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Chapter 8
Financing Health Care

Understand the scope and magnitude of U.S.
health care spending in relationship with other
developed countries
Review how the U.S. health care payment system
evolved, current trends and initiatives of the
Patient Protection and Affordable Care Act of 2010
Understand the related roles of government & the
private sectors in financing health care and roles
of respective sector stakeholders
Discuss historical efforts to link costs with quality

Overview (1)
The ACA has immediate effects, especially
on health insurance regulation; full effects of
policy changes to unfold over many years
ACA does not change fundamental public/private
financing mechanisms of U.S. health care

Most working Americans health coverage

provided by employers private insurance;
some recent declines due to recession; 4-6%
purchase coverage privately, relatively
stable over past years

Overview (2)

Uninsured numbers increased

steadily until 2011; decrease by 1M,
due to ACA allowing children on
parents coverage till 26 years.
Public funding: Medicare: all 65
years; Medicaid: low-income
Influences on financing: providers,
employers, purchasers, consumers,

Overview (3)
Major tensions among influencers
Government (public) versus private roles
& responsibilities
Employers roles & responsibilities as
major insurance purchasers
Relationships of costs to quality
Payment systems effects on quality

Primary issues: rates of cost growth;


Healthcare Expenditures in
Perspective (1)
National health care expenditures tracked &
reported yearly (2 years in arrears) by
National Center for Health Statistics (CDC);
Office of the Actuary, National Health
Statistics Group; U.S. Department of Health
and Human Services
2011: $ 2.7 trillion; $ 8,680/capita; 17.9% GDP
(Table 8-1, Fig. 8-1); Top personal: Hospital
($851 B); physicians ($541.B); prescription
drugs ($263 B) (Insert Figure 8-2 as next slide)

Healthcare Expenditures in
Perspective (2)
Top 2011 payment sources: Private
health insurance ($891 B); Medicare
($567 B); Medicaid ($405 B); all
public sources = 40% of total
payments (Insert Figure 8-3 as next

Healthcare Expenditures in
Perspective (3)
Rate of U.S. expenditure growth outstrips
general inflation by large margins
Among 29 developed nations, U.S. has
largest % of national economy devoted to
health, but lower life expectancy & poorer
health outcomes; higher U.S. prices, not
superior quality; other nations have universal
coverage while U.S. covers 26% populations
with public funds; other nations use more
health services with more technology.

Healthcare Expenditures in
Perspective (4)
20-40% U.S. spending is waste: services
of no value or valuable services inefficiently
delivered; reduction in cost variability,
revised economic incentives needed.
Fraud & abuse: 3-10% total spending, $ 75250 B/year; many federal/state agencies
combat technologically sophisticated
fraudulent schemes: Health Care Fraud
Prevention and Enforcement Action Team


Drivers of Healthcare
Expenditures (1)
Major cost drivers:
Expensive medical technology: diagnostic &
treatment equipment & pharmaceuticals:
computerization; highly trained personnel;
incentives for high volume use
Aging population: longevity increasing: major
consumers of hospital care, pharmaceuticals
Specialty medical care: 60% + physician
specialists; patient self-referrals; use of highest
cost interventions without payment
restrictions often unnecessary/inappropriate

Drivers of Healthcare
Expenditures (2)
Un- or underinsured: delays in obtaining services
result in higher cost interventions for late-stage
Labor intensity: large numbers of expensive,
highly trained personnel; requirements increase
with technology advances
Reimbursement system incentives: private &
government insurance: until managed care &
prospective payment, fee-for-service piecework
favored high utilization by providers & hospitals;
fee-for-service fuels high costs till present time

Evolution of Private Health

Insurance (1)
1800s: movement to insure workers against
lost wages due to work injuries; later
coverage added to accident policies for
serious illness
Insurance payments to medical care
providers not until 1930s with BC hospital
Antithetical to insurance to guard against
unlikely events, health insurance paid for
both routine and unexpected events

Evolution of Private Health

Insurance (2)
Indemnity coverage protected
insureds from costs of care by paying
whatever was billed; prevailed
1930s-1980s until introduction of
government prospective payment
and managed care.


Evolution of Private Health

Insurance (3)
Development of Blue Cross & Blue
Shield & Commercial Health Insurance
1930 Baylor, TX University teachers
contract with hospital to cover inpatient
services on an annual basis; model for
Blue Cross development, a private, notfor-profit empire dominating health
insurance for succeeding 4 decades
Blue Shield for physician payment
followed in 1940s with AMA support.

Evolution of Private Health

Insurance (4)
Development of Blue Cross & Blue Shield & Commercial Health
Insurance, contd
Blues, a new era in U.S. health care financing: hospital & doctor
care within reach of all working Americans; consumers insulated from
costs; hospital use skyrocketedBC subscribers admissions 50%
higher than nation as a whole; a financing alternative that silenced
lobbying for national health insurance coverage.
Initially community-rated for non-discrimination on risk factors,
ultimately, experience-rated to compete with commercial insurers


Evolution of Private Health

Insurance (5)
Development of Blue Cross & Blue Shield &
Commercial Health Insurance, contd
Initially not-for-profit & community-rated
for non-discrimination on risk factors,
ultimately, experience-rated to compete
with commercial insurers

Commercial insurers (for-profit ) entered

market in late 1940s; experience-rated
competitive premiums; more subscribers
than Blues, by early 1950s.

Evolution of Private Health

Insurance (6)
Managed Care (MCOs)
Cost increases, quality concerns-> Nixon
administration enactment of Health
Maintenance Organization Act (HMO) Act
of 1973 with loans, grants for combined
insurance & health care delivery
organizations focused on cost
containment and quality; required
emphases on primary care & prevention

Initially, two major HMO types:


Evolution of Private Health

Insurance (7)
Managed Care, contd
Staff model: employed physicians in
HMO-owned facilities with ancillary
services, some specialties
Independent practice association:
community-based, independent
physicians contracted to provide
services to HMO members in their
own office practices

Evolution of Private Health

Insurance (8)
MCO payment philosophy: populationbased; links payment with service
provision parameters; providers share
financial risk with insurers; population
basis allows insurer to actuarially
determine projected service use for age,
gender, other factors to estimate expected
costs & set premiums.


Evolution of Private Health

Insurance (9)
MCO goals: reverse fee-for-service financial
incentives for high volume: use pre-payment
for population groups, paying a pre-set amount
in advance for all services a population will
need in a given period to encourage costconscious, efficient care; Capitation: pays
providers a pre-set, per-member-per-month
amount whether or not services are used;
physicians spending lesser amounts than
predicted retain as profit, exceeding amounts
predicted results in penalty

Evolution of Private Health

Insurance (11)
Consumer financial risk sharing : copayments by visit ; deductibles require a
pre-determined amount of out-of-pocket
expenditures met before insurance
coverage begins; encourage consumer
Early hybrids: developed from cost &
quality concerns: group practice, network,
direct contract arrangements.


Evolution of Private Health

Insurance (12)
Managed Care, contd
Later hybrids: Point of Service Plans (POS)
allow members to use providers outside
networks at increased co-pays & deductibles;
9% of covered employees; Preferred Provider
Organizations (PPOs) formed by physicians &
hospitals to serve private payers & self-insured
organizations: guarantee a volume of business
to hospitals & physicians in return for fee
discounts; 2012 most popular plans: 56% of
covered employees.

Evolution of Private Health

Insurance (13)
Managed Care, contd
Trends: Rise of PPOs: payers &
providers negotiating power in fees &
use monitoring with more consumer
choice; Staff model decline: high facility
capitalization costs, consumer choice
issues, competition with independent
practices; Disease management
guidelines: Evidence-based guidelines in
disease management programs:
communications & interventions to
promote self-care for high-risk

Evolution of Private Health

Insurance (14)
Managed care, contd: Backlash-1998
Organized medicine, other providers, consumers
contested MCO policies on provider choice,
physician referrals, other restrictive practices
States led with consumer & provider rights
legislation in all 50 states
Employers implemented Consumer-driven Health
Plans (CDHPs) with health reimbursement
arrangements (HRAs) or health savings accounts
(HSAs) enabling consumer benefit & cost choices

Evolution of Private Health

Insurance (15)
Managed care, contd: Trends in Costs
1980s- 1990s: prospective payment (DRGs) &
MCOs stalled national health expenditure
growth while markets adjusted
2002-2012: average premiums for
employment-based family health insurance
increased 97%; singles contribute 18%,
families 28%; employees drop coverage
Employers use benefit buy-downs to reduce
premiums: co-pays, deductibles, drop riders

Evolution of Private Health

Insurance (16)
Managed care, contd: MCOs and Quality
National Committee on Quality Assurance
(NCQA): independent, not-for-profit
organization funded by revenues from
accreditation services fees; publishes &
markets online compendium of quality
indicators for 500 health plans serving 107 M
NCQA services (voluntary basis): accreditation
for: MCOs, PPOs, MBHCOs, new health plans,
disease management programs

Evolution of Private Health

Insurance (17)
Managed care, contd: MCOs and Quality,
Certification for provider organizations to verify
provider credentials, physician organizations,
PCMHs, disease management programs;
Recognition for physician performance excellence.
NCQA accreditation is rigorous: includes all
organization aspects: online surveys, on-site
reviews: quality management, physician
credentials, member rights & responsibilities,
clinical processes, care outcomes

Healthcare Effectiveness Data

and Information Set (HEDIS)
NCQA, MCOs, employer partnership:
created a standardized method for
MCOs to collect, analyze & report
their performance allowing
comparisons among MCO plans
Criteria: effectiveness of care;
access/availability of care; satisfaction
with care; health plan stability; use of
services; cost of care; informed health
care choices; health plan descriptive


Healthcare Effectiveness Data

and Information Set (HEDIS) (2)
2012 NCQA report: Audited HEDIS data
covering 125 M Americans disclosed
quality gaps informing policymakers,
purchasers, plan administrators on
avoidable illnesses and deaths


Self-funded Insurance
Programs (1)
Large employers collect premiums and pool
funds into accounts to pay medical claims
instead of using a commercial carrier
Use actuarial firms to set premium rates &
third-party firms to administer benefits, pay
claims, collect utilization data; third parties
may provide case management services
Employer advantages: avoid commercial
carrier administrative charges, premium
taxes; accrue interest on cash reserves,
exemption from ERISA

Self-funded Insurance
Programs (2)
ERISA controversies, e.g.: states
responsibilities for consumers
protections through regulation of
employer-sponsored plans; states
losses of premium revenue taxes;
prohibition of employees suits against
employer-sponsored health plans about
insurance coverage decisions
Currently, organizations administering
employer-based health insurance plans
have legal immunity for withholding
insurance coverage or for failing to

Government as a Source of Payment:

A System in Name Only (1)

Early focus: military, government

employees, special populations, e.g.
Native Americans
Now: Medicare, Medicaid, U.S. Public
Health Service hospitals, state, local,
long-term psychiatric facilities,
Veterans Affairs, military &
dependents, workers compensation,
public health protection, service

Government as a Source of
Payment: A System in Name Only (1)
Mosaic of reimbursement,
vendors/purchaser relationships, matching
funds, direct services, e.g.
Contracts with providers, not direct service
provision (Medicare, Medicaid, grants)
Federal with State matching funds (Medicaid)
Direct services (Veterans Affairs)

ACA: federal support programs for

uninsured; not a comprehensive, universal

Medicare: Historical
1965: Title XVIII of Social Security Act
All Americans 65 yrs. entitled to
health insurance benefits; 20 million
entered system in 1965; today, 50
million covered.
Financed by payroll taxes
Conceded accreditation,
administration to private sectorJCAHONow JC
Hospital payments by local Blue

Initial Medicare
Part A: Mandatory hospital
coverage, outpatient diagnostics,
extended care facilities, home care
post-hospitalization; funded by Social
Security payroll taxes.
Part B: voluntary MD coverage,
tests, medical equipment, home
health; funded by beneficiary
premiums matched with federal
Cost sharing: deductibles, coinsurance; medi-gap policies

Medicare Components
Part C: Managed Care Options for
Private Health Plan Enrollment
Part D: Prescription Drug Coverage


Medicare Cost Containment

and Quality Initiatives (1)
Costs rose much more rapidly than
By 1976: Most cost growth due to
added hospital personnel, nonpersonnel costs and profits
Early amendments added covered
services, increased costs; quality
concerns escalated through 70s and
Later amendments addressed cost
growth reductions and quality

Medicare Cost Containment &

Quality Initiatives (2)
Comprehensive Health Planning Act
(1966): organize local health
Professional Standards Review
Organizations (1972): review
Medicare hospital care.
Health Systems Agencies (1974):
plan for health resources based on
population needs (replaced CHP);
plans based on local population

Medicare Cost Containment &

Quality Initiatives (3)
OBRA 1980, 1981 amendments to
reduce hospital lengths of stay,
advocating home care
Tax Equity & Fiscal Responsibility
Act (TEFRA) 1982: Peer Review
Organizations (PROs) replaced
PSROs, providing clearer cost/quality
2001: renamed PROs to QIOs
(Quality Improvement Organizations)

Medicare Cost Containment &

Quality Initiatives (4)
DRGs (1983): Shifted Medicare from
Pre-set hospital case reimbursement
based on diagnoses of the International
Classification of Disease (ICDA) codes
(10,000+, grouped into 500+ categories)
Rewarded efficient care; financially
penalized inefficiency
Other insurers followed lead


Medicare Cost Containment &

Quality Initiatives (5)
DRGs, contd
Federal prospective Payment Assessment
Commission (ProPac) established to review
No negative effects on patient
outcomes; studies revealed positive
results from shorter lengths of stay
Slowed cost growth
Hospitals realized increased profits
COBRA (1985): penalties for financiallymotivated transfers; EMTALA (1986)
refined COBRA

Medicare Cost Containment &

Quality Initiatives (6)

Physician Fees: Rapid rise in

Medicare payments and specialty
services prompted political action:
1987-1989: price freeze
ineffective; results offset by
increased service volume
1992: RBRVS: Pay same amount
for office procedures whether
provided by specialist or primary
physician; incentives for primary
care practice; continued updates
by AMA & specialty societies

Health Insurance Portability and

Accountability Act of 1996 and the
Balanced Budget Act of 1997 (1)

HIPAA (Kennedy-Kassenbaum Bill)

Reaction to concerns raised in debates
about the Clinton National Health
Security Act, e.g.
Ensured continued coverage between
employers; prohibited exclusions for
pre-existing conditions
Established portable Medical
Savings Accounts


Health Insurance Portability and Accountability

Act of 1996 and the Balanced Budget Act of 1997

Reduce Medicare spending growth rate
over 5 years through direct and indirect
cost reductions
Fund State Child Health Insurance
Program (SCHIP) to enroll 10+ million
Medicaid-eligible children
Introduce Medicare Part C-managed care
Combat fraud and abuse

Health Insurance Portability and Accountability

Act of 1996 and the Balanced Budget Act of 1997

Strong resistance to the BBA:

Balanced Budget Refinement Act
(1999) to restore $ 17.5 B in cuts,
delay implementation of BBA
Benefits Protection and
Improvement Act (2000) increased
health plans and providers

Responses to BBA
Strong resistance:
Balanced Budget Refinement Act
(1999) to curtail MCO withdrawals
from Medicare +Choice (Part C)
Consolidated Appropriations Act of
2000: restored $17 B in cuts,
postponed/adjusted new payment

Balanced Budget Act of 1997 (2)

Reduce Medicare spending growth

rate over 5 years through direct
and indirect cost reductions
Fund State Child Health Insurance
Program (SCHIP) to enroll 10+
million Medicaid-eligible children
Introduce Medicare Part Cmanaged care
Combat fraud and abuse

Medicare Cost Containment and

Quality Improvement (1)
2001: CMS Quality Initiative to
monitor conformance with standards
of care:
Hospitals, nursing homes, home health
care agencies, physicians, other

Medicare Quality Monitoring System:

Monitors quality of care delivered to
Medicare fee for-service beneficiaries

Medicare Cost Containment and

Quality Improvement (2)
2005: Hospital Compare website: criteria
assessing hospital conformity with
evidence-based practice and consumer
assessments of hospital care
2008: No reimbursement for treatment of
hospital acquired infections or never
happen events and resulting treatment
Never happen events: e.g. catheteracquired infections, foreign objects
retained after surgery falls, other
traumas sustained during hospitalization

Medicaid and the SCHIP (1)

1965: Title XIX of Social Security Act
Mandatory joint federal-state
Shared state support based on states
per capita income

Basic insurance coverage for 62 M

low income individuals
19% of personal health service
spending; 31% of nursing home care

Medicaid and the SCHIP

Federal government establishes broad
guidelines with minimum criteria, e.g.
pregnant women & children; states
may use broader eligibility criteria:
Low income families and children
Long-term care for older and disabled
Supplemental coverage for lowincome Medicare beneficiaries for
non-Medicare covered services

Medicaid and the SCHIP (3)

Federally Mandated Medicaid Services
Inpatient, outpatient hospital services
Physician services
Diagnostic services
Nursing home care for adults
Home health care
Preventive health screening
Pregnancy related & child health services
Family planning services

Medicaid and the SCHIP

Medicaid Funding
Personal income tax, corporate and
excise taxes
Unlike Medicare
no entitlement; a transfer payment
from more affluent to needy
individuals; direct reimbursement
to providers, no intermediaries

Medicaid and the SCHIP

Medicaid Managed Care
1990s: States experimented with
Medicaid managed care to slow rapid
cost growth
1993: Federal waivers allowed
mandatory managed care
accelerated enrollment.
1997: BBA lifted all waiver
50 states participate; majority of
recipients in managed care

Medicaid and the SCHIP

BBA established State Child Health
Insurance Program targeting
enrollment of 10 M children with
federal matching funds, 1998-2007
8 M children enrolled by 2010; 2011:
9.8 M < 18 years (9.8%) remained
Renamed Child Health Insurance
Program; re-authorized 2009-2013;
ACA reauthorized 2010-2015.

Medicaid Quality
Initiatives (1)
CMS and State Operations develops
& implements Medicaid & CHIP
quality initiatives with state
Division of Quality, Evaluation &
Health Outcomes provides technical
assistance to states for quality
improvement initiatives

Medicaid Quality
Initiatives (2)
Quality Assessment Criteria
Prevention and health promotion
Management of acute conditions
Family experience of care
Availability of services

Division of Quality Evaluation and

Health Outcomes provides technical
assistance to states on quality
improvements efforts

Prelude to Passage of
the ACA
2008 presidential election: voter concerns
on health care second only to Iraq war
Obama promised swift action on health
2009-2010 bitter debates, public
Death of Sen. Edward Kennedy lost
Senate majority by replacement with
March 2010 ACA passed in Obamas
14th month in office; unparalled reforms59

Healthcare Financing Provisions

of the ACA (1)
Individual mandate and insurance expansion:
beginning 2014, most Americans must carry health
insurance or pay a penalty (tax), except those:
For whom the cost would exceed 8 % of income
With income is below federal tax filing
Religiously exempt
Undocumented immigrants
Members of Indian tribes


Healthcare Financing Provisions

of the ACA (2)
Medicaid expansion: states may expand
eligibility levels for non-elderly parents &
childless adults with incomes 133% of FPL.
State funds expansion @ 100%, 2014-2016; 95%,
2017; 94%, 2018; 93%, 2019; 90%, 2020 &
2012 Supreme Court decision: state participation
voluntary; June 2013: 26 states will participate,
13 will not participate; 7 are undecided; 4 will
pursue alternative plans


Healthcare Financing Provisions

of the ACA (3)
Health insurance exchanges (HIEs)
States must establish health benefit
exchanges (American Health Benefit
Exchanges) & create separate exchanges for
small employers of up to 100 employees.
(Small Business Health Options Program) or
Federal government will establish within
June 2013: 17 states accept; 28 decline; 6
states elect partnership arrangement with
federal government

Healthcare Financing Provisions

of the ACA (4)
Health insurance exchanges, contd
Web-based, consumer-friendly, comparative
information in standard formats to facilitate
consumer choice on benefits, pricing
For exchange participation, health plans must meet
federal requirements for minimum coverage, ten
essential benefits:
1.Ambulatory patient services
2.Emergency services


Healthcare Financing Provisions

of the ACA (5)

Maternity and newborn care

Mental health and substance use
disorder services, including behavioral
health treatment
6. Prescription drugs
7. Rehabilitative and habilitative services
and devices
8. Laboratory services
9. Preventive and wellness services &
chronic disease management
10. Pediatric services, including oral and


Healthcare Financing Provisions

of the ACA (6)
Health insurance exchanges, contd
Exchanges must be governmental entities or notfor-profit corporations
Eligibility: American citizens, legal immigrants
whose employers do not provide coverage or for
whom the cost of employer-supplied coverage is
prohibitive; guaranteed consumer acceptance
Federal government provides premium & costsharing subsidies by advance & refundable tax
credits based on personal income of 100-400% of
the FPL

Healthcare Financing Provisions

of the ACA (7)
Penalties, Taxes and Fees help Pay for
Employer health insurance: no requirement
to provide, but
Employers of 50: assessed $2,000/ FT
employee if do not offer coverage & at least 1
employee receives a premium credit through an
HIE; if do offer coverage & at least one employee
receives a premium credit through HIE assessed
lesser of $3,000 for each premium credit receiver
or $2,000 per non-enrolled employee

Healthcare Financing Provisions

of the ACA (8)
Penalties, Taxes and Fees help pay for
Large employers offering coverage must
automatically enroll employees into lowest cost
plan if employee does not enroll in employer
coverage or does not opt out of coverage.
Imposed tax on high-cost health plans, annual
fee on health insurers as % of premiums;
annual fees/taxes on medical device
manufacturers; tax on indoor tanning services;
2010-2019 revenue: $142 B

Healthcare Financing Provisions

of the ACA (8)
Penalties, taxes & fees help pay for ACA
Increased Medicare payroll taxes for high income
earners; modifications to health savings and
flexible spending accounts; increase in floor for
tax deductions for medical expenses: $ 249 B
Other revenue producers: $ 5.1 B; total= $ 396.1

CBO estimate: total cost of insurance

expansion approx. $ 1.1 trillion

Experimentation (1)
ACA pilot programs conducted over
several years experiment with
payment reforms with dual goals of
slowing spending growth & improving
Pilot results will provide information
valuable for planning and refine future
initiatives with the same goals


Experimentation (2)
Accountable care organizations (ACOs)
Groups of providers, suppliers of health care,
health-related services, others voluntarily join
to coordinate services for Medicare patients
Avoid fragmentation across multiple providers;
timely, appropriate care to reduce service
duplication, unnecessary hospitalizations &
costs based on Medicare per-capita
Combine fee-for-service with shared savings &
bonus payments

Experimentation (3)
Hospital value-based purchasing program
CMS began pilot projects in 2003; replicated by
private insurers
ACA requires VBP for 3,000+ Medicareparticipating hospitals; incentive payments
based on clinical outcomes & patient
satisfaction; discourages inappropriate,
unnecessary, costly care.
Funded by annual % reduction in hospital
Medicare payments

Experimentation (4)
Bundled Payments for Care
Improvement Initiatives (BPCI)
Created by the ACAs Center for
Medicare & Medicaid Innovation, will
test whether reimbursing providers on
the basis of the full spectrum of
Medicare patient- required services for
an episode of illness, rather than
piecemeal for individual services, can
achieve lower costs & improved patient

Experimentation (5)
Independent Payment Advisory Board (IPAB)
Purpose: decrease Medicare spending growth
through recommendations on care coordination,
waste elimination, best practices, primary care
15 Presidentially- appointed expert members
confirmed by Senate; recognizes need to offset
political interest group influences on
Congressional members
Recommendations in form of legislation with
Congressional deadlines for action


Experimentation (6)
Independent Payment Advisory Board (IPAB), contd
Absence of Congressional action allows DHHS
Secretary to implement legislation, not subject
to reversal by the Executive Branch or courts
Periodic public reports: standardized, systemwide information on health care costs, access to
care, service utilization, quality of care with
comparisons by region, types of services, types
of providers for Medicare and private payers


Experimentation (7)
Independent Payment Advisory Board
(IPAB), contd
IPAB cannot recommend policies to:
ration care, raise taxes, increase
Medicare premiums or cost-sharing,
restrict benefits, modify eligibility
Beginning in 2015: Biennial
recommendations to President &
Congress on slowing national healthcare
expenditure growth.

Continuing Challenges
Payment reforms entail an array of
challenges issues for policymakers
Most difficult issues may be changing
prior philosophies, value systems &
politics that resulted in the paradox of
profit, rather than value- driven reward
systems; Why are the bills so high?
rather than Who should pay them?
U.S. costs unjustifiable compared with
other developed nations health status &