matching funds to states based on per capita income in each state • Administered by each state • Eligibility criteria, covered services, payments to providers vary by state • Means-tested program
Medicaid • Finances care for: • Indigent • But does not provide medical assistance for all poor persons • Certain low-income people required for coverage by federal law (many elderly, blind, disabled receiving Supplemental Security Income, some pregnant women) • Eligibility criteria established by each state according to threshold levels for income and other resources and assets • Most states defined “medically needy” categories (e.g., institutionalized in nursing or psychiatric facilities) • Instrumental in providing health insurance to children in low-income families
SCHIP • State Children’s Health Insurance Program • Offers additional federal matching funds to states to expand Medicaid eligibility to enroll children under 19 years of age • Also provides coverage to qualifying pregnant women, parents, and caretaker relatives • Participating states have three options: • Expansion of Medicaid • Establishment of special child-health assistance program • Combination of the two approaches