HCMG Exam 1 PDF

Intro to Health Insurance Key Words Premium: Per period cost of being insured (Ex: monthly, quarterly payments) Cost Sharing: payments that you make from providers ○ Deductible: The amount a patient must pay out-of-pocket before the insurer starts to cover expen...

Intro to Health Insurance Key Words Premium: Per period cost of being insured (Ex: monthly, quarterly payments) Cost Sharing: payments that you make from providers ○ Deductible: The amount a patient must pay out-of-pocket before the insurer starts to cover expenses. ○ Copay: fixed amount you pay before or at the time of receiving a healthcare service. For example, if you go to the doctor's office or hospital and they ask for $5 (or another set amount), that's your copay. ○ Coinsurance: The percentage of the medical bill the patient is responsible for after meeting their deductible Out of pocket max/stop loss: a limit of an overall out of pocket costs for patient ○ Reduce unnecessary or excessive use of medical service Network: A group of healthcare providers (doctors, specialists, hospitals) that have contracts with an insurance plan to offer services at discounted rates to its members. Role of Insurance Why? ○ Protects against losses ○ Reduces economic uncertainty  ○ Improves welfare Why Insurance markets work well ○ Losses are not too rare (meteors) and not to common (car scratches) ○ Losses are unambiguous and easily assessed (death) ○ Moral hazard is minimal ○ Information is symmetric Other reasons ○ Covers things w/ no uncertainty (vaccines) ○ Mechanism to redistribute health care expenses across the population (typically by health status or income) ○ Increases health care utilization ○ Improves Adverse Selection Adverse Selection: People who are sicker or at a higher risk buy insurance, while healthier people don’t. Occurs when one party has more information than the other, putting the less informed party at a disadvantage. ○ Example: Insurer sets premium at the average risk level since they know the population risk level, but not the individual. Low-risk people would have a lower expected costs -> they would leave the market -> Insurers raise prices -> more low-risk people forgo insurance -> repeat (Unraveling) ○ This process can destabilize the insurance market, leading to higher premiums and fewer people being insured, especially healthier individuals. Asymmetry: patient knows more than the insurer Calculate a “fair” Premium Premium = Probability of being sick x Cost per episode of Care In reality, Premiums are unfair Covers administrative/contracting costs ○ Compensates for putting capital at risk Medical Loss Ratio (MLR): % of premiums spent on medical claims and quality improvement, compared to how much is spent on administrative costs and profits  ○ A higher MLR means more of the premium goes toward actual healthcare. ○ ACA did put limits on MLR: ~80-85% Limits to Adverse Selection Group Insurance (Employer sponsored health insurance_ ○ Group insurance is health coverage provided to a group of employees, typically sponsored by their employer. This setup often attracts healthier individuals, as employed individuals generally have better health status on average. ○ Natural Risks: Since group insurance is sold to a group of employees, the risk pool tends to be more favorable due to the generally healthier population of working individuals. Public Policies ○ Mandates: Legal requirements for employers to offer insurance. ○ Subsidies to Premiums: Financial assistance to help lower the cost of premiums for individuals. ○ Limited Enrollment Window: Specific periods during which employees can enroll in or change their insurance plans. Advantageous Selection ○ Definition: Advantageous selection occurs when insurance plans attract a higher proportion of low-risk individuals compared to high-risk individuals. ○ Strategies: Employers may offer generous plans, such as including benefits like gym memberships, to attract healthier employees who are more likely to utilize these benefits. ○ It’s unstable: lower-risk individuals are more likely to purchase insurance compared to higher-risk individuals -> lower premiums, attracting even more low-risk individuals -> would have to set new premiums to compensate for the change of risk pool Methods to Set Premiums Individual risk rated ○ Prior to the Affordable Care Act (ACA), individual insurance markets (like life and auto insurance) often used individual risk ratings. Premiums were based on an individual’s specific health status and risk factors.  Expense rated ○ Based on the average health status and spending patterns of a defined risk pool, typically seen in employer-sponsored health insurance. ○ Takes into account the overall healthcare costs of the group, allowing for more tailored premiums based on the specific characteristics and risks of that pool. ○ Employer Sponsored Health Insurance Insurers can adjust premiums based on the type of job. For example, jobs in high-risk industries (like construction) might incur higher insurance costs compared to lower-risk jobs (like office work). Community Rated: uniform prices ○ Broader and applies to a wider community or demographic group, often across different populations. ○ Pricing Basis: Premiums are uniform and set regardless of individual health status, although some adjustments can be made based on factors like age and tobacco use. ○ Key Characteristic: Aims to create equitable pricing by charging similar rates to all individuals in the community, promoting access to insurance. ○ ACA: Under the Affordable Care Act (ACA), community rating allows for some variation in premiums based on certain factors, including: Location: Geographic differences in healthcare costs can affect premiums. Age: Insurers can vary premiums based on age but must adhere to a 3:1 age band rule. This means: ○ An insurer can charge a 64-year-old a maximum of three times the premium charged to a 21-year-old. Tobacco Use: Insurers can charge tobacco users up to 1.5 times the premium of non-tobacco users, although this variation can differ by state. Moral Hazard in Health Insurance: Definition: Moral hazard occurs when having insurance changes an individual’s behavior, leading them to take more risks or use more healthcare services than they would without coverage. Insurance Influences Behavior: Ex-ante Moral Hazard (Before a medical event): ○ Without insurance, people may avoid risky activities (e.g., avoiding sports to prevent injury) or delay seeking medical care (e.g., waiting out a cold or an injury). ○ With insurance, individuals are more likely to seek care earlier (e.g., seeing a doctor for a cold or getting an X-ray for an injury) since they don't bear the full financial burden. Ex-post Moral Hazard (After a medical event): ○ Insurance increases consumption of medical care by people who become ill or injured Overuse of low value services ○ Price Distortion: Insurance distorts the actual cost of care. Since patients don’t feel the full financial impact, they may overconsume healthcare services (e.g., opting for more treatments or tests). ○ Price Sensitivity: As out-of-pocket costs decrease, people are likely to consume more healthcare services, which can increase overall healthcare costs. This drives up insurance premiums for everyone. Managed Care Plans MCP: Put controls on use Preferred Provider Organization (PPO): Cost: More expensive than other plans. Tiered Networks: Offers variable copays or coinsurance based on different provider networks. Flexibility: Provides a broad choice of providers within the network, and patients do not need referrals to see specialists. Pairing: Can be paired with a narrow network, but still offers more provider options. Generosity: Generally more generous in terms of flexibility, allowing patients to change providers easily.  Health Maintenance Organization (HMO): Cost: Typically cheaper than PPOs. Coverage Limitations: Coverage is generally limited to doctors who work within the HMO network. Gatekeeping: Requires a Primary Care Provider (PCP) to give referrals before seeing a specialist. Goal: Designed to reduce unnecessary healthcare utilization by enforcing restrictions like referrals and limiting the provider network. High Deductible Health Plan (HDHP): Eligibility: Often targeted toward individuals with lower incomes. Patient Responsibility: Patients are more likely to seek high-value care when they have financial responsibility ("skin in the game"). Cost Sharing: Includes significant cost-sharing, and is often paired with a Health Savings Account (HSA) to help manage out-of-pocket expenses. Less Common Plans: Point of Service (POS): ○ Similar to an HMO but with slightly higher premiums, allowing for some out-of-network coverage (still requires gatekeeping and referrals). Exclusive Provider Organization (EPO): ○ Similar to a PPO (Preferred Provider Organization) but does not cover any out-of-network care. ○ Members are required to use healthcare providers within the designated network to receive coverage. ○ Generally offers flexibility in choosing specialists without needing referrals from a primary care physician. More about High Deductible Health Care Plan Employees pay a lower premium for a higher deductible Shifts financial responsibility to consumers: empowering individuals to shop for and make informed decisions about their care.  Consumers actively pay their premiums: discourages overuse of healthcare services, such as unnecessary doctor visits or tests, which helps control overall healthcare costs.’ HSA vs FSA Behavioral Hazard Moral Hazard: Occurs when individuals use excessive healthcare services because costs are subsidized by insurance. Solution: Implement cost-sharing measures to make patients feel some financial impact, discouraging overuse. Behavioral Hazard: Misuse of care arises not only from subsidized prices but also from decision-making errors, leading to inefficient healthcare use. The Difference: Under moral hazard, people overuse low value care because it is priced below cost. Under behavioral hazard, people fail to use high-value care or inefficiently use low-value care Impact: Even with insurance coverage, individuals may underuse or overuse healthcare services, resulting in suboptimal care. Risk: Both over-consumption (excessive use of low-value care) and under-consumption (missing essential care) are possible outcomes. Challenge: Making patients more cost-conscious may reduce low-value care, but it could also deter necessary care, affecting overall health outcomes. Why Behavioral Hazard occurs : Attention: Diseases might not be noticeable Present-bias: Individuals tend to prioritize immediate costs or discomfort over long-term benefits. For example, skipping a flu shot might seem trivial now but can lead to illness later. Memory: forget to take meds, refill rx Beliefs: false beliefs about different treatments Can respond to these mistakes through nudges and educational programs. Valuable Based Insurance Design (VBID) A strategy aimed at improving healthcare outcomes and reducing costs by aligning out-of-pocket expenses with the value of healthcare services. The idea is to encourage patients to use high-value care while discouraging the use of low-value services ○ Downside: Hard to implement & “low value” is not clear What is low-value for one patient might be high-value for another due to differences in health conditions. Adverse Selection: Healthier individuals opt for plans that encourage high-value care, leaving plans with low-value care overutilized by sicker populations. This can make the pricing and risk management of insurance plans more difficult. High value: Refers to care that is clinically necessary and effective, providing the best health outcomes for the patient. ○ Ex: medications that manage chronic conditions like diabetes or hypertension, or preventive services like vaccines and cancer screenings. ○ These services are typically encouraged through lower out-of-pocket costs to promote utilization. Low value: Refers to services that are less appropriate compared to other widely available and more effective alternatives for a given medical situation. ○ Ex: excessive imaging tests or treatments where the risks outweigh the benefits. ○ VBID aims to deter the use of such services by increasing out-of-pocket costs for them.  Affordable Care Act Before the Affordable Care Act (ACA): Limited Options for the Uninsured: If you didn’t have employer-sponsored health insurance (ESHI), Medicare, or Medicaid, your options for health coverage were limited. This left many without any insurance. High Uninsured Rate: Over 20% of non-elderly adults were uninsured, making it difficult for many to access necessary care. Expensive and Unreliable Coverage: Health insurance was often costly, unreliable, and excluded coverage for many conditions, especially those that were critical or expensive. Higher Premiums, Skimpy Coverage: People without good insurance faced high premiums, and even then, the coverage was often weak, leaving significant medical expenses uncovered. ACA: three pronged plan Insurance Market Reforms (Coverage and Protections): Pre Existing Conditions: Insurers cannot deny coverage or raise premiums due to preexisting conditions. Modified Community Rating: Premiums are based on factors like age and smoking, with limits (e.g., 3:1 age bands for older individuals). Guaranteed Issue: Everyone can get insurance, regardless of health status. Essential Health Benefits: Insurers must cover a minimum set of essential health services. Individual and Employer Mandates: Individual Mandate: Everyone is required to have health insurance or pay a tax penalty (penalty reduced to $0 after 2019).  Employer Mandate: Large employers must offer health insurance to full-time employees or face penalties. This ensured that most working people would have access to insurance through their employer. Financial Assistance and Expanding Coverage: Medicaid Expansion: Extended Medicaid eligibility to cover more low-income individuals, expanding access to millions of people. Subsidies for Private Insurance: Middle-income individuals and families receive subsidies to help purchase private health insurance on the ACA exchanges. These subsidies make coverage more affordable based on income. Cost-Sharing Reductions (CSRs): Help lower-income individuals with out-of-pocket costs, such as deductibles and copays, when buying insurance through the exchange. Health Insurance Marketplaces are established in each site Community-Rated Premiums: Premiums can only vary based on factors like age, tobacco use, family size, and location (no health status or gender-based pricing). Guaranteed Availability: Insurers must offer coverage to all individuals regardless of their health status and must renew the policy each year. ACA: changes to private insurance coverage Stay on Family's Insurance Until Age 26: Young adults can remain on their parents' plans. Free Preventive Services: Insurers must cover preventive care (e.g., vaccines, screenings) without cost-sharing. No Lifetime or Annual Limits: Insurers cannot set a cap on the amount of care they will pay for over a person’s lifetime or annually. Caps on Out-of-Pocket Expenses: Limits on how much patients pay out-of-pocket for services in a given year. No Pre-Existing Condition Exclusions: Insurers cannot deny coverage or charge more based on health history. Caps on Medical Loss Ratio: Insurers must spend at least 80-85% of premiums on medical claims and quality improvement. Standard Set of Services: Insurers must cover a basic package of essential health benefits (EHB). ACA exchanges Created to simplify shopping for insurance, offering plans at varying actuarial values: Bronze, Silver, Gold, Platinum (premiums increase across tiers). Eligibility Status and Subsidies: Easy to check eligibility for public programs and premium subsidies. Tax Penalty (Mandate): Initially, a tax penalty for not having insurance, but this was zeroed out under President Trump. Financial Assistance: Medicaid Expansion: Largest public insurance expansion since 1965, initially funded 100% by the federal government, reduced to 90% in the long term. Subsidies ○ Premium Tax Credits: Reduces monthly premiums for those earning 100%-400% of the Federal Poverty Level (FPL) and lacking affordable employer-based coverage. ○ Cost Sharing Reductions (CSRs): Improves plan affordability for individuals earning 100%-250% of the FPL who purchase Silver Plans. Insurers provide discounts, and the government compensates them (although these payments were stopped under Trump). Why do people hate ACA Ideological Disagreement: Many oppose government involvement in healthcare. Increased Taxes: To fund ACA provisions, taxes were raised, leading to pushback. Medicaid Expansion Optional: States could opt out, leading to coverage gaps in certain regions. ACA under Trump Reduced outreach efforts and shortened the enrollment periods for ACA exchanges. Cut funding for ACA advertisements. Promoted cheaper, lower-quality insurance plans, allowing people to keep them longer. Encouraged waivers that reduced Medicaid enrollment (e.g., Medicaid work requirements).  Eliminated the Individual Mandate: The tax penalty for not having insurance was set to $0. Stopped paying cost-sharing reduction (CSR) payments to insurers. ACA under Biden Restored navigator funding and extended the enrollment period (including a special enrollment period due to COVID-19). Revoked waivers for Medicaid work requirements. Kept people enrolled in Medicaid during the pandemic through continuous coverage provisions. Increased federal funding for Medicaid. Key Legislation American Rescue Plan Act (ARPA): For two years, it extended eligibility for ACA subsidies to individuals with incomes above 400% FPL and increased the size of subsidies for those already eligible. Inflation Reduction Act: Extended the enhanced ACA subsidies from the ARPA for an additional three years, leading to higher enrollment numbers. Insurance Rates Decreased: Despite concerns about costs, insurer rates decreased over time, largely due to the ACA’s provisions and increased enrollments. Sources of Health Insurance: Employer-Sponsored Health Insurance Public vs Private Insurance Employer-sponsored ○ Selection Bias: Tends to exclude low-income and sicker individuals since it's often tied to stable employment. ○ Wage-Based Payment: Premiums are deducted from wages as part of employee compensation. ○ Public Subsidies via Tax Exclusion: Employer contributions to premiums are not taxed, effectively subsidizing this form of insurance.  ○ Higher Provider Payments: Employer-sponsored plans typically pay healthcare providers more than public insurance programs like Medicare or Medicaid. Public Insurance ○ Target Population: Aims to provide coverage to those without access to private insurance, including low-income individuals, the elderly, and those with disabilities. ○ Tax-Driven Financing: Funded primarily through taxes, with programs like Medicaid and Medicare drawing on public funds. ○ Redistributive Nature: Public insurance often redistributes wealth by providing health coverage to those who might not otherwise afford it, often with minimal premiums or none at all. Employer-sponsored Health Insurance Historical Basis: ESHI became widespread due to historical tax policy decisions favoring non-wage compensation (i.e., health benefits not taxed). Non-Wage Compensation: Health insurance provided by employers as part of employee benefits packages, reducing taxable income for both employers and employees. ESHI has two varieties ○ Fully insured Employers purchase health insurance from an insurance company. The insurer assumes the financial risk for employees' healthcare costs. Regulated by state insurance laws. ○ Self-insured Employers take on the financial risk themselves by directly covering employees' medical expenses. Often regulated at the federal level under ERISA (Employee Retirement Income Security Act). Enrollment rate of private sector employees by firm size ○ Larger Firms: Employees in larger firms are more likely to be enrolled in ESHI, and this trend has been consistent over time. ○ Smaller Firms: Deductibles tend to be higher in small firms, making their plans less generous compared to those in larger firms. Fully Insured Plans: How It Works: ○ The employer purchases health insurance from an insurer. ○ The insurance company collects premiums from both the employer and enrolled employees. ○ The insurer pays medical claims out of the pool of premiums, covering doctor and hospital services. Regulation: ○ Governed by state insurance laws (state-by-state variations). Self-Insured Plans (65% of Covered Workers): How It Works: ○ The employer collects premiums and is directly responsible for paying healthcare claims using company assets. ○ An administrative services company is hired to manage the claims process (handling payments to doctors/hospitals). ○ Some employers purchase stop-loss insurance to limit their financial liability if healthcare costs exceed a certain amount. Regulation: ○ ERISA (Employee Retirement Income Security Act): Federal law exempts self-insured plans from most state insurance laws. This includes: No reserve requirements (funds set aside for claims). Exempt from mandated benefits or premium taxes imposed by states. Can bypass state consumer protection regulations (e.g., covering abortion services even in states that limit such coverage). Newer hybrid-like option: level-funded (kinda cheaper) Technically Self-Funded: These plans are considered self-funded but come with extensive stop-loss coverage to manage risk. How It Works: The employer makes a fixed monthly payment to a plan administrator, similar to how premiums work in fully insured plans.  The administrator uses these payments to: ○ Fund a reserve account for medical claims. ○ Cover administrative costs. ○ Pay stop-loss coverage premiums (to protect against high claims). Reconciliation Potential: If actual claims are substantially different from projections, there may be financial reconciliation (employers may get a refund or owe more). Regulation Exemptions: Not subject to state insurance regulations. If offered to employers with fewer than 50 employees, these plans are also exempt from the ACA's small business rating and benefit standards. Popularity: There has been a significant increase in the use of level-funded plans in recent years due to their cost-saving potential and flexibility ESHI: How much its costs Premiums increased faster in 2023 due to high inflation. On average, employees contribute: 17% of the cost for single coverage. 29% of the cost for family coverage. ESHI upside ○ Lower Transaction Costs: Easier and cheaper for insurers to sell plans through employers. ○ Reduced Adverse Selection: Healthier workers typically enroll, reducing risk for insurers. ○ Favorable Tax Treatment: Health benefits are tax-exempt, making them financially attractive. ○ Psychic Value: Workers appreciate the security of health benefits. Downsides ○ Incomplete Labor Market Participation: Not all workers, particularly low-income or part-time, are offered ESHI. ○ Wage and Salary Impact: Health insurance costs can limit wage growth.  ○ Incomplete Coverage: Limited or constrained plan options may not meet all worker needs. ○ Job Lock: Employees may feel unable to change jobs due to fear of losing health coverage. ○ Job Loss: Losing a job often means losing health insurance. ○ Distortion from Tax Exemptions: The tax exclusion subsidizes moral hazard, leading to overconsumption of healthcare services. Tax Exclusion ○ Public subsidies through tax exclusion on benefits (state and federal) Public subsidies through tax exclusion of employer-provided health benefits (state and federal) amount to $250-300 billion per year. Benefits are valued based on marginal tax rates, with higher-income earners benefiting more. Tax exclusion has a larger fiscal impact than the ACA costs. ○ Economists hate it The majority of tax exclusion benefits go to the top of the income distribution. Shifts preferences away from wages and toward excessive health insurance. Overly generous health insurance may incentivize moral hazard, leading to unnecessary healthcare consumption. Tax advantages of ESHI Tax Schedule: 10% 0-50K 20% 50-200K 30% 200K + Health insurance policy of 10 K Compensation W/ Insurance W/O Insurance Difference 100K Taxable 90K 100 K Tax owed: 5K on first 50K 5k on first 50k 8K on second 40K 10k on second 50k  =13K =15K 2K The highest earners benefit the most from ESHI, as the tax savings are larger for those in higher tax brackets. This system incentivizes using health insurance over wages, leading to potentially more generous health plans but also creating a moral hazard where individuals consume more healthcare because the cost is partially hidden from them. Cadillac tax: The tax was intended to reduce health care cost growth, reduce favorable tax treatment of employer-provided insurance, and help fund the Affordable Care Act (ACA). Telemedicine ○ Exploded after COVID pandemic Sources of Health Insurance: Medicare Medicare is the largest single purchaser of healthcare in U.S Eligibility Congressional action in 1965 Federally administered and financed Pay as you go system - current finance current retirees ○ Leads to intergenerational transfer of wealth Eligibility ○ Elderly: 65+ & paid social security taxes x 10 years ○ Full disabled x 24 months (1972) ○ ESRD (1972), ALS (2001) Entitlement program - people meeting eligibility receive benefits as a matter of right Enrollment Population Mostly elderly bu non elderly disabled are represented ( $200,000 (ACA) Part B: physician and outpatient services (you have to sign up voluntarily) ○ General revenues + individual premiums ○ Part B subsidies tied to income since 2008 Part C: managed care option (over half, and growing) Pard D: since 2006, prescription drug coverage (voluntarily) ○ General revenues + individual premiums How Medicare gets revenue: general tax revenue, payroll taxes, beneficiary premiums. Part A Covers: Acute hospital care (up to 90 days), skilled nursing (up to 100 days), hospice care (life expectancy < 6 months)  Cost Sharing: Premium: $0 for beneficiaries with 10+ years of qualifying work history Inpatient stay deductible: $1,632 per benefit period Inpatient stay copay: ○ $0/day for days 1-60 ○ $408/day for days 61-90 ○ $816/day for days 91-150 (60 lifetime reserve days) ○ After day 151: pay all costs Skilled Nursing Facility (SNF): ○ $0/day for days 1-20 after a qualifying hospital stay ○ $204/day copay for days 21-100 ○ After day 101: pay all costs Out-of-pocket maximum: None for Part A. Part B Covers: Outpatient services (physician visits, preventive care, diagnostic testing, medical supplies) Premiums: Set at 25% of estimated Part B costs (higher premiums for higher-income seniors) Premiums increase with income (based on 2022 taxes) Cost Sharing (2024): Deductible: $40 per year Coinsurance: 80% covered by Medicare; 20% by beneficiary No coinsurance/deductible for preventive services Premiums: 95% of seniors sign up and pay Part B premiums. Out-of-pocket maximum: None for Part B. Part D Created by: 2003 Medicare Modernization Act  Voluntary: Offers both standalone Part D and combined Part C plans Premiums: Set at 25.5% of standard drug costs (higher premiums for high-income earners) Cost Sharing: Subject to the Inflation Reduction Act’s out-of-pocket maximum Medicare cannot negotiate drug prices (although this is changing) Medigap Purpose: Extra insurance you can buy from a private health insurance company to help pay your share of out‑of‑pocket costs in Original Medicare Coverage: Covers deductibles, copays, coinsurance Fills gaps in traditional Medicare like OOP spending, hospitalization deductibles, and 20% coinsurance for Part B services Who buys it: Typically purchased by middle/high-income beneficiaries (about 1/3 of beneficiaries). Guaranteed Issue: If enrolled at 65, beneficiaries have guaranteed issues without medical underwriting. Medicare Advantage (Part C) Medicare Advantage (MA) is a private insurance option for Medicare beneficiaries, offering an alternative to traditional Medicare (Parts A and B) How Medicare Advantage Works: Private Insurance Alternative: Instead of getting Medicare directly from the government (traditional Medicare), you sign up with a private insurance company. Comprehensive Coverage: Covers everything that Medicare Part A (hospital care) and Part B (outpatient care) do. Many plans also include Part D (prescription drug coverage). Medicare pays the private insurance company a fixed amount per person (capitation) each month to cover your medical care.  Plans submit bids to Medicare, and payments are based on these bids compared to a benchmark (based on traditional Medicare costs). ○ If the bid is below the benchmark, the plan gets a rebate, which they often use to lower premiums or cost-sharing for beneficiaries. Why Medicare Advantage? 1. Out-of-Pocket Maximum: Unlike traditional Medicare, Medicare Advantage plans have a limit on your out-of-pocket spending for covered services, which protects you from very high medical costs. 2. Lower Overall Costs: Medicare Advantage plans often have lower monthly premiums compared to Medigap (supplemental insurance). In some cases, there is no additional premium beyond the standard Part B premium. 3. Convenience of Bundled Plans: Medicare Advantage plans often bundle together Medicare Parts A, B, and D, so you get hospital, medical, and drug coverage from one plan. 4. Extra Benefits: Many people choose Medicare Advantage for the additional perks, like dental, vision, and wellness programs, which traditional Medicare doesn’t cover. 5. Simplified Plan Management: Medicare Advantage plans manage everything for you in one place. You don’t have to coordinate between different providers, and often you’ll work with a network of doctors and hospitals—making care coordination easier. Trade-offs of Medicare Advantage: Restricted Networks: You often have to use the plan's network of doctors and hospitals, unlike traditional Medicare, where you can see any provider who accepts Medicare. Utilization Management: Plans may require prior authorization for certain treatments or services, which can delay care. Medicare Payments to private MA plans Medicare pays private MA plans a fixed amount per enrollee each month, regardless of the individual’s actual healthcare costs. This is known as a capitation rate.  ○ In return, the plan is responsible for covering all Medicare-covered services (Parts A and B) and sometimes Part D (prescription drugs) for its enrollees. Hard problem: how to set the payments from Medicare to the private plans Medicare sets a benchmark based on what it would typically spend per beneficiary in traditional Medicare. MA plans to submit bids to offer their services. If a plan's bid is below the benchmark, the plan gets rebates (partial refund) from Medicare. These rebates must be used to benefit enrollees, either through lower premiums, reduced cost-sharing, or additional benefits like vision and dental. Cream Skimming refers to efforts by Medicare Advantage (MA) plans to attract healthier patients who are less likely to use expensive medical services. This can be done through offering benefits like gym memberships or other perks that appeal to healthier individuals. Healthier enrollees cost less to care for, but MA plans still receive the same capitation payment as they would for sicker patients, leading to overpayments. Cream skimming by MA plans leads to over payments ○ Risk Adjustment is used to prevent cream skimming by adjusting payments to plans based on the health status of their enrollees. In theory, this should encourage plans to accept sicker patients since they will be paid more for them. ○ However, risk adjustment can worsen the problem because it incentivizes MA plans to upcode. Upcoding occurs when providers classify patients as sicker than they actually are, using more severe billing codes to increase the payments from Medicare. This leads to overpayments based on inflated risk scores. Potential overpayments from Medicare to MA plans Cream Skimming: Plans target healthier individuals but are compensated as if they were sicker.  Upcoding: Providers assign more severe diagnoses than warranted, artificially increasing payments. Cost of Medicare Significant part of the federal budget, accounting for around 10%, largely because it covers a vulnerable population—primarily the elderly and disabled. ○ Medicaid, ACA, and CHIP together (9%) Projected of Expenses ○ As the Medicare population grows and healthcare costs increase, the program faces long-term financing challenges. ○ Growth of medicare population, aging, increasing costs Medicare trust fund solvency The Part A Trust Fund, which covers inpatient hospital services, is projected to be depleted by 2036 if no changes are made. The solvency of the trust fund is influenced by: Economic growth, which impacts revenue from payroll taxes. Health spending trends and the growing number of beneficiaries as the population ages. Demographic factors such as disability rates and immigration. Why has the projection depletion date extended? ○ Higher employment and wage growth has increased revenue from payroll taxes. ○ Lower-than-expected spending on Part A services has helped slow depletion. Addressing Medicare Financing Medicare Advantage (Part C) offers managed care plans that aim to control costs through utilization controls and selective contracting with providers. Alternative Payment Models (APMs): Move away from fee-for-service payments, which encourage overuse.  Bundled payments for specific episodes or across providers to promote efficiency. Shift financial risk to providers to incentivize cost-saving measures. Provider Care Models: Encourage more primary care over specialists. Shift services from inpatient to outpatient to reduce hospital stays. Reduce the use of costly services like skilled nursing facilities (SNFs). Implement preauthorization and other controls to limit unnecessary care, but risk cutting both valuable and non-essential services. Plan Design: Increase the age of eligibility for Medicare. Modify or reduce the services covered by Medicare. Alternative Funding: Increase taxes to support Medicare funding. The Affordable Care Act (ACA) already raised the Medicare payroll tax for high-income earners. Evidence of Reducing Utilization: Some evidence shows a 10-25% reduction in the use of costly services (e.g., inpatient care, specialists). What does Medicare do? Duel goals of health insurance ○ Better access to health care services -> improve health outcomes Difficulties in comparing health of people with and without Medicare Utilization ○ Older people more likely to get insurance Less likely to skip care ○ Cancer screenings increases ○ Financial protection Effects on eligibility on health Looking at effect on health is tricky because health behaviors change with age, making it hard to separate the impact of insurance from personal habits For example: People who wait until they turn 65 to go to the ER may appear healthier than those who go before, because they delayed care until they had better coverage. Solution: Focus on conditions that are serious enough that people will go to the ER regardless of insurance or health behavior. These conditions should have similar admission rates whether it’s a weekday or weekend (when health-seeking behavior is less influenced by scheduling). By comparing the outcomes for patients with these conditions just before and just after they turn 65, we can isolate the impact of Medicare eligibility on health outcomes. ○ Sources of Health Insurance: Medicaid Overview Medicaid provides health insurance to low-income individuals and families, offering essential coverage to vulnerable populations. State-based: Each state operates its own Medicaid program, but it must meet federal guidelines. Historically focused on pregnant women, young children, disabled, elderly ACA expansion - Extended coverage to low-income childless adults, significantly increasing the number of people eligible for Medicaid. Medicaid managed care: shifts the program from fee-for-service to a system where private insurers manage the care, aiming to control costs while maintaining quality. Eligibility Historically (non-expansion states) eligibility is categorical ○ Eligibility was "categorical": Based on membership in specific groups, originally tied to cash assistance programs.  ○ Federal Minimums: The federal government sets minimum eligibility levels for specific populations, but states can set eligibility higher. Examples: Low income elderly, disabled, blind, children, pregnant women, parents with dependent children ○ CHIP: Provides additional coverage for children whose families earn too much to qualify for Medicaid but still need assistance. Medicaid expansion under ACA: income based eligibility ○ Income-based eligibility: Expanded Medicaid to individuals with income under 138% of the Federal Poverty Level (FPL). ○ 2012 Supreme Court Ruling: Made Medicaid expansion optional for states, leading to variations in coverage across the U.S. Long-Term Care and Asset Tests Income-based qualification: Children, parents, pregnant women, and childless adults in expansion states qualify for Medicaid based solely on income. Dual Eligibility for Medicare Beneficiaries: Individuals earning less than 100% of the Federal Poverty Level (FPL) and those institutionalized in adult homes qualify based on both income and assets. Long-Term Care Asset Tests: For those needing long-term care in nursing homes, Medicaid considers assets even if they qualify based on income. ○ Standard asset limit: $2,000 (though states can set different thresholds). ○ Exemptions: Often excludes one car and sometimes the home. ○ 5-year look-back period: Prevents individuals from giving away assets to qualify for Medicaid. Medicaid Eligibility: Expansion vs. Non-Expansion States Eligibility varies widely depending on state rules. Medicaid Expansion: Some states expanded Medicaid under the ACA, allowing income-based eligibility for individuals up to 138% of the FPL.  Non-expansion states: Created a coverage gap where certain low-income adults are not eligible for Medicaid or marketplace subsidies. Coverage Gap: Affects 1.5-2 million adults in states that have not expanded Medicaid. These individuals fall into the gap of not qualifying for Medicaid or subsidies to purchase insurance on the ACA marketplace. Medicaid Premiums and Cost Sharing Varies by state: Premiums and cost sharing differ across states, but costs are usually minimal. ○ Premiums: Typically none for those with incomes below 150% of FPL. ○ Cost sharing: Maximum allowable charges vary by income, but: No charges for emergency services, family planning, pregnancy-related care, preventive services for children, and children in families earning below 133% FPL. Total premiums and cost sharing cannot exceed 5% of household income. Two flavors of Medicaid Fee-for-Service (FFS): Payment Structure: The state pays healthcare providers directly for each service received by a Medicaid beneficiary. Flexibility: Beneficiaries can choose their providers and receive care as needed without a network restriction. Cost Variability: Costs can be unpredictable, as they depend on the volume of services utilized. Medicaid Managed Care: Payment Structure: The state pays a managed care plan a set fee for each person enrolled in the plan (capitation).  Comprehensive-Risk Based Managed Care: ○ Plans receive a fixed dollar amount per member per month to cover a defined set of services. ○ The managed care organization (MCO) is financially at risk if its spending on benefits and administration exceeds the payments it receives. ○ If the MCO spends less than it receives, it keeps the surplus. Benefits: Provides states with more control and predictability over future costs, as it establishes a fixed payment structure. Medicaid Financing State-based with federal support and requirements ○ Match rate based on state income The federal government matches state spending on Medicaid. For every dollar a state spends on eligible Medicaid services, the federal government provides a certain percentage back to the state. The match rate varies based on a state's income level: Lower-income states receive a higher match rate to help them cover more of their costs. Wealthier states have a lower match rate. ○ ACA expansion match rate higher (90%) The Affordable Care Act (ACA) increased the match rate for states that expanded Medicaid to cover more low-income adults. For example, newly eligible enrollees under Medicaid expansion receive a 90% match rate from the federal government. ○ Financing Federal matching funds - general tax revenues States funds - general tax revenues ○ Enrollment Fluctuations: Significant swings in Medicaid enrollment and spending over time are influenced by economic factors, such as recessions. ○ Medicaid generous to beneficiary, not providers Provider pay much less than private insurance -> access issues  Payments to doctors vary by state Higher payments generate improvement in access What does Medicaid do? Health Insurance Objectives: Medicaid aims to improve access to healthcare services and health outcomes for its beneficiaries. Financial Protection: The program also serves to protect low-income individuals from the financial burden of healthcare costs. Research indicates that Medicaid has reduced the mortality gap between poor and non-poor non-white children by one-third. Oregon Medicaid Lottery An expansion aimed at older adults showed increased healthcare utilization. Subjective health perceptions improved or remained the same. Increases in mental health services and preventive care were observed. Physical health markers were stable, and financial health showed improvements. Future of Medicaid Expansion Opportunities: There are still 10 states that have not expanded Medicaid, presenting opportunities for future enrollment growth. Managed Care: ○ Managed care programs are currently a significant part of Medicaid, with payments to Managed Care Organizations (MCOs) comprising half of national Medicaid spending. ○ However, managed care has not fully addressed the needs of high-cost populations. Mixed Evidence on Savings: Evidence on the effectiveness of managed care in achieving savings is mixed, as is the understanding of how those savings are generated. Recent Developments: ○ Recent expansions have included postpartum coverage. ○ Various Medicaid demonstration programs are being implemented across the 51 states, each with its unique approach.  ○ Controversial topics include the introduction of work requirements for Medicaid eligibility. 115 Waivers Purpose: These waivers allow states to test new Medicaid approaches that differ from federal requirements. Examples: ○ Work requirements for Medicaid recipients. Why Implement 115 Waivers? 1. Encourage Tax Compliance: Ensure that beneficiaries are contributing to the tax system. 2. Stimulate the Economy: Encourage workforce participation among low-income individuals. Background Pre-2016: No waivers were approved that conditioned Medicaid coverage on work requirements. Trump Administration: Encouraged the use of waivers, leading to: ○ Approval in 13 states. ○ Submitted proposals in 23 states. ○ Arkansas was the only state to implement work requirements, resulting in penalties for noncompliance. Biden Administration: Withdrew approval for many of these waivers. ○ Georgia sued the Biden Administration in 2024 to continue its work requirement program, being the only state currently enforcing such requirements in Medicaid. Medicaid Disenrollment and Churn COVID-19 Continuous Enrollment: During the public health emergency (PHE), a continuous enrollment requirement was in place, preventing disenrollments. Post-PHE Changes: ○ As of April 1, 2023, states can resume disenrollments.  ○ Approximately 25 million individuals have been disenrolled, with 31% completing the renewal process. ○ Of those disenrolled, 69% lost coverage for procedural reasons (e.g., failure to provide required documentation). Provider Payments Credence goods A credence good is a type of good or service where the consumer lacks the expertise or information to determine what they truly need or the quality of the service provided. ○ Example: When your car breaks down, you may not know the exact issue or how to fix it. You rely on the mechanic to diagnose the problem and recommend the necessary repairs, even though you can’t fully verify the necessity or quality of the service. Asymmetric Information A situation where one party in a transaction has more or better information than the other, leading to potential inefficiencies or imbalances in decision-making. Moral Hazard: Definition: Occurs when one party takes on more risk because they don’t bear the full consequences of that risk (e.g., an insured person may engage in riskier behavior because they know the insurance will cover potential losses). Example: A person with health insurance might visit the doctor more frequently or take on risky activities, knowing their medical costs are covered. Adverse Selection: Definition: Occurs when one party has more information about their risk level and uses that to their advantage. In insurance, sicker individuals are more likely to buy  insurance, while healthier individuals might opt out, leading to an imbalance in the risk pool. Example: Sicker individuals are more likely to purchase health insurance, while healthier individuals may forgo it, causing premiums to rise. Credence Goods: Definition: These are goods or services where the consumer cannot easily assess the quality or necessity, both before and after consumption, due to lack of knowledge. Example: When visiting a mechanic, a consumer relies on the mechanic’s advice for repairs because they cannot independently assess the car's issue. Tangible Example: Agency Problems You are selling your home ○ Information Asymmetry: Realtors know more about the housing market, current prices, and buyer preferences than homeowners do. This knowledge helps them price and market your home better for a quicker sale. ○ Principal-Agent Relationship: As the homeowner (the principal), you hire a realtor (the agent) to sell your home. The agent is supposed to act in your best interest, but they might sometimes prioritize their own commission. However, their expertise usually makes them valuable despite this potential conflict. Fee-for-service (FFS) Historical basis for payment Every service is associated with a particular payment (fee), which insurer agrees to pay physician if service is performed ○ Office visit = $X ○ Procedure = $Y ○ Follow-up visit = $Z Physician decides on treatment courses, bills the fee for each service provided Induced Demand Medical Care as a Credence Good: Patients don’t know how much care they truly need, so they rely on the physician's advice. This creates an imbalance where the physician may have an incentive to provide more care than required. Fee-for-Service Model: Physicians are often paid based on the quantity of services provided (fee-for-service). While they don’t control the price of medicine, they do control how much care they offer, which can lead to providing more services than necessary. Patient Incentives: Patients often don’t face the full cost of care due to insurance coverage, so they have little incentive to question or push back against the amount of care suggested by the physician. Example: Long-term Care Hospitals (LTCHs): LTCHs: Designed for patients who need 20-40 days of care after being discharged from an acute-care hospital. Since LTCHs can provide longer-term care, there’s potential for induced demand if care providers extend stays beyond what is medically necessary. Reimbursement: In the context of LTCHs, how hospitals are reimbursed (e.g., fee-for-service vs. bundled payments) can impact the amount of care provided and whether there’s a risk of induced demand.  Size of spike on “magic day” larger for for-profit LTCHs increases after kindred/selection acquisition, larger for Examples of Induced Demand: 1. C-Section vs. Vaginal Childbirth: ○ Studies show that larger fee differences between C-sections and vaginal births in Medicaid lead to higher C-section rates. 2. Declining Fertility and C-Sections: ○ As fertility rates decline, C-section rates increase, possibly due to providers seeking to maintain income. 3. Medicare Fee Cuts and Increased Procedures: ○ Physicians whose incomes were reduced the most by Medicare fee cuts responded by performing more Coronary Artery Bypass Grafts (CABGs) in both the Medicare and private markets. 4. Invasive Treatments and Physician Payment Plans: ○ Plans that pay physicians more for invasive treatments lead to a higher proportion of those treatments being performed. Key Issue with Induced Demand: Providers control the quantity, not the price: Physicians aren’t in control of the prices of medical services, but they are in charge of deciding how many services or treatments are provided. This can lead to gaming the system by increasing the quantity of more profitable treatments. Potential Solutions to Induced Demand: 1. Managed Care: Research shows that managed care often lowers costs without harming patients. However, both doctors and patients tend to dislike this system due to perceived restrictions on care. 2. Revised Payment Structures: One potential solution is to change how providers are paid, such as moving away from fee-for-service to lump-sum payments based on diagnosis (e.g.,  bundled payments). This could reduce the incentive to perform unnecessary procedures. Payment Method Influences: 1. Volume of Services Provided: ○ Payment methods like fee-for-service incentivize providers to increase the quantity of services, as they get paid for each additional procedure or treatment performed. 2. Types of Services Provided: ○ Providers are more likely to offer high-margin services (procedures with higher profit margins) over low-margin services, prioritizing those that bring in more revenue, even if they aren't always necessary. Goals for Payment Reform: There is hope that adjusting or fine-tuning payment methods can: Improve Quality: Encourage providers to deliver higher-quality care rather than just more care. Improve Outcomes: Shift focus toward treatments that yield better health results for patients, not just those that are more profitable. Improve Value: Payment structures could be reformed to reward value-based care, ensuring better outcomes per dollar spent, rather than rewarding volume alone