Regional differences in the cost of health care are due to differences in both the price and volume of medical care.  Since, Medicare sets prices, there should be little variation in prices…right?

Actually, Medicare payments have geographic adjustments based on a number of factors.  For instances, the hospital wage index gives pay hospitals more in areas with higher labor costs.  Similarly, Medicare pays physicians more in high cost areas through the geographic practice cost index (GPCI).

In order to compare differences in volume across regions, one must also make the following adjustments

• additional payments to hospitals above the standard rates in the inpatient prospective payment system including graduate medical education, indirect medical education, and disproportionate share payments.
• additional payments to physicians above the standard rates in the physician fee schedule in provider scarcity areas and health provider shortage areas.
• additional payments to rural hospitals above standard rates in the inpatient prospective payment system, including special payments for sole community hospitals, small rural Medicare-dependent hospitals, and critical access hospitals.
• beneficiaries’ health status, as measured by the MSA’s average risk score from the CMS–hierarchical condition category (HCC) risk adjustment model.
• the rate of beneficiaries’ enrollment in Part A and Part B of the Medicare program—in some areas, the percentage of beneficiaries with only Part A or Part B coverage differs significantly from the national average.

After taking these factors into account, a recent MedPAC report finds that although raw per capita spending is 55% higher for beneficiaries in the area at the 90th percentile than for beneficiaries in the area at the 10th percentile, medical utilization use in higher use areas (90th percentile) is only about 30% greater than in lower use areas (10th percentile).  Approximately, 45% of the FFS population lives in areas that have service use within 5 percent of the national average.

The metro area with the highest service use was Miami.  In fact, Miami’s medical service use was twice the level of the services provided in the metro area with the lowest utilization levels (non-metropolitan Hawaii).  One reason for this difference is that “per capita spending on durable medical equipment and home health care in Miami–Dade County were both more than seven times the national average and dramatically above spending in neighboring counties.”

• Source: MedPAC (2009) “Measuring Regional Variation in Service Use: Report to Congress,” December 2009.
• Hat Tip:  Gooz News.

“The Medicare Improvements for Patients and Providers Act of 2008 (MIPPA) requires the Department of Health and Human Services (DHHS) to develop a plan that will transition Medicare payments into a VBP [value based purchasing] program for physician and other professional services that is based on efficiency and the quality of services provided. The Act also requires the DHHS to disseminate informational reports to physicians using episode groupers and/or per capita measures.”

One way to implement VBP is to evaluate physicians based on episodes of care.  Episodes of care aggregate claims information to construct episodes.  These episodes are supposed to represent a homogeneous unit of care for a given type of treatment or disease.  A paper by Thomas et al. (2009) however, has found some problems with how episodes are constructed.  For example:

• Many physicians typically treat a patient during an inpatient stay.  Can inpatient episodes reliably be attributed to a single physician?
• Most Medicare inpatient stays treat multiple diseases simultaneously.  How does grouping account for these comorbitities?
• Episode grouping is based on claim diagnosis codes.  “Since Medicare’s payment for a physician service is based on the CPT code (reflects procedure or type of visit) rather than on the diagnosis, physician offices have no incentive to spend much effort in coding a diagnosis. In contrast, the payments hospitals receive are determined by a combination of diagnosis and procedure codes.”
• Complications from surgical care can be the fault of the doctor or from factors outside their control.   Determining whether or not the physician is at fault is extremely difficult and any physician rating system will likely blend the two causes.

Slides and a “backgrounder” from a CMS listening session on “Defining an Episode Logic” are also available.

Accountable Care Organizations (ACOs) are the latest rage in the health policy world.  The question is, what are ACOs.  The Urban Institute’s Kelly Devers and Robert Berenson try to answer the following question: “Can Accountable Care Organizations Improve the Value of Health Care by Solving the Cost and Quality Quandaries?”

The goal of ACOs is to pay providers in a way that encourages them to work together, to pay providers in a way that does not encourage supplier induced demand, and to create an organization that is rewarded for providing high quality care.  What kind of organizations are currently poised to evolve into ACOs. This chart evaluates the prospects.

One question is why doesn’t Medicare just use their current Medicare Advantage program to accomplish these goals.  In the Medicare  Advantage program, Medicare pays a lump sum to private insurers and holds them accountable for all the medical care the beneficiary needs.  However, there are three main differences between ACOs and HMOs.

1. The “accountability” rests with the providers.  Providers or provider groups, rather than insurance companies, are evaluated on the quality and efficiency of care.
2. Direct contracting with provider organizations without the reliance on a health plan intermediary.
3. The ACOs allow for flexibility in the type of organization.  Some regions may prefer independent practice associations (IPAs) while others  may prefer a physician-hospital organization (PHO).

The physician-centered organization makes much sense to many policymakers because “the resources that flow from the decisions physicians make with patients account for a major portion of overall health care costs, regardless of where the care actually takes place.”

Medicare could pay ACOs with a “gainsharing” mechanism.  In the gainsharing framework, the fee-for-service payment structure remains, but a portion of patient cost savings gets passed through to the physician. On the other hand, Medicare could institute a partial capitation scheme.  This would be similar to Medicare Part D, where the prescription drug plans get a flat rate per person, but they also receive are involved in risk corridors, which “limit a prescription drug plan’s potential losses should the plan happen to experience much higher utilization and costs than expected.”

One problem with this framework is that physicians are good at treating patients, not at risk management.  Thus, many physicians may get stuck with high-risk patients and some ACOs may become insolvent unless there are adequate Medicare risk adjustment payments.

Secondly, patients may see ACOs as HMOs in disguise.  ”[I]f beneficiaries believe that ACOs are essentially tightly managed ‘HMOs in drag’ that are going to restrict their choices, undermine the doctor-patient relationship, and result in cheaper but lower-quality care, the concept will be met with skepticism, if not overt opposition.”

Other obstacles to ACOs include possible FTC and DOJ desires to quash ACOs on anti-trust grounds.  Further, state governments may need to change laws related to insurance regulation as well as organizational and professional liability.

• Devers K, Berenson R (2009) “Can Accountable Care Organizations Improve the Value of Health Care by Solving the Cost and Quality Quandaries?” Timely Analysis of Immediate Health Policy Issues, Urban Institute, October 2009.

The California HealthCare Foundation has an almanac entry on Children’s Health Coverage Facts and Figures.  Eligibility requirements for these programs is described in this table.  Other key findings include:

• The proportion of children without health insurance continued to decline through 2007, though the pace of improvement has slowed.
• Nearly 80 percent of California’s uninsured children are eligible for coverage under either Medi-Cal, Healthy families, or Healthy Kids.
• Medi-Cal and Healthy families are key sources of coverage for children in low-income households that together have closed the coverage gap among families with incomes up to 250 percent of the federal poverty level.
• Healthy Kids programs are also important for children’s coverage. twenty-four counties operate Healthy Kids programs and four others rely on California Kids.
• Children are less likely to have employment-based coverage than adults and are more likely to be enrolled in public programs in California.

How does one evaluate a physician’s efficiency level?  This process has five main dimensions.

• Which resource use measurement methodology to use. There are two main profiling methodologies: per capita and episode-based.
• How to account for differences in patient health status. This is done through risk adjustment.  However, choosing the proper risk adjustment method is crucial in order to produce accurate physician scores.
• How to attribute resource use to physicians. Important attribution decisions include whether to assign a patient’s resource use: i) to the single physician who bears the greatest responsibility for the resource use, ii) to all physicians who bore any responsibility, or iii)  to all physicians who met a given threshold of responsibility.
• What benchmark(s) to use. Should the benchmarks be evidence-based, set relative to peers, or established by consensus through organizations such as the National Quality Forum.
• How to determine what is a sufficient sample size to ensure meaningful comparisons. This sample size can vary on two dimensions: i) the availability of enough data on each physician to compute a resource use measure and ii) a sufficient number of physicians to provide meaningful comparisons.

The GAO has a report analyzing whether physician resource utilization per-capita is stable over time.  The report looks at 4 specialties [cardiology, diagnostic radiology, internal medicine, and orthopedic surgery] in 4 metro areas [Miami, Phoenix, Pittsburgh, and Sacramento].  The data used include: (1) Medicare claims files; (2) Denominator File, a database that contains enrollment and entitlement status information for all Medicare beneficiaries in a given year; (3) Hierarchical Condition Category (HCC) files that summarize Medicare beneficiaries’ diagnoses; (4) files summarizing the institutional status of beneficiaries; and (5) Unique Physician Identification Number Directory, which contains information on physicians’ specialties.

Below are the specifications the GAO report uses to create physician scores.

• Physician resource utilization is constructed on a per-capita basis.
• Risk adjustment is constructed using Hierarchical Condition Categories (HCCs).  The risk adjustment model uses the same 70 HCCs as the model CMS uses to set managed care capitation rates.
• Attribution is given to the physician with the highest Evaluation and Management (E&M) cost for each beneficiary [except for diagnostic radiology where the physician with the most Part B costs was attributed the individual’s annual cost].  However, very little of each individual’s annual cost was accounted for by the attributed physician.  Institutional services accounted for 54 percent of expenditures. On the other hand, “services provided by a particular physician in our study directly to that physician’s patients accounted for only 2 percent of total expenditures or about $350 for each beneficiary in a physician’s practice.  All other services—those provided by other physicians, home health care, hospice care, outpatient services, and durable medical equipment—accounted for the remaining 44 percent of expenditures.”
• The benchmarks used was cost relative to one’s peers.  The report acknowledges that quality metrics should also be incorporated in the evaluation.  However, since there are few established quality metrics for most specialties, the potential for quality evaluation at this point is limited.
• For the sample size, the GAO required physicians to have treated at least 100 Medicare patients each year in the study.  The meant that 28% of physicians were excluded from the sample in 2005 and 29% were excluded in 2006.

The report finds that “58 percent of physicians and 30 percent of beneficiaries were in the same quintile of resource use in 2005 and 2006. The pattern was even more pronounced for the top resource use quintile: 72 percent of physicians and 35 percent of beneficiaries remained in that quintile. If the level of physicians’ and beneficiaries’ resource use was purely random, only 20 percent would be expected to have remained in the same quintile.”

One important aspect of physician evaluation is whether or not these scores will actually change physician behavior.  The authors review of the literature finds that “feedback alone generally has no more than a moderate influence on physician behavior.”  It is possible, however, because most insurers have a small share of the physician’s business.  Feedback from Medicare, however, may lead to a more significant behavior changes because it is so large.

Also, it likely that disaggregated scores (by patient or by episode type) will have a larger effect on physician behavior than a single overall cost.  The more detail the physician can receive, the more he can learn how to alter his behavior.  In fact, the top five insurers actually provide patient-level detail in addition to the overall physician grade.

• General Accounting Office (2009) “Per Capita Method Can Be Used to Profile Physicians and Provide Feedback on Resource Use,” Report to the Chairman, Subcommittee on Health, Committee on Ways and Means, House of Representatives, GAO-09-802.

One problem with any government-run health insurance program is that politicians have an incentive to make decisions that are attractive to small, wealthy, cohesive constituencies, rather than for the greater good.  For instance, although CMS administrator tried to stem the tide of rising physician costs, Congress has repeatedly reinstated the physician raises.  The following three examples from Pham, Ginsburg and Verdier (2009) also

• “It is…appropriate for political debate to drive major policy directions in Medicare—such as when hospital prospective payment replaced cost reimbursement. But constituencies such as particular subgroups of hospitals can exert disproportionate influence, in turn spurring detailed legislation or rule making that is inconsistent with broader policy goals.”
• “Congress has legislated specific decisions that favor narrow groups of providers or suppliers, such as which area’s geographic adjuster should be used for a given hospital.”
• “The results of a demonstration convinced CMS that competitive bidding for suppliers of durable medical equipment would generate substantial savings without affecting beneficiaries’ access. Congress initially agreed, authorizing implementation of a competitive bidding program for durable medical equipment in 2003. But when suppliers protested because they anticipated lower payments, Congress postponed the program.”

Is there a solution?  Pham and co-authors believe so, but I am doubtful they will work.  They suggest a Medicare payment policy board which will remove payment from Congressional oversight.  Instead, it would be an independent commission like the FTC.  However, a board is not the most efficient way to run an organization.  The authors even state that “agencies headed by an individual rather than boards or commissions tend to general more cohesive policies…”  Further, the authors admit that establishing a payment policy board will not preclude political interference.

The other option Pham and co-authors suggest is to create a cabinet position for CMS and MedPAC review of payment legislation. However, interest groups are almost as likely to have an impact in the executive branch as in the legislative.  Public pressure to reduce cost is general and not terribly motivated by any issue.  Lobbying efforts by specialist physician groups, pharmaceutical manufacturers, and biotechnology firms are strong and difficult to avoid in any branch of government.

Although the British government has NICE, recreating this in the U.S. will be difficult.  The history of the Agency for Health Care Policy and Research (AHCPR) proves this.  Further, if the findings of an objective scientific finding concerning mammograms was much with such political heat, there will likely be similar backlash concerning payment modifications made by any NICE-style organization.  In short, any government-run healthcare system will have significant political “meddling” in payment decisions.

• Source: Pham, Ginsburg and Verdier (2009) “Medicare Governance And Provider Payment Policy” Health Affairs, 28(5): 1382-1394.

California’s Medicaid program, known as Medi-Cal, is the largest in the nation.  The California Health Care Foundation offers some interesting facts about the program in this report. For instance:

In just two years, Medi-Cal’s share of the state’s General Fund spending increased from 17% to 19%. If not for provisions in the federal stimulus bill that provide California with an estimated $10-$11 billion in additional federal Medicaid matching funds, state lawmakers likely would have made much deeper cuts to Medi-Cal.

Key facts include:

• Beneficiaries.  One in six Californian receive health insurance through Medi-Cal.  Further it is the major source of care for one out of every three California children and for nearly all individuals with AIDS.
• Expenditure. California spending on Medi-Cal was $47 billion in 2009.  This makes Medi-Cal the second largest area of state expenditures behind education.  However, California spends 25% less per Medicaid beneficiary than the national average.
• Expenditure Growth.  Over the past decade, Medi-Cal spending per beneficiary has grown at a much slower rate than private health insurance premiums (36% and 114%, respectively), and only slightly faster than general inflation (29%).  Medi-Cal spending is growing most rapidly among adults with disabilities, with outlays for personal care services (i.e., in-home supportive services) rising at the fastest rate. The program’s spending on prescription drugs has dropped, however, as Medicare is now the primary source of drug coverage for those beneficiaries eligible for both Medicaid and Medicare.
• Expenditure Concentration.  Medi-Cal spending is highly concentrated among a small subset of beneficiaries: just 10% of fee-for-service beneficiaries account for 81% of expenditures.

Much of my own research has focused on how physician financial incentives affect the quantity and quality of medical care. It should come as no surprise that I found a recent New York Times article on the topic stimulating.  Dr. Sandjeep Jauhar examines how hospital and physician financial incentives affect the length of a patient’s hospital stay.  An excerpt is below.

My hospital, like all acute-care facilities, receives a set payment per admission based on the patient’s diagnosis. So the longer a patient stays in the hospital, the more money the hospital stands to lose. Of course, the longer a patient stays, the greater the likelihood of hospital-acquired infections or harm from tests and procedures, which means timely discharge in most cases is good for hospitals and patients alike.

But doctors, paid separately by Medicare, have little motivation to discharge patients quickly. As long as their patients are in the hospital, they can bill and be paid for each visit they make.

I discussed this issue with an internist in private practice, who requested anonymity because of the sensitive nature of the subject. His patients, it seemed to me, were often staying longer in my hospital than necessary. “I understand why hospitals want to cut down length-of-stay,” he told me matter-of-factly. “But if I discharge a patient early, I don’t get paid. It’s O.K. if you have enough patients in the hospital, but if you don’t, you sometimes have to drag out the stay. I don’t like to do it, but sometimes you have to.”

In 1998, Medicare enacted the sustainable growth rate (SGR) which would slowly bring down Medicare physician compensation.  However, each year, it gets reversed by Congress. Now, instead of a gradual decline, the implementation of SGR would  result in a 21.2% pay cut for Medicare docs.

Before the Thanksgiving holiday, however, Congress once again reversed the SGR.  Megan McArdle gives some solid reasons of why the reform of the SGR should be included in any health reform bill.

One laudable goal is to improve medical quality while reducing cost. One way members of Congress have proposed to accomplish this is to use episode groupers in order to provide feedback to doctors regarding their resource use. None other than Max Baucus has advocated this (see p. 45 of this white paper).

However, matching patient costs to individual physicians is difficult. A paper by Pham et al. (NEJM 2007) shows that Medicare beneficiaries see many physicians in the course of a year or even during the course of the treatment for one disease.  “Beneficiaries saw a median of two primary care physicians and five specialists working in four different practices.”

The authors explore 4 methods to attribute patient episodes to individual physicians:

• Plurality provider algorithm.  Assigns a beneficiary to the physician (or practice) who billed for the greatest number of that beneficiary’s evaluation and management visits
• Plurality primary care physician algorithm.  This method excludes specialist visits and assigns the beneficiary to the primary care physician billing for the most evaluation and management visits.
• Majority provider algorithm. Assigns the beneficiary to the provider who billed for the plurality of evaluation and management visits, with the added criterion that the plurality must be at least 50% of those visits.
• Multiple provider algorithm.  Assigns the beneficiary to all providers who billed for at least 25% of the beneficiary’s evaluation and management visits, thereby allowing the beneficiary’s care to be assigned to more than one provider.

Using these methodologies, Pham and co-authors found that “Between 2000 and 2001, and again between 2001 and 2002, an average of 33% of beneficiaries had a change in their assigned physician, with that assignment changing to a different practice for the vast majority (97%).”

Further, because a physician must account for the majority of the patient’s episode-level visits, many of the physician’s patient visits will be excluded from their score.  In the CTS data from the Pham study, only “39% of a primary care physician’s Medicare patients, and 6% of a medical specialist’s Medicare patients, were assigned to them.”  Patient with chronic illnesses are more likely to have multiple physicians and are less likely to have their care episodes assigned to a primary care physician.

This persistent instability “may decrease the motivation of physicians to invest in long-term improvements in care for patients with chronic conditions (e.g., hiring patient educators), or the ability to target interventions to specific patients, if they perceive that the benefits to patients will take years to accrue and that many of their patients are unlikely to remain assigned to them. Care dispersion may thus limit the motivation of physicians and their ability to improve the quality of care in multiple ways.”

• Source:  Hoangmai H. Pham, Deborah Schrag, Ann S. O’Malley, Beny Wu, Peter B. Bach (2007) “Care Patterns in Medicare and Their Implications for Pay for Performance” NEJM, v356(11):1130-1139, March 15, 2007.

According to a N.Y. Times editorial, the Congressional Budget Office has consistently underestimated costs savings from a variety of institutional changes to Medicare.  For instance:

Medicare enacts the prospective payments system (PPS) for reimbursing inpatient hospital stays.

• The CBO projected total Medicare spending will rise to $60 billion in 1986.
• Actual Medicare spending in 1986 was only $48 billion.

Medicare begins paying skilled nursing facilities and home health care services a set fee per patient.

• The CBO projected a 9.1% reduction in Medicare spending.
• The actual savings turned out to be 50 percent greater in 1998 and 113 percent greater in 1999 than the budget office forecast.

The Medicare Modernization Act created Part D prescription drug coverage.

• The CBO projected that spending on the drug benefit would be $206 billion.
• Actual spending was nearly 40 percent less than that.

HT: GoozNews

The Social Security Administration’s Office of the Actuary projects Medicare costs up to 75 years in the future. How much of your taxable income will be going to pay for Medicare in the next 10, 25, or 75 years? Take a look at this chart.

By 2085, 12.24% of your taxable income will need to go to pay for Medicare. Not shown on this chart, is that 17.78% of your taxable income will also be needed to pay for Social Security. Thus, by 2085, 30% of worker income will go to fund these two entitlement programs.

The largest provider of medical services in the United States is Medicare.  Forty five million Americans receive Medicare.  Out of this total only 85% are elderly (aged 65 or older).  Disabled individuals, individuals with end-stage renal disease or Lou Gehrig’s disease are also eligible for Medicare coverage.

Medicare has 4 parts. Part A provides coverage for inpatient hospital services, Part B provides coverage for outpaitent and physician services and Part D provides a drug benefit. Medicare Advantage (or Medicare Part C) allows Medicare beneficiaries to enroll in private health insurance plans instead of the Parts A, B, and D.

Who pays for Medicare?

Medicare is funded by a payroll tax (2.9% of taxable earnings), general tax revenue and beneficiary premiums. Below I describe how each part of Medicare is funded.

• Part A: Inpatient hospital services are paid almost entirely through the Medicare payroll tax.
• Part B: Premiums paid by beneficiaries cover about one-quarter of outlays. General revenue covers the rest.
• Part C: Medicare Advantage plans places bids with the government to provide the services at the lowest cost. This bids are compared to a benchmark based on a county-level fee-for-service Medicare Spending. Plans are either paid the benchmark if their bid is at or above the benchmark. Plans are paid 75% of the difference between the bid and the benchmark if the bid is below the benchmark.
• Part D: Most enrollees pay one quarter of the Part D cost as premiums. In reality, however, receipts from premiums cover less than one-quarter of Part D’s total cost because some of the federal outlays for it (such as subsidies for low-income beneficiaries and for employers that maintain drug coverage for their retirees) are not included in the calculation of premiums.

What services make up the Medicare Budget?

Payment for inpatient hospital services (28%), Medicare Advantage Plans (20%) physician and supplier services (19%) make up the marjority of Medicare spending on enrollee benefits. In the fiscal year 2008, Medicare spent $453.9 billion on enrollee benefits. This chart lists the major types of services provided by Medicare and their cost.

Supplemental Insurance

Although all elderly are eligible for Medicare, some enrollees have additional coverage. For instance, 37% of fee-for-service Medicare beneficiaries also have coverage from former employers. Other individuals will purchase Medigap policies to cover the Medicare donut hole.  This chart lists the proportion of Medicare beneficiaries with supplemental health insurance.

Source:

• “Long-Term Budget Outlook” Congress of the United States, Congressional Budget Office, June 2009.

The healthiest 76% of Medicare beneficiaries consume only 14% of program expenditures. The sickest 15% consume 75% of Medicare expenditures.

• Hughes et al. (2004).

The Medicare Reimbursement series continues with a look at physician reimbursement in more detail. The source of this information is MedPAC’s Payment Basics.

Physician Reimbursement
Physicians payment is based on 3 factors: RVU, GPCI and the MEI conversion factor.

• Relative value units (RVUs) measure the relative costliness of three types of resources used to provide different physician services: physician work, practice expenses, and expenses for physicians’ professional liability insurance (PLI). Each of these three components of the RVU payment is adjusted separately for geographic cost variation (see GPCI discussion below).
• Geographic practice cost indexes (GPCI): Measures payments based on variation in the costs of providing services across 89 different geographical areas. Thirty four of these 89 geographical areas are state-wide. GPCI’s have a national average of 1.0. The law requires that the GPCIs be revised at least every three years.
  • Physician work GPCI: based on the earnings of professionals (lawyers, engineers, and others) reported in the decennial census
  • Practice expense GPCI: constructed to account for geographic differences in nonphysician staff wages (40% of the GPCI practice expense), office space costs (27% of the GPCI practice expense), and equipment and supplies (33% of the GPCI practice expense).
  • PLI GPCI: based on data CMS periodically collects from the largest malpractice insurers in each state
• Medicare Economic Index (MEI): Changes in the input prices for physician services are measured using the Medicare Economic Index (MEI), a weighted measure of average national prices for inputs needed to produce physicians’ services.

The Medicare Reimbursement series continues with the big money payments: acute inpatient hospital care, long-term care facilities and critical access hospitals. The sources of this information is MedPAC’s Payment Basics.

Hospital Acute Inpatient Services

• Payments made under the acute inpatient prospective payment system (IPPS) totaled $105 billion and accounted for about 25 percent of Medicare spending in 2006. These payments provide about 20 percent of hospitals’ overall revenues.
• In 2008, beneficiaries are liable for a deductible of $1,024 for the first hospital stay in an episode, and daily copayments of $256 are imposed beginning on the 61st day.
• Hospitals receive payment based on 2 factors: i) patient diagnosis and treatment and ii) hospital location. Each patient admission payment is based on Medicare severity diagnosis related groups (MS–DRGs), which is then adjusted by a geographic factor which measures labor costs in each local area.
• Clinical conditions are defined by patients’ discharge diagnoses, including the principal diagnosis—the main problem requiring inpatient care—and up to eight secondary diagnoses indicating other conditions that were present at admission (co-morbidities) or developed during the hospital stay (complications). The treatment strategy—surgical or medical—is defined by the presence or absence of up to six procedures performed during the stay.
• The MS-DRG is determined by the following factors:
  • Discharge base rates: Hospital are reimbursed a flat amount per discharge for the operating and capital costs that efficient facilities would be expected to incur in furnishing covered inpatient services.
  • MS–DRG relative weights: Medicare assigns a weight to each MS–DRG reflecting the average relative costliness of cases in that group compared with that for the average Medicare case.
  • New technology payments.
  • Wage Index: Medicare’s base operating and capital rates are adjusted by an area wage index to reflect the expected differences in local market prices for labor.
  • Bad Debts: Medicare reimburses acute-care hospitals for 70 percent of bad debts resulting from beneficiaries’ nonpayment of deductibles and copayments.
  • Indirect medical education: Teaching hospitals receive an additional payment.
  • Disproportionate share payments (DSH): Hospitals that treat a disproportionate share of low-income patients receive additional operating and capital payments .
  • Rural hospitals: Rural hospitals can receive extra money if they are a sole community hospital (SCH).
  • Outlier payments: These are additional payments for very costly patient cases.

Long Term Care Hospitals (LTCH)

• Payments to LTCHs were about $4.5 billion in 2007; Medicare beneficiaries accounted for about 70 percent of these hospitals’ revenues. In 2006, almost 116,000 Medicare beneficiaries had 130,000 discharges from LTCHs, and 392 facilities were Medicare certified. In order to qualify for LTCH payment, hospitals must have an average length of patient stay longer than 25 days.
• Beneficiaries transferred to an LTCH from an acute care hospital pay no additional deductible. However, beneficiaries admitted from the community are responsible for a deductible—$1,024 in 2008—as the first admission during a spell of illness, and for a copayment—$256 per day—for the 61st through 90th days.
• Since October 2002, Medicare has paid LTCHs predetermined per discharge rates based primarily on the patient’s diagnosis and market area wages.
• LTCH receive a flat per discharge rate to cover operating and capital costs. Payments for patient care as based on MS–LTC–DRGs, which are based on principal diagnosis, up to eight secondary diagnoses, up to six procedures performed, age, sex, and discharge status.
• Short-stay and high-cost outliers receive altered payment rates.
• The 25 percent rule reduces payments for LTCHs that exceed established percentage thresholds for patients admitted from certain referring hospitals during a cost-reporting period.
• There is no mechanism in law for updating payments to LTCHs. CMS intends to update LTCH PPS payment rates based on the most recent estimate of the Rehabilitation, Psychiatric, and Long-Term Care (RPL) market basket index (which measures the price increases of goods and services inpatient rehabilitation facilities, inpatient psychiatric facilities, and LTCHs buy to produce patient care).

Critical Access Hospitals (CAH)

• CAHs are limited to 25 beds and primarily operate in rural areas. Unlike traditional hospitals (which are paid under prospective payment systems), Medicare pays CAHs based on 101 percent of each hospital’s reported costs.
• To qualify for the CAH program, a hospital had to be at least 15 miles by secondary road and 35 miles by primary road from the nearest hospital or be declared a “necessary provider” by the state. However, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 eliminated states’ ability to declare additional hospitals “necessary providers” starting in January 2006.
• Medicare’s cost-based payments to CAHs were roughly $6 billion in 2006, representing 4 percent of all Medicare inpatient and outpatient payments to hospitals.
• Most rural hospitals are either CAHs (56 percent), sole community hospitals (SCHs) (18 percent), or Medicare-dependent hospitals (MDHs) (6 percent). CHs receive the higher of either (a) standard inpatient prospective payment rates or (b) payments based on the hospital’s costs in a base year updated to the current year and adjusted for changes in their case mix. MDHs are similar to SCHs, but they are eligible for a prospective payment rate based on a blend of current PPS rates (25 percent) and their historical costs (75 percent).
• There are two main differences between CAH and other forms of rural hospitals. First, CAH receive cost-based payment for inpatient and outpatient care, but SCH and MDH receive cost based payment only for inpatient care. Second, SCHs’ and MDHs’ payments are based on historical costs trended forward.

Ambulatory Surgical Centers

• Payments to ASCs were $2.9 billion in 2007, including both program and beneficiary spending.
• In January 2008, Medicare began paying for surgery-related facility services provided in ASCs using a payment system based on the hospital outpatient prospective payment system (OPPS). In contrast to the old ASC payment system, which had only nine procedure groups, the new ASC system has several hundred procedure groups. The unit of payment in the ASC payment system is the individual surgical procedure.
• In 2008, CMS substantially expanded the list of services that qualify for facility payment in ASCs. Medicare began paying for all procedures that do not pose a significant safety risk when performed in an ASC and do not require an overnight stay.
• The 2008 ASC conversion factor is 65 percent of the OPPS conversion factor ($41.40). The ASC rates are less than the OPPS rates because of the budget neutrality requirement.
• To account for geographic differences in input prices, CMS adjusts the labor portion of the ASC rate (50 percent) by the hospital wage index. CMS does not adjust the non-labor portion (the remaining 50 percent).
• CMS updates the ASC relative weights annually based on changes to the OPPS weights and the physician fee schedule practice expense amounts.

The Medicare Reimbursement series continues with today’s focus on outpatient care. The sources of this information is MedPAC’s Payment Basics.

Outpatient Hospital Services

• Outpatient hospital procedures range from injections to complex surgical procedures that require anesthesia. Outpatient hospital care accounted for $19 billion of total Medicare spending in 2007.
• Currently, outpatient hospital reimbursement is based on the outpatient prospective payment system (OPPS); similar to the PPS for inpatient hospital care. Originally, outpatient hospital reimbursement was based on hospital cost. Under this system, copayments for outpatient care were about 50% of cost. Under the OPPS, copayments are declining each year as a share of total OPPS payments until they reach 20 percent. OPPS pays providers based on HCPCS coding, specifically the ambulatory payment classifications (APCs).
• Congress has legislated permanent hold-harmless status to cancer and children’s hospitals. In addition, beginning in 2006 rural sole community hospitals (SCHs) receive an additional 7.1 percent above standard payment rates on all OPPS services except drugs and biologicals.
• CMS assigns some new services to “new technology” APCs based only on similarity of resource use. CMS chose to establish new technology APCs because some services were too new to be represented in the data the agency used to develop the initial payment rates for the OPPS. Services remain in these APCs for two to three years, while CMS collects the data necessary to develop payment rates for them.
• CMS makes most OPPS payments on a per service basis, but CMS pays for partial hospitalizations on a per diem basis.
• Hospitals can receive three payments in addition to the standard OPPS payments: i) pass-through payments for new technologies, ii) outlier payments for unusually costly services, and iii) hold-harmless payments for cancer and children’s hospitals and rural hospitals with 100 or fewer beds.

Outpatient Dialysis Services

• In 1972, the Social Security Act extended all Medicare Part A and Part B benefits to individuals with ESRD (of any age) who are entitled to receive Social Security benefits. ESRD beneficiaries account for 1% of Medicare enrollment.
• Spending for the 450,000 enrolled ESRD beneficiaries in 2006 was $20 billion. Of this, $8.4 billion was spent on dialysis.
• The base payment rate for each dialysis treatment is $132.49 for freestanding facilities and $136.68 for hospital-based facilities. By 2009, however, this rate will be the same for both types of facilities. The base rate is adjusted for patient age, BMI, body surface area as well as a geographic cost adjustment factor.
• Medicare pays dialysis facilities a predetermined payment for each dialysis treatment they furnish. Medicare covers two methods of dialysis—hemodialysis and peritoneal dialysis. The composite rate currently excludes several injectable drugs—such as erythropoietin, vitamin D, and iron—for which physicians are separately reimbursed.
• The Medicare Improvements for Patients and Providers Act of 2008 adjust payments in a number of ways. In the near future, injections will also be included in the composite rate. A P4P program is being instituted which evaluates physicians based on anemia management, dialysis adequacy, patient satisfaction, iron management, bone mineral metabolism, and vascular access.

Medicare reimburses providers based on the type of service they provide. In the Medicare claims data there are three types of procedure codes:

• Current Procedural Terminology (CPT): CPT codes are designed by the American Medical Association. They describe medical, surgical, and diagnostic services and are designed to communicate uniform information about medical services and procedures among physicians, coders, patients, accreditation organizations, and payers for administrative, financial, and analytical purposes. The CPT codes are republished and updated annually by the AMA.
• International Statistical Classification of Disease and Related Health Problems (ICD): “The ICD is used to provide a standard classification of diseases for the purpose of health records. The World Health Organization (WHO) assigns, publishes, and uses the ICD to classify diseases and to track mortality rates based on death certificates and other vital health records.”  Code lookup. The most recent version of the ICD classification is the tenth edition (i.e., ICD-10).
  
• Healthcare Common Procedure Coding System (HCPCS): “The HCPCS is divided into two principal subsystems, referred to as level I and level II of the HCPCS. Level I of the HCPCS is comprised of CPT (Current Procedural Terminology), a numeric coding system maintained by the American Medical Association (AMA)… Level I of the HCPCS, the CPT codes, does not include codes needed to separately report medical items or services that are regularly billed by suppliers other than physicians…Level II of the HCPCS is a standardized coding system that is used primarily to identify products, supplies, and services not included in the CPT codes, such as ambulance services and durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) when used outside a physician’s office. Because Medicare and other insurers cover a variety of services, supplies, and equipment that are not identified by CPT codes, the level II HCPCS codes were established for submitting claims for these items.”

Also there are 7 types of Medicare claims. These are:

• inpatient (IP),
• outpatient (OP),
• skilled nursing facility (SNF),
• hospice (HS),
• home health (HH),
• Part B or carrier (PB), and
• durable medical equipment (DME).

The first five claim types are deemed “institutional” claims and the last two are deemed “non-institutional.”

The Medicare Reimbursement Series Continues. The sources of this information is MedPAC’s Payment Basics.

Clinical Laboratory Services:

• Under Part B, Medicare covers medically diagnostic and monitoring laboratory services ordered by a physician.
• Medicare does not cover routine screening tests except for cholesterol and blood lipid tests, fecal occult blood testing, Pap smear tests, prostate-specific antigen tests, and diabetes screening tests.
• In 2007, Medicare payments for clinical lab services totaled $6.8 billion. Overall lab spending declined by 1 percent between 2006 and 2007 due to a drop in hospital-based lab spending. Medicare spending for lab services grew by an average of 9 percent per year between 1999 and 2006.
• Medicare sets payment rates for more than 1,100 Healthcare Common Procedure Coding System (HCPCS) codes used in billing for laboratory services.
• For new lab tests, CMS “crosswalks” to assign the test to a similar existing HCPCS. If the new lab test is dissimilar from all existing tests, CMS relies on a “gapfilling” method in which the carriers independently set rates for the first year of use.
• There is no beneficiary copayment.

Durable Medical Equiment (DME)

• Medicare spent about $8.6 billion on DME in fiscal year 2007. Medicare spending for oxygen and related supplies accounts for one-quarter of total DME expenditures.
• Generally, current fees are an average of the allowed charges from 1986 and 1987, adjusted by the consumer price index for all urban consumers to account for inflation.  However, there are exceptions to this for pharmaceuticals associated with DME use, home oxygen, and customized equipment.
• Each state has its own fee schedule to take into account regional cost variation.
• A pilot program using competitive bidding method was found to decrease DME costs 17%-22%.  A competitive bidding process for DME was to be phased in nationwide, starting with 10 metropolitan statistical areas (MSAs) in 2008 and expanding to 80 MSAs by 2009.  However, this schedule may be delayed due to problems with bidding software and organizational issues.

Today, we will focus on hospital care outside of the traditional Inpatient hospital care setting. Again, this information is culled from MedPAC reports.

Outpatient Hospital Services

• Outpatient hospital care, from injections to complex procedures, accounted for $19 billion of total Medicare spending in 2007
• Originally, outpatient reimbursement was cost based and copayments amounted to about 50% of total payments. Now, Medicare uses the Outpatient prospective payment system (OPPS) and copyament rates have decreased to 28% of total payments. There are carve outs for three additional items that fall outside the OPPS system: i) pass-through payments for new technologies, ii) outlier payments for unusually costly services, and iii) hold-harmless payments for cancer and children’s hospitals and rural hospitals with 100 or fewer beds that are not sole community hospitals
• Payments from Medicare to the hospital are based on the ambulatory payment classifications (APC). New technologies can be placed in a “new technology” classification for up to 3 years. Payments outside of the APC system include: CMS pays i) corneal tissue acquisition costs, ii) blood and blood products, and iii) many drugs.

Home Health Services

• Beneficiaries of home health services receive visits from skilled professionals to provide the following services: skilled nursing care, physical, occupational, and speech therapy, medical social work, and home health aide services.
• About 2.9 million beneficiaries used home health care in 2006. Medicare pays for home health care with both Part A and Part B funds; in 2006, total payments were $14.1 billion. Beneficiaries pay not copayments for these services.
• Medicare pays home health agencies based on 60-day episodes. The exact value or cost of home health benefits is inherently difficult to define. Medicare uses one of 153 home health resource groups (HHRGs) to determine payment rates. The HHRGs are based on clinical (e.g., IV needed, wound present, ulcer present) functional (e.g., dressing, bathing, toileting needs) and the number of visits needed.
• Outlier payments are available when costs exceed 167% of the base pay. Home health agencies receive 80% of the difference between the HHRG base rate and their reported cost.

Hospice Care

• Hospice care is available for Medicare beneficiaries whose life expectancy is six months or less. However, by agreeing to hospice care, patients forego the right to curative treatment. Medicare will pay for medical care for illnesses that are unrelated to their terminal illness. Beneficiaries occasionally pay a $5 hospital copayment, but are largely protected form out-of-pocket expenses within the hospice setting.
• Between 2000 and 2005, hospice use increased by 11% per year. In addition, as of December 2007, 51 percent of hospice agencies were for profit, compared to 27 percent in 2000. Medicare payment for hospice grew from $2.9 billion in 2000 to over $10 billion in 2007.
• Benefits cover skilled nursing services, drugs, physical and occupational therapy, counseling and other services.
• Hospice agencies receive a set daily rate for their services. The vast majority of hospice cases receive the routine home care (RHC) base payment, but five percent do receive higher daily rates for more complicated cases. This base payment is adjusted geographically to reflect wage differences between regions. Payments are also capped; total payments over total number of beneficiaries may not exceed $22,386.

I will continue reviewing some Medicare reimbursement information as described in a variety of MedPAC reports.

Medicare Advantage

• Medicare Advantage is a program where Medicare beneficiaries can receive private heath insurance, partially or fully funded by CMS.  The health insurance must provide coverage at least as generous as Medicare Parts A and B.
• Private health plans bid to provide services to Medicare beneficiaries.  If a plan’s standard bid is above the benchmark, then the plan receives a base rate equal to the benchmark and the enrollees have to pay an additional premium that equals the difference between the bid and the benchmark. Ifa plan bid falls below the benchmark, the plan receives a base rate equal to its standard bid.
• Medicare payments are also based on enrolled beneficiaries’ demographics and health risk characteristics. Medicare uses beneficiaries’ characteristics, such as age and prior health conditions, and a risk-adjustment model—the CMS–hierarchical condition category (CMS–HCC)—to develop a measure of their expected relative risk for covered Medicare spending.
• Medicare Advantage Plans can be either local or regional.  Regional plans can be offered to any beneficiary of one of the 26 Medicare regions.   A region’s benchmark is a weighted average of the average county rate and the average plan bid.  The average plan bid is each plan’s bid weighted by each plan’s projected number of enrollees

PART D

• Medicare Part D provides coverage for pharmaceutical expenses.
• Overall, Medicare subsidizes premiums by about 75 percent and provides additional subsidies for beneficiaries who have low levels of income and assets.
• The standard 2009 benefit includes: a $295 deductible; coverage for 75 percent of allowable drug expenses up to a benefit limit of $2,700; no coverage between $2700 and $6134, and about 5 percent coinsurance for drug spending above the catastrophic limit of $6154.
• Individuals eligible for both Medicare and Medicaid with incomes up to 100 percent of poverty have no deductibles, nominal copays, and no coverage gap.
• Medicare subsidies for Part D come in two forms: A direct, capitated payment to plans calculated as a share of the adjusted national average of plan bids, and individual reinsurance of 80 percent of drug spending above

This week, I will be discussing Medicare Reimbursement in detail.  The Medicare Payment Advisory Commission (MedPAC) has a high-quality series of reports analyzing Medicare’s reimbursement system. Findings from these reports includes:

Physician Services

• In 2006, about 569,000 physicians billed Medicare.
• In 2007, Medicare paid $60 billion for physician services.
• All physician services are reported to CMS according to the Healthcare Common Procedure Coding System (HCPCS), which contains codes for about 6,700 distinct services. Payment rates are based on RVUs.
• Under the Medicare incentive payment program, physicians receive bonus payments when they provide services in health professional shortage areas (HPSAs).
• For most physician services, Medicare pays the provider 80 percent of the fee schedule amount. The beneficiary is liable for the remaining 20 percent coinsurance.
• Services billed separately and provided by nurse practitioners are paid at 85 percent of physicians’ fees.

Oxygen and Oxygen Equipment

• “Beginning in January 2006, section 510(b) of the Deficit Reduction Act of 2005 (DRA) limited rental of oxygen equipment to a period of 36 months of continuous usage. After 36 months, Medicare only pays for contents and non-routine maintenance…According to the Office of Inspector General (OIG), 22 percent of beneficiaries who started renting equipment in 2001 rented for 36 months or longer.”
• Medicare has instituted competitive billing for the purchase of Durable Medical Equipment. A demonstration showed that “competitive bidding lowered prices for home oxygen between 17 and 21 percent.”

Psychiatric Hospital Services

• Medicare payments to psychiatric facilities are estimated to be $4.1 billion in 2007.
• In 2006, 312,000 beneficiaries had 473,500 Medicare discharges from Inpatient Psychiatric Facilities (IPF) for a psychiatric or substance abuse disorder.
• Beneficiaries treated in IPFs are responsible for a $1,024 deductible for the first admission during a spell of illness, and for a $256 copayment for the 61st through 90th days.
• IPFs recieve a base payment rate of $638 per day (in 2009) which is increase with patient age, severity of diagnosis, and the presence of comorbidities and payment declines with the length of the hospital stay. Payments are also adjusted based on geographic factors, if the hospital is a teaching hospital, and whether or not there is an emergency room.

Inpatient Rehabilitation Facilities (IRFs) and Skilled Nursing Facilities, (SNFs) and

• For treatment after an illness, injury or surgery, some patients need to visit an inpatient rehabilitation facility (IRF).
• Medicare payments to IRFs were an estimated $5.6 billion in 2007. Medicare accounts for about 70 percent of IRF cases. In 2006, there were about 404,000 Medicare discharges from IRFs.
• Similar to psychiatric services, beneficiaries are responsible for a $1,024 deductible as the first admission during a spell of illness, and for a $256 copayment for the 61st through 90th days.
• Reimbursement is based on the severity of patient illness.  Patients are classified into one of 92 case mix categories and one of four tiers based on comorbidities.  Patients with very short stays (less than 4 days) receive a discounted rate and those with very long stays get more generous reimbursement.
• To be considered an IRF, you must meet the 60% rule.  This means that 60% of all admissions must fall into one of these categories: stroke, spinal cord injury, congenital deformity, amputation, major multiple trauma, hip fracture, brain injury, neurological disorders, burns, severe arthritis conditions, joint replacement for both knees or hips.
• Skilled Nursing Facilities (SNFs) are used for short-term inpatient skilled care a hospital stay. Medicare reimburses SNFs prospectively, giving them a flat rate for every day of care, up to 100 days in the facility. Payments for SNF are adjusted for: differences in local labor costs and type of patients through Resource Utilization Groups (RUGs). Patients with more severe conditions, worse ADL scores, and who need more therapy get higher RUGs scores and thus a higher reimbursement rate.

Historically, Medicare recipients in their final year of life generated about six times the expenditures of the average surviving Medicare enrollee and accounted for almost 30 percent of total program spending. However, in the late 1980s, a confluence of two forces helped increase the use of hospice care among Medicare beneficiaries.

First, in 1984, Medicare instituted the Prospective Payment System (PPS). Hospitals began receiving fixed payments for each admission based on patient diagnosis (DRG). Thus, hospitals had an incentive to move long-term care patients to alternative facilities, such as hospices. Secondly, in 1988, the Duggan v. Bowen court ruling held that the HCFA (now CMS) had to expend their interpretation of home health benefits. Soon after, Medicare began to cover more hospice and home health services. Because of these two forces, the supply of home health services and hospices boomed.

Did the rise in popularity of hospice decrease Medicare’s end-of-life expenditures? A paper by Garber, MaCurdy and McClellan find that the answer is no.

Hospice and home health care did substitute for some inpatient hospital services. Between 1988 and 1995, “the percentage of Medicare recipients who died in an acute hospital fell from about 42 percent to less than 35 percent. The percentage who died without any Medicare-covered services fell much more dramatically, from about 40 percent in 1988 to about 25 percent in 1995.” Hospice care rose from about 2% in 1988 to 10% in 1995.

This growth in the utilization of hospice care was strongest in patients who had chronic diseases such as lung cancer. Predictably, individuals who died of sudden illnesses such as acute myocardial infarction (AMI) or hemorrhagic stroke did not increase their use of hospice care.

However, although the hospice care did substitute for inpatient hospital care expenditures for end-of-life medical continued to increased. “…per-decedent total expenditures in the final month of life rose from about $5,400 in 1988 to $7400 in 1995, expressed in 1995 dollars.” Even though inpatient hospital utilization decreased at the end of life, the cost of this care increased dramatically. For instance, for patients who died of AMI—where inpatient hospitalization at the end of life varied little over time—the cost of care in the final month of life rose by nearly 50 percent in real terms between 1988 and 1995.

In summary, although hospice utilization increased and inpatient hospital care decreased, “the simultaneous rise in the use of hospice and other services, however, meant that the number of days that patients received Medicare-covered services rose between 1988 and 1995.” the net effect of these changes in utilization was an increase in monthly Medicare expenditures before death, rising from about $5,500 in 1988 to more than $7,000 in 1995 (in 1995 dollars).

• Alan M. Garber, Thomas MaCurdy, Mark McClellan (1999) “Medical Care at the End of Life: Diseases, Treatment Patterns, and Costs,” in Frontiers in Health Policy Research, volume 2, p. 77-98.

The Congressional Budget Office (CBO) periodically releases its 75-year health care spending projections. Current projections forecast the following health care spending levels:

• Total spending on health care would rise from 16% of GDP in 2007 to 25% in 2025, 37% in 2050 and 49% in 2082.
• Federal spending on Medicare (net of beneficiaries premiums) and Medicaid would rise from 4% of GDP in 2007 to 7% in 2025, 12% in 2050 and 19% in 2082.

U.S. Health Care System Overview

The distribution of health care spending between public and private sources can in this chart. Currently health insurance although public health insurance is gaining ground, employer-provided health insurance still covers most Americans. Overall, healthcare spending has increased from 4.7% of GDP in 1960 to about 16% of GDP now. According to the CBO (as well as most other researchers) the major driver of this long term cost growth “has been the emergence, adoption, and widespread diffusion of new medical technologies and services.”

CBO Projection Methodology

The simplest way the CBO projects health expenditures is to use excess cost growth models. Excess cost growth measures increases in health care spending above the level of GDP growth. For instance, between 1975 to 2009 excess cost growth was 1.9 percentage points. Medicare excess cost growth was 2.3%, Medicaid excess cost growth was 1.9% and all other insurance (e.g., private health insurance, other public programs) had excess cost growth of 1.8%.

In reality, the forecasting method is much more detailed.

• Medicare and Medicaid Projections. The CBO projects total spending for Medicare and Medicaid less the contributions from states and enrollee premium contributions. Premiums are assumed to be a flat percentage of part B and Part D premiums. State contributions for Medicaid are held constant at 57% of total projections after the expiration of the temporary increase enacted in the American Recovery and Reinvestment Act of 2009.
• Budget Scenarios. The CBO uses two budget scenarios. The extended-baseline scenario assumes current laws do not change and that physician payment formulas will continue to apply and will necessitate large reductions in these payments over the next several years. The alternative fiscal scenario assumes that Medicare physician payment will increase with inflation. Spending on the alternative fiscal scenario is greater because the physician reimbursement rates are assumed not to be cut.
• Long term projection Details.
  • CBO projections from 2009-2019 used the projections from the CBO March 2009 budget report under both the extended-baseline and alternative fiscal scenario.
  • In 2020, excess cost growth for spending in Medicare and Medicaid will equal its historical levels of 2.3 percentage points and 1.9 percentage points respectively.
  • From 2009 through 2020, excess growth in all other spending (e.g., private health care and other public programs) will equal its historical average of 1.8 percentage points.
  • Excess growth in all three categories–Medicare, Medicaid and other spending–slows beginning in 2021. The slowdown in Medicare spending is one-third the rate of slowdown in non-Medicare spending.
  • Excess cost growth for other health spending declines smoothly from 1.8 percentage points in 2020 to 0.1 percentage points in 2083.
  • The rate of excess cost growth from Medicare drops from 2.3 percentage points in 2020 to 0.9 percentage points in 2083. For Medicaid, excess cost drops from 1.9 to 0.1 percentage points between 2020 and 2083.
  • Overall, average excess growth of all health care drops from 1.9 percentage points in 2020 to 0.5 percentage points in 2083, averaging 0.8 percent over that period.

Why will excess cost growth slow? The CBO gives four reasons: i) higher cost sharing, ii) increased utilization management, iii) reduced insurance coverage by employers, and iv) greater scrutiny of new technologies (e.g., cost effectiveness review). Under these projections, “spending per person by 2035 would have growth by more than $14,000 (in 2009 dollars) but more than 80 percent of that extra money would be spent on health care. Although spending for other goods and services would grow by just 14 percent, spending for health care would nearly triple.”

Source:

• “The Long-Term Outlook for Health Care Spending“, Congressional Budget Office, November 2007.

Health Reform is at the top of President Obama’s list of reform efforts. Mr. Obama claims that not only will health reform improve the physical health of the nation, it will also improve its economic health. In a Council of Economic Advisers Report, President Obama lists three reasons why slowing health care costs and expanding health care coverage will increase economic growth. Let us look at each of these arguments in turn.

THE ECONOMIC IMPACT OF SLOWING HEALTH CARE COST GROWTH

1. It would raise standards of living by improving efficiency. Decreasing health care costs while maintaining the same quality of health care would certainly improve efficiency. However, simply decreasing costs will not necessarily improve efficiency since the quality of medical care could deteriorate. Many researchers believe that Americans receive too much specialist care and not enough primary care. Cutting costs in the primary care sector may actually decrease efficiency. Further, decreasing reimbursement for groundbreaking technologies may slow the growth of longevity rates. Thus, cutting cost by reducing reimbursement for inefficient medical care would improve efficiency, but cutting cost by reducing payment for cost-effective method would actually decrease efficiency.
2. It would prevent disastrous budgetary consequences and raise national saving. The first part is certainly true while the second is not. The Medicare Trust Fund is will run out of funds in less than ten years. As the baby boomers continue to progress into retirement, the promised health care benefits will need to be financed by a higher tax rate on workers. Thus, the government must take some action to bolster its fiscal solvency. Cutting health care costs, however, may not increase national savings. Let us assume overall spending on medical care health care spending is too high right now. This may be the case because employers–not employees–choose the set of health plans offered and the moral hazard problem has lead to overconsumption. In this case, decreasing spending would increase savings, because individuals are spending too much on health insurance. But why are people spending “too much”? It could be the case that they are spending (on average) exactly what they want to given the expensive nature of medical care. If this were the case, reducing government health care expenses would be offset by an increase in private health expenditures. For instance, a government cut in reimbursement rates to doctors would decrease spending and increase savings. Patients faced with the possibility of lower quality care may opt to spend more money on more personalize health care (e.g., flat-rate no limit primary care doctors) which would decrease savings. The net effect on savings is ambiguous.
3. It would lower unemployment and raise employment in the short and medium runs. The most important point to mention here is “Who cares about the short/medium runs?” If you are going to implement new huge government program to reduce unemployment in the next 3 year, this is a huge mistake. Any large health reform effort should be made not for it’s short run impact, but for its long run impact. Nevertheless, cutting costs may create a small short-run increase in employment. The reason is that firms can will pay less for health insurance (or pay lower taxes for Medicare) and can hire more employees. However in the medium to long run, total worker compensation is set in a competitive market. Thus, a drop in health insurance premiums will likely be offset by higher wages and employment will remain at the same level as if no cost-cutting occurred. As evidence of this, the cost of health care has increased monotonically for the last 30 years. On the other hand, unemployment looks like a sine wave, displaying no strong long-term trend.  If medical costs caused unemployment, one would expect unemployment to be increasing over the long run just as medical costs have done.

THE ECONOMIC IMPACT OF EXPANDING COVERAGE

1. It would increase the economic well-being of the uninsured by substantially more than the costs of insuring them. It is likely that the economic of the uninsured would increase. It is likely that the economic well-being of the currently insured would decrease (through higher taxes). The net effect in the short run is likely to positive. To restate, in the short run, expanding coverage is almost certainly worthwhile. The question is whether or not expanding coverage be detrimental in the long run. Would an increase in the proportion of individuals with government-run health care lead to a stifling of innovation? Would lobbying by interest groups (e.g., PhARMA, AMA) lead to distorted reimbursement patterns? Would costs cutting measures lead to longer wait times to see doctors? While the short run benefits of expanding health insurance coverage are clear, the long run effects on both economic and health sector efficiency is ambiguous.
2. It would likely increase labor supply. The CEA claims that “reducing disability and absenteeism in the work place” will increase the labor supply. This is true, but may be offset by a reduced number of people who are employed in the first place. Many people take second jobs just for the health insurance. If individuals can get health insurance without working, this could decrease the labor supply. Overall, I believe the net effect will be small. The more important economic impact is (3) below.
3. It would improve the functioning of the labor market. This is definitely true. Individuals often keep job below their skill level simply because they fear losing health insurance. Other high-skilled individuals will take low-paying second jobs (e.g., Starbucks) just to have some insurance coverage. These two problems are named Job Lock and Job Stretch. If workers can choose employers based on wages, their own skills, and the overall work environment, this will lead to more efficiency labor market than if individuals would need to choose jobs based on the health plans offered. Further, it would increase small business innovation. Workers would be more attracted to small business if they knew they could receive insurance from the government.

• On the need to count the deadweight loss from additional taxation as part of Medicare’s administrative cost.
• Are arguments for Medicare’s lower administrative costs the same ones used to justify socialism?
• Would efficiency improve if Medicare administrative costs were higher?

President Obama addressed the American Medical Association in Chicago today.  His goal was push through his health care reform agenda.  On Saturday, his Weekly Address also focused on health care reform.   What is this agenda and how will it be paid for?

 Obama wants a public health care plan for the uninsured.  The total cost of his proposed health reform is about $1 trillion (although some disagree with these estimates).  He has proposed a number of ways to raise this money.

Additional Revenues

Savings

Obama also has come up with $635 billion of additional “savings.”  These include:

• Incorporate productivity adjustments into Medicare payment updates.  Read: pay doctors less.
• Reduce subsidies to hospitals for treating the uninsured as coverage increases.  This means eliminating the DSH payments.  It makes sense that if most or all individuals are insured, then DSH payments can be drastically reduced.  I do wonder, however, whether immigrants (legal and illegal) will be eligible for the public insurance plan.
• Pay better prices for Medicare Part D drugs.  This means negotiated lower prices with drug companies.  It would be preferable to significantly limit the duration of patents in order that generics can more quickly compete with patented medicine.  Further, shortening patent life will lead to new add-ons and innovations based on these patents.
• Less Money for MRIs and CT scans.  Technically, Medicare will double ”the assumed utilization rate for calculating practice expense RVUs for the technical portion of reimbursement from 25 hours per week (50% utilization) to 45 hours per week (100% utilization).”  This means that Medicare that the equipment will be used more hours per week which reduces the price per scan.  One reason for the lower compensation, is because areas with more MRI machines and CT scanners do not have better health outcomes, only higher prices.
• Cut Fraud and abuse; increase Medicare payment accuracy.  This is easier said then done.  Dr. Rich is skeptical that fraud programs will significantly cut healthcare costs.  He cites his own experience with anti-fraud programs.
• Improve Quality.  Also easier said than done.  The Obama administration attempts to reduce hospital readmissions.  This may mean lower payments for patients who are readmitted to the hospital for the same disease.  If this is the case, hospitals may provide subpar care to patients who are re-admits or they may recode the patients as having a different disease to increase reimbursement.  The government also wants to expand the Hospital Quality Improvement Program. Because medical quality is so difficult to measure, some of these measures may be counterproductive.  

Presents for Physicians

The President propose two changes that doctors do like.

• Less paperwork.  Simpler paperwork would help smooth the operation of physician offices, especially for physicians in smaller practices.  However, making the paperwork simple isn’t so simple.  The more transparent the paperwork, the less information the government has and the less they know about the procedures they are paying for.  Further, Obama claims to clamp down on physician fraud.  More fraud-fighting requires more–not less–paperwork.
• Limits on malpractice claims.  Limiting malpractice claims will have little direct effect on health care costs. The indirect effect, however, could be large.  If physicians decide to do less tests and less precautionary medicine, this could significantly reduce health care costs.  Yet Barack Obama did say that “I’m not advocating caps on malpractice awards, which I personally believe can be unfair to people who’ve been wrongfully harmed…”

A final note

This leaves one question: is former Illinois senator Barack Obama a Green Bay Packers fan?  Probably not, but he did praise Green Bay as a place where health care costs are below the national average while excellent health care is available.

Survey estimates of Medicaid enrollment are 43 percent lower than raw Medicaid program enrollment counts.  Why is this the case?  Roebuck and Liberman (HSR 2009) find that many people are not reporting that they have Medicaid coverage.  “43 percent of Medicaid enrollees answering the CPS as though they were not enrolled and 17 percent reported being uninsured.”

One reason for the underreporting could be that the poor may only enroll after they get sick.  Further, if they do not pay for Medicaid, they may feel that they are just receiving government assistance rather than “insurance.”

Why does Medicare spend $7,500 for patients in El Paso, Texas but spends $15,000 for patients in McAllen, Texas?  It McAllen richer? Does McAllen receive better care?  Are patients sicker in McAllen?  

“Come on” the general surgeon finally said. “We all know these arguments are bullshit.  There is overutilization here pure and simple.”  Doctors, he said, were racking up chanrges with extra tests, services, and procedures.

The surgeon came to McAllen in the mid-nineties and since then he said, “the way to practice medicine has changed completely.  Before, it was about how to do a good job. Now it is about ‘How much will you benefit?’”

Using data from the 2004 and 2006 Health and Retirement Survey (HRS), Levy and Weir (2009) analyze the take up of Medicare Part D after its enactment on Jan 1, 2006.  They find that in 2006 only 7% of seniors lacked drug coverage compared to 24% in 2004.  It seems that Medicare Part D caused this large increase in drug coverage.

Medicare Part D Eligibility

Medicare Part D eligibility can be defined as follows:

• Medicaid-covered Medicare beneficiaries (“dual eligibles”) were automatically enrolled in both Part D and a means-tested subsidy. 
• Individuals with other coverage–usually through their employer–were instructed to keep their coverage.
• Medicare Advantage (MA) plans had to offer drug coverage after Part D was implemented. Many of the MA plans, however, already had included drug benefits in their benefits package.
• Individuals with private, non group insurance or those without prescription drug insurance had to decide whether or not they wanted to enroll in a Part D plan.

Results

The evolution of senior drug coverage is shown in the following table.  After the implementation of Medicare Part D we see that  7% of seniors lacked drug coverage compared to 24% before part D.  Why didn’t these 7% take up Medicare Part D?  Are they uneducated?  Are not native English-speakers? It turns out that they just have low demand for prescription drugs.  ”Those with low levels of education or income were no less likely to enroll in Part D than were beneficiaries with more education or income.”  Also, the authors find that 41% of individuals who didn’t take up Medicare Part D said they didn’t need any medications. 

Crowd out

Did part D crowd out employer drug coverage?  We did see  employer drug coverage drops from 40% in 2002 and 2004 to 37% in 2006.  However, individuals who have employer-provided drug benefits were almost just as likely to retain these benefits in 2004 as in 2006.  The authors argue that “while this does not rule out the possibility that some individuals dropped employer drug coverage because of Part D, it suggests that most new Part D enrollees are coming from individuals who would have remained uninsured or purchased Medigap in the absence of Part D.”

• Levy, Helen and Weir, David (2009) “Take-Up of Medicare Part D: Results from the Health and Retirement Study” NBER WP #14692.

Bond Markets seem to be concerned over the escalating level of U.S. Government debt.  Yields rose during the latest $14 billion auction of U.S. 30-year Treasury Bonds.  This graph shows an ominous budget deficit trend as well.  There seems to be good reason for this.  

American’s stimulus plan and entitlement programs are putting an increasing burden on American tax payers.  With the recession taking a toll on tax revenues, Social Security and Medicare funding is increasing jeopardy.  CNN reports that the “Social Security trust fund will be exhausted by 2037 — four years earlier than estimated last year… The recession also hit Medicare. The Medicare trust fund is forecast to be tapped out by 2017, or 2 years earlier than the trustees’ estimate last year.”

1. How much of my salary goes to pay for Medicare?  
2. What is the difference between Medicare Part A, B, C and D?
3. What is a donut-hole? [hint: They don't have them at Dunkin' Donuts]

The Incidental Economist has a concise, easy-to-understand three-part series of posts on Traditional Medicare, Medicare Advantage, and Medicare Prescription Drug Plans.  It will help you answer all these questions and more.  You can also see my prior posts on the ‘Genesis and Development of Medicare‘ and ‘How to Pick a Medicare Plan.’

• Answers:  1) 2.9%, half paid by the employee, half by the employer; 2) A – hospital coverage, B – outpatient care, C – Medicare Managed Care (aka Medicare Advantage), D – Prescription Drug Plan; 3) a coverage gap in your health insurance benefit.

How do hospitals estimate the cost of different inpatient stays?  A paper by Clement et al. (2009) reviews 3 techniques:

Microcosting. “With microcosting, a detailed list of each component of a patient’s care is created and costed separately for each facet of a patient’s hospitalization. Given the level of detail, microcosting is generally considered the ‘gold standard’ for costing inpatient stays.”  Direct and indirect (overhead) costs are allocated over the patient’s entire hospital stay. “…nursing hours, the electricity required to light the recovery room, the catheter implanted, the operator’s time, food costs, etc. are captured and detailed. Given its labor-intensive nature, microcosting is not implemented in many hospitals.”

Refined-grouper number. Canada implemented the first DRGs in 1967.  “The system classifies patients into categories capturing cases of similar clinical, utilization, and length of stay characteristics. The categories were then further subdivided based on secondary diagnoses, sex, age, and discharge status creating DRGs.”

In 1983, Medicare adopted the the DRG system as a prospective payment instrument.  Later the rDRG was created.  The rDRG “applies a complication and comorbidity overlay to the DRG. Thus, the principal diagnoses group similar cases, as in the original DRG system, and the secondary diagnoses are used to subsequently classify cases into rDRG. In Alberta, a system based on rDRGs was used to group cases into groups comprising similar cases … The groupers are developed using a two-step process. First, based on the principal diagnosis or procedure code, cases are grouped together. Subsequently, cases are further grouped within the principal diagnosis group, based on secondary diagnoses and procedural codes. The two-step grouping process classifies cases into RGN that correspond to the rDRG grouping system.

A cost is developed by Alberta Health and Wellness (AHW) for each RGN using the microcosting data. A weighted average of each RGN cost across hospitals in Alberta is calculated and subsequently adjusted for the severity of case mixes within hospitals.”

Case-mix-groupers. Introduced in Canada in 1983, CMGs constitute a Canadian grouping system that is analogous to, but different from the DRG system developed in the United States…Cases are classified into CMGs based on the most responsible diagnosis as opposed to the principal diagnosis used in the DRG methodology…Thus, CMGs attempt to capture the diagnosis responsible for the greatest proportion of the hospitalization instead of the admitting diagnosis. An ‘average patient cost’ is calculated from all the microcosting data…Each CMG is assigned a relative index weight (RIW) that represents the complexity of the case in comparison to the average patient. The average annual cost per admission can then be determined for specific CMGs…A cost for each hospitalization can then be estimated by multiplying the CMG-specific RIW by the average Canadian cost per case ($3,103 per case).”

• Fiona M. Clement (Nee Shrive), William A. Ghali, Cam Donaldson, Braden J. Manns (2009) “The impact of using different costing methods on the results of an economic evaluation of cardiac care: microcosting vs gross-costing approaches” Health Economics, Volume 18, Issue 4  (p 377-388)

All health services researches know that comparative-effectiveness research is a vital link towards improving quality and decreasing cost.  Comparative effectiveness examines different medical treatments and evaluates which are the most cost effective.  The UK’s NICE (National Institute for Health and Clinical Excellence) publishes clinical appraisals regarding which treatments the NHS should cover.

Should the U.S. create a NICE-style government agency to conduct comparative effectiveness research?  Few researchers doubt that comparative effectiveness research is needed.  The question is whether it should be provided by the government.

Pro

Comparative effectiveness research is a public good.  Information is a non-rivalrous good (when I learn something that does not stop you from learning it).  Once the best treatment for each disease is established, it is difficult (but possible) to exclude individuals.  Because comparative effectiveness research is a public good the government would seem to have a large role to play.  Further, the government may be a more unbiased researcher than would be the case if private insurance companies conducted comparative effectiveness research.

Even if the government decided to continue funding a comparative effectiveness agency such as AHRQ, this does not preclude the private sector or academia from conducting their own research.

Con

Michael Cannon makes a strong argument against a centralized NICE-style government body.  Most convincingly, he states that  ”If a government agency produces unwelcome research, those groups will spend vast sums on lobbying campaigns and political contributions to discredit or defund the agency.”  If AHCPR’s history (now AHRQ) is any indication, it will be difficult for a government-funded body to publish controversial findings.  Health Affairs reports that when AHCPR found limited health benefits to back surgery, back surgeons “found sympathetic ears among House Republicans.” AHCPR’s funding was cut by 21% due to lobbying by back surgeons and medical device manufacturer Sofamor Danek.

If the government does not do a good job, could the private sector?  The answer is likely yes.  Cannon suggests that prepaid group plans (PGPs) such as Kaiser Permanente would be in the best position to conduct the comparative effectiveness analysis.  ”PGPs therefore boost the production of a nonexcludable good (comparative effectiveness information) by bundling it with an excludable good (reputation).”

Although expanding AHRQ’s role does not preclude private sector health plans from conducting their own research, spending on AHRQ will likely crowd-out private health plan comparative-effectiveness research.

Conclusion

Should there be an agency similar to NICE in the U.S. Michael Cannon makes a compelling argument that the answer is no, but he does this in a fantasy world where he forms American institutions from scratch.  Private sector insurance companies would be more likely to conduct comparative effectiveness research if:

1. Medicare was eliminated.  Seniors could instead receive vouchers to purchase their own private health care.  When people shop for their own insurance and pay for the marginal insurance premium dollar out of their own pocket, this will increase demand for cost effectiveness research.
2. Medical licensing (but not certification) standards were eliminated.  This way, insurance companies could take advantage of using more cost-effective labor such as nurse practitioners and physicians assistants.  ”According to professor of health policy Jonathan Weiner, nonphysician  clinicians comprise 14 percent of primary  care providers nationally, but 17 percent at Kaiser Permanente and 25 percent at Group Health.”

If these two changes were instituted, then I agree that a government-run comparative effectiveness organization would be unnecessary.  However, this is not the world we live in.   Medicare’s budget for 2009 was $420 billion.  In this world, I believe that there should be a government cost-effectiveness agency in order to monitor Medicare’s the cost-effectiveness of Medicare spending.   Further, government funding for medical research is needed whether or not Medicare exists.

Thus, I see two feasible options: (1) Eliminate Medicare, subsidize health insurance through vouchers, and leave the cost-effectiveness research to private health plans; and (2) Keep Medicare and expand funding of a government-run comparative-effectiveness body (such as AHRQ).

• Michael Cannon (2009) “A Better Way to Generate and Use Comparative Effectiveness Research” Feb 6, 2009, Cato Institute Policy Analysis brief # 632.
• Bradford H. Gray, Michael K. Gusmano, and Sara R. Collins (2003) “AHCPR And The Changing Politics Of Health Services Research” Health Affairs, Web Exclusive: 25 June 2003.
• Steinbrook, Robert (2008) “Saying No Isn’t NICE — The Travails of Britain’s National Institute for Health and Clinical Excellence” NEJM, 359(19):1977-1981.

In 2004, 29% of Medicare enrollees had Medigap coverage.  Are these policies priced efficiently?

An NBER paper by Maestas, Schroeder and Goldman (2009) argues that the answer is no.  

Prior to July 1992, Medigap was minimally regulated.  With the passage of the Omnibus Budget Reconciliation Act of 1990 (implemented in July 1992), Medigap plans were standardized.  Each plan fell into one of ten types–labelled plans A though J. Medigap plans are basically identical within each type.  Further, since Medicap is a reinsurer–Medicare provides primary coverage–medical care quality is identical across plans.  

Because of this homogeneity, one would expect to see small variations in Medigap plan prices.  Maestas, Schroeder and Goldman, however, find significant price variation persists.  One reason for this price variation is high search costs.  Average search costs in the Medigap market are $72.  Further, the authors conclude that:

“…the extensive (and perhaps overwhelming) array of unique options available, the elevated incidence of cognitive limitations among older individuals, and the high costs associated with fixing ‘wrong’ choices, all lead to a setting in which ‘choice overload’ is likely to prevail.  To compensate, individuals turn to others whom they perceive to be experts:  insurance agents.  As we show, agents sell the vast majority of policies in the market but do not necessarily steer buyers to the best policies.”

• Maestas, Schroeder and Goldman (2009) “Price Variation in Markets with Homogenous Goods: The Case of Medigap,” NBER WP #14679.

Joe Paduda of Managed Care Matters has a two great posts on Medicare’s new payment structure.  

The first post reports how exactly Medicare is changing its reimbursement for medical services.  ”It looks like reimbursement for cognitive services – the 99xxx codes for readers expert in CPT-4s…office visits and similar services for others – will be increased while payments for surgeries, imaging, and other ‘procedures’ will be reduced.”

The question remains, will these changes stick?  For years, policy experts have advised CMS to increase primary care compensation and decrease specialist compensation.  However, specialists are a smaller, more cohesive group.  This facilitates the formation of compelling lobbies for specialists.  Mr. Paduda accurately predicts that these Medicare reimbursement changes will create a “loud, violent, and ugly” political backlash from specialists.

In the second post, Mr. Paduda reveals some insight as to how Medicare reimbursement changes will affect Medical care contracting in the short- and long-term.

Transportation issues can create significant barriers to accessing quality health care.  If you do not have a car, physically cannot drive, or do not have public transportation where you live, getting to the doctor’s office can be difficult.  Although the federal government mandates that state Medicaid programs provide nonemergency medical transportation services to vulnerable populations, providing this service has been costly and inefficient. 

Kim, Norton and Stearns (2009) examine 2 of the 21 states who have begun using transportation brokerage services to cut down on costs and improve quality.  The authors use a difference-in-difference estimation technique, identified through difference in the timing of the transportation brokerage implementation in Georgia and Kentucky.  The authors find the following results after the implementation of transportation brokerage services:

For asthmatic children and diabetic adults, “the increased use of any health care services accompanied with decreased expenditures conditional on any use led to a decrease in total expenditures by $18 per person per month. Compared with average monthly total health care expenditures by study populations, these results imply a 13 percent decrease in total health care expenditures for children with asthma and 4 percent decrease for adults with diabetes.”

Transportation brokerage services increased the probability patients would use outpatient care, but decreased the probability that they would be so sick that they had to be hospitalized. Although these findings are only for two subpopulations, transportation brokerage services may be an attractive means to reduce hospitalizations and health care costs.

• Kim, Norton and Stearns (2009) ”Transportation Brokerage Services and Medicaid Beneficiaries’ Access to Care,” Health Services Research, v44(1):145-161.

What percentage of your prescription drug costs should your insurance company cover?  You may say “100%, of course!”  However, if health insurance cover all pharmaceutical costs this will drive up premiums.  

One solution to this problem is reference pricing.  If generics are available for $10 and name brand drugs are available for $100, the insurance company only covers $10 for drugs in this category.  Why would anyone want a $100 drug when a $10 one is available?  The Health Care Blog gives 4 reasons why physicians don’t prescribe more generics:

1. Many drugs are better known by their often simpler brand names and so physicians routinely write the brand name on the prescription, even if they do not mean that the brand has to be filled.
2. Physicians do not have any idea what drugs actually cost their patients, because we are “too busy” and because prescription drug pricing transparency might wake us up.
3. Some physicians believe, against the evidence in double-blind trials, that generics are inferior or less pure than the brand name version.
4. Some patients are convinced, also against the evidence in double-blind trials, that they do better with the brand than with the generic version and request that their physician specify the brand.

Yet the Wall Street Journal reports that CMS may ban reference pricing.  Authors Dr. Rick Peters and Dr. Karl Luber claim that reference pricing does much good and should not be banned.

I tend to agree with them.  If low cost, safe generics are available, then insurance should only cover the cost of generics.  This will lower costs and convince more people to take generics.  

There is a down-side to reference pricing, however.  By giving less money to the pharmaceutical companies who manufacture the name brand drugs, this may stifle innovation of these drugs in the long run.  However, incentives to innovate could be generated through extending patent lengths or giving prizes to pharmaceutical companies who develop new drugs.  

Reference pricing is a fair way to steer patients and physicians towards more cost-effective use of pharmaceuticals.

Wisconsin’s Medicaid plan covers children from 0-5 years old whose parents have income below 150% of the poverty line.  Sixty percent of Massachusetts residence receive coverage through their employer compared to 53% nationwide.  Forty-six percent of Californian firms with less than 50 employees offer health insurance compared to the national average of 43%.

How did I know these facts?  Am I a genius?

No, I used the State Coverage Initiatives website provided by the Robert Wood Johnson Foundation.  The website has a nice summary of each state’s SCHIP, Medicaid eligibility rules and well as graphs showing where individuals do (or don’t) receive insurance coverage.

• State Coverage Initiatives: statecoverage.org.

For many illnesses, Medicare pays physicians a lump sum for the entire episode of care.  This is known at the prospect payment system (PPS).  But how does Medicare determine the payment amount?  How should Medicare determine the payment amount?

Medicare generally looks at 1) what treatments are generally used on average to treat a patient with this disease, 2) what treatments are used to treat patients with disease of varying severity, and 3) how much does each type of treatment cost.  Then they add up the costs and give the docs one lump sum payment.

The difficult part is determining the treatments that should be used.

Dennis Cotter writes in the Health Affairs blog about Medicare’s reimbursement decisions regarding the PPS for end-stage renal disease (ESRD).  Cotter found that Medicare is much more likely to use historical, patient utilization data to determine the treatments included in the PPS rather than the treatments that should be used.  Cotter talks about the case of  erythropoiesis-stimulating agents (ESAs), a drug used to treat ESRD.  ESAs are billable separately from the PPS, giving docs an incentive to use higher quantities of ESAs.  n fact, “Large for-profit chain facilities used larger dose adjustments and targeted higher hematocrit levels compared to smaller nonprofit units.” 

How does Medicare determine how much of these separately billable ESA prescriptions is allowable?Historical data is often used because it is the status quo.  Using the status quo doesn’t upset pharmaceutical companies or compel docs to change their practice patterns.  However, using the status quo may mean wasting significant amounts of health care dollars.  Currently, ESA spending costs Medicare $2.5 billion.  If Medicare only reimbursed physicians for using the correct amount ESAs–rather than the historical amounts–the $2.5 billion could be reduced by 53%.

Medicare was implemented in 1965 to cover the medical costs of the oldest members in society.  In 1965,  the U.S. life expectancy was only 70 years old.  Now, however, life expectancy at birth is over 78 years.  Medicare is now not just covering the oldest of the old, it also covers the “moderately” old since we are living so much longer.

An NBER working paper by  John B. Shoven, Gopi Shah Goda examines what eligibility ages for programs such as Medicare and Social Security would be today and in 2050 if adjustments for mortality improvement were taken into account.  The authors conclude the following:

“We find that historical adjustment of eligibility ages for age inflation would have increased ages of eligibility by approximately 0.15 years annually. Failure to adjust for mortality improvement implies the percent of the population eligible to receive full Social Security benefits and Medicare will increase substantially relative to the share eligible under a policy of age adjustment.”

• John B. Shoven, Gopi Shah Goda (2008) “Adjusting Government Policies for Age Inflation” NBER WP #14231.

Recently, the San Diego Union Tribune reported that the Sharp Grossmont Hospital in eastern San Diego county was cited for a number of preventable deaths. Reporter Cherl Clark found numerous problems, which included:

“staff members restraining a highly medicated, 25-year-old man with schizophrenia in such a way that he was allowed to suffocate. In addition, hospital workers caused the death of an 83-year-old woman who had undergone a hysterectomy by injecting a dangerous anti-narcotic into her bloodstream. Other problems included nurses who did not know or use proper CPR, an unsanitary operating-room mattress held together by tape and glue, unsafe storage and handling of food and kitchen equipment, and use of critical medications such as heparin that had expired up to a year earlier.”

CMS is threatening Sharp Grossmont that it could lose all federal money (i.e., Medicare and Medicaid). Since 50% of Sharp Grossmont’s business comes from Medicare and Medicaid patient, this would be a disaster for the hospital. What should we do with underpreforming hospitals?

In regular markets, when a product has lower quality, people stop buying that product and switch to another one. For instance, if GM stops making high quality cars, people switch to Toyota. The market compels companies to offer a desirable bundle of quality and price or else they will lose business. Because markets are so effective at maintaining high quality, withholding Medicare and Medicaid payments from Sharp Grossmont makes sense, right?

Maybe not in this case. First of all, some hospitals may not be in a competitive market. While urban hospitals must compete with other, nearby hospitals, Sharp Grossmont is supposed to provide medical care for the entire Grossmont Healthcare District, which covers 750 square miles in San Diego’s more suburban and rural East County. This area has more than 652,000 residents and Sharp Grossmont has the busiest emergency department in San Diego County. By reducing funding, individuals who have emergencies will receive even worse care than before.

This is similar to the no child life behind program. Low preforming schools lose money. But these are exactly the schools that need more money to survive. If students had the freedom to switch schools, then penalizing a failing school would make perfect sense since the students could opt for higher quality schools. The failure of low quality schools would not be a problem if students had other schools available for them to choose to attend. If individuals do not have any choice of which school they attend, however, withholding funding from schools or hospitals can make low quality schools worse.

Will Sharp Grossmont be decertified? The CMS threat to withhold funding is likely just a bluff.

“Among the 450 hospitals in [CMS certification officer Steven] Chickering’s jurisdiction of Hawaii, California, Nevada and Arizona, 10 to 12 a year have as many major lapses, he said. Ninety-nine percent of those facilities resolve their crises and keep their federal payments, Chickering said.”

The federal government knows that removing funding from the only emergency room in a 750 square mile area is not politically feasible. Although individuals may not have much choice of a hospital in an emergency situation, in non-emergency situations patients can decide to drive longer distances to visit physicians at more competent hospitals. If CMS payments are proportional to patient volume, then Sharp Grossmont may take a financial hit due to this lower patient volume without having the hospital decertified.

Decertification is likely not the answer, but having such serious quality lapses reflects poorly on the state of health care in San Diego, and in the U.S. in general.

• Additional information on Sharp Grossmont’s predicament can be found at KPBS’s the Editors Roundtable.

The U.S. is in a huge amount of debt. This will only worsen in the short- to medium-term as the the baby boomers retire and Medicare and Social Security budgets balloon. Here’s a movie about it.

• “This country has started consuming more than it produces.” – Warren Buffet

The controversy as to how much Medicare should pay doctors is continuing to brew (see N.Y. Times article).  Congress passed a law overriding a pay cut to Medicare doctors.  Although the president vetoed the bill, Congress garnered enough support to override the veto.

Dr. Rich of The Covert Rationing Blog claims that the Medicare reimbursement mechanism “is so fundamentally ridiculous that it can only be understood by recognizing that it is a fairly typical bureaucratic attempt to covertly ration healthcare.”

How would you enjoy having legislators determine your salary?

As I noted in an earlier post, choosing a Medicare part D plan is difficult.  However, there are resources to help people choose a Medicare Part D plan based on which prescriptions they are taking and where they live.  Medicare has its own Personalized Plan Search.  The private sector also has come up with user-friendly ways to search for the best health care plans.  MedicareSaver has an easy-to-use plan selector which also includes a video guiding you along the site.

With Health 2.0 gaining strength, choosing a health insurance is not as difficult as it once was.

According to an article on TheHill.com, Medicare denies more claims than commercial insurers.

“Medicare was the most likely to deny any part of a claim, with a 6.9 percent rate. Aetna was a close second at 6.8 percent while the others ranged from 2.7 percent to 4.6 percent.

Coventry Health had the fastest median turnaround between receiving a claim and responding, at four days, according to the AMA. Medicare and CIGNA took a median 14 days; Humana and Aetna, 13 days; Health Net, 11; United Healthcare, 10 and Anthem, seven.”

Why is this? It could be the case that commercial health insurers have more efficient claims processing centers. While economists generally believe that the private sector is more efficient, in the case of health insurance claims firms make more money when they deny more claims. Thus, I am not sure that the profit motive is leading to more private-sector claims approvals.

Competition between insurers may increase claims approvals. Most physicians and hospitals must take Medicare because it represents so large a share of the helathcare spending. On the other hand, physicians may only accept patients whose insurance companies have prompt payment with fewer denials. This leads to some incentive for insurance companies to decrease claims denials.

Another reason for the differential claims denial rates is the demographics of Medicare and commercial insurance enrollees. Almost all Medicare enrollees are over 65, while commercial insurers have enrollees who are of varying ages. Since older individuals are more likely to demand high cost medical procedures, if high cost medical procedures are the ones that are more likely to be denied then Medicare’s higher denial rate may simply be due to the composition of its enrollees.

Whatever the reason, the fact that Medicare denies more claims than commercial insurers should dispel the myth that the government is simply a benevolent entity, while commercial insurers are ruthless, profit-hungry wolves. The truth–as always–lies not in the black nor the white but in the gray.

According to a report by the The Colorado Health Institute, 68 percent of rural and 74 percent of urban dentists do not accept Medicaid patients.  Even for those dentists who do accept Medicaid, many are not accepting new Medicaid patients.  The full report is available here.

What is Medicare Part D?

Medicare Part D began in 2006 and provides insurance coverage for pharmaceuticals for the elderly. The program is set up so that the government does not purchase the drugs directly, but subsidizes private prescription drug plans, which then negotiate prices with the pharmaceutical companies. There are two types of Part D plans. The first are prescription drug plans (PDP) which only cover drugs. Medicare Advantage plans (MA-PD) are comprehensive, managed care insurance plans which also include insurance coverage for pharmaceuticals.

Typical Part D coverage includes a $250 deductible, with 75% coverage for the first $2000 (after the deductible). Part D defers 0% of the cost of drugs between $2000 and $3599–the “donut hole”–and then once annual spending reaches $3600, Part D pays only 95% of the costs.

The government subsidies these PDP and MA-PD plans based on a bidding process. A national average bid is calculated and multiplied by some constant percentage (it was 34% in 2007) to determine what premium the enrollees will pay. The 66% subsidy is distributed to the plans as a lump sum, so that if plans offer higher or lower premiums, the enrollee incurs the full cost (benefit) for higher (lower) premiums.

To reduce the possibility of crowd-out, CMS subsidies firms that provide prescription drug coverage to their retirees.

What does economic theory predict about Medicare Part D’s influence on prices?

Many economists would at first glance believe that this would lead to an increase in prices. Consumers should be have less elastic demand since they will only be paying for a fraction of the drug cost if they have Part D insurance. An NBER working paper by Duggan and Morton (2008) believe that this will not be the case. First, PDPs and MA-PD have large customer bases and can negotiate bulk discounts. Individuals do not have the buying power to negotiate these discounts. Further, drug companies often use formularies which advise patients as to alternative drugs (e.g., generics) which are cheaper. Physicians advice patients as to the most medically effective drug, but not the most cost effective treatment. Thus, insurance company formularies can make patient cross price demand elasticities for drugs more elastic since they are more aware of comparable drug substitutes.

Further, the production of pharmaceuticals is one with extremely high fixed costs (e.g., R&D, advertising) and very low, relatively flat marginal costs. Thus, prescription drug insurance will likely increase pharmaceutical utilization, which will decrease average costs.

Medicare Part D’s impact on Price

Duggan and Morton find the Medicare Part D decreased average overall price by 12%. Patients of course pay even less than this 12% figure, because insurance pays for a portion of the drug costs. Thus, for patients moving from cash payment to Medicare Part D, net drugs prices for them decreased 24%.

This decrease, however, could have reflected an overall decrease in drug costs and may be unrelated to Part D insurance. To test this, Duggan and Morton examine the prices of drugs in “protected” therapeutic classes. The government mandate that insurance companies must cover all drugs for treatment categories such HIV, anti-cancer, immunosuppressant, etc. Because the Part D plans are mandated to cover all drugs in the category, plans cannot 1) use their buying power to negotiate lower prices since producers know that the drug must be covered and 2) use formularies to direct enrollees to less expensive alternatives since all drugs must be covered. Thus, the authors predict that for drugs in these protected classes, their should be no price decrease. This is exactly what the authors find.

“The results…suggest that drug prices offered by Medicare part D plans grew with others in those therapeutic categories where their ability to move market share was most limited. This provides some support for our model…which predicted smaller price declines (or larger price increases) for those treatments without good substitutes.”

• Duggan, Mark; Morton, Fiona Scott; 2008. “The Effect of Medicare Part D on Pharmaceutical Prices and Utilization“, NBER WP #13917.

Throughout its history, Medicaid provided health insurance for the nation’s poor. It did this by reimbursing providers on a fee-for-service basis. In the 1990s, however, California and other states decided to let private insurance companies bid for the right to provide services for Medicaid patients. These HMOs would receive a fixed per patient per month payment and the private insurer would be responsible for providing health care to Medicaid enrollees.

HMOs may be more efficient than the government since 1) they have an incentive to keep enrollees healthy to save cost, 2) they can negotiate lower input prices, and 3) competition may lead to higher quality, lower priced medical care. On the other hand, keeping the government run fee-for-service program may have been more efficient if 1) the government’s size and negotiating power could decrease input costs, 2) there may be increasing returns to scale, 3) the HMOs may include significant markups in their bids, and 4) HMOs may offer medical services which do not appeal to unhealthy enrollees (i.e., adverse selection).

A paper by Mark Duggan in the Journal of Public Economics in 2004 aims to see if contracting out Medicaid health care provision to private HMOs decreased costs. Duggan uses the fact that California enacted a mandate that all AFDC Medicaid enrollees must switch to a private HMO. For other individuals, such as those on SSI and those who were disabled, deaf or blind, the switch to the HMO was voluntary. This mandate was enacted between January 1993 and December 1999 depending on the county. The author uses variation in the county enactment date to find the effect of Medicaid HMOs on cost.

Background

The manner in which California instituted the transitioned individuals into private managed care plans can be categorized into 3 groupings:

1. Geographic Managed Care. “the state government contracts with several commercial HMOs to coordinate care for Medicaid recipients. Plans initially applied by submitting a menu of prices at which they would be willing to insure each type of Medicaid recipient. The government then awarded contracts to the plans most likely to deliver high quality medical care at a low price, though the weight placed on quality and spending was not specified.”
2. County Organized Health System (COHS). “Under this model, the not-for-profit, community-based HMO was reimbursed a fixed amount per recipient-month that varied by eligibility category.” Individuals did not have any plan choice and the state did not allow bids from for-profit firms.
3. “Two plan” counties. In these counties, the Medicaid enrollees would be able to choose between one private, commercial plan and one not-for profit plan. “…the state solicited bids from private companies and awarded a contract to just one of the plans.”

The following chart gives the type and date of managed care mandate by county.

Methods

Duggan uses the following equations to estimate spending.

• ManCare_jkt = α₁ + γ₁Mandate_kt + μ₁X_jkt + θ_1j + λ_1t + t*ρ_1k + ε_1jkt
• Spending_jkt = α₂ + γ₂Mandate_kt + μ₂X_jkt + θ_2j + λ_2t + t*ρ_2k + ε_2jkt

Subscripts j, k, and t index individuals, counties, and years respectively. The variable Mandate is equal to the fraction of individual j’s Medicaid eligible months in which a mandate was in effect. ManCare is equal to the fraction of the j’s eligible months in which he is actually enrolled in an HMO. Spending is equal to the Medicaid spending for person j at time t.

Results

Duggan finds that the managed care mandate increased Medicaid spending. Medicaid spending increased by between 17% and 23% for counties in which the mandate came into effect. These results, however, were less pronounced where there was competitive bidding between insurance companies (i.e., the Geographic Managed Care and “Two plan” counties).

Also, despite the increased spending, the author finds no evidence of increased quality in terms of better infant birth outcomes.

• Duggan, Mark (2004) “Does contracting out increase the efficiency of government programs? Evidence from Medicaid HMOs” Journal of Public Economics, v 88(12): 2549-2572/

Consumers are starting to pay a larger share for high priced drugs.  According to the N.Y. Times (“Co-payments“), insurance companies “…are charging patients a percentage of the cost of certain high-priced drugs, usually 20 to 33 percent, which can amount to thousands of dollars a month.”  Medicare’s drug plans have introduced new fee schedules where patients pay larger copayments for Tier 4 and Tier 5 drugs.  Private insurers now followed Medicare’s lead.

Should consumers bear a larger burden of their health care costs?  On the one hand, moving towards more out-of-pocket costs will reduce premiums.  Further, higher co-payments will reduce moral hazard (i.e., the use of unnecessary medical care simply because insurance pays for it).  Also, this moves us closer toward insurance as a policy to insure people against catastrophic risk and not as a mechanism to pay for all medical care.

Still, health economist James Robinson from UC-Berkeley states that “It is very unfortunate social policy.  The more the sick person pays, the less the healthy person pays.”

David Whelan chronicles the rise (and possibly future fall) of Medicare Advantage programs in his article “Unfilled Prescription” in Forbes.

Earlier laws privatizing Medicare, starting with a pilot program in 1985, were written to give insurance companies only 95% of the money otherwise spent per Medicare member. The insurers were supposed to figure out how to make up the difference. It was a blunt way to save the Treasury money, but few companies stepped up…

The 2003 law hiked the payments to lure more insurers into the market. In some counties minimum payments to these plans reached as much as 128% of the amount Medicare traditionally spends per patient. Insurers rushed in, and costs soared. In the most remunerative counties, two times as many old people are enrolled in Medicare Advantage as the national average. As a result, taxpayers now pay an average of 12% more per private-plan beneficiary, not 5% less.

Whenever we talk about cost we also need to talk about quality.  Are people who opt for Medicare Advantage plans getting higher quality care than in traditional Medicare?  Are they able to see doctors in a more timely manner?  Is care more coordinated?  If this is the case, then the extra costs may be worth the money.

Nevertheless, an economist would guess that Medicare Advantage plans should be cheaper.  Even though the private plans have higher administration and advertising costs, they likely are more efficient than the government plans.  Further, one would anticipate that healthier seniors would choose the Medicare Advantage plans and sicker senior would be more likely to choose traditional Medicare.  This selection problem should make Medicare Advantage cheaper.

I agree that the federal government should not pay more money for private plans than it does for traditional Medicare.  It should reimburse the plans the same (or less if there is adverse selection) as it costs for the government to administer traditional Medicare and if firms want to increase the price, than seniors can pay the difference.  If seniors do not want to pay the difference, they can always opt for traditional Medicare.

Medicare is inefficient and expensive. Medicare has been expanded through Medicare Part D, which covers prescription drugs. Can expanding an inefficient, expensive system be a good thing? Gary Becker argues yes.

Since drugs have high fixed research costs but low marginal costs, having the government pay for drugs can increase innovation. In fact, a working paper by Blume-Kohout and Sood (2008) finds that “…the passage of Medicare Part D was associated with significant increases in pharmaceutical R&D, especially for classes with high elderly market share.” Further, the fact that there are high fixed costs and low marginal cost means that passing Medicare Part D will likely reduce the average cost of drugs. According to Becker:

This property of the cost of producing drugs has two extremely important implications for Medicare costs. The first is that drugs are an efficient way to treat diseases and disorders that hit a large number of men and women since then the fixed costs can be spread over a larger number of users. This makes them particularly valuable to the elderly who are a growing share of the population in the United States and all other developed countries, and in many developing countries as well, including China…

Drugs are also valuable in inefficient delivery systems that have trouble choking off medical treatments that would not pass a benefit-cost calculation. This would characterize systems with highly subsidized medical care, with excessively low deductibles, or with rules that cannot deny treatments to the very elderly and those close to dying who would benefit only a little from receiving treatment. Surgery, hospitalization, and close physician supervision are expensive ways to treat seniors who do not benefit much from this care since the cost of these procedures tend to rise in proportion to the number treated. On the other hand, while treating seniors with drugs sometimes also may not add much in the way of benefits, the additional cost per user would be much smaller than the average cost per user.

Medicare Part D may increase efficiency in the “second-best” world in which we live today.

A recent article in the Journal of Health Economics found that increasing Medicare reimbursement may have no meaningful effect on hospital use or patient outcomes.

“There is widespread concern about the quality of health care in the US, and the effect of provider payments on the quality of care is an important and unsettled issue in this debate. The critical question is whether changes in provider payments affect health. To date there is relatively little research on this question. Here, we present evidence of the effect of plausibly exogenous changes in Medicare reimbursement – caused by geographical reclassification – on hospital staffing (nurses) and patient outcomes. We find that changes in Medicare reimbursement levels of approximately 10% have no meaningful effect on hospital use of resources or patient outcomes.“ 

• R Kaestner, J Guardado, 2008. “Medicare reimbursement, nurse staffing, and patient outcomes” Journal of Health Economics, 27(2): 339-361.

The [Medicare Hospital Insurance Trust] fund also continues to fail our long-range test of close actuarial balance by a wide margin. The projected date of HI Trust Fund exhaustion is 2019, the same as in last year’s report, when dedicated revenues would be sufficient to pay only 78 percent of HI costs. Projected HI dedicated revenues fall short of outlays in this and all future years. ”

Who is this scare-mongering quotation from?  Rush Limbaugh?  Conservative think tanks?  Fox News?

Actually, this message is from the Social Security and Medicare Boards of Trustees 2008 Annual Report.  Currently, Medicare accounts for 3.2% of GDP.  The authors of the report project that by by 2028, Medicare expenditures will surpass Social Security expenditures.  By 2082, Medicare expenditures will account for 10.8% of GDP!

What is to be done?  We can increase taxes to levels that in the long run would cripple the economy.  We could cut the number of people receiving Medicare benefits.  For instance, we could increase the age at which people are eligible for Medicare or limit Medicare benefits to only certain groups (e.g.: the poor, those who are eligible for Social Security benefits, etc.).  The government could reduce the generosity of the plans by either shifting more costs to patients (i.e.: increasing co-pays and deductibles), or reduce the generosity of the benefit package (i.e.: rationing).  Or we could scrap Medicare all together and start over (e.g.: a voucher program, no elderly health insurance, mandatory savings for the purchase of health insurance later in life).

All of these ways to solve the Medicare crisis have pros and cons and those adversely affected by any change are likely to vehemently protest any reform.  Nevertheless, Medicare as it currently is structured is not a fiscally sustainable program.

Merrill Goozer reports (“CMS okays heart scan…“) on how Center for Medicare and Medicaid Services (CMS) has reversed a policy to stop paying for heart scans.  There has been no clinical evidence to show that these expensive heart scans identify heart disease any better than less expensive procedures (i.e.: stress tests).

Physician revenue, however, would be hurt by this decision and after extensive lobbying, CMS has decided that paying for heart scans may be a good decision after all.  In the words of Merrill Goozer: “Pay first, evidence later. It’s the American way.”

Michael Cannon reports (“Pennsylvania Proposes to Defraud Non-Pennsylvanians“) that Pennsylvania is manipulating the Medicaid system.  Pennsylvania is increasing Medicaid payments to hospitals (thus increasing the amount of federal matching funds) with one hand, but with the other is creating a tax on “profits of general hospitals in two counties, Allegheny [Pittsburgh] and Philadelphia.”

Thus, the hospitals will be left with the same profit level–higher Medicaid payments will be eaten away by the special tax levy–however, Pennsylvania will have to pay a lower percentage of the cost because of the additional matching funds.  Who is hurt?  Only the taxpayers in those other 49 states.

Mr. Cannon analyzes the situation more acerbically: “…the federal Medicaid program allows Pennsylvania to siphon money away from other states.  That sound you hear is your pocket being picked.”

The Wall Street Journal has an interesting article (“Markets and Medicare“) by John Goodman, President of the National Center for Policy Analysis. The article has some innovative suggestions regarding how to improve the health care system.

Medicare should allow alternative payment mechanisms, such as compensating doctors for e-mail and telephone communication with the patient (I completely agree with this). Geisinger Health System “…offers a 90-day warranty on heart surgery, similar to the type of warranties found in consumer product markets. If the patient returns with complications in that period, Geisinger promises to attend to it without sending the patient or the insurer another bill.” While this may seem like a good idea, if someone falls sick within 90 days, it may not always be possible to attribute the complication direction to the heart surgery. It may be due other co-morbidities and how seriously the health system takes this guarantee is unknown.

Virginia Mason Medical Center in Seattle will not give patients MRIs for back pain without first seeing a physical therapist. This is entirely sensible and will greatly cut costs without affecting the quality of patient care.

It is interesting that Goodman advocates the “resticted MRI use” since the NCPA says that “The NCPA’s goal is to develop and promote private alternatives to government regulation and control, solving problems by relying on the strength of the competitive, entrepreneurial private sector.” Reducing the number of MRIs run is certainly the optimal solution from a systems point of view, but reducing MRI use smells like rationing. Physicians have no incentive to decrease the number of MRIs taken–unless the insurers refuse to pay for them–since the patients demand them and many physicians are owners of the MRI care centers to which they refer patients.

What we all must realize is that all good are rationed. They are either rationed through a price mechanism, through queues or through by insurance company or government mandates.

The USA Today reports on the development of a shingles vaccine. According to the article, “The vaccine reduced shingles cases by 51% in people given the vaccine vs. those given the placebo. Vaccination reduced the burden of illness, a measure of pain and discomfort, by 61%.”

So why aren’t people getting this vaccine? One reason is how the vaccine is paid for. The vaccine, priced around $150 by the manufacturer, is covered by the part of Medicare that pays for prescriptions, not doctor visits. That means doctors are not automatically paid for shots given in their offices. Some send patients to pharmacies to get the shots or pick up prescription vials, adding steps that may reduce use, Oxman says. Others stock and give the vaccine, but require patients to pay upfront and seek their own reimbursement.

There is a law which states that drug companies must sell drugs to Medicaid at their the lowest price.  It turns out the Merck was selling drugs to hospitals at a steeper discount than what they were giving to Medicaid.  Merck will pay $399 million for overcharging in Philadelphia and $250 million for overcharging in Louisiana.

According to the New York Times (“$671 million“):

“Merck…was hiding the steep discounts it gave to hospitals by reporting higher prices to the government, prosecutors said.

From 1997 to 2001, Merck also gave money and perks to doctors and other health care professionals to entice them to prescribe Merck drugs, a practice the government called excessive.“

It’s decision time for Medicare Part D purchasers. Seniors have until December 31st to make their Part D choice and this decision is not a painless one.

The Marketplace Money radio program recently reported (‘Deciphering Part D‘) that “the most popular policies have increased their prices substantially, especially Humana and United Healthcare, the ones that most of the people are in. Some of the policies’ prices have even doubled. So even though the average prices have only increased by about 14 percent, if you’re in one of the more popular plans, it’s really important to look at what your costs will be next year because you may want to change to a different policy.”

How can some plans double their prices yet still retain customers? Neo-classical economists would say that if the price of insurance at one company would rise, all seniors would switch to the cheaper plan and there would be a competitive equilibrium at the market price. Yet in the presence of switching costs, the insurance companies may be able to raise prices significantly without losing many customers.

Switching costs for Medicare Part D include the time consuming process of selecting from the hundreds of Medicare Part D plans. Children of seniors may also have to aid their parents in selecting a plan. Thus, if the price of my Part D insurance went up 16% while the rest of the plans went up 14%, I may decide to pay the higher price since I do not want to incur the search costs of finding a new Medicare Part D plan.

Companies such as Humana and UnitedHealth knew this would be the case. In the first year of Part D, these companies likely under-priced their insurance plans to attract customers. Once the customers had settled on their policies, they could more easily raise prices.

Despite the market inefficiencies caused by switching costs, this is not a reason to completely abandon a free market system. If the price increases of an individual company get too high, they will eventually outweigh the switching cost and the senior will move to a new plan. Further, information technology advances can help reduce switching costs. For instance, Medicare has a Prescription Drug Plan Finder that helps to estimate the cost of different plans depending on which prescriptions you are taking.

Which Medicare plan should you choose? Health journalist Charles Ornstein of the L.A. Times was making just this choice for his mother in “Puzzling out plan option for Medicare.” Even for a veteran health journalist, the choice is not as easy as it seems.

Below, I will give some background information which will help people like Mr. Ornstein’s mother better understand the choices she is facing.

• Medicare Advantage plan (Part C): “These programs are designed to provide full coverage — replacing traditional Medicare — and include HMOs and preferred provider organizations.” The CHA Medicare Advantage fact sheet states that “In order to join one of these plans, you have to have both Medicare Part A and Part B and you must continue to pay the Part B premiums ($93.50 in 2007). You receive all Medicare-covered benefits through the private plan chosen.” There are 5 types of plans.
  1. Medicare Health Maintenance Organizations (HMOs)
  2. Medicare Preferred Provider Organizations (PPOs)
  3. Medicare Private Fee-for-Service Plans (PFFS)
  4. Medicare Special Needs Plans (SNPs)
  5. Medicare Medical Savings Accounts (MSAs)
• Medigap plan: “Also known as supplemental plans, these cover co-pays and deductibles that patients normally pay under Medicare.” Medigap benefit packages are labeled A through L. Each letter represents a different standardized benefit package mandated by law. According to the CHA Medigap fact sheet, all Medigap plans must offer the following benefits.
  • Co-insurance for hospital days 61-90 ($248/day in 2007) and co-insurance for the 60 lifetime reserve days ($496/day in 2007).
  • 100% of the cost of hospital care beyond 150 days covered by Medicare, up to a maximum of 365 lifetime days.
  • 20% co-insurance for Medicare approved charges after the $131 annual Part B Medicare deductible has been met.
  • The first three pints of blood in each calendar year.
• Medicare Drug Plan (Part D): These are the Medicare prescription drug plans. Standard Part D coverage according to the CHA Medicare Part D fact sheet includes:
  • An initial $265 deductible.
  • Then, Part D covers 75% of the cost of all drugs between $265 and $2400 spent per year.
  • There is a doughnut hole between $2401-$5451 where Medicare Part D offers no coverage.
  • Above $5451, Part D pays 95% of drug costs.
  • After the consumer has spent $3850 in out of pocket costs, Part D will cover all drug costs.

There are so many options, what is a person to do?

First do some research to help you understand what Medicare will cost and what benefits will be included. The California Health Advocates is a good place to start. For instance, you can learn about Medicare Part A hospital benefits. Some of the benefits included are as follows:

The Medicare.gov website also has some tools to help you choose a plan. The Medicare Personalized Plan Search seems like a useful tool. Depending on your trust level in the federal government, you may or may not believe that the Plan Search is constructed in an unbiased manner. Since I do not have a Medicare claim number, I could not try out the service.

If you trust your state government more than the feds, you can look at California’s Department of Insurance rate comparison website at www.insurance.ca.gov.

You can also seek more information from one of the Patient Advocacy websites recommended by Dr. Richard Fogoros of GUTHealthcare.

Just like making any big purchase, you need to do some research, shop around, and try to find an unbiased source of information to help you find the ideal plan to meet your individual needs. Good luck!

In 2006, the federal government first began expanding Medicare coverage to include prescription drugs using the Medicare Part D program. According to one report, Part D will cost taxpayers $47 billion in 2007.

Yet it is possible that Medicare Part D could actually save taxpayers money. If prescription drugs and other medical care are substitutes, then increasing funding for lower cost pharmaceuticals could actually save taxpayers money on the more expensive hospital stays (covered by Medicare Part A) and physician visits (covered by Medicare Part B). For instance, it is possible that regularly taking beta blockers may reduce the chance that one needs an expensive heart surgery.

On the other hand, if pharmaceuticals and other medical care are compliments, than increasing Part D funding, could increase the total spending in Medicare Parts A and B. For instance, individuals taking prescriptions drugs may need to go to the doctor more often–covered by Part B–in order to have their pharmaceutical usage monitored.

So how does Medicare Part D affect other Medicare spending?

This is the question Baoping Shang and Dana Goldman investigate in their NBER Working paper “Prescription Drug Coverage and Elderly Medicare Spending.”

Data and Methods

Shang and Goldman use data from the 1992-2000 Medicare Current Beneficiary Survey (MCBS) and compares Medicare spending differentials between individuals who have a Medigap policy with drug coverage and individuals who have a Medigap policy without drug coverage.

Since Medicare spending–like most health care spending–is right skewed with a large mass at zero expenses. The authors use a two-part regression structure. In the first regression, the the authors use a probit regression to determine the probability an individual had any health care spending. In the second regression, Shang and Goldman utilize an OLS (an later an IV) structure to find the impact of Medigap drug coverage on total spending, conditional on the fact that the individual had some spending. Mathematically, the two regressions look as follows:

1. p* = β₀ + β₁*d +β₂₍d*Income) + ε
2. ln(Y|Y>0) = γ₀ + γ₁*d +γ₂(d*Income) + ν

p* is the probability of any spending, d is a dummy variable if the individual has drug benefits, and Y is total Medicare spending.
This econometric structure could lead to incorrect inferences if selection bias were present. In fact, “[c]ompared to those with prescription drug benefits, Medicare beneficiaries without drug benefits tend to be older, less educated, less likely to be in an urban area, and poorer. They are sicker in term of both self-reported overall health and histories of chronic diseases.”
In an attempt to eliminate selection bias, Shang and Goldman employ state reforms in the health insurance markets as instrumental variables. These reforms include the following:

• “Guaranteed issue requires health plans to offer coverage to all individuals, regardless of their health status or claims experience.
• Rate rating includes rating bands, very tight rating bands, and community rating. Rating bands restrict health plans’ use of experience, health status, or duration of coverage in setting premium rates for individuals. Very tight rating bands allow very limited adjustment for experience, health status, and duration. Community rating prohibits health plans’ use of experience, health status, or duration of coverage in setting premium rates for individual coverage.”

For their instrument, Shang and Goldman look at states with 1) both guaranteed issue and rate rating, 2) states with only rate rating, and 3) states with neither. Since MCBS is a panel, the authors employ a discrete factor model to control for three different levels of unobserved heterogeneity directly and allows some correlation of these fixed effect terms with the error terms.

Results

A simple two part model finds that the “prescription drug benefits increase drug spending by $157, reduces Medicare Part A spending by $135, and increases Medicare Part B spending by $31″–a net $104 reduction in Medicare spending. The more complicated structural model using structurally estimating unobserved heterogeneity parameters finds that the drug benefit increases drug spending by $170 (or 22%). However, “prescription drug benefits decrease Medicare Part A spending by $350 or 13%; and prescription drug benefits decrease Medicare Part B spending by $74 or 4% although the estimates are statistically insignificant.”

Healthcare Economist comment

Even for those who oppose government provided health insurance, few would argue with the statement that given Medicare’s existence, it is important to be sure it operates in the most efficient way possible. This paper demonstrates that Medicare Part D may be cost saving. Leaving out prescription drug benefits may lead patients to choose expensive surgeries–which are free to them since they are covered by Medicare –over taking prescription drugs–which are costly without Medicare Part D. The authors sum up their findings in a compelling manner: “…it appears that Medicare beneficiaries may have been overinsured with respect to medical services, and underinsured with respect to prescription drugs.”

Shang, Baoping; Goldman, Dana; (2007) “Prescription Drug Coverage and Elderly Medicare Spending” NBER WP #13358.

“Medicare adopted its [Medicare as a Secondary Payer] MSP policy in 1982, effective January 1, 1983. This legislation states that for individuals working at firms with 20 or more employees, and otherwise eligible for Medicare benefits, Medicare serves as a secondary payer for health care expenses. The employer’s health insurance is the first payer. Because employer-sponsored health plans tend to be more comprehensive than Medicare, these workers are effectively foregoing their Medicare benefits by working. If these same individuals were not working, they would receive Medicare as their primary health insurance.”

A recent NBER working paper (“A Tax on Work for the Elderly: Medicare as a Secondary Payer“) claims that the MSP policy creates an implicit tax for elderly workers and thus creates disincentives to work. The authors calculate that the implicit tax is 15-20 percent at age 65 and increases to 45-70 percent by age 80. Making the Medicare the primary payer (MPP) will have two fiscal impacts. First, the cost of Medicare will increase. Since Medicare will be the primary payer, it will then be paying for more treatments. Secondly, enacting an MPP policy will decrease the implicit tax, increase the income and hours worked of elderly individuals and thus increase income tax receipts. The authors claim that since the second fiscal impact will dominate the first and thus recommend that an MPP system be implemented.

• Gopi Shah Goda, John B. Shoven, Sita Nataraj Slavov (2007) “A Tax on Work for the Elderly: Medicare as a Secondary Payer” NBER WP #13383.

How do market forces affect the safety of children in hospitals? A paper by Smith, et al. (HSR 2007) looks at data from Florida, New York and Wisconsin and they see if Medicaid market concentration affects quality of care for children aged 0-17.  It is important to examine Medicaid’s affect on patient safety since about 40% of all pediatric hospitalizations are charged to Medicaid.  Recent developments have lead to a variety of Medicaid programs.

Since the early 1990s, most states, with increasing flexibility granted by the federal government, have transferred Medicaid-eligible children into managed care programs as a way to improve access to preventive services and to reduce health care expenditures. Between 1991 and 2004, the proportion of Medicaid recipients enrolled in managed care plans increased from under 10 to over 60 percent.

Using data from the State Inpatient Databases (SID) and the Healthcare Cost and Utilization Project (HCUP), the authors calculate the  Herfindahl-Hirschman index (HHI) for both Medicaid-payer and hospital concentration.  The hospital data is adjusted for available technology using the ‘Saidin Index’ and DRG diagnoses are used to adjust for hospital case mix characteristics.

The authors find the following:

At the market level, patients in markets in which Medicaid payers face relatively little competition are more likely to experience a patient safety event (odds ratio [OR]=1.602), while patients in markets in which hospitals face relatively little competition are less likely to experience an adverse event (OR=0.686). At the patient-discharge and hospital levels, Medicaid characteristics are not significantly associated with the incidence of a pediatric patient safety event.

The authors do note, however, that the number of Medicaid markets with high market power is very small and not representative of most Medicaid markets.  Thus, these results may not be very generalizable.

The 2005 Deficit Reduction Act aimed to reduce Medicaid entitlements as one means to reduce the national deficit. One portion of the bill changed eligibility rules for the elderly to qualify for Medicaid payment of nursing home (NH) expenses. In the May edition of the Journal of Health Economics, authors David Grabowski and Jonathan Gruber estimate whether or not restricting (or expanding) Medicaid eligibility rules significantly impact NH utilization.

Who pays for nursing homes?

There are generally 4 institutions which pay for nursing home (NH) care.

1. Medicare. Medicare pays 100% of the first 20 days of NH stays after a hospitalization, and a portion of NH costs between days 21-100 after a hospitalization.
2. Long-term care (LTC) insurance. Private LTC insurance is purchased at younger ages and protects against the risk of needing NH care. LTC insurance is still fairly rare; only about 4% of NH expenditures are paid by private LTC insurance plans.
3. Out of pocket payments.
4. Medicaid. Medicaid will generally pay for NH care if the individual meets certain income and asset requirements. Generally, the individual needs to qualify for Supplemental Security Income (SSI) or be in a state which allows the individual to “spend down” income in order to qualify for Medicaid.

Analysis

The authors seek to see how loosening Medicaid restrictions will impact NH usage. Expanding Medicaid income eligibility requirements, of course, will mechanically make more individuals eligible for Medicaid, but it may also make Medicaid more attractive since one does not need to “spend down” such a large portion of their assets or income. Loosening Medicaid restrictions can also affects supply. Higher Medicaid reimbursement rates will likely increase the percentage of patients who are Medicaid patients (vs. private insurance or out-of-pocket patients), but may also increase the total number of nursing home patients.

Complications

The analysis does have some complications. Certificate-of-need (CON) laws restrict the ability of NH supply to adjust to changes in NH demand. Also, the population affected by changes in eligibility are the middle class; poor individuals (always eligible) and rich individuals (never eligible) are not impacted by marginal changes in eligibility requirements. One also has to worry that Medicaid NH patients receive worse care than private insurance NH patients, but Grabowski et al. (NBER 2006) shows that this is not the case. Finally, the availability of care given by family or friends is not measured in this study and would likely impact NH utilization.

Data and Results

The data used is the National Long-Term Care Survey (NLTCS) from 1982, 1984, 1989, 1994 and 1999. The data have information on individual demographics, health, as well as income and asset levels to determine Medicaid eligibility. The econometric specification uses a probit regression with time, marriage, and state dummies included.

The authors generally find that loosening Medicaid eligibility rules has a limited impact on Medicaid NH usage. Further, the “spend down” rule that many states have adopted also does not significantly affect Medicaid NH utilization. The authors conclude: “we find consistent and clear evidence that nursing home utilization is inelastic with respect to state policies. Thus, the large increase in nursing home expenditures over the past few decades is not likely attributable to increased generosity in state Medicaid payment programs.”

• Grabowski; Gruber (2007) “Moral hazard in nursing home use” JHE, vol 26, issue 3, pp. 560-577.

What exactly is Governor Arnold Schwarzenegger proposing in his health care initiative unveiled early this year? Below I briefly summarize his press release, as to what the reforms will entail and then follow with some of my comments.

Individual Mandate

• All individuals must have a minimum level of insurance.

Children

• Children of families whose income falls below 300% of the Federal Poverty Line (the FPL was $19,350 for a family of 4) are eligible for public health insurance. Those living with families below 100% of the FPL will receive Medi-Cal insurance while those living in families with income between 101-300% of the FPL will receive Healthy Families coverage. All people living in California are eligible regardless of their residency status.
• Parents will be responsible for providing health insurance for children in families with income over 300% of the FPL.

Adults

• Adults with incomes below 100% FPL are eligible for Medi-Cal. Adults with incomes between 100% and 250% FPL are eligible for coverage through a state purchasing pool operated by the Managed Risk Medical Insurance Board. Individual insurance premiums increase as follows:
  • 100-150%: 3% of gross income
  • 151-200%: 4% of gross income
  • 201-250%: 6% of gross income
• Adults above 250% FPL will be responsible for purchasing their own health insurance, either on the private market or through work.
• Poor undocumented immigrants will receive care at the county level, through county clinics, UC hospitals, and safety net clinics.

What do I think of the plan? Expanding care to the poor is a desirable social goal. Giving the poor no choice as to what type of care they will receive, however, is undesirable. If Medi-Cal health insurance is of poor quality, the individual will experience a serious income shock if they attempt to leave Medi-Cal and enroll in private insurance and thus their choice of insurance plans is limited to one. Offering individuals the choice of having Medi-Cal/Healthy Families or receiving an equivalent contribution towards another private/employer-provided insurance plan would go a long ways towards increasing competition in this market.

Also, the plan gives a strong disincentive to work for those families which make near the 300% threshold. If a family of 4 were to earn $55,000, they would be eligible for the Healthy Families program with some premium. If they were to earn $60,000 (which is just above the 2005 FPL for a family of 4) then they would lose the Healthy Families coverage and have to find insurance on their own. The gradually increasing price of the Healthy Families program is a wise policy move, but is not sufficient to eliminate distortions due to non-linearities in the Income-Insurance benefit function.

The individual mandate is an interesting case. Is it right to dictate to families where they should be spending their limited resources? On the other hand, families could elect to go without health insurance and if they did fall ill they would be able to fall back on the government safety net. Thus, I do not hold a strong opinion on individual mandates at this time.

A recent paper in the Health Services Research journal (“Hospice…“) looks at whether hospice care reduces hospitalizations for elderly terminally ill patients in nursing homes. In the introduction, authors Pedro Gozalo and Susan Miller state that there are two main implications which result from end-of-life hospitalizations:

“At the patient level, hospitalizations of frail NH [nursing home] residents have been shown to include hazards that negatively affect the quality of life (Creditor 1993) and, in many cases, are inappropriate (Saliba et al. 2000). At the policy level, hospitalizations represent the main component of total health care costs, particularly during the last few months of life. In an recent study using both Medicare and Medicaid claims for NH decedents in the state of Florida in 1999, Miller et al. (2004) found hospital expenditures to account on average for 78 percent of all expenditures in the last month of life among those patients that did not receive hospice and 33 percent among NH residents who had any hospice in the last 30 days of life.“

The main problem in determining whether or not hospice care reduces hospitalization is the issue of selection. Individuals who enroll in hospice care may be relatively ‘healthier’ than those who are hospitalized without hospice care. Also, it could be the case that hospice patients are ones that prefer less aggressive treatment methods. Local market idiosyncrasies can also lead to erroneous conclusions.

Econometrics

To take these selection issues into account the authors use an inverse-probability-of-treatment weighting (IPTW) [see Robin, Hernán and Brumback (2000) for more on IPTW methodology].

• Let H=1 if an individual enters hospice care and H=0 otherwise;
• let Y=1 if the individual is hospitalized and Y=0 otherwise.
• Also, let P(W)=P(H=1|W) which is the probability of being hospitalized conditional on W.
• W is a vector of both patient characteristics (X) and a set of hospice provider characteristics (Z).

Using the IPTW methodology, the authors regress Y on H and X and each observation is weighted by the following term:

• H/P(W) + (1-H)/[1-P(W)]

In other words, if the individual enters a hospice, they receive a weighting of P(W)^-1, and if the individual does not enter a hospice the observation is weighted by [1-P(W)]^-1. One problem with this method is that it assumes that the vector W adequately models the choice of hospice care and that there is no unobservable sorting into hospice compared to non-hospice care. To reduce the endogeneity of the hospice characteristics (Z), the authors wisely decide to use the characteristics of the hospice nearest to the individual, not the actual hospice chosen.

Results

The authors find that the most important determinants of hospice enrollment are: principal diagnosis of cancer and patient preferences for noncurative care. Further, the paper concludes that nursing homes “that choose to contract with hospices may be less likely to hospitalize their residents, even if [the] hospice was not present.” The authors find that one quarter of the hospice effect on hospitalization is due to patient preferences, but the hospice effect on hospitalization is still strong.

• Gozalo; Miller (2007) “Hospice Enrollment and Evaluation of Its Causal Effect on Hospitalization of Dying Nursing Home Patients” Health Services Research 42:2 (April 2007) pp. 587-610.
• Robin, Hernán and Brumback (2000) “Marginal structural models and causal inference in epidemiology” Epidemiology. Sep;11(5): pp. 550-60.

The RAND health insurance experiment (HIE) demonstrated that increasing coinsurance rates decreases medical care utilization. The HIE also found that health outcomes did not vary between individuals with high, low and zero coinsurance rates.

A working paper by Chandra, Gruber and McKnight (“Patient Cost Sharing…“) re-examines whether or not this is the case using a more current dataset specifically focused on the elderly. The medical utilization data the authors use is for of all CalPERS retirees between January 2000 and September 2003. Almost all of the retirees are covered by Medicare, but since Medicare typically has a 20% coinsurance rate, CalPERS provides supplemental insurance to their retirees. The authors conduct a difference in difference estimation comparing copayment changes from the CalPERS decision to raise PPO copayment rates in February 2001 and then to raise HMO copayment rates beginning in January 2002.
The authors find that physician office visits and prescription drug utilization are very price sensitive. For office visits, the estimated price elasticity is between -1.38 and -1.90 and for pharmaceuticals the price elasticity is between -0.20 and -1.4. These findings are surprising since it is typically assumed that the demand for medical care is inelastic.

The authors also found that increased cost sharing led to a slight increase in hospitalizations. However, when the subpopulation of individuals with chronic health conditions is examined, large increases in hospitalization rates are found. This means that individuals with chronic health conditions forego office visits and drug purchases due to the increase in price, but this decision will worsen their health and thus increase the chance they are hospitalized.

Why would an insurance company want to increase the number of expensive hospitalizations? It turns out that the CalPERS insurance plans pay for the ‘first-dollar’ of office visit and pharmaceutical costs. Thus, by increasing copayments, office visits and drug use decrease. Since Medicare pays for the ‘last dollar’ of medical costs (i.e.: Medicare pays for expensive hospitalizations and surgical procedures), the CalPERS plans do not incur the cost of the increased hospitalizations. To summarize, CalPERS receives the majority of the cost savings from increased copayments whereas Medicare bears the cost of the increased hospitalizations when office visit and pharmaceutical demand decreases.

This papers shows that it is always important to take a more global, more systematic view whenever a researcher is investigating the medical field.

• Candra, Amitabh; Gruber, Jonathan; McKnight, Robin (2007) “Patient Cost-Sharing, Hospitalization Offsets, and the Design of Optimal Health Insurance for the Elderly,” NBER Working Paper #12972.

Do increases in government spending affect health outcomes? While this seems like a simple question, proving whether or not spending impacts outcomes is difficult. There are questions of reverse causality: the governments of countries or regions with more serious health problems ceteris paribus may decide to increase their allocation of health spending; thus one may erroneously conclude that government spending worsens health outcomes. Also, whenever one examines different regions or countries, a researcher must take into account heterogeneity across these geographical units. For instance, observing that Florida has higher Medicare spending and a higher death rate may not imply that government spending increases mortality, but simply that Florida has a higher percentage of elderly patients. Further, raising spending levels may increase the amount of unnecessary procedures preformed, and thus worsen health outcome measures.

Two studies which analyze government spending and health outcomes are papers by Bokhari, Gai, and Gottret (2007) and Byrne et al. (2007), both published in the Health Economics journal. The first paper analyzes cross-country government spending variation and the second looks at regional disparities in Veterans Affairs (VA) spending across U.S. regions.

Bokhari, Gai and Gottret (2007)

To control for the problems above, the Bokhari paper controls for income level (GDP), the level of donor funding, the deviation in donor funding from its historic average, and some infrastructure variables such as literacy levels, miles of roads in the country and measures of access to improved water sources and sanitation. The authors also use an instrumental variables approach to control for endogeneity in income and government health expenditures. The instrument for income is the consumption-investment ratio since the authors claim that it is correlated with GDP per capita, but not with infant mortality (the dependent variable). The authors use the military expenditures of a nation’s neighboring countries as an instrument for the proportion of spending on health. This is a decent instrument–better than using a country’s own military expenditures–but if there was a war it would be likely that another country’s military expenditures would be correlated with infant mortality measures.

While cross-country regressions should always be viewed with some skepticism, the authors do find that increasing government health expenditures decreases infant mortality as well as maternal mortality. According to the authors, “[t]he elasticity of under-five mortality with respect to government expenditures ranges from -0.25 to -0.42 with a mean value of -0.33. For maternal mortality the elasticity ranges from -.042 to -0.52 with a mean value of -.050. For developing countries, [the] results imply that while economic growth is certainly an important contributor to health outcomes, government pending on health is just as important a factor.” In developing countries where many of the top health problems come from contagious diseases, one would expect public health efforts to be particularly effective in reducing mortality rates.

The authors do wisely qualify their claims by stating that increased government health spending in countries with corrupt government can reduce health outcomes. Also, one may worry that increased government health spending may decrease government spending in other areas important to health (e.g.: water works, utilities, network of roads, and education) . For instance, having poor roads may prevent the population from easily accessing care in a hospital or outpatient facility.

Byrne, Pietz, Woodard and Petersen (2007)

The Byrne et al. paper looks at health care funding and risk-adjusted mortality in 22 VA geographical networks over a six year period. The risk-adjustment is accomplished by controlling for Diagnostic Cost Groups (DCG).

The authors conclude the following: “in cross sectional regressions that VA Networks with higher funding have lower risk-adjusted mortality when all male veterans were analyzed. However, when we analyzed a multi-year data set consisting of six years, using a hierarchical linear regression with clustering on Network, funding levels are no longer significantly associated with mortality, but Network was highly significant. This indicates that some characteristics of the Networks themselves are driving this result.” The authors, however, found a positive correlation between spending and poor health outcomes for the sickest patients in the sample. One can not be sure if this is due to increased spending leading to unnecessary procedures or because unobserved sickness levels are correlated with mortality.

Overall, it seems that in developed countries, government health care spending is not strongly correlated with health outcomes. In developing countries, however, government spending has a positive association with health outcomes likely due to public health efforts to control infectious diseases.

• Bokhari, Gai and Gottret (2007) “Government health expenditures and health outcomes” Health Economics, vol 16, pp. 257-273.
• Byrne, Pietz, Woodard, Petersen (2007) “Health care funding levels and patient outcomes: a national study” Health Economics, vol 16, pp. 385-393.

Many analysts believe that medical costs can be contained by having the government run the health care system. The Ludwig von Mises Institute disagrees with this; in fact they believe that while Medicare and Medicaid “…provided a basic welfare program that covers most persons aged 65 and older as well as all needy individuals,” these programs significantly raised the cost of medical care in the United States. The complete article (“Why is medical care so expensive?“) can be found here; an excerpt is below.

“The program [i.e.: Medicare and Medicaid] undoubtedly has saved lives as it has enabled elderly and poor people to receive medical treatment they were not able to afford on their own. It has raised the quality of living for many. But its sponsors completely ignore some undesirable consequences such as the soaring costs and the rising number of people who therefore choose to forego any health insurance coverage. “

Politicians are faced with a serious dilemma in the near future: reauthorize the State Children’s Health Insurance Program (SCHIP) and spend billions of dollars on a single-payer government health program or fail to renew the program and leave many children uninsured and many constituents angry. The Kaiser Family Foundation reports (“Several Lawmakers…“) that the SCHIP will expire on September 30th, 2007, and that currently several Democratic Congressmen are working on competing SCHIP renewal bills. The New York Times reports (“…Helath Care Battle“) that renewing SCHIP for the next five years will cost $50-$60 billion.

While SCHIP enjoys widespread support (its is politically difficult to oppose providing health insurance to uninsured kids), opposition to the program comes from a curious source: the House Black Caucus. The Health Care Policy and Marketplace Review blog says that Caucus members such as Charles Rangel oppose SCHIP because they believe

“all of that money going to cover healthy children should be used for the people who really need it – the ‘55-year-old like me’ who has diabetes or heart failure of mental illness. Medicaid funds are being used to send hundreds of thousands of healthy children of the chronically ill, near-poor diabetics to a doctor — while the actual sick person in the family sits on park bench and can’t afford to go anywhere except the ER or a public hospital, if they can afford the copay.”

Another view comes from the Health Affairs blog. In a recent post, Sarah Dine argues that providing health insurance for children isn’t enough; enabling children to easily access high quality care can be just as or more important. Ms. Dine cites a paper by Julia Lear which posits that health care professionals can often best treat children right in their own schools. The abstract from the paper is quoted below.

“A vast array of child health professionals—99,000 counselors; 56,000 nurses; 30,000 school psychologists; 15,000 social workers; and smaller numbers of dental hygienists, dentists, physicians, and substance abuse counselors—provide care to children and adolescents at school. However, most thought leaders in child health know little about this “hidden” system of care or are skeptical about its capacity to contribute to children’s well-being. Increased interest in prevention and chronic disease management, powered by escalating concern about childhood overweight, might end the isolation of school health programs and link them more effectively to community-based prevention programs and health care services.”

In recent years, the federal government has attempted to increase access to government provided health insurance. Between 1984 and 2004, the percentage of non-elderly individual with government provided health insurance rose from 13.5% to 17.5%. Over the same time period, however, the percentage of American without health insurance also rose from 13.7% to 17.8%.

In their 1996 paper, Cutler and Gruber claim that increasing access to public health insurance plans crowds out private health insurance. It is an important policy question to understand whether expanding public health insurance is reducing the amount of uninsured individuals or simply shifting Americans from private to public insurance rolls. In Cutler and Gruber (QJE 1996), the authors estimate that a 10% increase in Medicaid coverage reduced private health insurance rates by 5%; this represents a 50% crowd out level.

Subsequent studies have argued that this 50% crowd out figure is an overestimate. Card and Shore-Sheppard (2004) use SIPP data (instead of the CPS) and found no crowd out with the 1990 OBRA Medicaid expansion. A paper a year later by Ham and Shore-Sheppard (2005) in Industrial and Labor Relations Review claims that by adding state*year interaction terms to the Cutler Gruber (1996) econometric specification changes the crowd out estimate to zero. Other studies, such as LoSasso and Buchmueller (2004) and Dubay and Keeney, have found crowd out estimates on the magnitude of the Culter/Gruber paper.

To combat these critics, Gruber and Simon have released a 2007 NBER working paper to re-estimate crowd out figures using updated data. The data used are the 1996-2002 SIPP data. Despite the panel nature of the data, Gruber and Simon have decided to treat the data as if it were simply a pooled cross-section, thus losing the ability to fully control for individual or household characteristics. Their econometric estimation technique is as follows:

• INS_ijt = α + ELIG_ijt + ν_j + Ï?_t + ε_ijt

They authors also use an instrumental variables approach similar to the one employed in Currie and Gruber (1996). A random sample of 300 children of each age (and their families) is taken from each year of the SIPP. Eligibility rules for each state are applied to this sample for each of the 12 months of each of the years to calculate the fraction of the national sample eligible (in state j, time t) that is eligible for Medicaid. This effectively weights the rules in each state by their effects if applied nationally. Eligibility is instrumented by this ‘simulated percent eligible‘ variable. The authors also later include state*year interaction terms as well.

Using an individual level of observation, the authors find 20% to 40% crowd out, although the authors can not rule out that these estimates are statistically different from zero. Using family level estimates, crowd out is larger 60% to 80%, and these results are more statistically significant. One problem of using the family level estimates are that families where all household members are eligible for Medicaid of SCHIP and families where none of the household members are eligible for Medicaid are composed of vastly different income levels. SCHIP health insurance is available for all children part of a household with income below 133% of the federal poverty line and some children between 133% and 350% of the federal poverty line depending on the state, whereas adult generally need to be below the poverty line to qualify for Medicaid. Also, I find it unintuitive that the paper finds more crowd-out for individuals with employer-provided health insurance compared to non-group policies. Could these individuals be switching jobs to higher paying jobs without insurance and then taking up Medicaid coverage?

The authors also examine anti-crowd out measures such as mandatory waiting times between when private insurance is dropped and when Medicaid insurance is taken up. Gruber and Simon find that the waiting times are ineffective against preventing crowd out but these estimates are not precise.

• Gruber and Simon (2007) “Crowd-Out Ten Years Later: Have recent public insurance expansions crowded out private health insurance” NBER Working Paper #12858.

In 2005, approximately 114 million visits were made by Americans to the hospital emergency departments. Of these, more than eighty percent concluded with a discharge and a recommendation for follow-up care. Receiving prompt and adequate post-ER care is imperative for the resolution of many illnesses and temporary disabilities. Is timely care available for these patients?

A study by Asplin, et al. (2005) and a subsequent paper by Neath and Carlin (2006) look at how easy it is to schedule an appointment after an ER visit. To collect the data, clinics were phoned by a graduate students posing as patients just released from a hospital emergency department. Callers had four (made-up) medical conditions: pneumonia, elevated blood pressure, vaginal bleeding in the first trimester, and symptoms of depression. The depression observations were excluded from the study because many primary care physicians do not feel qualified to treat depression.

In each call, the individual claimed to have either: 1) private insurance, 2) Medicaid insurance, 3) no insurance and could not pay, or 4) no insurance but would pay for the visit out-of-pocket. A call was deemed successful if an appointment was made within 7 days and the out-of-pocket payment for the appointment was $20 or less.

Results

Asplin, et al. preform a simple paired comparison in which the same clinics are compared where the only difference between the observations is the unit of insurance the phony patient had. Neath and Carlin directly incorporate other covariates – such as the medical condition, safety-net status of the clinic, city dummy variables, etc. The results are similar in both studies, but the table below gives Neath and Carlin’s findings.

We can see that the “overall success probabilities in Asplin et al. were distressingly low.” One also notices that it is much easier to get an appointment if one has private insurance, but these differences are less severe at “safety net” clinics. Finally, the authors note that the majority of clinics made no attempt to determine the severity of the caller’s condition. Having trained staff answering the phone calls and preforming triage is costly, but is likely worth the cost for patients needing immediate assistance. Put more concisely, Asplin states: “Financial screening is trumping medical triage.”

• Asplin, et al. (2005) “Insurance Status and Access to Urgent Ambulatory Care Follow-up Appointments” JAMA, vol 294, pp. 1248-1254.
• Neath and Carlin (2006) “Does Insurance Status Affect Access to ER Follow-up Care?” Chance, vol. 19, pp. 58-60.

In a typical market, an increase in the consumers’ willingness to pay will increase price and increase quantity (see graph).  On the other hand, a decrease in willingness to pay will decrease price and decrease quantity. 

This axiom of economics does not hold in the health care market; at least not according to a 1998 HCFA White paper to Richard Foster.  The paper found that when Medicare decides to reduce its fees, the quantity of medical services supplied by physicians actually increases.  In fact, a Medicare price decrease led to increased medical service volume and intensity by 31% (significant at the 5% level).  A Medicare price increase also increased volume and intensity but the results were not statistically significant. 

Other papers have found similar results:

• Yip (1994) found that after Medicare reduced the price for coronary artery bypass graftings (CABGs) in New York and Washington, there was a large and statistically significant increase in the volume and intensity of CABGs.
• Christensen (1992) looked at the state of Colorado in the 1970s.  He found that a one half of a Medicare price decrease was offset by increased volume of medical services and one third of the price decrease was offset by increased intensity of medical services.
• Nguyen and Derrick (1997) estimated a behavioral response which was statistically significant only among physicians whose practices received a Medicare price reduction.  The magnitude of the response was 40% for these firms.

Why is this occurring?

1. First, patients often do not know what type of care they require so they physicians can suggest treatments which may be unnecessary.
2. Since patients bear little cost of these procedures, their price sensitivity is low relative to the total cost of a procedure.  It is also possible that when Medicare prices decrease, the amount of the coinsurance paid by patients needed to cover a procedure goes down; this demand change may have some influence on the increase in quantity.
3. Uncertainties in the practice of medicine allow for a variety of practice styles, so even peer review or a physician’s behavior may not be appropriate. 

Ever wonder what Newt Gingrich is up to?  You may be surprised to learn that he’s working to change healthcare in the U.S.  Mr. Gingrich has founded the Center for Health Transformation.  On the Consumer Health World Blog, Gingrich proposes dividing Medicaid into 3 different programs.

1. Capabilities Program – This program would help both Americans with disabilities and those with work-related or other injuries lead the fullest possible lives. The program should provide incentives to people with disabilities to be productive, rather than threatening them with a loss in benefits if they get a job.”
2. Program for the Healthy Poor – Poor individuals should be offered vouchers for health savings accounts that sensitize them to the benefits of prevention, wellness and early detection.”
3. Elderly care – Gingrich proposes legislation would create a program to serve the elderly that reintegrates the family back into their care. The current system, for example, prevents a daughter whose mother is in an assisted-living facility from contributing financially to her mother’s care without losing all Medicaid coverage. This either-or mentality is anti-family and leaves the recipient with a lower quality of life.

Jason has insurance and his brother Nosaj does not.  Jason utilizes more medical services than Nosaj.  Is this situation occuring because Jason is truly sicker than Nosaj (adverse selection), or is this because since Jason has insurance, medical services are cheaper for him than Nosaj (moral hazard)?  Disentangling the problems of moral hazard and adverse selection is what Susan Ettner sets out to do in her 1997 JHE paper “Adverse selection and the purchase of Medigap insurance by the elderly.” 

Ettner motivates her paper by dividing individuals into four groups:

• Group A: High propensity to use services; Employer does not offer Medigap coverage
• Group B: Low propensity to use services; Employer does not offer Medigap coverage
• Group C: High propensity to use services; Employer does offer Medigap coverage
• Group D: Low propensity to use services; Employer does offer Medigap coverage

Ettner assumes that groups A, C and D will purchase Medigap and group B will not.  If individuals choose employment based on criteria apart from the quality of the firm’s health plan offerings, then groups C and D combined will accurately represent the population as a whole.  We can calculate the amount of adverse selection by taking the difference between the average utilization of group A versus groups C and D combined.  Moral hazard can be calculated by comparing the average utilization of group B versus groups D; however this not possible since empirically it will be impossible to separate out groups C and D.  Ettner says that comparing group B versus groups C and D combined will lead to an overestimate of moral hazard, but this will still be less biased then an estimator comparing uninsured (B) vs the insured (A, C, and D).

Data and Methodolgy

Ettner uses data from the 1991 Medicare Current Beneficiary Survey (MCBS) and runs a multinomial logit regression comparing individuals with employer Medigap, individual Medigap and Medicaid only policies.  In addition to usual demographic and socio-economic variables, Ettner uses state-level variables such as SSI income standard, a cost-of-living index and the price of the most comprehensive Medigap policy in the state. One problem is that individuals with a high propensity to consume medical services may elect not to choose Medicaid coverage since they know that if they become sick, they can ex post sign up for Medicaid and be covered.

The author proceeds to estimate moral hazard and selection effects on resource use.  The expected value of using a service ‘Y’ can be written:

• E(Y)=P(Y>0)*E(Y|Y>0)

The probability term is estimated using a probit model and the conditional expected value term is estimated using OLS.  In this part of the paper, Ettner enriches the analysis by subdividing the regressions into basic Medigap and enhanced Medigap (eg: those with nursing care and/or prescription drug coverage). 

Results

Ettner finds that overall, adverse selection is not a significant factor in the purchase of Medigap insurance.  There is some evidence of adverse selection (those with cardiovascular or musculoskeletal problems are more likely to purchase Medigap), but there is also evidence of favorable selection (individuals who are smokers or who rate their health to be poorer are less likely to buy Medigap policies). 

Regarding the utilization results, Ettner finds that the enhanced Medigap comparisons showed stronger moral hazard effects than those with basic Medigap policies.  If adverse selection is not controlled for, the paper demonstrates that the moral hazard estimates are biased upwards.

Ettner, Susan; (1997) “Adverse selection and the purchase of Medigap insurance by the elderly” Journal of Health Economics, Vol 16, pp. 543-562.

Why is publicly provided health care so expensive?  One reason is the the fraud which is bound to occur.  The New York Times reports (“Hospital Grew…“) that New Jersey’s largest health care provider–St. Barnabas Health Care System–bilked $630 million from the federal government between 1995 to 2003. 

Medicare pays extra cash to hospitals for the very sick and very expensive patients they call outliers.  In the St. Barnabas case, the fraud occurred when the hospital chain inflated the bills of these outliers.  For those who say that ‘this is just the thing that happens when hospitals only look at the bottom line’ it is interesting to note that St. Barnabas is listed as a non-profit hospital chain.  I wrote in March questioning the validity of tax breaks for non-profit hospitals and this evidence helps to buttress my argument.  Patrick Burns, an analyst at Taxpayers Against Fraud, stated:

“The way the system has operated, it’s almost irresponsible corporate governance for hospitals not to cheat Medicare.”

This is not the only case of Medicare fraud in recent years.  According to the San Francisco Chronicle (“Tenet settles…“), Tenet Healthcare, one of the largest U.S. hospital chains has paid $727 million to settle an overbilling fraud investigation.  Brian Martin, a sociology professor at the University of Wollongong in Australia has a nice summary of how Tenet deceived the federal government.

Yesterday, I reviewed one paper claiming PPS along with competition reduced cost, but these cost reductions occurred mostly for the most expensive (read most sick) patients. Continuing the PPS theme, today we will look at a 1995 article in Econometrica in which David Cutler attempts to measure “The Incidence of Adverse Medical Outcomes under Prospective Payment.” Under PPS, hospitals no longer received any revenue from preforming the marginal service, or equivalently hospitals bear the full cost of marginal treatments. Also, average cost figures for each procedure changed depending on how the DRG was valued. The price a hospital received for a procedure is:

• P_h,d=WGT_d*P_h*(1+IME_h)*(1+DSH_h)

The DRG value of a certain diagnosis ‘d‘ is given by variable ‘WGT‘ which is adjusted by a hospital specific factor ‘P_h‘ which reflects the local wage conditions. Other adjustment factors are the indirect medical education costs (‘IME‘) and a federal subsidy to hospitals which provide a disproportionate share of their services to the poor (‘DSH’ – see Baicker and Staigler post). Cutler hypothesizes that the effect hospitals bearing the cost of marginal treatment will be increased mortality. Also, any decrease in average price for a treatment should result in increased mortality. Cutler also investigates re-admission rates as well.

Using 1981-1988 data from Medicare and Social Security records, first preforms a difference in difference estimate using Massachusetts (which adopted a PPS in 1986) as a control for the federal PPS (which was adopted in 1984). He finds that mortality increased after the PPS was passed and readmission probability also increased. To refine the analysis, Cutler then uses a maximum likelihood estimation on a logistic hazard function to estimate the impact of PPS into 2 components: 1) the effect of eliminating revenue for the marginal treatment and 2) the impact of any changes in average cost for the procedure.

The impact of the elimination of marginal reimbursement led to a 25% decline in mortality, and a mild increase in the readmission probability. On the other hand, a one standard deviation decrease in average payment for a procedure led to an increase in mortality of 0.5%. The average price decrease also led to a lower re-admission rate.

How can we explain these findings? The elimination of marginal reimbursement may have decreased the use of unnecessary procedures. A more likely explanation is that of DRG creep where doctors code mildly sick patients as having severe diseases in order to increase their compensation. The result of DRG creep is that the patient pool in each DRG group is healthier after PPS than before it simply due to these classification changes and not due to any improvements in the medical care received. Since hospitals do not get paid for marginal services, they may wish to readmit their patients in order to double-bill Medicare.

The finding that an increase in average cost of a procedure reduced mortality is intuitive since paying hospitals more money to take care of certain illness will likely lead to better care for those illnesses. Readmissions are less likely as well, since increasing the profitability of a procedure would reduce the probability of a hospital needing to use double billing.

The true value of this paper is performing clever econometric specifications using MLE estimators. A discrete set of mass points [as suggested by Heckman and Singer (1984)] is used to account for unobserved heterogeneity for each individual. As Cutler admits, it is difficult to judge if many of the health impacts of PPS are due to true changes in the level of medical care or simply due to accounting changes such as DRG creep, so one should interpret these findings with caution.

Cutler (1995), “The Incidence of Adverse Medical Outcomes under Prospective Payment,” Econometrica, Vol. 63, No. 1. (Jan., 1995), pp. 29-50.

Prospective Payment Systems (PPS) and competition go hand in hand.  Without competition, a PPS gives hospitals and physicians the incentive to minimize health care outlays.  A competitive fee-for-service (FFS) system-to which most Americans were accustomed to in the 1980s-can lead to severe cost increases due to the problem of moral hazard.  Combining PPS and competition will lead to efficient provision of health care services; at least this is the thesis of a 2002 paper written by Meltzer and Chung (“Effects of Competition under prospective payment on hospital costs among high-and low-cost admissions“). 

Meltzer and Chung look at hospital financial data from the California Office of Statewide Health Promotion and Development before (1983) and after (1993) the Medicare and Medi-Cal PPS was implemented.  In 1983, the authors find that under the FFS regime the higher competition level in an MSA, the higher the price increases.  After the PPS , the authors found that increased competition levels lead to significant decreases in cost.

Meltzer and Chung also hypothesize that these effects would be exacerbated in ‘high cost’ patients.  The authors claim that “declines in hospital cost growth will be concentrated at the top of the spending distribution.”  To motivate this claim, the authors construct the following hospital profit maximization model:

• max D(q)[P-c(s)-c(q)]

Here ‘q‘ is the quality of care which is implicitly a function of the patient’s sickness level ‘s‘.  Since we are dealing with a PPS, the price ‘P‘ is not dependent on quality.  The first order condition (after dividing both sides by c(s) is:

• [P-c(s)-c(q)]=[c'(q)*D(q)]/D’(q)

or rearranging

• [P-c(s)-c(q)]/c(q)=[e_{c,q}]/[e_{D,q}]

where [e_{a,b}] is the elasticity of a with respect to b.  This equation says that the ratio of profit to cost should equal the ratio of the cost and demand elasticities.  Totally differentiating this first order condition shows that dq/ds<0.  This means that quality will decline in a PPS system as the severity of the illness decreases.  The data support this as we see that the cost reductions under PPS are greatest for the groups in the sickest quantiles. 

This paper provides strong suggestive evidence but is not overwhelmingly convincing.  The largest decreases in cost most likely occur in the most expensive patients since they make up the largest portion of hospital expenses.  One would expect any secular trend to show up most in these 'expensive patients.'  Further, hospitals may have reduced inpatient costs for these very sick patients, but may have made up the difference with higher outpatient costs as treatment methods became more flexible in the 1990s.  Further, the hypothesis that more competition leads to faster cost reduction under FFS, may not be robust if there are omitted variables which are not taken into account.  The authors do control for population size and average income in the MSA, but the regression may be improved by using regional or state dummies, as well as a measure of migration to the MSA.

David Meltzer and Jeanette Chung (2002) “Effects of Competition Under Prospective Payment on Hospital Costs Among High- and Low-Cost Admissions: Evidence from California, 1983 and 1993″, Forum for Health Economics & Policy, Forum: Frontiers in Health Policy Research, Volume 5: Article 4.

http://www.bepress.com/fhep/5/4

A common justification for Medicare is that the public health insurance system has an overhead cost which is about 2% of claims, while the private sector has administrative costs between 20%-25% of claims.  This tells us that Medicare is the best system for America…right?

Merrill Mathew’s of the Council for Affordable Health Insurance (CAFI) summarizes the findings of Mark Litow’s paper “Medicare’s Hidden Administrative Costs.”  Litow finds that taking into account extra legal costs from Medicare adjudication and CMS salaries, the administrative cost ratio increases to 5.2%. 

Private Insurance on average has administrative costs of 16.7% (varying between 30% for individual policies to 12.5% for large group policies).  Yet these figures are inflated.  If we exclude taxes and profits, as well as sales commissions, then the total administrative costs decrease to 8.9% overall and 8.0% for large group policies.  I do not agree that commissions should be deducted from this this figure but profits and taxes certainly should.  Medicare does not pay taxes and does not make a profit so any fair comparison should exclude these items.  Further, tax revenue from insurance companies adds to the public’s coffers; profits should be seen as a cost of capital. 

Even with Litow’s manipulation of the numbers, Medicare seems like a better deal.  Let’s see why:

• Economies of scale: There are large economies of scale in the insurance business; however ,large insurance companies can certainly replicate the majority of the scale economies Medicare enjoys.
• Cost of Capital: Medicare incorrectly counts its cost of capital as 0.  The true cost would take into account the direct cost of hiring IRS workers to collect the taxes which pay for Medicare as well as taking into account the distortionary effects of income taxation on workers labor supply decisions.  For the private sector, the costs of capital is transparent: it is simply the interest rate. 
• Demographics: Medicare serves the elderly population and thus has a high cost per enrollee.  In 2003, the average medical cost for Medicare was $6,600 per person per year, while the same figure for private insurance was $2,700.  Thus, if public and private health insurance had the same administrative cost per person, Medicare would still be seen as ‘more efficient’ since Medicare’s administrative cost ratio would be less than half the size of the private insurance’s cost ratio.

Finally, we need to realize that administrative costs are like people: some are good, and some are bad.  What if a private insurance company raised its administrative costs by 1% , but was able to reduce fraudulent claims by 10% and reduce the premium charged to customers by 8%.  This is an example of how an increase in the administrative cost ratio can add value.  It is likely that private companies try to avoid paying for unnecessary medical treatment and are more vigilant to detect fraudulent claims then Medicare. 

The National Governors Association (“Florida Invests $308 Million in New Medicaid Computer System“) reports that Electronic Data Systems (EDS) has won a contract to “develop a new Medicaid computer system beginning March 1, 2008″ for the state of Florida. The system is supposed to help participants navigate Florida’s Medicaid system, file claims, and report fraud. The article does not state whether or not the database will contain patient health information, which would likely be opposed by privacy advocates. An interview with the EDS vice-president of U.S. state and local government businesses hinted that the company was hoping to be a part of the digitization of patient records.

Wisconsin, Rhode Island, Massachusetts, Oregon and Kentucky have already signed multi-year contracts with EDS to implement Medicaid data management services. The deals are for $189m, $73m, $48m, $73m, and $170m respectively.

One of the major reasons for the flurry of activity is the Medicaid IT Architecture (MITA) project, which attempted to give guidelines for database and IT modernization for each state’s Medicaid program.

Medicaid currently covers 55 million poor and disabled Americans; these 55 million individuals have much change to look forward to.  In February of this year, the President signed the Deficit Reduction Act (DRA)of 2005.  According the Kaiser Family Foundation, the act will reduce federal spending on Medicaid by $39 billion between 2006 and 2010, while giving states more freedom to administer their Medicaid as they please.   An article in today’s Washington Post (“States’ changes reshape Medicaid“) gives a variety of examples of how states are implementing the changes.  To generalize, the executive director of the National Governors Association stated that “additional co-pays and small reductions in benefits” will be implemented in order to avoid “pushing hundreds of thousands of women and children off the rolls.”  Specific examples of changes are:

• Kentucky will group Medicaid recipients into 4 categories: the general population, children, the elderly and the disabled, and will vary benefits depending on one’s group.  According to the Louisville Courier-Journal (“Changes…“) many of Kentucky’s 700,000 Medicaid enrollees would be switched to managed care plans.  Some patients would “be charged a $50 copayment to go to the hospital and will be limited to four prescriptions per month.”
• Florida plans to privatize all of Medicaid, allowing patients to choose between a variety of private health plans.  According to the NY Times (“U.S. gives Florida…“) Medicaid would shift from a defined benefit to a defined contribution entitlement where those eligible would receive a fixed risk-adjusted dollar amount to be used towards purchase of health insurance.  Also, “Medicaid recipients can ‘opt out’ of Medicaid altogether and receive subsidies to help pay the employee’s share of the premium for employer-sponsored health insurance.”  This is similar to the idea of vouchers proposed by Victor Fuchs (see my February 6th post).
• South Carolina is planning to give its 850,000 Medicaid recipients access to health savings accounts according to the Carolina Journal (“Plans are laid for Medicaid“).  The newspaper reports that “Each would be able to deposit a subsidy adjusted for age, sex, and physical condition into his HSA, from which he could withdraw funds to purchase an approved private health plan, pay for services with cash, or some combination.”
• According to the Heartland Institute, Oklahoma has approved a risk-adjusted defined benefit amount which they could place in their health savings account or use towards purchase of insurance. 

It is likely that many of these programs will decrease waste and give consumers more choice, but it is possible that the poorest poor will be worse off.  We need see how these programs are actually implemented, however, in order to determine their full impact.

“People generally don’t have a clue about what the health care they are consuming costs,” Michael O. Leavitt, the Secretary of Health and Human Services told reporters in a WebMD article (“Gov’t releases hospital prices“).  With a new initiative in hand, Mr. Leavitt hopes that consumer ignorance will soon dissipate.

Yesterday, officials at the Centers for Medicare and Medicaid Services (CMS) opened a new website (Health Care Consumer Initiatives) which lists prices hospitals typically charge for 30 popular medical services.  It also lists the prices Medicare pays for each service.  WebMd claims that the impetus for this change came directly from the executive office:

The release is part of a broader administration strategy for slowing rising health care costs. President Bush favors broader use of personal health savings accounts as a way to spur consumers to spend more of their own money on health expenses. He has pushed greater price and quality transparency as a way to foster competition among health providers for consumers’ dollars.

Those who have read this blog before know that the Healthcare Economist is always in favor of more information being released to the public.  Although I doubt providing the initiative will drive major changes in the medical services industry, it may force hospitals to reconsider their pricing policies and give consumers more bargaining power with their providers.

Under the Balanced Budget Act of 1997, the Federal government established the State Children’s Health Insurance Program (SCHIP), which was aimed at reducing the number of uninsured children in the United States. States were given a variety of options of how to implement this program. Nineteen states decided to operate the SCHIP program as an extension of Medicaid (M-SCHIP), fifteen states operated stand-alone programs (S-SCHIP) and 17 states used both approaches.

Researchers often use a variety of regression methods to test for the impact of government programs on various variables. A common approach in this case is to use an ‘eligibility’ variable to test for a change in insurance coverage. However, a Rosenbach, Ellwood, Czajka, Irvin, Coupe and Quinn (2001) paper gives one pause as to the effectiveness of such a simple approach.

For instance Minnesota’s M-SCHIP program extended insurance benefits to less than 100 individuals. New York’s S-SCHIP program had an enrollment of over 500,000 children. What accounts for these differences?

Prior to Title XXI–the SCHIP legislation–Minnesota already had a generous public insurance benefit for children under their Medicaid system. Children at or below 275% of the poverty line were eligible for Medicaid insurance prior to the national legislation. After the legislation, a child had to be at or below 280% of the federal poverty line–an insignificant change.

New York also had a children’s insurance benefit (CHPlus) before Title XXI came into effect. CHPlus granted insurance to children below a less generous threshold, ranging between, 100% to 192% of the federal poverty line. The state, however, rolled over all CHPlus participants (over 170,000 individuals) into their new S-SCHIP program.

Thus, it is imperative that a researcher not assume that pre-SCHIP benefit levels in each state are comparable, or else one will reach erroneous conclusions.

DB’s Medical Rants cites an interesting New York Times article (“Medicaid Hurdle for Immigrants May Hurt Others“) regarding the administrative burden created by a new law requiring all Medicaid recipients to prove their citizenship in order to receive the public insurance.

The Kaiser Family Foundation’s State Health Facts website gives a wide variety of statistics detailing health insurance in America. The study finds that there are 45.5 million uninsured non-elderly individuals (16% of the total non-elderly population). Out of this total 4.1 million (9% of the uninsured) are poor children and 12.6 million (28% of the uninsured) are poor adults.

While these numbers are large, they may be overstated. The 1997 Balance Budget Act created the State Children’s Health Insurance Plan by which states were required to offer insurance to all children in poor households. Thus, the balance of the 4.1 million children must be composed of a) illegal immigrants, b) children in households where their parents decided not to sign them up for SCHIP or c) poor bureaucratic implementation of the progam in certain states.

Also, the 12.6 million figure for poor adults may be overstated as well. While these individuals may not have insurance, many poor individuals who undergo hospital procedures are signed up for Medicaid at the hospital. Thus, although these individuals are technically uninsured, in reality they do have access to health insurance. All poor adults are not eligible for Medicaid, however. Most single males between the ages of 18 and 65 who are do not qualify for Social Security Disability also do not qualify for Medicaid.
The extent to which these figures are overestimated, however, is difficult to calculate.

The State Health Facts numbers come from the Urban Institute and Kaiser Commission on Medicaid and the Uninsured estimates based on the Census Bureau’s March 2004 and 2005 Current Population Survey (CPS: Annual Social and Economic Supplements)

Programs such as Medicaid and Medicare aim to expand health insurance to those currently uninsured.  These programs certainly accomplish this goal, but they also crowd out private insurance.  This means that an individual who has private health insurance may decide to use public insurance instead.  This would mean that society is simply substituting individual payment of insurance for government payment of insurance.

Culter, Gruber (1996) provide the seminal work on this subject.  They examine Medicaid expansions in the late 1980s and early 1990s.  During this period there were large increases in the Medicaid eligibility, specifically for pregnant women and children in (relatively) higher income families.  Cutler and Gruber find that an increase in Medicaid insurance coverage for 100 children will result in a decrease in private insurance for 31 of these children (31% crowdout); for adults, increasing coverage for 100 people will reduce the number of people with private insurance by about 49 individuals (49% crowdout).  One would guess that these effects are so large because they estimate the impact of Medicaid expansions, and thus many of these potential participants would have already had insurance.  Crowdout is presumably much lower for those at the lowest end of the income distribution.

Estimation

Using the 1988-1993 March Current Population Survey (CPS), Gruber and Cutler aim to estimate the following equation:

• COV=B_1*Elig + B_2*X + a_s*state + a_t*time+e
• ‘COV‘ is a dummy for Public, Private, or No insurance; ‘Elig‘ is a dummy for eligibility; ‘X‘ is a vector of demographic variables; ‘state‘ and ‘time‘ are dummy variables for specific states and years.

One problem, however is that ‘Elig‘ is an endogenous variable; people may choose how many hours to work in order to be able to participate in the Medicaid program.  In order to account for this, Cutler and Gruber use an instrumental variable approach.  The create a new variable ‘SimElig‘ by selecting a national random sample of 300 children of each age in each year and 3000 women of child-bearing age in each year.  They then assign the same sample to each state in that year and compute the average eligibility for the group in each state.  Thus, ‘SimElig‘ will vary only through differences in state legislation over time and not by the composition of Medicaid participants in each state.

Health Outcomes

One important question is whether or not having Medicaid insurance improves health outcomes.  While this article does not tackle this issue explicitly, it cites other studies that have.  Currie and Gruber (1995) find that Medicaid eligibility increases for children were associated with increases in medical care utilization and health improvements.  On the other hand, Piper, Ray and Griffin (1990) find no health benefits from Medicaid expansions in Tennessee, and Newhouse, et al. (1993) conclude that there is no significant health differences resulting from more or less generous insurance.

Policy Suggestions

Cutler and Gruber suggest the following policies:

1. A sliding scale subsidy for the purchase of insurance.  People would receive a voucher for purchase of insurance which they could use either towards payment for private health insurance or they could simply use it towards a contribution towards a Medicaid program.  The subsidy would gradually decline as income increased.
2. A waiting period could be imposed between when a person loses private insurance and when they become eligible for Medicaid.  This would discourage individuals from quickly switiching to free Medicaid insurance at the expense of private insurance.  Many states have recently adopted this approach, especially for the State Children’s Health Insurance Program (SCHIP)
3. They do not support directly subsidizing hospitals or medical providers for the care of the poor or creating a national health insurance scheme.

While many poor people do not have insurance, a great majority have access to some type of care.  For instance, all people have access to emergency room services.  I currently volunteer at one of the many free clinics located in San Diego county.  Thus, lack of insurance is not equivalent to absence of medical care.

A brief model I have created may help explain how poor individuals choose their optimum number of work hours and amount of health care consumption.

Individuals are utility maximizers and maximize the following function:

U(C,h,l), s.t.:

• C+p*s+=I+wL;   if p*s
• C=c; if p*s>I+wL-c
• h=f(s);
• l+L=N
• p=P+t