GOVERNMENT Government can not exactly be described as an industry segment but it has significant effect on the rest of the industry in every segment. Due to this big effect, we agreed that the two major effects of the government come in the form of Medicare and Medicaid. These two programs effect millions of people and eventually the health industry overall. Analyzing these programs that are very complex and intertwined with each other was a complex job. Even though we tried our best to separate them as two different segments, many problems are similar.
We believe this information is essential while analyzing the rest of the industry. MEDICARE AND MEDICAID A) MEDICARE HISTORICAL CONTEXT Medicare was enacted in 1965 under Title XVIII of the Social Security Act to help older persons obtain and pay for medical care. In the early 1960s before Medicare, only about half of older Americans had any health insurance, compared to 75 percent of those under 65. Some people, seeking private coverage, were denied on the basis of age or pre-existing conditions. Others could not afford it.
Medicare is divided into two parts: Hospital Insurance (Part A) and Supplementary Medical Insurance (Part B) which represent two of the four Social Security Trust Funds (the others address retirement/survivors and disability income). In 1972, the program was extended to certain people under age 65: those with kidney failure and those receiving Social Security Disability Insurance (DI) benefits for at least two years. WHO IS ELIGIBLE FOR MEDICARE? In 1994, Medicare covered 36 million people (32 million aged and 4 million disabled), including: a) Persons age 65 and over eligible for Social Security benefits (including retired workers, spouses of retired or disabled workers or surviving spouses); b) Persons under age 65 receiving DI for two-years (including workers and their surviving spouse or adult disabled child); c) Persons of any age with end-stage renal disease (ESRD) (including workers, spouses, or children); and persons, age 65 or older, who are otherwise not eligible but elect to enroll by paying a monthly premium ($261 in 1995). As a “social insurance” program, Medicare Part A is an earned benefit for most people and requires no premium upon eligibility. In contrast, participation in Part B is voluntary for a monthly premium ($46.10 in 1995). In 1994, over 98 percent of older and 88 percent of disabled beneficiaries elected Part B.
MEDICARE S IMPORTANCE IN THE OVERALL HEALTH INDUSTRY Medicare is a major payer in the U.S. health care system, accounting for 28% of all hospital and 20% of all physician payments. It also covers 45 percent of health care spending for the elderly overall, but less for the oldest old, who require more nursing home care. MEDICARE EXPENDITURES AND ENROLLMENT In 1994, Medicare outlays were $163 billion. Approximately 9 percent of Medicare spending is for disabled beneficiaries, 5 percent for those with end-stage renal disease (ESRD), and the rest for the aged. About five percent of enrollees account for 50 percent of spending. Beneficiaries with ESRD incur the highest costs per person.
PROBLEMS AND WORRIES ABOUT FUTURE Medicare is projected to grow at an average rate of about 10 percent per year and spending is projected to reach over $450 billion in 2005 under current law. Over time, Medicare spending has grown as a percentage of the federal budget and of gross domestic product (GDP). Simultaneously, health care costs have outpaced the incomes of older and disabled persons. What drives these growth figures? In the near term, Medicare projections primarily are based on expected increases in medical prices and the volume and intensity of services and new technologies. These are largely the same factors causing spending growth in the private sector, although Medicare’s population is generally in poorer health. Over the long-term powerful forces are projected to push up costs and, thus, expenditures.
Technological change is likely to continue being a cost-driver. In combination with technology, our demographics are also changing, i.e., our society is “aging” as a result of the retirement of the baby boom and longer life expectancy. Unless dramatic new ways are found to attain efficiency in Medicare, changes will have to occur in enrollment, benefits, or funding. COST CONTAINMENT EFFORTS Efforts to control Medicare costs have taken many forms, such as fee limits or utilization review to reduce unnecessary services. In the early years, controlling prices to reduce program spending was frequently undermined because the total volume of services rose. In 1983, the Prospective Payment System (PPS) was created, which set limits on hospital reimbursement for inpatient care by establishing a set amount to be paid for each patient’s case, depending on the medical condition or “diagnosis-related group.” Hospitals were no longer paid for whatever treatment they provided.
Beginning in January 1992, the Medicare Fee Schedule for physician services was implemented. The fee schedule uses a “resource-based relative value scale,” which sets a relative value according to the time and complexity of the service performed, rather than paying physicians their usual or customary fees. Despite these changes, Medicare expenditures continued to grow, albeit at a slower rate than might have occurred otherwise (see Table-1). In recent years, skilled nursing facility and home health have grown much faster than hospital and physician care. MEDICARE FINANCING Two trust funds are used to finance the Medicare program, the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund. Current employees and their employers each pay 1.45 percent of a worker’s salary (self employed workers pay 2.90 percent) to HI. The trust fund also receives interest earned on trust fund balances and revenue from some taxes on Social Security benefits.
The HI trust fund, in contrast to the Social Security retirement trust fund, is not accumulating a large balance for future years. It is operating largely on a “pay-as-you-go” basis. Because of the rapid health cost spiral, lifetime Medicare benefits are much greater than the average worker pays in, although the ratio has declined due to recent increases in the payroll tax. SMI is financed by premium contributions of enrollees (covering about 25 percent of costs) and from general federal revenue (covering the remaining 75 percent). The SMI Trust Fund is not designed to accumulate funds for future benefit payments. PROBLEMS and SOLUTIONS ON MEDICARE The 1995 Trustees report projects that, under a “best guess” scenario, the HI Trust Fund will be depleted by 2002.
In contrast, the SMI Trust Fund, because it is financed on a year-by-year basis, is “adequately financed” in the short run. Health programs, like retirement programs, are affected by the aging of our society. Unlike retirement programs, though, they are affected by the rapid development of medical technology and the rising costs of health care. Proposed short-term solutions for the Medicare funding gap include raising payroll taxes, shifting contributions from other Trust Funds, changing premiums and co-pays, expanding managed care, or reexamining cost-sharing to influence the use of certain services. Each of these options has different side-effects for current as well as future beneficiaries, and each has strong supporters and opponents.
More systematic changes may be needed to sustain Medicare financing over the long run. Among the types of changes that have been debated include restructured or combined Parts A and B, increased contributions, different benefits, higher age of eligibility, new managed care rules or provider reimbursement, vouchers for the purchase of private insurance, taxes on benefits, and income-related beneficiary cost-sharing. Table 1: Medicare Growth PAYMENTS*: 1967 1975 1985 1995** 2005** HI (Part A): 3.0 10.5 42.3 110.2 240.0 SMI (Part B): 1.3 4.0 21.6 64.0 209.3 Total: 4.2 14.5 63.8 174.2 449.3 Total as % GDP: 0.52 0.92 1.58 2.45 3.70 (Avg. growth/year: 1967-75: 17%; 1975-85: 16%; 1985-95: 11%; 1995-2005: 10%) ENROLLMENT (mil) 1967 1975 1985 1995* 2005** Aged: 19.5 22.8 28.2 33.3 35.3 Disabled: 2.2 2.9 3.9 6.8 Total: 19.5 25.0 31.1 36.2 42.1 (Avg. growth/year: 1967-75:3%; 1975-85: 2%; 1985-95: 2%; 1995-2005: 2%) $per enrollee 217 583 2,055 4,818 10,677 adj. for cost per indiv. 217 362 638 1,066 1,645 *not including administrative costs **projected Source: Health Care Financing Admin., Congressional Budget Office B) MEDICAID Medicaid, the joint federal-state program that provides health care insurance to some 34 million low-income Americans, faces the most radical changes in its thirty-year history.
Under congressional proposals, federal Medicaid payments would be reduced dramatically compared to current law, many low-income Americans now guaranteed coverage regardless of where they live would no longer be entitled to Medicaid, and states would assume far greater responsibility for deciding who receives coverage and who does not. The federal role would be limited to providing Medicaid block grants. This role can be defined as a fixed amount to be given to each state without a requirement for matching funds or rules about how the funds are to be allocated; the formula to be used to determine the amount each state will receive has yet to be decided. Under current law, federal Medicaid spending is projected to grow from $89 billion in 1995 to $178 billion in 2002 — about 10 percent a year. The main reasons for the anticipated growth are 1) rapid inflation throughout the health care system, which far exceeds the general inflation rate; 2) especially big cost increases in nursing home care and services for the disabled, which Medicaid covers; and 3) rising numbers of children who will become eligible for coverage. From 1995 to 2002, total spending over and above current annual expenditures would be a cumulative $332 billion. Congress has agreed to reduce that projected growth in the program by $163 billion over the next seven years.
Reductions in federal payments relative to current law would be 18 percent per year on average over the seven-year period. Because the size of the cuts increases over time, in 2002 federal outlays would be more than 28 percent less than they would be under current law. Moreover, many federal requirements governing how the money is spent would be eliminated. The federal government’s role would be limited mainly to delivering a lump sum payment (known as a block grant) to each state, which would then determine how the Medicaid funds would be spent. Because Medicaid would cease to be an entitlement, many impoverished children, pregnant women, elderly Americans confined to nursing homes, and disabled people would lose health care coverage, reversing more than fifteen years of federal efforts to extend Medicaid coverage to more of these people. In many respects, those changes succeeded in expanding access to medical services for millions of low-income Americans, especially children. The enormous decline in U.S. infant mortality since the enactment of Medicaid, which now finances a third of all baby deliveries, is largely attributable to the program.
Certainly, embracing more beneficiaries has been costly. Covering greater numbers of people has required more money, and federal and state Medicaid outlays have soared in recent years. One way the congressional plan would likely reduce the program’s rate of growth is by removing some of those people from Medicaid eligibility, leaving them uninsured. In addition, Medicaid’s already low payment rates to doctors, hospitals, and managed care providers such as health maintenance organizations would be cut further. One consequence of payment reductions would be the risk that doctors would be reluctant to accept Medicaid recipients as patients. Inflation throughout the entire private and public health care system – not just Medicaid – has also far outpaced price increases in the rest of the economy.
The main force driving rampant health care inflation is the proliferation of expensive new medical technology. Curtailing federal spending on Medicaid and Medicare is unlikely to dampen demand for that technology. Instead, doctors, hospitals, and other providers are likely to shift those costs from the government to the private sector as they have in the past. The public will still have to pay in the end. Most of the 34 million Americans now covered by Medicaid have low incomes and meager financial resources. Enrollment in Medicaid increased by 53 percent from 1985 to 1993 while the share of working Americans with employer-sponsored health insurance declined.
The proportion of the population covered by Medicaid increased from 8 percent in the early 1970s to 13 percent today. If the growth in Medicaid over the past five years had not offset part of the decline in employer-based insurance, it is estimated that the number of uninsured Americans would have climbed from 41 million to 50 million. Under Medicaid, poor people who meet certain requirements are entitled to health care that the federal government and the states jointly finance. Medicaid has extended much better medical services to many more impoverished children, pregnant women, and elderly Americans. Medicaid constitutes a relatively small portion of the federal budget.
In 1994, the federal portion of Medicaid accounted for 6 percent of federal outlays. That was less than Social Security (22 percent), defense (19 percent), discretionary (non-entitlement), domestic spending (17 percent), and Medicare (11 percent). Medicaid accounted for only 10 percent of federal entitlement spending in 1994. That compares with 40 percent for Social Security and 20 percent for Medicare. Medicaid benefits are determined by certain federal guidelines and are further determined by individual state policies.
Figures D and E show the various income eligibility standards for different categories of Medicaid recipients. (Note that the federal poverty line is $7,470 for an individual, $10,030 for a single mother with one child, and $12,590 for a family of three.) When Medicaid was enacted in 1965, the U.S. infant mortality rate (for children under one year old, excluding fetal deaths) was 93 per 1,000 live births. By 1992, that figure had declined to 34. A number of factors contributed to the decline, including improved medical technology, but analysts agree that Medicaid coverage played a role by helping the poor gain access to the health care system.
For every dollar Medicaid spent on prenatal health services, more than two dollars was saved on medical costs for infants under two months old. In addition to federally mandated coverage of physician, hospital, and nursing facility services, all states have chosen to cover eye care, dental care, and prescription drugs. Almost all states also include physical therapy, hospice care, and a variety of rehabilitative services. About half of the states provide screening, prevention, and diagnostic services for adults, and chiropractic and occupational therapy. Only 22 percent of those receiving Medicaid did not see a doctor within the past year, compared to almost half of the uninsured poor. Among those who saw a doctor during the year, Medicaid beneficiaries averaged 6.3 visits compared to 3.8 visits per year for uninsured, impoverished Americans. Children on Medicaid are more likely than uninsured poor children to receive routine medical treatment and dental examinations prior to kindergarten.
Moreover, poor children with Medicaid are more likely to receive phys …