1. Issues Related to Health Care Financing l Overview of the size and growth of the health care sector l The distribution of personal health care services l Flow of Funds for Health Care l Nature of Financing Decisions Judith R. Lave, Ph. D. January 2004

2. Share of National Health Expenditures, By Type 2002 Total (Billions)$1,553 Total100% Personal Health Services86.3 Prog. Admins + Net Cost of Health Insurance 6.8 Research & Construction3.6 Public Health3.3 Per Capita Expenditures$5,440

3. Notes on Data l Summary Information: Jan/Feb Issues of Health Affairs (K. Levit et al. Health Spending Rebound Continues. Health Affairs. 23(1), 2004. l Complete data:www.cms.gov: Search: National Health Expenditures, Click: Health Accounts. Click: Tables

4. Annual Percent Change in National Health Spending Selected Years Current Dollars 1970-1980 12.9% 1980-198810.8 1988-19939.3 1993-19975.3 1997-20006.2 200-2001 8.5 2001-2002 9.3

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

6. National Health Expenditures as a Percent of GDP 1970-2010 Accelerated growth Managed care and BBA impacts: “one- time” effects on price and volume levels Moderate Growth

7. Distribution Expenditures on Personal Health Care 2002 Prescription drugs 12.1% 10.4% Nursing-- home care 25.3% Physician & Clinical Services 36.3% Hospitals 15.9% Other health services

8. Percentage Change in Expenditures 2000-20002 Category Percent Change 2000-2001 2001-2002 Overall8.5%9.3% Hospital Care7.59.5 Physician and Clinical Services8.57.7 Nursing Home&Home Health5.84.9 Prescription Drugs15.915.3

9. premiums, general taxes, payroll taxes, state lotteries 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) premiums, general taxes, payroll taxes Providers (doctors, hospitals, dentists, etc.) Patients Employers Employees

10. Nonelderly Americans With Selected Sources on Health Insurance Coverage: 2002 Type of Coverage% of nonelderly population * Employment-Based Coverage Individually Purchased Public Medicare Medicaid Tricare/CHAMPVA No Health Insurance 64.2 6.7 15.9 2.3 11.9 2.8 17.3 Population: 250.8 million * Does not add up to 100% because people can have more than one source of health insurance

11. Sources of Supplemental Coverage: Among Non-Institutional Medicare Beneficiaries: 1999 Other* 2% Medicare Only 13% Employer- Sponsored 33% Medicaid 11% Medigap 24% Medicare HMOs 17% Total = 34.7 million non-institutional Medicare beneficiaries

12. No Standard Health Plan l Health Insurance Policies Vary With Respect to: ncovered services ncovered providers nadministrative terms under which services are accessed nmethods for paying providers

13. Importance of Insurance Coverage l Use of services is a function of price (which depends on insurance structure and coverage) (i.e., Claritin) l Decisions to cover or not cover certain providers/technologies/services can make or break an industry (i.e., physical therapy, mammograms, obesity surgery) l Medicare is often pace-maker on ways to pay providers

14. Brief Discussion of Health Care 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.

15. Definitions of Terms in the Following Charts l 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. l 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. l 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.

16. 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 35.4 33.627.721.2 Private Health Insurance 5.0 5.9 6.6 Other 13.413.113.613.7State & Local 100% Total 2002199319801970Source of Payment

17. Percent of Personal Health Care Expenditures Paid Out of Pocket 19902002 Total 22.6%15.8% Hospital 4.4 3.0 Physician & clinical services 20.510.1 Nursing Home care 40.425.1 Dental 48.344.0 Prescription Drugs 55.8*30.0 *This is for 1992

18. 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 49.312.525.17.535.9 100.0% 103.2 Nursing Home Care 17.60.230.047.877.7 100.0% 162.4 Prescription Drugs (99) 5.4 …. 44.049.593.6 100.0% 70.3 Dental Services (99) 12.420.310.149.2 66.2 100.0% 339.5 Physician Services 17.230.73.03.033.941.1 100.0% 486.2 Hospital Care 17.419.315.835.855.8 100.0% $1,340.2 Total Personal Healthcare Government Private Source of Expenditure (%)

19. What are some of the problems that people have with current insurance?

20. Employer Sponsored Health Insurance l 90% of Private Health Insurance Obtained Through Employer l Employer Share of Premium Excluded from Taxes l Employer Selects Plan l Who Bears the Cost? nEconomists: The Employee in lower wages nOthers: The Employer in lower profits

21. Question What are the advantages/disadvantage s of getting health insurance through the employer?

22. New Wrinkle Defined 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.

23. A Very Conservative Position l Decide how much you want to subsidize health care—who do you want to help? l Get rid of the incentives that encourage people to obtain their health insurance through their employers. l Eliminate the tax subsidy of employer based health insurance: treat all health insurance equally—probably with a tax credit. l 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.

24. Selected Policies By Third Parties l Control Over Prices nGovernment – Administered Prices –Prospective Payment System lHospitals – “DRG’s” lNursing Home – “RUG’s” lHome Health Agencies – “HHRG” lOutpatient Department – - “APC” lRehabilitation Facilities – “FIM-FRG” DRG = Diagnoses Related Group RUG = Resource Related Group HHRG = Home Health Related Group APC = Ambulatory Patient Classification FIM-FRG = Functional Independence Measure- Function Related Group

25. Development of Managed Care Strongly Encouraged By Capitation l Selection of Physician/Providers who Practice Cost-Effectiveness Care l Capitation of Primary Care (Gate- Keeper and Other Providers) l Utilization Management nCare management nPreadmission screening nConcurrent review nGuidelines nDisease management l Introduction of Best Practices

26. Percent Distribution of Medicare Enrollees and Program Payments Under Medicare: CY 1998 29.3 Million Enrollees$168.2 Billion in Program Payments Percent of Persons ServedPercent 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 Amount of Program Payments $500-1,999