CatastrophicHealth InsuranceJanuary1977

Congressional Budget OfficeCongress of the United StatesWashington, D.C.

CATASTROPHIC HEALTH INSURANCE

The Congress of the United StatesCongressional Budget Office

For sale by the Superintendent of Documents, U.S. Government Printing OfficeWashington, D.C. 20402 - Price $1.45

Stock No. 052-070-03882-9

PREFACE

The 95th Congress is likely to consider expandingthe federal role in financing health care services. Ex-pansion could take the form of a national health insuranceplan covering all persons for a broad range of services,or it could involve selective extensions of coverage bytype of risk insured or by population group protected.The decision whether to extend coverage—and if so how—will be based on various considerations. These includethe nature and severity of needs so far not met by publicor private insurance programs, the total and federal bud-get costs of various options, and the probable impacteach would have on inflation and overall spending in thehealth care sector of the economy.

One widely discussed alternative for selectivelyextended coverage is catastrophic health insurance. ThisBudget Issue Paper examines the frequency and origins of"catastrophic" expenses; the extent to which they are cur-rently met through public programs and private insurance;and various proposals for insuring catastrophic costs. Acompanion paper on long term care explores another selec-tive coverage option.

This report was prepared by Susanne A. Stoiber ofthe Human Resources Division of the Congressional BudgetOffice, under the supervision of Stanley S. Wallack andC. William Fischer. The author wishes to acknowledge theassistance of M. Eugene Moyer of the Social SecurityAdministration National Health Insurance Modeling Team;Charles E. Phelps of the Rand Corporation; Gordon R.Trapnell, consulting actuary; and Lorna Blumen, formerlywith the Human Resources Division. The paper was editedby Mary Richardson Boo and prepared for publication underthe supervision of Johanna Zacharias. Toni Wright typedthe manuscript.

Alice M. RivlinDirector

January 1977

111

III!

TABLE OF CONTENTS

Page

Preface iii

Summary xiii

Introduction xxv

Chapter I: The Magnitude and Distributionof Catastrophic Costs 1

Defining a Catastrophe 1

Uniform Expenditure Definitions 4

Income-related Definitions 7

Causes of Catastrophic Expenses 9

Chapter II: Private Insurance Plans andPublic Programs: AdequateProtection Against CatastrophicCosts? 11

The Growth of Third-Party Coverage 11

Private Health Insurance 18

Public Programs 23

Tax Subsidies 27

Chapter III: Programs to Fill the Gaps 29

Designing a Plan to Meet PolicyObjectives 29

Policy Alternatives for CatastrophicInsurance 31

v

"MITT

Mill.

A Traditional Insurance Plan 32

A Fixed-percent-of-income Plan 35

A Mixed Traditional and Income-relatedPlan 38

A Graduated-percent-of-income Maximum-liability Plan 40

Chapter IV: Adopting a Plan: PotentialEffects on Health Care andFederal Priorities 44

Appendix A: Estimates of Induced Costs 49

VI1

II I illtl

TABLES

1. Distribution of Total Expenditures forPopulation Under Age 65 6

2. A Percent of Income Distribution ofFamily Health Expenses - Fiscal Year 1978Projections 8

3. Fiscal Year 1978 Estimate of HealthExpenditures 12

4. Public and Private Insurance Holdingsby Source of Insurance and FamilyIncome, Fiscal Year 1978 Projections 16

5. Numbers of Persons Classified byAdequacy of Protection AgainstCatastrophic Costs in FiscalYear 1978 17

6. Private Major Medical Coverage: byFamily Income - Fiscal Year 1978Projections 20

7. Persons with Basic Hospital Insuranceand No Major Medical Insurance,Projected for Fiscal Year 1978 21

APPENDIX TABLES

A-l. Distribution of Hospital Expendituresby Size of Individual Expenditures:Projections for Population UnderAge 65 55

ix

81-878 O - 77 - 2

"WfT ¥ IT"

JJ.ILJU1-

A-2. Distribution of Hospital Expendituresby Size of Admissions Charges:Projections for PopulationOver Age 65 55

A-3. Length of Stay and Costs in NursingHomes Fiscal Year 1978 Projections 56

A-4. The Cost of Hospital Care by Lengthof Stay: Population Under Age 65 57

A-5. The Cost of Hospital Care by Lengthof Stay: Population Over Age 65 57

A-6. The Uninsured: Why They Don't HaveCoverage 58

A-7. Nature of Hospital Insurance BenefitsUnder Basic Hospital Insurance 59

A-8. Income Eligibility Levels for MedicaidParticipations by the MedicallyNeedy: 1975 60

FIGURES

1. Hospital Length of Stay: Fiscal Year 1978Projections 3

2. Nursing Home Length of Stay: FiscalYear 1978 Projections 4

3. Representative Increase in CatastrophicExpenses as a Proportion of TotalExpenses: 1970 to 1975 46

XI

nnr

ii • ii n

SUMMARY

Public concern over what has been popularly termed"catastrophic" health care costs has increased in recentyears. The growth of private insurance with extremelyhigh coverage limits, the adoption in five states of pub-lic catastrophic health insurance plans, and the intro-duction of several catastrophic health insurance billsin the U.S. Congress are all signs of this increased con-cern .

In considering whether it would be appropriate ordesirable to adopt a national catastrophic health insur-ance plan, the Congress has been handicapped by lack ofinformation in several areas. These include the magnitudeand distribution of "catastrophic costs;" the extent towhich public and private insurance plans are alreadycovering such costs; and the possible impact of alterna-tive catastrophic health insurance plans on the healthcare system and on the federal budget. This paper ex-plores these issues.

MAGNITUDE AND DISTRIBUTION OF CATASTROPHIC COSTS

The magnitude and distribution of catastrophic costsdepend on how "catastrophe" is defined. For purposes ofdetermining whether individuals are entitled to insurancebenefits or tax relief, two methods have been used mostcommonly to gauge whether a medical event is catastrophic.One measure has been large absolute expenditures; theother has been expenditures that are large relative to anindividual's income. The first type of measurement—largeabsolute expenditures—is typically used in traditionalprivate insurance plans and in a number of public programsmodeled on private insurance. The second standard ofmeasurement—expenditures that are large relative to anindividual's income—has been used only in government.This standard is the basis upon which medical expenseswhich exceed 3 percent of adjusted gross income are al-lowed as a federal tax deduction.

Xlll

1L.1JUL

If a large expenditure definition is used, theproblem takes one form. In fiscal year 1978, an esti-mated 2.4 million persons under the age of 65 will incurexpenses that exceed $5,000. Their aggregate expensesover that amount are estimated at $13.1 billion. This isthe type of catastrophic cost problem which is most dra-matic because it often is associated with life-threaten-ing events, and thus captures public attention. It isalso the one that most significantly affects middle-income families.

If an income-related definition is applied, a dif-ferent type of problem appears. An estimated 21.4 millionfamilies will incur medical expenses exceeding 15 percentof their income in 1978. These do not necessarily consti-tute "catastrophic" expenses, however, because almost90 percent of those costs will be met by private insuranceor public programs. The proportion of the expenses thatmight be considered catastrophic are those which the familymust pay directly (these are called out-of-pocket expenses).An estimated 6.9 million families will have out-of-pocketexpenses that total more than 15 percent of income. Mostof these (4.1 million) are low-income families. For low-income families, the aggregate expense over the catastroph-ic threshold is estimated at $2.3 billion.

Whether the income-related or large-expendituredefinition of catastrophic is used, the most significantcatastrophic expense problem is long-term care. In fiscalyear 1978, an estimated 1.3 million persons will be resi-dents of nursing homes for six months or longer, at anaggregate cost of about $14.7 billion. Almost 55 percentof that cost, or $8 billion, will be paid directly byconsumers. Most residents of nursing homes have modestincomes, so the expense is large not only in absoluteterms but also relative to income.

ADEQUACY OF PROTECTION AGAINST CATASTROPHIC COSTS

Consumers have three major sources of assistance inmeeting the cost of health care: private insurance, pub-lic programs, and tax subsidies. Collectively, thesesources significantly reduce the percent of medical ex-

xiv

penses that are paid directly by the consumer and thusthe incidence of costs that are catastrophic to the per-son involved. Some problems remain, however. Four ofthe most significant are:

-- Coverage is uneven. An estimated 18 millionpersons are totally without protection undereither private insurance or public programs.

— Certain services are excluded from coverage.Both public and private insurance plans failto include certain types of services or insurethem very inadequately.

— Some insurance plans do not adequately coverhigh expenses. An estimated 37 million personsare covered under insurance plans that do notadequately cover high expenses or long hospitalstays.

-- Tax subsidies do not effectively assist lower-income families"! TaX subsidies are effectivein mitigating the impact of high out-of-pocketexpenses for middle-income families when insur-ance is inadequate, but they provide only mar-ginal assistance to lower-income families.

The lack of adequate ba$ic insurance coverage foralmost a third of families with incomes below the nationalmedian, and the failure of both public and private healthinsurance programs to cover certain types of servicesresult in two kinds of catastrophic out-of-pocket ex-penses: the cost of long-term care for the aged; andaverage or normal expenses that consume an unreasonableproportion of low-income families' resources.

Unusually large expenses (except those that resultfrom long-term care and mental illness) generally appearto be met through existing private insurance and publicprograms. Major medical insurance has improved markedlyover the last five years, and the 103 million persons esti-mated to have major medical insurance are reasonably wellprotected against high expenses, especially those resultingfrom hospitalization. Medicare adequately covers most

xv

mnr

hospital costs for the aged and disabled, but both groupscan experience high out-of-pocket expenses for non-hospital services. The following table shows the numberof persons at various levels of protection againstcatastrophic expenses.

Numbers of Persons Classified by Adequacy of Their Protec-tion Against Catastrophic Costs in Fiscal Year 1978

Numbers of Persons (in millions) Status of Protection

18The uninsured--not eligiblefor aid from non-insurancesources

19 a/Families with incomes of lessthan $10,000 holding onlyindividual private policies

26The aged and disabled onmedicare

37.5 a/Basic hospital with no majormedical insurance

24

103

Medicaid population

Major medical, comprehensivemajor medical, members of HMOs,

Unprotected

Least Adequate

Less than AdequateProtection

Less than AdequateProtection

Adequate Protection

Good Protection

a/ These categories overlap.

xvi

PROPOSALS FOR CATASTROPHIC INSURANCE

It is difficult to design a uniform catastrophicinsurance plan that meets all of the cost problems with-out becoming, in effect, a comprehensive national healthinsurance program. The drafters of catastrophic planshave therefore been forced to emphasize certain coverageobjectives and to de-emphasize others, or to create aplan with different benefit packages tailored to thespecial needs of target groups. Also, finding the mosteffective means of filling the gaps is not the sole cri-terion that must be considered. Other important policyconsiderations include:

o Adequacy and fair distribution of benefits

o Compatibility with basic insurance

o Simplicity and economy of administration

o Impact on inflation

o Impact on federal budget

Long-term nursing home care has generally been ex-cluded from catastrophic insurance plans despite theobvious need for assistance in financing such care. Thereason is that long-term care poses a host of complexsocial and and administrative problems that are not pre-sent in financing other types of health services. Inclu-ding long-term nursing home care in a catastrophic planwould greatly complicate the financial and administrativearrangements necessary to handle other strictly financialcatastrophic cost problems. Long-term care protection istherefore not included in the proposals discussed in thispaper. _!/

_!/ This problem and alternative approaches to solvingit are treated in another Budget Issue Paper, "Long-termCare," to be published by the Congressional Budget Office

xvn

81-878 O - 77 - 3

Three catastrophic protection plans that reflectthe major types of approaches that have been proposedare outlined below. A fourth alternative, a uniformnational program to address the specific problems of bothlow- and middle-income families is included to illustratethe extremely high costs of such a program.

Alternative One: A Traditional Insurance Plan

An insurance plan designed to operate as a supple-ment to basic private insurance and medicare fits the mostcommon concept about catastrophic insurance. Such a planwould finance only very high expenses—not the averageexpenses of low-income families without public or privateinsurance protection. It would be beneficial primarilyto middle-income families who have health insurance orother resources to meet expenses below the catastrophicprotection threshold. The plan illustrated would extendmedicare benefits both by removing all limits on hospitaland nursing home care and by placing a $250 limit on cost-sharing for non-hospital services. For the populationnot covered by medicare, the plan would pay for allhospital care after 150 days and all medical expensesthat exceed $2,000. Medicaid would remain unchanged.

The total cost of this plan is estimated at $13.0 to$14.0 billion in fiscal year 1978, the net additionalcost to the federal government at $12.0 to $13.0 billion.

Alternative Two: An Income-related Plan with FixedMaximum Liability

An income-related plan designed to cover all out-of-pocket medical expenses in excess of a designated propor-tion of income—for example, all expenses that exceed 15percent of family income—would provide universal catas-trophic protection. Such a plan would respond to the mostpressing problems of low-income families not covered byprivate insurance or medicaid. However, these familieswould still be required to commit a substantial share oftheir resources to purchasing medical care. This kind ofplan would leave some middle- and higher-income familieswith a potential liability for out-of-pocket costs so high

xvi 11

that they would be likely to retain private coverage.The total fiscal year 1978 cost of this plan is estimatedat $16.4 billion, the net additional cost to the federalgovernment at $14.9 billion.

Alternative Three: A Mixed Traditional and Income-relatedPlan

A plan designed to pay the total expenses of low-income families and the exceptionally high expenses ofmedicare beneficiaries, as well as to encourage improve-ments in catastrophic protection through private insurancefor middle-income families would address the major coverageproblems on a categorical basis. Certain groups would notbe fully protected against catastrophic costs under thisplan and the entire population would not be covered byuniform benefits. A plan of this kind would not guaranteeprotection against high expenses for middle-income per-sons, nor would it assist persons near the poverty linewho are unable to purchase adequate private coveragebecause of pre-existing health problems. The fiscalyear 1978 total program cost of this plan is estimated at$32.6 billion. The net additional cost to the federalgovernment is estimated to be about $24 billion.

Alternative Four

A uniform and universal plan can be designed to dealwith the specific catastrophic expense problems of bothlow-income and middle-income families through a singleprogram. Such a plan was proposed in 1973 by the Depart-ment of Health, Education, and Welfare (HEW). However,any plan encompassing all of the objectives in a uniformnational program produces what would actually be an ex-tremely expensive comprehensive national health insuranceplan with an estimated total program cost of $129 billionin fiscal year 1978. The net additional cost to thefederal government is estimated at $79 billion. A uniformnational program is included here solely to illustrate thataddressing the special catastrophic cost problems of low-and middle-income families simultaneously would result ina significant increase in federal expenditures. The in-

xix

"TliW WITT

crease could be moderated by reducing the level of pro-tection. The plan illustrated covers approximately95 percent of a family's health expenses (excluding long-term care).

The following table outlines the major provisions ofthe three catastrophic plans, and also includes a plansimilar to the HEW proposal. It assesses the adequacy ofeach in meeting the major catastrophic cost problems andin fulfilling the policy objectives mentioned above.Estimates are given for total program costs and their netfederal budget impact. The estimates assume that all planswould be financed through federal revenues.

POTENTIAL IMPACT ON THE HEALTH CARE SYSTEM

There is every indication that the supply of medicalservices will expand rapidly to meet whatever demand isgenerated by a new insurance system. The experience ofthe last fifteen years with the expansion of private healthinsurance coverage, as well as the passage of medicare andmedicaid, suggests that adoption of catastrophic healthinsurance (or comprehensive national health insurance) willstimulate the expansion of expensive treatments and facili-ties, particularly hospitals.

This expansion will result from the extension ofthird-party payments, which have the effect of removingconstraints on the demand for services by consumers andalso services generated by providers. During a seriousillness, the patient and his family are likely to seekmedical treatment regardless of cost or inconvenience.Expensive techniques and services will be adopted as rapid-ly as there is demand for them and funds are available topay the cost.

The development of high-cost, technology intensivetreatments has already increased the proportion of healthexpenditures devoted to catastrophic illness. A comparisonof the proportion of insurance payments generated by per-sons with exceptionally high expenses in 1970 and 1975shows a pronounced trend toward spending a larger propor-tion of the health care dollar on persons with very highexpenses.

xx

This trend suggests that the federal government, indeciding on the type and level of health insurance sup-port, may ultimately have to make a choice. The basicoptions are either to spend money on preventive and main-tenance-of-health services, which could significantlyreduce the incidence of illness at a low per~-person cost;or to underwrite high-cost treatment; but with the likelyresult of increasing sick persons' lifespans only marginally

xxi

mi in

I l l H i B i l l

CATASTROPHIC INSURANCE OPTIONS

Descriptionof Plan

Alternative 1 Alternative 2

Separate plans for aged andnonaged to supplement medicareand average private insurance.Over-65 PlanRemoves all limits on medicarehospital coverage and coinsur-ance and places a $250 limiton SMI coinsurance.Under-65 PlanPays all hospital costs after150th day; medical expensesin excess of $2,000.

Financed through federal taxes.Administered by the SocialSecurity Administration.

Covers all out-of-oocketmedical expenses (exceptthose for long-term care)which exceed 15 percentof a family's gross income.

Financed through federalgeneral tax revenues. Ad-ministered by the SocialSecurity Administration.

Primary Bene-ficiaries andPersons NotAssisted

Primary Beneficiaries26 million aged and disabledon medicare.103 million persons with majormedical coverage and 22 mil-lion middle-income familieswith basic hospital insurance.Persons Not SignificantlyAssisted26 million persons withoutinsurance and 19 million fami-lies with incomes below thenational median who hold indi-vidual insurance policies.

Primary Beneficiaries26 million persons nowuninsured.19 million low-incomepersons who hold individualinsurance policies.26 million aged and dis-abled on medicare.All persons receive someprotection although middle-income families wouldprobably continue to relyprimarily on privateinsurance.

Impact on Benefits regressive.Other Policy Compatible with basic insur-Objectives ance.

Relatively simple and inex-pensive to administer.Marginal increase in infla-tionary pressures.

Benefits proportional andtargeted to meet greatestneed.Difficult to integratewith basic insurance.Relatively complex andexpensive to administerbecause of income-testedbenefits.

Fiscal Year Total Program Cost - 1513 to1978 Cost SI4 billion.Estimate Net New Cost to federal

government - $12.0 to$12.5 billion.

Total Program Cost -$16.4 billion.Net New Cost to federalgovernment - $12.2 billion.

XXI1

Alternative 3 Alternative 4

Federalized medicaid program for low-income families (entitlement at $4,800for family of four) universal spend-down .Extension of medicare benefits as des-cribed in alternative no. 1.Tax advantages revoked for privateinsurance that fails to meet federalcatastrophic protection standards.Financed by federal tax revenues;states retain current medicaid sup-port obligations; but contributionsfrozen at 1978 levels.

HEW "Mega" Proposal.Comprehensive coverage for low-income families; catastrophicprotection against large expensesfor all persons.This plan addresses all majorcatastrophic cost problems exceptlong-term care.

Primary Beneficiaries16.2 million low-income persons notcurrently on medicaid or holdingindividual insurance policies.1.4 million lower-middle income fami-lies with very high expenses.26 million aged and disabled onmedicare and medicaid.Persons Marginally Assisted103 million persons with major medicalinsurance.22 million middle-income families withbasic insurance if tax penalty resultsin improved coverage.Persons Losing ProtectionPersons currently eligible for medi-caid; not eligible under new standards.22 million middle-income families withbasic insurance if tax penalty resultsin loss of coverage.

Prima.ry Beneficiaries26 million persons currentlyuninsured.19 million low-income personswith individual policies.26 million aged and disabled onmedicare.The entire population would beprotected against all healthexpenses (excluding those fornursing home care) which exceedapproximately 4 to 6 percent offamily income. For some higherincome families, protection wouldbe generally less adequate thancurrent private insurance.

Benefits targeted to greatest need.Compatible with basic insurance.Reasonably uncomplicated to administerbecause income-testing is minimized.Moderately high increase in inflation-ary pressures.

Benefits progressive for lowest-income families; proportional forremainder of population; targetedto greatest need.Assumes elimination of most otherinsurance; thus not difficult tointegrate.Complex and expensive to adminis-ter beca.use of almost universalincome-testing and administrationof income-related cost-sharing.Large increase in inflationarypressures.

Total Cost - $32.6 billion.Net New Cost to federal government -$20 to $21 billion

Total Program Cost - $129.0 bil-l ion.Net New Cost to federal govern-ment - $79 to $80 billion ifwholly tax financed.

XXI11

iii

INTRODUCTION

Almost every American family, except the verywealthy, risks financial ruin from large, uninsured medi-cal expenses. In popular terminology, such medical ex-penses have become known as "catastrophic."

Public concern over catastrophic health care costsis reflected in the recent growth of private majormedical insurance with extremely high coverage limits,the adoption in five states of public catastrophic insur-ance plans, and the introduction of several catastrophicinsurance bills in the U.S. Congress. However, littleinformation has been available to aid policy-makers injudging whether the problem is severe enough to be madea high priority for federal government action and whatthat action should be. Important unanswered questionsinclude:

o What are the magnitude and distribution of"catastrophic" costs?

o To what extent are private insurance plansand public programs providing protectionagainst these costs?

o Are existing insurance arrangements inadequateand what alternative programs might be adopted?

o Could alternative plans fill the major gapsin coverage and at what cost?

o What effects might a federal catastrophicinsurance plan have on the health care system?

o Should catastrophic protection be the highestpriority for new federal health expenditures?

xxv

81-878 O - 77 - 4

TM1FI T

This paper explores these questions and providesinformation to illuminate the current policy debate overcatastrophic health insurance. That debate is likely tointensify as very high expenditures increasingly dominateoverall health care spending, and as national healthresources are increasingly concentrated on a small propor-tion of the population. These expenditure trends willspur consideration of the immediate problem of financinghigh costs and the longer-range question of whether manyof the high-cost services are socially desirable.

xxvi

CHAPTER I THE MAGNITUDE AND DISTRIBUTION OFCATASTROPHIC COSTS

DEFINING A "CATASTROPHE"

The term "catastrophic" implies a sudden and un-predictable misfortune having grave consequences for theaffected person, but it is extremely difficult to isolatethe point along a continuum at which high, but normal,health care expenses become catastrophic.

Two methods have been commonly used to determinewhether a medical event is catastrophic for purposes ofentitlement to insurance benefits or tax relief. Thefirst method defines a catastrophe in terms of largeabsolute expenditures; the second measures expendituresin relation to individual income. The first measurement--large absolute expenditures--is typical of traditionalprivate insurance plans and public programs modeled onprivate insurance. The second measurement—expendituresthat are large relative to individual income—has beenused only in government.

The magnitude and distribution of catastrophic costsare largely dependent upon which measurement is used todefine a catastrophe. For example, an estimated 2.5 millionpersons under age 65 will have medical expenses in excessof $5,000 in fiscal year 1978. In contrast, an estimated12.3 million families will have non-insured expenses thatexceed 10 percent of their income.

The definition of catastrophe will also have an im-portant impact on how resources are allocated among typesof services and different population groups. The impactof each of four major definitions of catastrophe is dis-cussed in the following chapters.

Traditional Insurance Definition

Large absolute expenditures, the traditional insurancedefinition of catastrophe, have been measured in variousways. One measure specifies a fixed expenditures within a

JIUIII.

stipulated period of time as the threshold for catastrophiccost—for example, $2,000, $5,000, or $10,000 per year.A variation of this method determines the threshold byspecifying a certain amount of service within a stipulatedperiod, such as a specified number of hospital days peryear. Both the fixed expenditure and fixed utilizationconcepts have been incorporated in the catastrophic pro-tection section of a Senate bill, "Catastrophic HealthInsurance and Medical Assistance Reform Act" (S. 2470,94th Congress), sponsored by Senators Russell Long(D-Louisiana), Abraham Ribicoff (D-Connecticut), and others.

The fixed utilization concept presumes that largeexpenditures have been incurred after a specified amountof service has been received. Specific diseases have alsobeen presumed to entail catastrophic expenses. For example,the Social Security Amendments of 1972 (Public Law 92-603)extended medicare coverage to persons suffering from end-stage renal disease (kidney failure).

The distribution of gross benefits under either afixed expenditure or fixed utilization plan is likely tobe regressive.

Utilization of Services Definition

Definitions of catastrophe that hinge on utilizationof services usually refer only to institutional care inhospitals and nursing homes. Figures 1 and 2 highlightthe difference between the lengths of stay in hospitalsand nursing homes projected for fiscal year 1978. Forboth the aged and the non-aged, most hospital stays willlast less than 10 days. More than 90 percent will endbefore the 30th day; and less than 1 percent will exceed100 days. In contrast, only 11 percent of nursing homestays will end before the 30th day, and almost three-quarters will exceed 100 days.

If 60 days of care is used as the threshold ofcatastrophic cost, persons hospitalized for at least thislength of time will have aggregate expenses estimated at$4.1 billion in fiscal year 1978. If the same measure isused for nursing homes, persons admitted for more than60 days will have aggregate expenses estimated at $17.7billion. Long hospital stays represent a small proportion

Figure 1.Hospital Length off StayFiscal Year 1978 ProjectionsPercent of Total Hospital Days and Discharges100

Persons over age 65(Discharges)

Persons under age 65(Total Hospital Days)

10-29 30-59Length of Stay (Days)

60-100 101-365

Source: CBO calculation based on data furnished by the Social Security AdministrationNational Health Insurance Modeling Team and the General Accounting Office.

of total hospital costs while long stays generate a largemajority of total nursing home costs, illustrating thatdifferent utilization measures are appropriate for dif-ferent types of services. _!/

I/ See appendix for tables detailing the distribution oflengths of stay and associated costs for short-termhospitals and nursing homes.

TUT I

Figure 2.Nursing Home Length off Stay:Fiscal Year 1978 ProjectionsPercent of Persons With Nursing Home Stays50

40

30

20

10

15 45 75 105 135 165 195 225Length of Stay (Days)

285 315 345 360

Source: Calculated from data furnished by ABT Associates

Uniform Expenditure Definitions

If a uniform expenditure standard is used to measurea catastrophe, the exact incidence rate will depend onthe threshold level selected. The Long-Ribicoff bill stipu-lates $2,000 for non-hospital medical expenses; others haveproposed $5,000 for total expenses. For purposes of illus-tration, $5,000 will be used in this discussion.

An estimated 2.6 million persons (or 1.25 percent ofthe total population) incurred medical expenses in excess

of $5,000 in 1974. 2/ Aggregate expenses attributable tothese people totaled $21.4 billion or about 20 percent oftotal national expenditures for health. 3/

Almost half of the individuals with expendituresexceeding $5,000 were in the institutionalized population.(In this context, the term "institutionalized population"refers only to persons in long-term care facilities:nursing homes, psychiatric hospitals, chronic disease andtuberculosis hospitals. It does not include persons inshort-term general hospitals.)

The institutionalized catastrophic population ispredominantly aged and female. Most are in nursing homes.In fiscal year 1974, catastrophic cases as measured bythe expenditure of $5,000 accounted for 67 percent oftotal nursing home costs. It is estimated that by fiscalyear 1978, 90 percent of all persons admitted to nursinghomes will incur charges in excess of $5,000.

Thus, the largest group with catastrophic costsmeasured by large expenditures is aged persons in long-termcare institutions. However, by 1978, a significant numberof the non-aged, non-institutionalized population is alsolikely to have expenses of $5,000 or more. Projectionsfor fiscal year 1978 indicate that an estimated 2.5 millionpersons under age 65 will have total hospital and non-hospital expenses in excess of $5,000 (see Table 1). Theaggregate expenses incurred are estimated at $25.6 billion—approximately $13.1 billion of which represent expenses

2/ Data are not available from which to estimate the pro-portion of 1978 expenditures for the entire populationthat are attributable to persons spending $5,000 ormore. Therefore 1974 data are used in this illustration,although other estimates in the paper are for fiscalyear 1978.

3/ Howard Birnbaum (Abt Associates), Every Person's Guideto Catastrophic Expense Statistics, 1976. (Preparedunder contract to the Department of Health, Education,and Welfare, National Center for Health StatisticsResearch. HRA Contract 230-75-141.)

1

in excess of the $5,000 catastrophic threshold. Accordingto the projections, two-thirds of catastrophic expensesfor this age group will be related to stays in short-termgeneral hospitals.

Table 1. DISTRIBUTION OF TOTAL EXPENDITURES-/FORPOPULATION UNDER AGE 65 (Fiscal Year 1978Projections)

ExpensesPer Capita

Number of Persons(in Millions)

Totals 200.4

Aggregate Expense(in Billions ofDollars)

None<$100100-500500-1,000

1,000-2,5002,500-5,0005,000 and over

68.077.622.312.612.94 .52.5

5.36.29.1

20.215.525.6

81.9

SOURCE: Calculated from data furnished by the SocialSecurity Administration National Health Insur-ance Modeling Team.

a./ Hospital, physician, outpatient, other professionalservices (except dental care), and prescription drugs

The expenditure distribution shown in Table 1 illus-trates the episodic nature of health spending by the under-65 population. About three-quarters of this age group areestimated to have fiscal year 1978 expenses of less than$100; the few persons with exceptionally high expensesaccount for a very large proportion of all spending by thenon-aged. Using the $5,000 expenditure measure, an esti-mated 1.3 percent of the non-aged population will accountfor more than 30 percent of all health expenditures incurred

by this group. Comparable distribution of expendituredata does not exist for the aged, but available infor-mation suggests that persons over age 65 have much highercontinuing or average expenses.

Income-related Definitions

Most people think of catastrophic expenses in termsof a family's income or other resources, such as insurance.This income-related definition is the basis upon whichmedical expenses that exceed 3 percent of adjusted grossincome are allowed as federal tax deductions.

The expenditure level most frequently used to desig-nate the threshold level of catastrophic cost is 10 to15 percent of family income. 4_/ A variation of thismethod is the "protected income" concept. Under this con-cept , a base income level is assumed to be the minimumnecessary for family needs exclusive of medical care costs.Expenditures are deemed catastrophic when health-relatedexpenses reduce family income below the protected level.This is the basis for entitlement to medicaid benefitsunder current "spend-down" provisions and in the federalizedmedicaid section of the Long-Ribicoff bill.

The distribution of catastrophic expenses using apercent-of-income test is substantially different from thedistribution using either utilization or absolute expendi-ture tests. As Table 2 illustrates, an estimated 21,4million families (or about 28 percent of all families) willhave expenses for medical care which exceed 15 percent offamily income in fiscal year 1978. Not all of these costswill be paid by the family directly; almost 90 percent willbe paid from third-party sources (private insurance, publicprograms, philanthropy, industry).

4_/ Economists Charles Phelps, Karen Davis, and political~~ scientist Theodore Marmor have used 10 percent of income

as the threshold of catastrophic expenditures. SenatorWilliam Brock (R-Tennessee) introduced a tax credit bill(S. 1528, 94th Congress) for medical expenses in excessof 15 percent of adjusted gross income (less personalexemptions of $750 per person which would bring thethreshold below 15 percent).

81-878 O - 77 - 5

T

Table 2. A PERCENT OF INCOME DISTRIBUTION OF FAMILY HEALTH EXPENSES(In Excess of 15 Percent of Gross Income) (CivilianNoninstitutionalized Population - Fiscal Year 1978Projections)

Total Expenses Outlays (Total Expenses NetFamily Income (Insured and Noninsured of Third-Party Payments)

Number of AggregateFamilies Expense(in millions) in Excess

of Thresh-old ( inbillionsof dollars)

Number of AggregateFamilies Expense in(in millions) Excess of

Threshold(in billionsof dollars

$5

5,

10

20

,000

000 - 10,000

,000 - 20,000

, 000+

8,

5.

6

1

.0

.4

. 1

.9

16.

11.

17,

14.

.0

,0

.0

.6

4.

1.

1.

0,

1

,5

.0

.4

2.

1.

1.

1.

3

3

.0

,7

Totals-/ 21.4 6.9 6.3

SOURCE: CBO Projection based on the 1970 CHAS/NORC Survey and ondata supplied by the Social Security Administration NationalHealth Insurance Modeling Team.

a. Components may not add to totals because of rounding.

In order to assess the actual impact of these expen-ses on the family, the measure of catastrophe is usuallynot gross expenditures, but the net out-of-pocket cost afterany applicable insurance or other third-party payments havebeen made. For purposes of this discussion, out-of-pocketexpenses that exceed 15 percent of family income will beconsidered catastrophic.

Using this measure, an estimated 6.9 million familieswill have out-of-pocket expenses for medical care thatexceed 15 percent of their gross income in fiscal year 1978.These families represent about 9 percent of the total numberof families projected for that year. About 28.0 percent offamilies with incomes of less than $5,000 will have catas-trophic expenses by this definition, compared with about

8

0.2 percent of families with incomes in excess of $20,000(see Table 2). This difference illustrates the superiorityof insurance coverage held by higher-income families. Cur-rent tax policy is partially responsible for the bettercoverage of high-income families because the tax deductionallowed for insurance purchase is more valuable to themthan to low-income families.

The expenses that will place an estimated 4.1 millionlow-income families in the catastrophic category using thisincome-related definition are usually not large dollar ex-penditures. A substantial number of low-income familieshave expenses that might be considered average or normal byabsolute national standards but are catastrophic in rela-tion to low income.

A catastrophic protection plan based on the above orother income-related standards could be more progressivein its distribution of benefits than a fixed-expenditureor utilization plan. However, the entitlement and benefitprovisions alone will not determine whether a plan will beregressive, proportional, or progressive. The financingmechanism chosen will also have a great impact on the dis-tributional effects of the program.

THE CAUSES OF CATASTROPHIC EXPENSES

The frequency and nature of catastrophic expensesvary significantly according to the standard of measure-ment used. This suggests that it may be difficult toachieve agreement upon a single definition of catastropheto determine the distribution of catastrophic insuranceor tax benefits. Depending on the definition used, thereare three types of catastrophic expenses.

o Long-Term Care. Using any of the definitionsof catastrophe, long-term care, affectingprimarily the aged, is the most frequent causeof catastrophic expenses.

o High Dollar Expenditures. Infrequent highexpenses (primarily for hospital care), ac-counting for almost one-third of all healthcare costs, characterize the expenditurepatterns of the non-aged, although continuingexpenses for this population group aregenerally very low.

High Expenditures Relative to FamilyIncome. These expenditures are incurredprimarily by low-income families, Middle-and high-income families are usually unaf-fected because average dollar expendituresare not large and because the large expen-ses are usually insured.

10

CHAPTER II PRIVATE INSURANCE PLANS AND PUBLICPROGRAMS: ADEQUATE PROTECTION AGAINSTCATASTROPHIC COSTS?

The consumer has three major sources of assistancein financing health care expenses. Private health insur-ance, government programs, and tax subsidies have allreduced the proportion of total health care expenses paiddirectly out-of-pocket, thus reducing the financial impactof illness. Direct payment plans (both public programsand private insurance) operate in a substantially differentway from tax subsidies, so they will be discussed sepa-rately here. However, the overall effectiveness of pro-tection against catastrophic expense requires an assess-ment of the interaction between these two forms of assis-tance .

DIRECT PAYMENT PLANS: THE GROWTH OF THIRD-PARTY COVERAGE

Third-party payments (those made on behalf of indi-viduals by government, private insurance, philanthropy,and industry) have grown sharply in the last twenty-sixyears. In fiscal year 1950, the consumer paid 68.0 per-cent of his health bill directly. Private insurance paidonly 8.5 percent and public programs 20.2 percent. Byfiscal year 1978, consumer out-of-pocket spending is pro-jected to drop to 29.0 percent, with private insurancepaying 31.0 percent and public programs 39.0 percent.

Despite this substantial growth in public and pri-vate insurance coverage, few families are fully protectedagainst every contingency. Some families are uninsured orseriously underinsured. In addition, the growth in bene-fit payments has not been evenly distributed across ser-vices. The increase in third-party payments is largelyattributable to improved hospital coverage. Today, gov-ernment programs (federal, state, and local) account for

11

Table 3. FISCAL YEAR 1978 ESTIMATE OF HEALTH EXPENDITURES^/(in Billions of Dollars)

Type of Expenditure

Source of Payment

Long- Psychi-term atricHospital Hospital

Totals Care Care

Short-term Out-Inpatient patientCare Care

Consumer out-ofpocket

Private Insurance

Federal Programs—/

State and LocalGovernmentPrograms c/

Philanthropy

Totals

$ 49.

46.

43.

18.

1.

$158.

.2

0

9

,4

.2

.7

$ 0.

0.

0.

0.

0.

$ 2.

2

2

8

.7

02

.0

$ 0.

1.

2.

4.

0,

$ 8

8

4

. 1

.2

.06

.7

$ 5.

25.

25.

4.

0.

$61.

1

9

5

.3

.5

.3

$ 1.

1.

2.

2.

0.

$ 8

4

4

6

.8

.4

.7

a/ Calculated from data furnished by the Social Security AdministrationNational Health Insurance Modeling Team.

b/ Medicare, medicaid, Department of Defense, Veterans Administration,categorical health programs and workmen's compensation.

12

Table 3. (continued)

Type of Expenditure

Source of PaymentPhysicianServices Dental

OtherProfes- Nursingsional Eye- HomeServices glasses Care Drugs

Consumer out-of-pocket

Private insurance

Federal Programs b/

State and LocalGovernmentPrograms c/

Philanthropy

Totals

$ 10,

13.

6.

o

0

$ 33

,6

,8

.7

.0

.02

.1

$ 8.6

1.3

0.4

0.3

0

$10.6

$ 2.

0.

0.

0.

0

$ 3

.3

4

.5

.2

.07

.5

$ 2.9

0.02

0.07

0.05

0

$ 3.1

$ 9.

0.

4.

3.

0

$17

.6

1

,6

.4

.08

.9

$ 7.

1.

0.

0.

0

$ 9

6

2

6

.5

.9

£/ Medicaid, other state and local programs (such as municipal hospitalsand mental institutions), workmen's compensation.

13

52 percent of all payments to hospitals. Private insur-ance pays almost 38 percent; consumers pay 9 percentdirectly. _5/

Although hospital care accounts for about 44 percentof health expenditures and, together with nursing homecare, is the most frequent cause of large expenditures,the cost of non-institutional services can become catas-trophic. Most of these costs will be paid directly by theconsumer. Table 3 estimates the payment source for majortypes of health expenditures in fiscal year 1978, assumingno change in current law or policy.

Aggregate estimates of insured and non-insured ex-penses obscure extreme variations in individual cases. Anestimated 26 million people in fiscal year 1978 (12 percentof the U.S. population) will have no insurance coveragethrough private insurance or public insurance programs suchas medicare and medicaid. The uninsured are largely self-employed; work for an employer with a small low-wage workforce; are in poor health; in school; or unemployed. Q_f

5/ Social Security Bulletin, March 1976, Vol. 39, No. 3.These percentages understate the true extent of con-sumer liability for out-of-pocket hospital expenses.The understatement occurs because hospital "bad debts"are spread across third-party payment sources; thus,charges that were originally an out-of-pocket liabilityare ultimately recorded as third-party payments. Also,aggregate estimates that group community hospitalswith long-term care hospitals and federal and stateinstitutions mask the actual extent of consumer cost-sharing in private community hospitals because thereis usually no consumer cost-sharing in federal andstate institutions.

Q_/ The uninsured give various reasons for not obtainingcoverage. When queried in the 1974 Health InterviewSurvey, 40 percent indicated they could not afford in-surance; 32 percent said that other aid was available(presumably from direct care programs such as theVeterans Administration or through Workmen's Compensa-tion). See appendix for table detailing results ofsurvey.

14

An estimated 8 million of the uninsured have other sourcesof aid (for example, the Veterans Administration system).Thus, 18 million people may be considered totally unpro-tected.

Table 4 illustrates the projected insurance statusof the U.S. population in fiscal year 1978 according tofamily income and source of insurance coverage. Almost53 percent of the uninsured will have incomes estimatedto be $5,000 to $10,000 in fiscal year 1978. These fami-lies are usually not eligible for medicaid benefits 7_/and presumably have limited resources to meet exceptionalmedical expenses.

Another 29 million people are estimated to hold onlyindividual (non-group) policies (see Table 4), which usual-ly offer protection inferior to that provided in grouppolicies. About 67 percent (or 19.4 million) of personsinsured exclusively through non-group policies will havea projected fiscal year 1978 family income of less than$10,000.

In fiscal year 1978, an estimated 37 million personswill be unprotected against catastrophic expenses. Theyconsist of the uninsured not eligible for aid from non-insurance sources such as the Veterans Administration,medicaid, and workmen's compensation (18 million), andpersons with family incomes of less than $10,000 holdingonly individual insurance policies (19.4 million). Theremainder of the population has some protection againstcatastrophic expenses, although the adequacy of that pro-tection varies substantially with the source of coverage.

7_/ Thirty-one states operate a "medically needy" programwhich may reach some families in these income ranges.Also, through the medicaid "spend down" provisions,families who have medical expenses large enough to re-duce their income (net of medical expenses) to the in-come eligibility level of the medically needy (or cashassistance recipients) may qualify for medicaid bene-fits.

15

81-878 O - 77 - 6

Table 4. PUBLIC AND PRIVATE INSURANCE HOLDINGS BY SOURCE OF INSURANCE AND FAMILY INCOME,FISCAL YEAR 1978 PROJECTIONS a/ (persons in millions)

Family Income

$5,000

5,000 - 9,999

10,000 - 19,999

20,000 - 29,999

30,000 and over

Totals

NoInsurance

6,

13.

3.

1.

1.

26,

.3

7

,4

,4

2

,0

Medicaid

12

6

6,

0,

0,

24,

.2

.1

.0

.0

.0

.4

Medicare

6.9

6.7

6.8

5.4

.2

26.0

EmployerGroup

5

38,

65,

8,

2,

120

.5

.7

.5

.9

.3

.9

EmployerGroup +Nongroup

.8

1.7

4. 1

0.1

0.1

6.8

OtherGroup

0,

0,

1.

0,

0,

3

.6

.5

,5

. 1

.4

. 1

OtherGroup +Nongroup

0.2

0.2

0. 1

0.0

0.2

.7

Individual

9

9

6,

2

0,

28

.9

.5

.6

.0

.8

.8

SOURCE: CBO Projection based on the 1970 CHAS/NORC survey; the CBO TRIM Model; and Preliminarydata from the January - March 1976 Health Interview Survey.

a./ Totals exceed 1978 population projections because of duplicate counts in some categories(e.g., an estimated 4 million medicare beneficiaries also receive medicaid benefits). However,the "individual" category includes solely persons estimated to hold only an individual policy.

Adequacy of Overall Protection

The combination of public direct-care programs,public insurance plans, and private insurance fails toprovide universal protection against catastrophicallyhigh out-of-pocket costs.

Table 5 illustrates the level of protection againstcatastrophic expenses provided by major public and pri-vate insurance. (Population totals exceed the projectedfiscal year 1978 population because of duplicate countingin certain categories.)

Table 5. NUMBERS OF PERSONS CLASSIFIED BY ADEQUACY OFPROTECTION AGAINST CATASTROPHIC COSTS INFISCAL YEAR 1978

18 Million PersonsThe uninsured—not eligiblefor aid from noninsurance sources

19 Million Persons a/Families with incomes of less than$10,000 holding only individualprivate policies

26 Million Persons a,/The aged and disabled on medicare

38 Million Persons a,/Basic hospital with no majormedical insurance

24 Million PersonsMedicaid population

103 Million PersonsMajor medical, comprehensive majormedical, members of HMOs

Unprotected

Least AdequateProtection

Less than AdequateProtection

Less than AdequateProtection

Adequate Protection

Good Protection

a./ These categories overlap.

17

The following section discusses in detail theadequacy of public and private catastrophic protection.

Private Health Insurance

There are three types of private health insurance:basic hospital coverage, major medical, and comprehensivemajor medical.

Basic hospital coverage insures a limited range ofbenefits. The number of insured days of hospital careand the maximum amounts paid for each kind of service arespecified. Coverage varies widely among basic plans; someinsure 15 days of hospital care a year, others 365 days.

Major medical insurance is usually intended to sup-plement basic hospital coverage. If purchased alone, with-out basic underlying coverage, it is often referred to as"catastrophic" insurance. Major medical insurance coversa broad range of expenses and involves a large deducti-ble 8y and relatively high maximum benefit payment limits.This type of plan usually specifies the fraction of theentire bill, up to the benefit limit, that will be paidby insurance (usually 80 percent).

Comprehensive major medical insurance integratesbasic hospital coverage and major medical. It involvesrelatively low deductible levels, like basic hospitalcoverage, and high maximum payment limits, like majormedical policies. 9/

A deductible is the amount of covered medical expensethat must be incurred by the insured before benefitsbecome payable by the insurer. Deductibles are usual-ly in the amount of $50, $75, or $100, but can rangeto $1,000 in catastrophic policies.

For purposes of this analysis, persons enrolled inHealth Maintenance Organizations are considered tohave comprehensive major medical insurance.

18

Generally, families with major medical or compre-hensive major medical insurance are more adequately pro-tected against both general and catastrophic expensesthan families holding only basic hospital coverage. Anestimated 103 million persons will have major medical orcomprehensive policies in fiscal year 1978; an estimated37.5 million will have basic hospital insurance with nomajor medical coverage.

Major Medical Insurance. The catastrophic expenseprotection provided under major medical and comprehensivemajor insurance or through health maintenance organizations(group practice plans) is very extensive. This type ofinsurance has been improved so substantially in the lastfive years that enrollees are unlikely to suffer catas-trophic expenses for services covered by their insurance. 10/In fiscal year 1978, 36.7 million persons with major medi-cal insurance are estimated to have unlimited coverage, orpolicies with coverage limits of $250,000 or $1 million.The average benefit under policies held by the 66.7 millionpersons whose major medical insurance has a maximum pay-ment limit is estimated at $112,000 in that year. In fis-cal year 1970, the average payment limit for such policiesis estimated to have been about $11,000. Even familiesthus insured, however, are vulnerable to catastrophicexpenses arising from non-insured services, particularlynursing home care, mental health services, drugs, anddental services.

Major medical coverage is closely correlated withincome. Families with fiscal year 1978 incomes above$10,000 are more likely to hold this type of coverage thanthose earning less than $10,000. Table 6 shows fiscalyear 1978 projections of major medical coverage by familyincome.

1Q/ This statement should be qualified by noting that somecomprehensive and major medical policies place nolimit on beneficiary cost-sharing. Thus some personsin this group may incur catastrophic expenses throughhigh co-payments.

19

ITT"

ITable 6. PRIVATE MAJOR MEDICAL COVERAGE (by Family Income

- Fiscal Year 1978 Projections)

FamilyIncome

Number ofPersonswith cov-erage(in mil-

Percent ofPersons atIncomeLevel withCoverage

Persons withMaximum Pay-ment Limitson Coverage(in millions)

Persons withUnlimitedCoverage( in millions )

lions )

:$s5,

10

20

30

,000

000-9,999

,000-19,999

,000-29,999

, 000 and over

Totals

6.

31.

54.

7,

3.

103,

.6

.8

.8

.2

.0

,4

15,

44.

61.

56,

69.

.6

.6

. 3

.7

.8

3,

19

36,

4

2

66

.6

.7

.8

.6

.0

.7

3

12

18.

2

1

36

.0

. 1

.0

.6

.0

.7

SOURCE: Projections based upon the 1970 CHAS/NORC Survey and a specialsurvey of employer group insurance made by the Department ofLabor in 1975.

Basic Hospital Insurance. Basic hospital insuranceprovides less adequate catastrophic protection than majormedical insurance. Basic policies expose insured personsto two risks not faced under major medical coverage. Thefirst risk is that they may exhaust their benefits; thesecond is that the benefits paid by their plan may besubstantially less than the actual charges for services.

Table 7 shows that over 92 percent of those estima-ted to have basic hospital without major medical coveragein fiscal year 1978 will be insured for a limited numberof days of hospital care. These 45 million people riskexhausting their hospital benefits. The actual" risk isrelatively small because the average number of days insuredunder a policy that limits days of coverage is estimated

20

at 207 in fiscal year 1978. ll/

The risk of incurring catastrophic expenses throughinadequate benefit payments is much greater. Many basicplans have very low reimbursement limits for hospitalcharges, and beneficiaries are liable for large out-of-pocket costs for both hospital room and board and forancillary charges.

Table 7. PERSONS WITH BASIC HOSPITAL INSURANCE AND NOMAJOR MEDICAL INSURANCE, PROJECTED FOR FISCALYEAR 1978 (by Income Class)

PersonsFamily CoveredIncome (in millions

<$5

5,

10

20

30

,000

000-9,999

,000-19,999

,000-29,999

,000+

3

11

19

3

0

.3

.9

.2

.0

.1

Persons withLimited Daysof Coverage

) (in millions)

2.

10.

18.

2.

0.

9

6

0

9

1

Persons withUnlimitedCoverage(in millions)

0.

1.

1.

0.

0.

4

3

2

1

0

SOURCE: CBO projections based upon the 1970 CHAS/NORCsurvey and a special survey of employer groupinsurance made by the Department of Labor in 1975,

ll/ If persons with basic hospital insurance and no majormedical coverage are neither more nor less likely tohave a long hospital stay than the remainder of theunder-65 population, approximately 138,000 personsunder 65 with basic hospital coverage are likely toexhaust their hospital insurance benefits in fiscalyear 1978.

21

IThere are two basic types of insurance payments for

hospital care. The first is referred to as a "servicebenefit," and pays the full cost, whatever a particularhospital's actual charges may be. The second, referredto as "indemnity" coverage, stipulates the maximum pay-ment for room and board or ancillary charges, regardlessof the hospital's actual charge. Persons with servicebenefits are better protected against catastrophic hospi-tal expenses than those with indemnity coverage.

Of the estimated 37.5 million people in fiscal year1978 who hold basic hospital insurance with no majormedical coverage, about 69 percent are estimated to haveservice benefits and 31 percent indemnity coverage. Theproportion of the families with indemnity coverage de-creases as incomes rise. 12/ The average maximum paymentsmade under indemnity coverage are also closely correlatedwith income, increasing as family incomes rise. 13/

The American Hospital Association considers insur-ance to be adequate if it pays 75 percent of hospitalcharges. However, the average room and board maximum un-der indemnity policies in fiscal year 1978 is estimatedat $71, or 62 percent of hospital room and board charges

12/ This decrease reverses for families earning more than$30,000, the overwhelming majority of whom hold in-demnity policies. The benefit levels provided underpolicies held by these higher-income families are sub-stantially better than those of lower-income bene-ficiaries. See appendix for table detailing distri-bution of hospital benefit payments by family income.

13/ The average value of indemnity protection for hospitalroom and board charges in fiscal year 1978 is estimatedat $62 for persons with family income of less than$5,000 and $100 for persons with family income of$30,000 or more. The average charge for hospital roomand board in fiscal year 1978 is estimated at $113.Therefore, the estimated 3 million persons with cover-age limits of $62 can expect to pay almost half theroom and board charges out-of-pocket, while the 0.2million with coverage limits of $100 will be personallyresponsible for about 15 percent of the cost.

22

projected for that year. Therefore, a majority of the12.2 million persons with indemnity coverage and nomajor medical insurance should be considered to haveinadequate protection for even a short hospital stay.The problem of inadequate indemnity payments is likelyto diminish in the next three to five years, however, asthe trend away from cash indemnity to full service bene-fits continues.

Public Programs

Two types of government programs provide assistancein financing health care: direct care programs and third-party reimbursement plans. Under the first category, thegovernment (federal or state) organizes and provides ser-vices directly. The largest direct care systems are statelong-term care institutions (psychiatric and chronic dis-ease hospitals) and the federal hospital systems forveterans, Indians, and Alaskan natives. Government third-party reimbursement plans are modeled on private healthinsurance, paying private providers on behalf of publicprogram beneficiaries. Major third-party reimbursementplans include medicare, medicaid, and CHAMPUS. 14/

Direct Care Programs. Direct care programs, espe-cially the Veterans Administration system and state long-term care facilities, are an important source of care forpersons with catastrophically high expenses and inade-quate resources to seek treatment in private facilities.

14/ CHAMPUS (Civilian Health and Medical Program of theUnited States) is operated by the Department ofDefense to finance health expenses for militarydependents and retirees of the Armed Services.

23

IJJLj...

A large proportion of care provided in VeteransAdministration hospitals could be described as catas-trophic protection for uninsured veterans or for thosewhose illnesses require treatments not usually coveredunder private policies. 15/ The Veterans Administrationhospital system thus provides an important source ofprotection against catastrophic expenses for veteranswith a service-connected disability (2.2 million personsin 1975), for veterans over the age of 65, and for otherveterans who cannot afford private care.

State long-term care institutions, particularlypsychiatric hospitals, are a similar source of free carefor indigent patients and persons without private insur-ance coverage for mental illness. 16/ Almost three-quarters of all psychiatric hospital care is financedthrough government programs, the remaining 26 percentthrough private insurance (17 percent) and direct consumerpayments (9 percent).

Third-party Reimbursement Programs. The two majorgovernment third-party reimbursement plans are medicareand medicaid.

15/ A 1974 Veterans Administration survey on one week'shospital admissions found that 68 percent of allveterans admitted had neither public nor privatehealth insurance. Similarly, almost one-third ofthe fiscal year 1974 VA patient census were veteransadmitted for psychiatric care—a service not usuallycovered under private insurance.

16/ According to the 1970 census, 63 percent of personsinstitutionalized in state and county psychiatricfacilities had no income before admission.

24

Medicare provides health insurance coverage for theaged, the disabled, and persons suffering from chronicrenal disease. The program has two parts. HospitalInsurance (HI) is provided to all eligible Social Securitybeneficiaries meeting one of three criteria: attainingage 65; meeting Social Security's definition of total andpermanent disability; or suffering from chronic renal dis-ease. Supplementary Medical Insurance (SMI) is an optionalsupplement designed to pay part of non-hospital expenses.The Social Security Administration estimates that in fis-cal year 1978 the HI program will cover 23.6 million aged,2.4 million disabled, and 24,000 renal disease patients.A slightly smaller number will participate in SMI.

The medicare HI program provides adequate protectionagainst catastrophic hospital costs for most beneficiaries.A 1971 survey based on a 1 percent sample of medicare bene-ficiaries using hospital services found that the programprovided coverage for about 97 percent of all hospitaldays (excluding deductible and coinsurance charges). 17/Medicare HI coinsurance (the patient's portion of thecost) can be burdensome to the long-stay patient becausebeneficiary co-payments start on the 61st day and increasewith length of stay. However, about 95 percent of medi-care hospital stays end at least two weeks before the61st day. Over a five-year period (1966-1971), only0.3 percent of hospitalized medicare beneficiaries areestimated to have exhausted their HI benefits.

Catastrophic protection under the SMI program isless adequate. SMI beneficiaries must pay 20 percent ofall covered expenses, with no payment maximum. This re-quired cost-sharing can cause substantial out-of-pocketspending for some beneficiaries. Beneficiaries are alsoresponsible for provider charges that exceed the "reason-able" limit set by medicare. These excess charges areestimated to reach about $0.8 billion in fiscal year 1978.

17/ Preliminary data from an unpublished study.

25

T

i.

Because of the cost-sharing requirements under HIand SMI and large expenditures made for non-covered ser-vices, medicare pays for only about 42.0 percent of thehealth expenditures of the aged. Approximately one-fifthof the aged receive medicaid benefits to supplement medi-care. The combination of medicare, medicaid, and supple-mentary private insurance pays 71.0 percent of the healthexpenses of the aged. The distribution for the disabledis assumed to be about the same.

There are no data to indicate the extent to whichout-of-pocket spending by the aged and disabled coversroutine expenses, or those classified as catastrophicunder a high expenditure test. Therefore, no precisejudgment can be made about the adequacy of medicare pro-tection against high dollar expenditures.

Medicaid is designed to help specified groups of low-income people: the low-income aged, blind, and disabled;and families receiving payments under the Aid to Familieswith Dependent Children program. Thirty-one states havealso included other needy persons not qualified for cashassistance. However, because primary eligibility is tiedto welfare, significant numbers of poor persons are noteligible for benefits. In 1975, an estimated 8 to 10 mil-lion persons with incomes below the poverty level wereexcluded from the program. The primary groups of low-income people not eligible for medicaid are single indi-viduals and families without children. An estimated24.4 million people will receive benefits under the pro-gram in fiscal year 1978.

Medicaid is intended to provide full protectionagainst both routine and catastrophic expenses, althoughthe exact benefit package varies by state. There is nocost-sharing and providers are not allowed to bill thepatient for charges in excess of those reimbursed undermedicaid. Recipients are responsible for the full cost ofnon-covered services. These costs can be substantial insome states.

In the 31 states that include medically-needy per-sons in addition to the mandatory cash-assistance recip-ients, medicaid theoretically provides catastrophic pro-

26

tection for non-poor families with exceptionally highmedical expenses. There is evidence, however, that thisprotection operates very erratically. A 1975 study ofthe spend-down program found that in one state less than5 percent of those eligible received benefits under theprogram.' 18/

The largest population group qualifying for benefitsunder the medically-needy program is aged persons in needof long-term nursing home care. As a result, the primarycontribution of medicaid to financing catastrophic expen-ses is through the payment of long-term nursing home costs,Medicaid is the only major third-party reimbursement plan,public or private, that provides substantial coverage forlong-term nursing home care. Estimates for fiscal year1978 are that medicaid will pay about 45 percent of allnursing home costs.

Tax Subsidies for Medical Care

Medical care is subsidized through the tax system byallowing individual taxpayers to (1) exclude from taxableincome the contributions for health insurance premiumsmade in their behalf by employers and (2) claim medicalexpenses (including health insurance premiums up to $150)as an itemized deduction. The federal individual incometax revenue lost by these provisions is estimated to be$4.7 billion for the exclusion and $2.3 billion for thededuction in fiscal year 1978.

The exclusion provision is designed to encourage thepurchase of health insurance in general, but its effect oncatastrophic insurance is unclear. The deduction provision,on the other hand, is intended specifically to subsidizehigh expenses (those exceeding 3 percent of adjusted grossincome). The medical expense deduction provides a taxsaving only to taxpayers who itemize deductions. Lower-income taxpayers tend to take the standard deduction andtherefore cannot take advantage of the medical deduction.The value of the deduction to the itemizing taxpayer de-pends upon his marginal tax rate.

18/ Evaluation of the Medicaid Spend-Down. Urban SystemsResearch and Engineering, Inc., HEW Contract No.SRS-74-58.

27

The medical expense deduction is effective in pro-viding catastrophic expense protection primarily tofamilies in higher income brackets. A study of 1970taxpayers found that the frequency of high real costs tothe high-income (over $15,000) taxpayer is cut in halfas a result of the deductible, but drops only from 9.1 to7.5 percent for the low-income ($3,000 to $5,000) tax-payer. 19/

19/ Bridger Mitchell and Ron Vogel, "Health and Taxes:An Assessment of the Medical Deduction," The SouthernEconomic Journal, Vol. XLI, No. 4, April 1976.

28

CHAPTER III WHAT PROGRAMS MIGHT BE ADOPTED TO FILLTHE GAPS?

Designing a Plan to Meet Policy Objectives

Constructing a single uniform catastrophic protec-tion package to cover all the risks is almost impossible.The major stumbling block is the necessity that it be alimited catastrophic protection scheme and not a compre-hensive plan.

Covering all the diverse risks that create catas-trophic expenses is relatively simple under a comprehen-sive plan that pays for most health expenses. It is lessfeasible when the object is to pay for only a small por-tion of costs as in a catastrophic plan. Moreover, find-ing the most effective means of "filling the gap" for theconsumer is not the sole criterion to be considered. Otherpolicy objectives are important:

1. Adequacy and Fair Distribution of Benefits. Ifthe plan is publicly financed, financial assistance shouldbe the same for persons in similar circumstances, and bene-fits should be adequate to prevent financial hardship.

2. Compatibility with Basic Insurance. Because acatastrophic insurance plan does not pay all costs, butonly those in excess of a catastrophic threshold, the planshould integrate basic and catastrophic coverage.

3. Simplicity and Economy of Administration. Thestructure of the plan should not be too complicated to beclearly understood and appropriately used by consumers andproviders. It should be designed for economy of adminis-tration and to reduce opportunities for fraud and abuse.

4. Minimizing Inflationary Pressures. The planshould attempt to minimize the addition of new inflationarypressures on health care services. Any new insurance planor tax credit that increases the extent of third-party pay-ments will increase demand and stimulate a higher rate ofinflation than would be expected under current policy. How-ever, certain types of third-party payments are likely tobe more inflationary than others.

29

T

J_

Devising a uniform catastrophic protection planwhich adequately fills the main coverage gaps and meetsall of these objectives is very difficult. For example,a plan modeled on traditional private insurance (withfixed deductibles for utilization or expenditures) can bereadily designed for compatibility with basic insuranceand relative economy of administration. Assuring that sucha plan would provide an equal measure of protection to allpersons is much more difficult, since some beneficiarieswill have no basic insurance and others will have cover-age of varying degrees of adequacy.

A fixed deductible plan could be designed to pay forunusual expenses that are not met through private insur-ance. But such a plan would not help low-income familieswhose routine expenses are high relative to family income(unless the deductible is set so low that the plan is ef-fectively comprehensive rather than catastrophic insur-ance) .

An income-related plan can be targeted to meet indi-vidual need and would therefore be the best means of meet-ing the catastrophic expense problems of low-income fami-lies. However, such a plan would be complex and expensiveto administer because both income and expenditures wouldhave to be verified. The plan might also invite confusionregarding eligibility, and would be hard to integrate withbasic insurance.

Effect of Induced Demand on Program Costs

The design of a particular catastrophic insuranceprogram—the population groups and expenses covered, theadministrative structure and reimbursement mechanismsemployed—will determine the program's impact on such fac-tors as consumer demand, provider behavior, and the use ofhealth care resources. The interaction of these factorswill, in turn, be a major determinant of total programcosts.

A program decreasing consumer out-of-pocket costs willincrease demand for services. Therefore, a program thatcovers previously uninsured people or that pays for ser-vices the consumer previously financed directly will increase

30

demand a great deal more than a plan that only marginallyextends present coverage. For this reason, consumer cost-sharing through deductibles and coinsurance are sometimesused as mechanisms to regulate the level of consumer de-mand.

Improvements in third-party coverage also have animpact on provider behavior. When insurance coverageincreases, so do provider charges. This occurs even whenthe supply of providers is fully adequate to satisfy thehigher level of consumer demand. Extensions of third-party reimbursement also generate more provider-initiatedservices. Consumers are not inclined to question thenecessity of these additional services because third-partypayments insulate them from the direct cost.

Increases in the quantity of services generated byconsumers and providers and the higher level of providercharges resulting from new insurance are collectivelycalled "induced demand." As the term implies, these arenew costs created or induced by the insurance plan. In-duced demand does not refer to current expenditures thatare absorbed by the new insurance plan, called "transfercosts." (See appendix for a discussion of assumptionsused in computing induced demand.) The administrativestructure and reimbursement mechanisms used in a programgreatly influence the degree to which potential inducedcosts generated by new insurance coverage are realized.

POLICY ALTERNATIVES FOR CATASTROPHIC INSURANCE

The difficulty of satisfying in one plan all of theobjectives outlined has forced drafters of catastrophicinsurance plans to set priorities. Three prototype catas-trophic plans, each illustrating a different emphasis ofobjectives, are presented below. In addition, a plan thatdeals simultaneously with all of the major catastrophiccost problems is presented for comparison.

1. A traditional insurance plan.

2. A fixed-percent-of-income maximum-liability plan

31

L

3. A mixed traditional and income-related plan.

4. A graduated-percent-of-income maximum-liability plan.

Long-term nursing home coverage has been excludedin each plan, despite the fact that nursing home care isthe major cause of catastrophic expenses among the aged.The financing of long-term care poses many complex socialand administrative problems not involved in the financingof other types of health care. Some of these problemsstem from the peculiar nature of the service, which isoften more custodial or residential than strictly medical.Thus, judgments must be made about the extent to which ahealth insurance benefit should subsidize the care, andto what extent other forms of housing, income assistance,or social services are more appropriate.

Additional problems arise from the nature of thepopulation group that requires long-term care. Seventy-five percent of persons in nursing homes are over the ageof 75; about 40 percent are more than 85 years old. Manyhave no close family members and are not competent tomanage their own affairs. Close supervision is necessaryto assure that funds a,re not misused and that the mostsuitable level of care is provided.

Although the inclusion of long-term care in a catas-trophic plan would greatly complicate the financial andadministrative arrangements required to handle other,solely financial, catastrophic cost problems, the issue ofhow to finance long-term care should be considered concur-rently with proposals for other catastrophic protection.20/

Alternative Ong. A Traditional Insurance Plan

A traditional insurance fixed-expenditure catastropicplan designed to operate as a supplement to basic privateinsurance, medicare, and medicaid would not attempt to

20/ For a discussion of long-term care options, see CBO1977 Budget Issue Paper "Long-Term Care."

32

finance "first dollar expenses" 21/ or to provide pro-tection to persons with inadequate private insurance.Instead, it would be a purely catastrophic supplement toaverage private coverage. It could logically provideseparate benefits for the medicare and non-medicare popu-lations because of significant differences in their basicinsurance benefits.

General Coverage Plan. A plan for the non-medicarepopulation could cover all short-term inpatient hospitalcare in excess of 150 days, and non-hospital expenses(excluding dental care and nursing home care) in excess of$2,000 a year per person. Coverage would remain in effectuntil the persons had been out of the hospital for sixmonths or without non-hospital expenses in excess of $100per month for six consecutive months. The program wouldbe administered by the Social Security Administrationthrough its network of medicare fiscal agents. Only theperson incurring catastrophic expenses would become enti-tled to coverage, not the entire family.

The rationale for these coverage limits is that 150days of hospital care comfortably brackets the minimumaverage coverage level of basic private hospital insurance,The plan assumes that inadequate basic coverage will beupgraded to meet most of the cost of hospital expenses be-low the catastrophic threshold. The $2,000 expenditurerequirement for non-hospital care is chosen somewhat arbi-trarily because data are lacking on the percent of non-hospital charges incurred by insured persons and subse-quently paid by insurance. The $2,000 limit assumes thatapproximately 50 percent of non-hospital charges will bepaid directly by the insured person.

21/ "First dollar" coverage in health insurance refers toa plan which begins to pay benefits from the first dol-lar of charges the beneficiary incurs. In practice,this has usually come to mean that the plan pays 80percent or 100 percent of charges after the beneficiarypays a relatively small deductible—for example, $75or $100.

33

LJLI-L-

Medicare Supplementary Plan. This plan, designed asa supplement to medicare, would remove all limits on hospi-tal and skilled nursing home benefits and eliminate hospitaland skilled nursing home coinsurance. A limit of $250 perperson would be placed on cost-sharing under SupplementaryMedical Insurance (SMI).

The advantages of a traditional insurance plan interms of the policy and coverage objectives stated may besummarized as follows:

— It would provide catastrophic coverage for largeexpenses without disrupting basic insurancearrangements.

— It would be relatively simple and inexpensiveto administer because of the standardized de-ductibles and because the number of personswho would enter the plan each year would berelatively small.

-- It would not be conducive to beneficiaryfraud or administrative bias because of theuniform delineation of the catastrophicthreshold.

However, the plan would provide no significantassistance to low-income families who are uninsured orinadequately insured. The distribution of benefits isregressive, providing proportionately better protectionto higher-income families.

The fiscal year 1978 transfer costs (current expendi-tures absorbed by the new plan) of the general plan areestimated at $7.1 billion and the administration costs at$0.5 billion. The transfer costs of the medicare supple-mentary plan are estimated at $1.5 billion, the adminis-trative costs at $0.1 billion. The induced costs of a planof this kind would be relatively low for two reasons.First, it offers only a marginal increase in existinginsurance protection. Second, at these spending levels,care tends to be furnished whether or not the direct finan-cial resources of the consumer are sufficient to pay for it.Thus, much of the induced cost under this plan is payment

34

of bad debts. The induced costs of the general coverageplan are estimated at $3.3 billion; the medicare supple-mentary plan at $0.8 billion.

The total cost of the program in fiscal year 1978is estimated at $13.0 to $14.0 billion. The net additionalcost to the federal government would be lower—in the rangeof $12.0 to $13.0 billion. The offset estimates are im-precise because as no date are available on the compositionof the health expenses claimed under the tax deduction; itis impossible to estimate with any precision the extent towhich the plan would decrease the amount of tax revenuelost because of the deduction.

A less expensive version of the traditional insuranceplan could be devised by altering the deductible require-ments. Increasing the hospital deductible from 150 to 200or even 250 days would make virtually no difference in pro-gram costs. However, increasing the non-hospital deductiblefrom $2,000 to $5,000 would decrease transfer costs underthe general plan by $3.7 billion. Similarly, increasingthe SMI coinsurance maximum under the medicare supplementaryplan to $500 would decrease transfer costs by $0.25 billion.

Alternative Two. A Fixed-percent-of-income Plan

An income-related plan designed to pay all expensesin excess of a designated percent of family income couldoperate in several ways. One approach would be to set thesame deductible requirement for all families; for example,the family would have to spend 15 percent of their incomeon health care before the insurance became effective. Asecond approach would apply a sliding scale to the percentof income devoted to medical expenses before insurancebecame effective. For example, families earning less than$10,000 might be required to spend 5 percent of their in-come, from $10,000 to $20,000, 10 percent of income, andso on. The system could be further elaborated by income-related coinsurance. For purposes of this analysis,however, a fixed-percent-of-income approach without co-insurance is used.

35

The plan illustrated under this approach covers anyindividual or family for the full amount of non-insuredmedical expenses (excluding long-term nursing home careand care in state long-term and psychiatric hospitals) inexcess of 15 percent of family income. If the plan wereoperated as an insurance program, any family with expensesover the threshold could apply for coverage. If it wereoperated as a refundable tax credit, the family couldelect to have the credit applied to their tax liability,or to have an excess refunded in advance. In either case,the current tax deduction for expenses exceeding 3 percentof adjusted gross income would be eliminated. The costestimates assume that the plan will operate as insurance;estimates would be higher if the plan operated as a taxcredit.

In fiscal year 1978, an estimated 7 million familieswould qualify for benefits under such a plan if existingpublic insurance programs and private insurance arrange-ments remain unaltered. It is unlikely, however, that alllow-income families would continue to purchase privateinsurance, since the premiums would be almost as expensiveas the 15 percent spending requirement, or deductible, un-der the public catastrophic program. Thus, a large numberof families with incomes of less than $10,000 would probablyrely entirely on the catastrophic insurance program. Thisis particularly true for those who hold only individual(non-group) policies.

The response of families insured through employer-subsidized group plans is more difficult to predict. Unionnegotiators would probably try to have current premium pay-ments transferred to wages or other fringe benefits if thepublic program benefits duplicated the benefits of privateinsurance plans. However, the varying liability of dif-ferent employees for deductible payments (which under thepublic plan would depend not only on the employee's wages,but on total family income) would continue to make a stan-dard insurance package desirable.

The preference of middle-income families for compre-hensive (or "first dollar") protection must also be con-sidered. Health insurance is used by many of these familiesas a means of enforced saving or prepaying routine and pre-

36

dictable expenses. It is likely that many would continueto so use it, even if the result were higher average out-of-pocket costs than they would incur if they reliedwholly on the public catastrophic insurance program.

The estimated number of families benefiting from thefixed-percent-of-income program could range as high as 10to 15 million in fiscal year 1978. If medicaid were elimi-nated and replaced by the new program, the number of fami-lies receiving benefits would increase by an additional11 million. For purposes of cost estimating, this illus-tration assumes that all current public programs are re-tained.

The primary advantage of a fixed-percent-of-incomeplan is that benefits would be targeted at individual need.Therefore, assistance would be provided in equal propor-tions to families at different income levels. In practice,about 75 percent of benefit payments would be made on be-half of families with incomes below the national median.

The plan's disadvantages may be summarized as follows:

(1) Targeting benefits (through income and expenditureverification) is a complex and expensive administrativeprocess.

(2) Income-related benefits create incentives forconsumers to misrepresent income to gain fraudulent entryinto the program.

(3) Integrating the catastrophic plan with basicinsurance benefits would be difficult and would requireongoing disclosure of family income data to provide insur-ance companies to assure that private insurance liabilitylimits are not exceeded. Such disclosures may be regardedby some as an invasion of privacy. There would probablybe many multiple payments to providers because health in-surers have rarely exercised their present right to coordi-nate benefits among private insurers—a much simpler taskthan coordinating with benefits from an income-relatedcatastrophic plan.

37

"TfTTT'

The fiscal year 1978 transfer costs of the plan areestimated at $14.5 billion; administrative costs at$1.5 billion and induced costs at $1.8 billion ($1.4 bil-lion of these induced costs are attributable to medicaidas a result of increasing medicaid reimbursement to medi-care levels. Thus, only $0.4 billion of the inducedcosts are strictly attributable to the catastrophic plan.State governments would pay 45 percent or $0.6 billion ofthe medicaid induced costs.) The total program cost istherefore an estimated $16.4 billion. The net additionalcost to the federal government is estimated at $14.9 bil-lion (assuming the elimination of the current tax subsidyfor expenses which exceed 15 percent of adjusted grossincome).

Although this plan produces a positive induced demandfactor which increases the direct cost of the federalcatastrophic program, it is estimated to have a grossnegative effect on total spending of -$2.3 billion. Thisreduction in spending is not reflected in the cost of theprogram because it would occur in private spending outsidethe program. This occurs primarily because the design ofthe insurance plan makes it attractive for many familiesto drop private insurance coverage and self-insure for ex-penses up to 15 percent of their income. A reduction inthird-party protection is assumed to reduce demand sub-stantially. If this assumption is valid, a catastrophicinsurance plan of this nature would reduce overall nationalspending for health services by $0.5 billion (induced pro-gram demand of +$1.8 billion minus an off-program reductionin spending of -$2.3 billion).

The transfer costs of the plan depend on the deduc-tible level chosen. If, for example, the deductible levelis set at 20 percent of income instead of 15 percent, thetransfer costs would be reduced from $15.7 billion to$11.5 billion.

Alternative Three. A Mixed Traditional and Income-relatedPlan

A third approach combines elements of traditionalfixed-deductible insurance and income-related protection.Rather than establishing a uniform benefit for the entirepopulation, it responds selectively to the major catas-trophic cost problems.

38

The plan has three parts. The first would federal-ize medicaid with nationally determined eligibility andincome standards. For purposes of illustration, theeligibility criteria used will be $4,800 for a family offour (with increments of $500 for each additional familymember). Families with incomes in excess of these amountswould become eligible for benefits when health-relatedexpenses reduced their income to the protected level. Thesecond part would extend medicare benefits as in the medi-care supplementary plan described above. The third partwould alter federal tax policy to prohibit employers fromclaiming the cost of health insurance benefits as a taxdeduction and individuals from claiming the $150 insurancepremium deduction unless the insurance provides specifiedcatastrophic benefits.

The advantages of this plan are that it addressesdirectly the problems of low-income and aged persons, pro-vides a universal catastrophic protection plan by means ofthe medicaid spend-down, and encourages the improvement ofcatastrophic protection under private insurance. Thesegregation of coverage for the aged and poor largelyavoids the problem of integrating basic and catastrophiccoverage, since the medicaid population would presumablydrop private coverage. The plan would be relatively uncom-plicated and inexpensive to administer, although the spend-down provisions would present the same administrative prob-lems as the income-related plans.

Among the disadvantages are that catastrophic protec-tion for middle-income families is simply encouraged, notguaranteed. However, the catastrophic insurance alreadyheld by these families is very good, so the lack of a man-datory extension of coverage may not leave a significantgap in protection. A more serious problem is that, asidefrom residual medicaid spend-down eligibility, no assistanceis provided to non-poor families who are unable to obtainadequate private coverage because of pre-existing healthproblems. Another disadvantage is that the lack of a uni-form and universal system could cause public program bene-ficiaries to be treated as "second class" patients in someinstances. This is currently a widespread problem affectingmedicaid patients.

39

.JLJUIL

The fiscal year 1978 transfer costs of this feder-alized medicaid plan are estimated at $22.8 billion,administrative costs at $1.6 billion, and induced costsat $5.8 billion. The extended medicare plan has a totalcost of $2.4 billion. Therefore, the total cost infiscal year 1978 is estimated at $32.6 billion. Thisestimate assumes that the increase in tax subsidies toemployers who upgrade their insurance to meet catastrophicstandards is approximately offset by a decrease in subsi-dies to individual taxpayers who will no longer be able toclaim a deduction for catastrophic expenses and to employerswho drop insurance altogether rather than upgrade it to meetfederal standards.

The net additional cost to the federal government infiscal year 1978 is estimated at about $24 billion if statesare required to maintain their current dollar level supportfor medicaid. It is likely, however, that the cost wouldbe significantly higher because the federalized medicaidincome-eligibility level would probably be set at the esti-mated fiscal year 1978 poverty level, rather than the eli-gibility level of $4,800 for a family of four. Assumingthat the 1978 poverty standard is used, transfer costs ofthe federalized medicaid program are estimated at $29.0 bil-lion.

Alternative Four. Graduated-percent-of-income Maximum-liability Plan

None of the three limited catastrophic plans outlinedabove fully meets all of the major catastrophic cost prob-lems. A uniform and universal plan can be designed to dealwith the specific problems of both low-income and middle-income families through a single program. Such a plan wasproposed by the Department of HEW in 1973 as part of theMega Proposal.

However, encompassing all of the catastrophic coverageobjectives in a uniform national program produces what isactually a comprehensive national health insurance plan.It is included in this comparison solely to illustrate thatfully and simultaneously addressing the special catastrophiccost problems of low- and middle-income families cannot beaccomplished without a significant increase in expenditures.

40

This illustration uses an average family expenditurelevel of about 5 percent of income for medical care ex-cept for families below the poverty level, who would beexcused from all payment. The high coverage levels areintended to discourage the purchase of additional insur-ance; the cost-sharing provisions would not present anundue hardship to any family but would discourage unneces-sary utilization of services and keep consumers aware ofprovider charges, thus reducing induced demand.

Graduated-percent-of-income catastrophic insurance

Family IncomeLevel

$3,0003,000-4,9995,000-7,4997,500-9,99910, 000-14,99920,000-24,99925,000-29,99930,000-49,999$50,000 and over

FamilyPays

0.00.020%50%50%85%100%100%100%

Billsof Up to

$ 750750

1,0001 ,0001,0001,0002,000

Plus

25%25%25%25%25%

of AdditionalBills Amountingto

0.00.0

$ 500600

1,0002,0002,000

MaximumLiability

$ 150375875

1,0001,2501,5002,500

The program could be administered as either a publicor mixed public-private insurance plan. A family with out-of-pocket expenses in excess of the indicated income-relatedthresholds could request coverage, and the plan would payall expenses subject to the indicated cost-sharing. Theprogram could be administered directly by the federal govern-ment or by private insurance carriers. In the latter case,income testing would still necessarily be a government func-tion. The original HEW proposal suggested the use of govern-ment insurance vouchers that could be redeemed throughdesignated private insurance carriers.

The advantages of this type of plan are that it ade-quately meets the major catastrophic needs of both low- andmiddle-income families. It also solves the problem of inte-

41

grating basic and catastrophic coverage (except forfamilies at the highest income levels, for whom a pri-vately purchased comprehensive insurance plan would costless than the deductible and coinsurance required underthis plan).

The primary disadvantage of the plan is its adminis-trative complexity. Keeping track of each family's deduc-tible and coinsurance requirements, which might changeseveral times in a year, would be expensive. The timeneeded to record expenditures, to compute the requiredcost-sharing, if any, and to bill the family for itsshare of the cost would necessarily result in many hundredsof thousands of incorrect billings. Retroactive adjust-ments would be a continuous and expensive process.

The estimated fiscal year 1978 transfer costs of theplan are $100.7 billion, transferred administrative costsare $8.1 billion, and induced administrative costs, $4.2billion. Induced service costs are estimated at $16.0 bil-lion. The total program cost is therefore estimated at$129.0 billion. The plan would eliminate medicare andmost of medicaid (a residual medicaid plan would be neces-sary to finance long-term care, resulting in offsets esti-mated at $49 to $50 billion in fiscal year 1978. There-fore, the net additional cost to the federal government(assuming the program is wholly tax-financed) is estimatedat $79 to $80 billion.

All the plans described here have been discussedwithout reference to specific funding mechanisms. Thoseoperated by the government could be financed entirelythrough general revenues, through payroll taxes, or througha combination of tax sources. If operated as privateinsurance programs, some of the plans could be financedlargely through employer-employee insurance premium contri-butions, with general revenue subsidies. The impact on thefederal budget would vary depending on the extent to whichthe plans are tax- or premium-financed. However, for pur-poses of estimating cost, all the plans described areassumed to be tax-financed.

42

The financing mechanism chosen will have a greatimpact on the overall distributional effects of the pro-gram. It should be emphasized, therefore, that the distri-bution of benefits described under each option presentsonly part of the information necessary to assess the over-all income distribution effects of that option. Thispaper does not assess the distributional impact of variousfinancing options. 22 /

The difficulty of constructing an insurance programor tax credit that adequately addresses the major catas-trophic needs but does not become, in practice, a compre-hensive protection plan, raises the question of whetherlimited catastrophic protection is a sensible concept.Programs that meet most or all of the catastrophic cover-age requirements are so close to being a comprehensiveprotection plan that they should be evaluated in the con-text of comprehensive, rather than catastrophic insurance.

22/ For a discussion of the distributional effects offinancing mechanisms and benefits under major nationalhealth insurance programs, see Bridger M. Mitchell,"The Financing of National Health Insurance," Science,May 14, 1976, Vol. 192, pp. 621-636.

43

CHAPTER IV ADOPTING A PLAN: POTENTIAL EFFECTS ONHEALTH CARE AND FEDERAL PRIORITIES

Fifteen years' experience with private healthinsurance coverage, medicare, and medicaid suggests thatcatastrophic health insurance (or comprehensive nationalhealth insurance) would stimulate the use of high-costtreatments and the growth of expensive facilities, partic-ulary hospitals. The extension of third-party paymentsremoves market constraints on consumer demand for servicesand the provision of services; the increase in demand islikely to be especially significant in the case of catas-trophic illnesses because the patient and his family arelikely to seek services without regard to cost or incon-venience.

The supply of medical services will probably expandrapidly to meet whatever demand is generated by a newinsurance system. Expensive techniques and services willbe adopted as rapidly as there are funds to pay for them.In 1972, for example, an estimated 8,000 persons were onrenal dialysis in the United States at a cost of about$160 million. In fiscal year 1978, following the exten-sion of medicare benefits to persons suffering from end-stage renal disease, the number of persons on dialysiswill have increased by 150 percent to 20,000, at an esti-mated cost of $420 million. By 1980, the medicare renalprogram is projected to cost about $1 billion.

The renal dialysis precedent suggests that the costsimplied in an expansion of high technology treatments arevery substantial. The National Academy of Sciences estimatedin 1973 that the cost of treating end-stage heart diseaseby implanting an artificial heart could range from $600million to $1.75 billion. Inflated to 1978 costs, therange would be from $1.39 billion to $4.0 billion. 23/Similar costs are associated with novel treatments forother chronic diseases.

23/ Institute of Medicine, Disease by Disease TowardNational Health Insurance, National Academy of Sciences,June 1973.

44

There is evidence to indicate that the proportion ofhealth expenditures devoted to catastrophic illness isalready growing rapidly, partly because of the developmentof high-cost treatments. A comparison of the proportionof insurance payments generated by persons with except-ionally high expenses in 1970 and 1975 shows a marked trendtoward spending a larger proportion of the health caredollar on persons with catastrophic illnesses. 24 /

Figure 3 illustrates the increase between 1970 and1975 in the proportion of total expenditures exceedingcertain catastrophic levels by employees of the Metropoli-tan Life Insurance Company. To make the comparison meaning-ful, 1970 expenditures are inflated to 1975 price levels.The figure shows that when the $5,000 expenditure definitionis used, 22.5 percent of total spending in 1970 was forcatastrophic illnesses. In 1975, the proportion was 28.1percent.

In only five years, using the $5,000 definition,real expenditures for persons with catastrophic illnessincreased by 25 percent. The rate of increase at the$10,000 definition level was an even more dramatic61 percent; at the $15,000 level, it was 105 percent.There is no reason to believe that the expendituresgenerated by the Metropolitan Life employees differsignificantly from those of the population at large.

Huge expenditures are directed toward catastrophiccases, but treatment is often for patients in the endstages of terminal illness and, it may be argued, is onlymarginally effective. For the patient, his doctor, andhis family, even a marginal extension of life—whateverfinancial cost—is generally considered worthwhile, butsociety may be forced to view the question differently.The problem of resource allocation is not peculiar to a

24/ Gordon R. Trapnell, "The Increasing Cost of CatastrophicIllness," paper presented at the American Public HealthAssociation Convention, 1976. The work reported wasprepared under contract to the National Center forHealth Services Research.

45

LJl

Figure 3.Representative Increase in CatastrophicExpenses as a Proportion of Total ExpensesPercentage Increase 197O tO 1975

200

150

100

50

$2500 $5000 $7500 $10,000 $15,000Catastrophic Threshold Levels

Source: Gordon R. TrapnellData from the Metropolitan Life Insurance Company Employee GroupHealth Insurance Plan

$20,000 $25,000

purely catastrophic insurance program but is common toall national health insurance proposals and to the exten-sion of private health insurance to meet catastrophiccosts.

If very substantial increases in health-care spendingare to be avoided, it may be necessary to establish priori-ties among types of care. This may ultimately imply theneed to choose between federal expenditures for preventive,health-maintaining services and high-cost services forpersons whose lifespan may be only marginally increased.

46

APPENDIX

1

48

ESTIMATES OF INDUCED COSTS

The methodology followed to estimate induced costsis essentially the same as that described in "A Compari-son of the Costs of Major National Health InsuranceProposals." I/ Some modifications to that methodologywere necessary to accommodate features of uniform maximumliability insurance plan, which limits the maximum that anyindividual or family can pay out-of-pocket to 15 percent oftheir income. This proposal would discourage the purchaseof private health insurance to pay the cost of relativelysmall bills and hence reduce the overall spending forhealth care services. The change made in the methodologyfor estimating induced services was simply to assume thatthe process is reversible; that is, that a transfer froman insurance program to payment out-of-pocket will decreasethe use of health care services by as much as an increasein such insurance coverage would have been assumed toincrease such use. 2_/ The essentials of this methodologyare summarized below as it affects the proposals forcatastrophic health insurance examined in the CBO analysis.

Payment of Bad Debts and Unbilled Services

A national health insurance plan will pay all billsfor services covered by the program. In the absence ofsuch a program, many services which are not covered byinsurance will not be fully billed to patients, or ifbilled will not be fully paid. Many physicians and otherpractitioners do not bill the full charge to low-incomepersons who are not eligible for medicaid. If insured,

iy Prepared for the Office of the Secretary, H.E.W., undercontract No. HEW-OS-74-138 by Gordon R. TrapnellConsulting Actuaries, September 1976.

2_l This proposition is of course an empirical hypothesisthat needs to be established or disproved. Here it issimply an assumption.

49

II1 ____

the insurance payment is often taken as full compensationwithout any attempt to collect any cost sharing (deducti-bles, coinsurance, co-payments, etc.)- Similar discountsmay be given to friends of those with especially largebills. Some institutions do not bill the full cost ofservices. If the majority of services of such institu-tions are covered by a national health insurance plan,however, charges will be raised to the full level of costthat would be recognized by such a program.

Many services billed by both institutions andpractitioners are not paid. Bad debts of hospitals runapproximately 5 percent. Many physicians do not collect5 percent to 15 percent of their bills. Further lossesare incurred by discounting uncollected bills to collec-tion agencies or lawyers.

Such bad debts and unbilled charges for servicesdirectly covered by an insurance plan will be paid, andsuch payment will increase overall spending for healthcare. Since bad debts are a higher proportion of chargesfor services for those with catastrophic claims, a catas-trophic health insurance plan will pay for a larger pro-portion of bad debts and unbilled charges than otherproposals.

Increased Use of Services

If a health care service is paid for by a thirdparty (insurance plan, government program, etc.), thenpatients will use more services. This phenomenon has beenwidely discussed in the health economics literature as ademand response to lowering the effective price paid byconsumers. The increase in services is assumed to be afunction of the amount transferred from (or to) directpayment, bad debts, or unbilled charges to an insuranceor government program.

50

Full Payment for Services Now Paid for Through StateMedicaid Programs

Reimbursement rates under many state medicaid pro-grams are substantially lower than the payment rates inthe medicare program which is specified to be the reim-bursement basis used by the options for catastrophicillness discussed in this paper. Absorption of theseservices into one of the plans analyzed will increasethe level of payment to providers. Such increase is anew cost of health care.

Excess of Charges Over Reasonable Charges on AssignedClaims

Each of the plans analyzed in this paper would payreasonable charges as defined in the medicare program.Physicians would be prohibited from collecting any excessof actual charges over "reasonable charges" if theyaccept assignment for the insurance payment. Reasonablecharges are less than actual charges primarily for tworeasons:

(a) Reasonable charges are determined from data thatare one and a half years old on the average at the timeapplied. Since the level of physician fees has beenrising rapidly, reasonable charges are substantiallylower than actual charges.

(b) Since 1973 increases in reasonable charges havebeen limited to an economic index compiled on the basisof physician costs. The base was 1973, a time at whichphysician fees had been decreased by compliance with thecost control program.

It is estimated that in 1978, reasonable charges willaverage approximately 80 percent of actual charges ofphysicians. Those physicians who do not accept assignments

51

L

may not bill patients for the other 20 percent. 3̂/ Inorder to estimate the effect of this provision, it isassumed that physicians accept assignment on 50 percentof their services, the same proportion as in the presentmedicare program. It is further assumed that supplementalinsurance will not pay such excess of actual over rea-sonable charges. Finally, it is assumed that the rate ofbad debts among such excess charges is twice that forother physician bills paid out-of-pocket.

Diversion of Philanthropic Contributions

Many medical institutions rely on voluntary contri-butions to pay for a significant share of furnishing ser-vices that will be reimbursed through a new program.Since program funds will be available, such donations willno longer be needed for their present purpose. To a largeextent, however, such funds will be spent for some otherhealth purpose. This diversion of philanthropic contribu-tions to new purposes constitutes a new spending for health

Maintenance of Federal Facilities

Many of the services presently furnished through theVeterans Administration and Public Health Service hospitalsand facilities will be covered under one of the optionsanalyzed. As a result of the availability of the new fundsmany persons will obtain health care in private facilities.It is unlikely, however, that spending for federal facili-ties will be reduced in proportion to this transfer ofservices elsewhere. New types of services will be fur-nished. Further, overhead costs will be a higher propor-tion of total spending.

3/ In addition, many patients will not pay for suchcharges billed after the government has determined thatsuch charges are "unreasonable."

52

Administrative Costs

Payment for services must be processed through anew insurance program rather than directly out-of-pocket(or non-payment due to bad debts or unbilled charges).Such processing is a new cost resulting from the pro-posal. Costs will be increased if new functions must beperformed. For example, it may be necessary to collectmore elaborate data than maintained typically by privatehealth insurers or to determine the income of each claim-ant under the program in order to determine his cost-sharing. £/ On the other hand, to the extent that indi-vidual insurance is replaced by group insurance or agovernment program with a similar level of processing--theoverall spending for administration will be reduced.

The base used to estimate the administrative costsof the proposal is the processing cost in the presentmedicare program. These costs were adjusted for theaverage size of claims and the proportions of hospital,medical, drugs, etc., for aged and disabled persons ascompared to the general population.

Induced Costs

The induced costs were divided into those that willbe paid for directly by one of the programs set up underthe options analyzed and those that would be borne by thegeneral public. For example, the programs would ingeneral bear most of the cost of new services furnished,bad debts and unbilled charges paid, and the higher paymentlevel for services formerly paid for medicaid. The excessof actual over reasonable charges on assigned claims,however, reduces the payments that otherwise would have

4/ For example, the comprehensive health insurance optionwould require the determination of the income forvirtually all persons with covered services under theprogram.

53

be paid out-of-pocket and do not affect program costs.Similarly, redundant federal facilities and the diver-sion of philanthropic donations increase spending outsideof such programs. Most of the induced administrativecosts is borne directly by the programs.

54

Table A-l. DISTRIBUTION OF HOSPITAL EXPENDITURES IN SHORT-TERMNONFEDERAL HOSPITALS (by Size of Individual Expenditures)FISCAL YEAR 1978 PROJECTIONS FOR POPULATION UNDER AGE 65

Per CapitaExpenditure

$100 - 500

500 - 1,000

1 .000 - 2,500

2,500 - 5.000

5,000 and over

Number ofPersons( in millions )

2.75

6.6

7. 1

2.3

1. 3

Aggregate ChargesAttributable toPersons withExpenses Indicated(billions of dollars)

$ 0.5

4.4

9.0

10.4

13.3

SOURCE: Calculated from data furnished by the Social SecurityAdministration National Health Insurance Modeling Team.

Table A-2. DISTRIBUTION OF HOSPITAL, EXPENDITURES IN SHORT-TERMNONFEDERAL HOSPITALS (by Size of Charges Associated withIndividual Admissions) FISCAL YEAR 1978 PROJECTIONS -POPULATION OVER AGE 65

Expense Per AdmissionNumber ofAdmissions(in millions)

Aggregate ChargesAssociatedwith Admissions(billions of dollars)

<$500

500 -

1,000

2,500

5 . 000

1, 000

- 2,500

- 5,000

and over

0.

0.

3,

2.

1

.4

.8

.5

.2

.4

$ 0.

0.

5,

7.

8.

2

.6

,4

.4

.2

SOURCE: Calculated from data furnished by the Social Security AdministrationNational Health Insurance Modeling Team and medicare length ofstay distribution data furnished by the General Accounting Office.

55

Table A-3. LENGTH OF STAY AND COSTS IN NURSING HOMESFISCAL YEAR 1978 PROJECTIONS

Length of Stay MidpointAveragePer Diem

Cost PerPersonPer Year

NumberofPeople

Cost PerYearAll Persons(in millions)

1 -1 -2 _3 -4 —5 -6 -7 -8 -9 -10 -11 -1 year

30 (days)2 (months)3456789101112or more

154575105135165195225255285315345360

41.41.41.40.40.40.38.38.38.38,38.38.35.

545454.14,1414,3030,30.30.30,30.34

1345678810121312

623,869,116,215,419,623,469,618,618,196,065,214,722

248,174,166,142,126,118,118,105,109,93,82,73,717,

044759865066274379379979370578293284636

154326519598684784884913942954992968

9,129

,531,625,951,808,279,024,173,327,551,121,865,375,765

Total 17,953,395

SOURCE: Calculated from distribution data furnished by Abt Associates.The data were produced by Abt Associates under contract to theNational Center for Health Services Research.

56

Table A-4. THE COST OF HOSPITAL CARE: BY LENGTH OF STAY - FISCAL YEAR 1978 PROJECTIONS(Civilian Noninstitutionalized Population Under Age 65)

Days of Inpatient Hospital Care

Under 10 10-29 30-59 60-100 101-365+

Number of Persons (in millions) 15.3 3.8 0.8 0.1 0.9

Total Hospital Charges Attributableto Persons with Indicated Length ofStay (billions of dollars) 14.7 12.5 6.1 2.6 1.7

i

SOURCE: Calculated from data furnished by the HEW National Health Insurance Modeling Team.Oio

Table A-5. THE COST OF HOSPITAL CARE: BY LENGTH OF STAY - FISCAL YEAR 1978 PROJECTIONSNONINSTITUTIONALIZED POPULATION OVER AGE 65 IN NON-FEDERAL HOSPITALS

^i^:: Days of Inpatient Care

~~ Under 10 10-29 30-59 60-100 101-365+

! Number of Episodes (in millions) 4.3 3.2 0.5 0.07 0.01

I Total Costs Attributable to Such1 Lengths of Stay (billions of dollars) 5.4 11.6 4.0 0.7 0.3

—I

j SOURCE: Calculated from unpublished medicare hospital length-of-stay data obtained from the1 General Accounting Office.

Table A-6. THE UNINSURED: WHY THEY DON'T HAVE COVERAGE

Ul00

B'amily Income

(persons underage 65 - 1974)

<$3,000

3,000-4,999

5,000-6,999

7,000-9,999

10,000-14,999

15,000

All Incomes

CannotAfford

Other InsuranceAid Not

a/ Available b/ Obtainable

Does NotBelieveinInsurance

DissatisfiedwithPreviousInsurance Other Unknown

(Percent of Families in Income Class)

47.

44.

45.

42.

31.

20.

40.

.8

.6

,0

7

,4

6

2

34

36.

30

27.

31.

34.

31.

.9

.2

.5

. 3

. 1

.5

.9

2,

2

2,

1.

1

1.

2 .

.2

.3

.2

.5

.6

.8

.0

7,

8.

9.

11.

13.

15.

10.

.0

. 1

.2

.2

.6

,7

.5

1,

1

1,

2.

2.

3.

2

. 1

.9

, 9

.6

.1

.9

.2

6.

6.

10.

13,

17.

20.

11.

.0

.0

.0

,5

.9

,3

3

1.

0.

1.

1.

2.

3.

1.

. 1

.9

, 2

.2

.3

,3

.9

SOURCE: 1974 Health Interview Survey (unpublished data).

a/ In most cases, this answer probably means that they are "high risks" and therefore would haveinsurance premiums substantially higher than the average individual policy premium.

b/ Veterans Administration, Medicaid, Workmen's Compensation, other state aid programs.

h

Table A-7. NATURE OF HOSPITAL INSURANCE BENEFITS (Basic HospitalInsurance - No Major Medical) FISCAL YEAR 1978 PROJECTIONS

Family Income

Service Benefits(Semi-Private IndemnityRoom or Ward) Coverage

(in millions of persons)

Average Room andBoard Limit UnderIndemnity Plans

<$5,000

5,000-9,999

10,000-19,999

20,000-29,999

30,000 and over

1.

7.

14.

2.

0

. 3

.4

.8

.7

.001

2

4

4

0

0

.5

.4

. 3

.01

$ 62

71

76

89

99

SOURCE: Calculated from the 1970 CHAS/NORC survey and a 1975 survey ofemployer group health insurance made by the U.S. Department ofLabor.

59

Table A-8. MAXIMUM ON ANNUAL FAMILY INCOME GOVERNING FEDERAL FINANCIALPARTICIPATION IN PAYMENTS FOR MEDICALLY NEEDY INDIVIDUALSUNDER TITLE XIX OF THE SOCIAL SECURITY ACT, JULY 1975

State

Number of persons in family

Arkansas (2/)California $2,400Connecticut 1,700District of Columbia (2/)Guam (2/)Hawaii (2/)Illinois (2/)Kansas 3,500Kentucky 1,200Maine 2,000

Maryland 1,800Massachusetts 3,800Michigan (2/)Minnesota (2/)Montana (2/)Nebraska (2/)New Hampshire 3,700New York (2/)North Carolina 2,000North Dakota (2/)

Oklahoma (£/)Pennsylvania (2/)Puerto Rico (2/)Rhode Island (2/ )Tennessee (2/)Utah (2/)Vermont (2/)Virgin Islands C.2/)Virginia (2/)Washington 2,900

West Virginia (2/)Wisconsin (2/)

$2,0003,8004,500( 2/ )(2/ )578003,5004,3002,2002,100

2,5004,4004,4004,4003,5003,4004,3004,4002,6003,600

2,8003,900(2/ )378001,6003,2004,300(2/ )3,6004,200

2,7004,700

$2,2004,7005,600( 2/ )(2/ )679004,2005,2003,0002,900

3,2005,1005,4005,3004,0004,0005,0005,4003,0004,600

3,5004,800( 2/ )475001,9004,1005,200(2/)4,3005,100

3,3005,500

$2,4005,6006,500( 2/ )(27 )870005,1005,7003,8003,600

3,9005,9006,4006,2004,5004,5005,6006,4003,2005,600

4,3005,600( 2/ )572002,2004,9005,900(2/ )5,0006,000

4,0006,500

$2,7006,4007,300( 2/ )(27 )971006,0006,2004,4004,200

4,5006,7007,5007,0005,0005,1006,2007,6003,6006,300

4,9006,400( 2/ )578002,4006,0006,700(2/)6,0006,800

4,1007,500

NOTE: States not shown do not provide care for the medically needy underTitle XIX, Medicaid.

I/ Connecticut—11, $600; $12, $600; 13, $800; 14, $1000; 15, $900;Illinois--$800 to $900; Washington--!, $500; 12 and 14, $400; 13,17, $300; 16 and 18, $200.

2y Data not reported.

15, and

60

6

$2,9007,2008,200

1073006,9006,9005,0004,900

5,0007,5008,5007,7005,6005,6007,0008,8003,8007,000

5,6006,900

676002,7007,1007,300

675007,700

4,1008,200

7

$3,2007,9009,100

1176007,7007,5005,6005,600

5,6008,3009,5008,5006,1006,2007,6009,8004,1007,400

6,2007,700

773002,9007,5008,100

772008,600

4,1008,900

8

$3,4008,60010,000

1273008,2008,0005,6006,300

6,1009, 10010,5009,1006,6006,8008,60010,8004,3007,800

6,7008,500

872003,2007,9008,800

779009,100

4, 1009,300

9

$3,6009,30010,800

1370009,0008,5005,6007,000

6,6009,80011,4009,8007,1007,3009,10011,8004,4008,100

7,2009,300

879003,4008,4009,600

875009,600

4,1009,700

10

$3,90010,00011,600

1377009,7009,0005,6007,700

7,20010,60012,40010,3007,6007,9009,80012,8004,7008,400

7,20010,100

975003,7008,80010,300

9720010,000

4,10010,000

AdditionalAmountfor eachAdditionalPerson

__

—a/)$600(I/ )--

—700

600800

1,000600500600700800300400

—600

800300400800

700d/)

300

61

O