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Chapter 16: Health Care Reform
Hospital Fees Hit the Middle Class Hard: Present
System Favors the Rich and Poor – Medical Men
Suggest Ways to Lower the Cost of Illness – The
New York Times
Problems with Current System
• High Costs – over 13 percent of GDP.
• High percentage of population without
health insurance – about 14.6 percent.
• Proper Access to Care for those covered by
Medicaid.
• Practices such as Cream-skimming.
Comparison of G-8 Countries, 1999
Country
PCHE
PCGDP
MRI per
mill
Per cap
calories
Per cap
CO
(ppm)
Hosp
Admits
per 1000
Per cap
physician
consults
Infant
Mortality
per 1,000
live births
Canada
$1,939
$22,708
1.8
3,161
338
100.6
6.4
5.3
France
2,298
21,884
2.8
3,575
142
230.0
6.5
4.3
Germany
2,696
22,814
6.2
3,411
71
226.8
6.5
4.5
Italy
1,602
18,500
6.7
3,629
116
180.4
6.0
5.1
Japan
2,623
37,544
23.2
2,782
30
98
16
3.4
United Kingdom
1,747
23,954
4.5
1,690
88
150.9
6.1
5.8
United States
4,373
35,657
8.1
3,754
320
124.9
5.8
7.1
Note that all but the US have universal or near universal health insurance coverage, single-payer
systems, and a much greater role for government.
How Much Does the Government
Spend on Health Care in the US?
• According to data published by the Centers for Medicare and Medicaid
Services (CMS), government, at all levels, has been responsible for
paying for roughly 40 to 45 percent of all health care over the last three
decades (http://cms.hhs.gov/statistics/nhe/default.asp).
• Relative to government, this figure suggests that the private sector has
continued to exert greater control over the health care purse strings.
• Woolhandler and Himmelstein (2002), however, scrutinize the method
CMS uses to measure government spending in the national health
accounts and show that government has much more control over health
care spending than the private sector does in the US.
• Steffie Woolhandler and David Himmelstein are both professors at
Harvard Medical School, primary care physicians, and founders of
Physicians for a National Health Program, a nationwide group with
more than 9,000 members (visit http://www.pnhp.org).
Government Spending on Health
Care - continued
• Woolhandler and Himmelstein explain that CMS includes only direct
purchasing of medical care for programs such as Medicare, Medicaid,
and government-owned hospitals in its measure of government
spending.
• Consequently, public employee benefits, such as the Federal
Employees Health Benefits Program, are missing from the reported
figure by CMS because although the government supports these public
programs with tax-financing, private insurers are responsible for
writing the actual check because they administer the program on behalf
of the government.
• In addition, Woolhandler and Himmelstein point out that health
insurance premiums are exempted from various types of federal, state,
and city taxes so implicitly government also pays for this portion of
health care by granting these tax preferences.
Government Spending on Health
Care - continued
• To get a better idea about tax-financing of health care, the authors add
the direct purchasing of medical care by government, expenditures on
public employee health benefits that are tax-financed but administered
by the private sector, and the value of the health insurance premium
tax preference.
• In 1999, they showed that direct spending of government equaled 45
percent of all health care spending. Public employees benefits
accounted for another 5.4 percent and the tax subsidy for health
insurance premiums amounted to another 9.1 percent.
• Thus government, at all levels, was responsible for financing nearly 60
percent of all health care costs in the US, indicating that tax-financing
accounts for the largest source of health care funds.
Government Spending on Health
Care - continued
• On a per capita basis, their estimates for 1999 revealed that the US
government spends more on health care than Switzerland, Canada,
Germany, France, Australia, Italy, Japan, Sweden, and the UK. These
are countries where government traditionally has played a much
greater role in the financing and reimbursing of health care.
• Of course the much higher overall health care spending in the US
provides part of the explanation for the greater per capita spending
figure by the government.
• These estimates are certainly provocative because they show that taxfinancing represents the major source of funds for health care in the
United States. Indeed, tax-financing accounts for an even greater share
of health care costs considering that not-for-profit health care
organizations such as hospitals and nursing homes are also granted tax
preferences.
•
Federal Employees Health
Benefits Program
• Did you ever wonder which physician attends to your
doctor when she feels ill? Or consider to which clinic your
dentist goes when he requires dental care? Or speculate
about who provides health insurance coverage to those
federal employees overseeing the operation of the
Medicare and Medicaid programs in the U.S?
• Let’s examine the latter speculation.
FEHPB - continued
• Active federal employees, such as those working in the
Center for Medicare and Medicaid Services, receive their
health insurance through the Federal Employees Health
Benefits Program (FEHBP).
• The FEHBP is the largest employment-based health benefit
plan in the nation, covering over 9 million people,
including in addition to active employees, retired federal
employees, dependents of active and retired federal
employees, and members of the U.S. Congress.
• The total cost of the program amounted to $20 billion in
2000 and the Office of Personnel Management, a federal
agency, runs the FEHBP.
FEHBP - continued
• In 2003, the FEHMP offers enrollees tremendous choice among 188
different plans. The idea is that choice promotes competition among
health insurers, which helps to contain costs and spur innovations.
• Choices include national and regional traditional fee for service, PPO,
HMO, and POS plans. All enrollees have at least a dozen fee-forservice options in addition to local HMOs. The federal government
pays 75 percent of the plan’s premium up to a maximum of 72 percent
of the enrollment weighted average of all premiums.
• The subscriber is responsible for paying any remaining amount above
the subsidy cap. Creating consumer cost consciousness is the
motivation behind the subsidy cap.
• To help federal employees make informed decisions, the FEHBP and
other organizations distribute information about the various health
plans including consumer satisfaction surveys.
FEHBP - continued
• The FEHBP has been fairly successful at controlling health insurance
premiums. For example, over the period 1992 to 1999, premiums of
regional FEHBP plans increased by an annual average of 3.3 percent
compared to a 5 percent increase for all private health insurance plans.
• As another point of comparison, the FEHBP premium increase
compared very favorably to the average increase of premiums for
CALPERS, the California Public Employees Retirement System,
which amounted to 2.8 percent over the same 7-year period.
• Moreover, in 2003, premiums of FEHPB plans increased by 11.1
percent significantly less than the 20 to 25 percent premium increase
for CALPER plans.
• CALPERS is the nation’s largest public pension fund and provides
health insurance to 1.2 million state and local government employees
and their families in California.
FEHBP - continued
• Many have pointed to the FEHBP as a model for reforming
Medicare and a mechanism to expand health insurance
coverage.
• For example, when running for president, Senator Bill
Bradley proposed that uninsured individuals should be
given income-related vouchers to enroll in the FEHBP.
• Researchers and policy analysts continue to discuss the
merits of broadening enrollment in the FEHBP.
Proposals for
Health Care Reform
MEDICAL SAVINGS
ACCOUNTS
• Takes a market-oriented approach.
• Develops tax-free accounts to pay for medical care
expenses.
• Part of funds put towards a high deductible, catastrophic
plan and part towards routine medical care.
• Fund allocation for routine care earns interest and can be
rolled over into future years, or used to buy into health
plan.
• Each family makes the choice based on price, income,
health status, degree of risk aversion and other factors.
MSAs - continued
• Does not call for universal coverage but gives freedom of
choice.
• Because contributions to the MSA are tax deductible up to
a preset limit, the price of health care is reduced, making it
more affordable.
• Risk-adjusted tax credits might also be made available for
poorer households
• Unused portion of the MSA continues to grow and could
replace Medicare and/or used for financing long-term care.
• Cost containment is achieved through price consciousness
and elimination of many small claims
Criticism of MSAs
• Consumers are not sufficiently informed to
make price conscious decisions.
• Consumers will forgo necessary or
preventive care to save money.
• Lead to adverse selection
• Deductible insufficient to control health
care costs
• Plan is regressive
Responses to Criticisms
• Demand studies show that consumers are
conscious of health care prices, even very
small out-of-pocket prices. MSAs will
create an incentive for consumers to
become even more informed.
• Point to success of MSAs already in use.
• Present system is more regressive than
MSAs.
MSAs – The Case of Singapore
• The pressure to contain rising health care costs has
brought a considerable amount of attention to
Singapore’s health care system because it relies on
medical savings accounts.
• Current figures indicate that Singapore spends
between 3 and 4 percent of GDP on health care
and that is a far cry from the 13 percent of GDP
the United States currently allocates to health care.
• Some attribute the ability of Singapore to tame
health care spending on the cost containment
incentives that comes into play with medical
savings accounts.
MSAs in Singapore - continued
• Singapore health care system is composed of three basic arrangements.
• The Medisave program is a compulsory savings plan that forms the
basis for the individual medical savings accounts. The contribution
rates range from 6 to 8 percent of monthly income and are shared
between employee and employer. Self-employed individuals must pay
the entire amount and caps are placed on monthly contributions which
prohibit more affluent individuals from accumulating unreasonably
high savings balances.
• Medisave accounts are used primarily to finance inpatient hospital care
and strict payment schedules are in place to protect the accounts from
being depleted too rapidly.
MSAs in Singapore - continued
• To protect individuals from the financial burden of
a major illness, a catastrophic illness insurance
plan, called MediShield, is available.
• This insurance plan is optional and pays for 80
percent of hospital expenses after a rather
substantial deductible has been met.
• The third institutional component of the Singapore
health care system is the Medifund, which is an
endowment established by the government to
finance the health care needs of the poor.
MSAs in Singapore - continued
• Barr (2001) contends that the ability of the Singapore
health care system to contain costs can only partially be
explained by the implementation of medical savings
accounts.
• Strict government controls on inputs and prices along with
the rationing of medical care have played an even greater
role in controlling costs.
• Other explanations include a relatively young population
and the existence of a number of traditional Chinese
medical practitioners that are not funded under the
government sponsored health care programs.
Michael D. Barr. “Medical Savings Accounts in Singapore.”
Journal of Health Politics, Policy and Law. 26(August, 2001). pp. 709-726.
INDIVIDUAL MANDATES
• Like MSAs, places the responsibility for insurance
on the individual but not coverage is mandated.
• Individuals are required by law to purchase a basic
medical insurance plan as defined by the federal
government but individuals are not precluded from
purchasing more comprehensive coverage or
prevents employers from sponsoring the coverage.
• Universal coverage is achieved through a
combination of the mandated coverage and the
government’s guarantee of a “fall back” plan.
Individual Mandates - continued
• Risk adjusted tax credits and vouchers are offered
for those with insufficient income. The Medicaid
and Medicare programs are eventually phased out.
• Fall back plans are created through competitive
bidding.
• Cost containment is achieved through competition
which is heightened because federal government
plays no direct role.
• Critics complain about lack of information, moral
hazard problem, and loss of freedom.
MANAGED COMPETITION
• Basis of Clinton Health Plan.
• Builds on existing system of employer-provided medical
coverage.
• Employers are mandated to provide medical coverage for
basic medical services or pay, for example, an 8 percent
payroll tax on the first $22,500 of wages for employees not
covered.
• Self-employed individuals and early retirees must pay for
health care coverage with an 8 percent tax on adjusted
income up to a preset maximum. The tax is collected
through the income tax system.
Management Competition continued
• Novelty is the creation across of the country of
government buyer organizations called health
alliances, that use their purchasing power to
negotiate competitive prices for health insurance
from private companies.
• The alliances also serve as brokers that collect
premiums, manage enrollment, and carry out other
administrative duties.
• Each alliance is supposed to offer a number of
competing plans for enrollees.
Managed Competition continued
• Universal coverage is achieved through employer
mandates and subsidies provided to low-income families.
• Employers pay 80% of premiums and consumers pay 20%.
Consumer portion creates incentive to reduce the
likelihood of excessively generous plans.
• Medicaid and Medicare are maintained and eventually take
advantage of the alliances.
• Cost containment results from the competition among
private insurers as they vie for customers through the
alliances. All plans must offer a uniform benefit package.
Managed Competition continued
• One criticism is that not enough
competition will exist in rural areas.
• Another is that the alliances will result in
“one-size-fits-all” health insurance plans.
• The employer mandate will result in
unemployment especially among the low
income workers.
NATIONAL HEALTH
INSURANCE
• Creation of an insurance system similar to the one
presently existing in Canada.
• Current multipayer system is replaced by a singlepayer public system. Health insurance companies
are eliminated.
• Universal coverage is guaranteed with first-dollar
coverage. Financed through general taxes.
• Medicare and Medicaid are ended so funds can be
used to support the NHI. Employers pay taxes
equal to the current premium contribution.
NHI - continued
• Cost containment based primarily on the
efficiencies associated with using a single payer
system and elimination of the costs associated
with risk selection, taxes, and profits
(administrative costs without benefits).
• Health care expenditures are controlled by
establishing a link with GDP.
• Global budgets for hospitals and fee schedules for
physicians are implemented.
NHI - continued
• Employment effects are felt in the private
health insurance market and health care
administration.
• Critics worry about that government
enterprise is monopoly enterprise – little
variety and response to consumer demands.
Attempts at State
Health System
Reform
Health System Reform in Hawaii: The Case of
Employer Mandates
• The Prepaid Health Act of 1974 mandates with few
exceptions that employers provide health insurance to all
employees.
• Each medical plan must provide minimum set of benefits
and the employee’s premium contribution is limited to 1.5
percent of monthly salary.
• The rest of the population covered by the State Health
Insurance Program (SHIP) of Hawaii.
• SHIP later rolled into QUEST program that was designed
to provide health insurance to those individuals with
incomes up to 300 percent of the federal poverty level.
Premium contributions base on sliding scale. Program
provides a standard package and MCOs compete for
QUEST contracts.
Health System Reform in Hawaii
• Unfortunately the uninsured rate in Hawaii
increased from 5.8% in 1995 to slightly under 10
% in 2001 for a number of reasons:
– High cost of Quest has caused eligibility to be
tightened.
– Low employment growth
– Growing number of employers that provide health
insurance to employees but not family members
– Only two dominant health insurers
Health System Reform in Maryland: The Case of
Regulation
• In the early 1970s Maryland established an All Payer
Hospital Payment System.
• In 1994, a Comprehensive Standard Health Benefit Plan
was established to provide small to medium size firms with
access to health insurance, although employers are not
mandated to provide coverage.
• Any health insurance company doing business in Maryland
must offer a standard plan to all businesses employing 50
or fewer workers. Plans must be community rated except
for minor adjustments and no benefit denial allowed for
preexisting conditions.
• To control costs, premiums can be no greater than 12
percent of the average wage in the state.
• About 11.3% uninsured in 2001.
Health System Reform in Minnesota: The Case of
Regulated Competition
• In 1992, Minnesota approved MinnesotaCare that
addressed the issues of cost containment and
access.
• Cost containment plan placed great emphasis on
competition along with some degree of regulation.
• The competitive aspect focused on integrated
service networks (ISNs), which were prepaid
health care plans that compete on the basis of price
and quality. Competition was made possible by the
mandatory disclosure of price and quality
information and standardization of health benefits.
Health System Reform in Minnesota
• Regulatory component called for the state commissioner of health to
set a cap on the growth of ISN premiums and control fees of out-ofnetwork providers through an all payer rate setting system.
• Other cost controls included targets for health care expenditure growth
and CON laws.
• Uninsured persons were offered state subsidized coverage based on a
sliding fee scale financed by taxes on health care providers and the
cigarette tax.
• Any company providing health insurance must guarantee coverage
regardless of health status and change modified community rated
premiums.
Health System Reform in Minnesota
• In 1995, the Minnesota legislature began to repeal or
modify many of the reforms. The legislature repealed the
all payer rate setting legislation and curtailed the expansion
of MinnesotaCare subsidies to childless households with
incomes up to 275 percent of the poverty level.
• In 1997, other provisions were also repealed. In particular,
the state repealed revenue limits on HCPs and changed the
growth limits on health care expenditures to cost
containment goals which are now voluntary.
• Close to 8 percent of the population uninsured in
Minnesota in 2001.
Health System Reform in Oregon: The Case of
Rationing
• Oregon Health Plan in the early 1990s prioritized a list of 740 medical
procedures. Each medical procedure was rank based on its ability to
improve health, its cost, and perceived community value. For example,
treatment for appendicitis was ranked 12th and medical therapy for a
stroke was ranked 287th.
• Once the legislature determined the level of funding for Medicaid, the
Health Services Commission determines the number of medical
procedures the state can cover.
• In Oct. 2002, the state financed 566 out of 736 illnesses or disorders.
For example, any Medicaid recipient in need of a liver transplant
because of cancer (ranked 608th) would be denied coverage under the
Oregon Plan.
Health System Reform in Oregon
• Proponents of the Oregon Plan argue that the state is trading off
comprehensive coverage for a few to make greater access available to
many.
• Prior to the plan, the Oregon Medicaid program covered only
individuals with incomes at or below 58% of the federal poverty level.
With the plan, individuals with income at or below 100% of the FPL
and pregnant women with incomes at or below 133% of the FPL are
now eligible.
• Critics of the system point out the the poor primarily bare the burden
of cost containment under the Oregon Plan and that prioritizing is best
left to the marketplace.
• Effective February 1, 2003, Oregon is implementing 3 new health
plans with varying levels of eligibility and consumer costs as a way of
expanding health insurance coverage.
• In 2001, about 13 percent of all Oregonians were covered by health
insurance.