Gabby Elzinga Joey HayesErin HarperDerek Field

Professor HansenEcon 548

March 24th 2015

General Overview

Historical ContextPart A: Inpatient/hospital care insurance (Derek)Part B: Outpatient/preventative care insurance (Erin)Part C: Medicare Advantage (Joey)

Added 2003Part D: Drug coverage (Gabby)

Added 2006

Political context, and enactment

-Lack of coverage among seniors-Inaccessible expensive coverage people with preexisting conditions-65+ healthcare coverage: 50% in 1965-Social insurance program created under Social Security Act, signed by LBJ 1965

Eligibility

-US Citizens who contribute to Medicare for 10 years-Younger people with permanent disabilities-People over 65 who did not contribute for 10 years may still receive benefits if they pay a premium-No consideration of pre existing conditions (KFF 2010)

Who uses?

● In 2010, 47 million people had Medicare coverage● 8 million younger people with permanent disabilities● 39 million people 65 and over

o 44% beneficiaries have 3+ chronic conditionso 29% have cognitive impairmentso 15% have functional limitations (KFF 2010)

● Improved coverage: 50% in 1965, 97% since 1970● Moon, 2001: Use of new medical procedures grew

faster among Medicare patients than among the young

Part A Overview

CoverageCosts to patients, taxpayers Costs to patientsProspective Payment System 1983Balanced Budget Act 1997Affordable Care Act 2010

Part A: what’s covered

● Inpatient care: o hospital stayso hospice careo rehabilitation facilitieso nursing homeso home health care.

● Partial coverage after 60 days - more in next slide

● Quality incentives: penalty on hospitals with high readmission rates

Cost to patients: incomplete coverage

Days of treatment covered annually

Coverage - 2015 costs

1-60 Full: $0

61-90 Partial: $315 coinsurance

90+ 60 lifetime reserve days: $630 coinsurance

post-lifetime reserve full costs

● Cost-sharing: requiring patients to be financially responsible for paying deductibles, copays, supplementary insurance

● Hoffman 2014: Cost-sharing reduces moral hazard, overconsumption

Costs to taxpayers: payroll taxes

● Funded through payroll taxes deducted from workers’ earnings: 2.9% total

● Deduction levied on both employees and employers: 1.45% each

● 4.5 workers contributing : 1 beneficiary in 1965● 3.3 workers : 1 beneficiary 2011 Heritage, 2012

Part A: PPS Reimbursements, how they work

● Aimed at reducing future Medicare costs (MDoH 2001)

● Fixed reimbursements, amounts determined by diagnosis category

● Amounts not always equal to the cost of the procedure, hospitals may keep extra money, must eat any losses.

● CBO 1991: Hospital margin of rural hospitals decrease more than that of urban hospitals

Part A: Balanced Budget Act 1997

● Cut the size of reimbursements for Medicare-covered procedures

● Wu, 2014: Patients at hospitals with relatively larger cuts experienced increases in 30-day, 90-day and 1-year mortality rates

● Reduction in hospital margins AFHHS & EY 1999

Part A: Patient Protection and Affordable Care Act 2010

● Increased contributions from wealthy by .9%● Holds down inflationary increases in PPS

reimbursements procedures, will save $260 billion over 10 years, cuts:o Home health care: $66 billiono Skilled nursing services: $39 billiono Hospice care: $17 billion

Part B: Overview

- Medical Insurance- Financing- Beneficiary Payments

- Means Testing- Effects on Patient Access - Payments to Physicians - Effects to Physicians - In Depth: Sustained Growth Rate

Part B: Medical Insurance

Created as a part of Johnson’s “Great Society” reforms in 1965

- 1966 - $3 monthly premium - 2015 - $104.60 for most beneficiaries

“Supplementary Medical Insurance” - Same eligibility as part A- 95% enrolled in Part A enrolled in

Part B- Optional, but 10% late fee for

enrollment after 7 months- More highly utilized and cost

effective than part A

Includes:- Physician care- Outpatient/Ambulatory care- Preventative care

Ex: flu shots- “Durable Medical Equipment”

Ex: walkers, oxygen equipment

Part B: Financing● Supplementary Medical Insurance

(SMI) Trust Fund:o Monthly premium covers 25% of

program financing (1984) Originally 50%

o General Tax Revenue covers 75% of program financing

● Budget Neutrality Model (1972) o Premiums cannot increase by

more than Social Security benefits adjustment

o Changes that occur cannot have more that $20 million impact on part B expenditures

Monthly Medicare Premiums 1966-2014

Part B: Beneficiary Payments

What Patients Pay:● Deductible

● Currently $147● Some services given without

deductible

● Monthly Premium →● Set to cover 25% of

spending● Directly out of Social

Security Checks

● Co-payment for service● 20% co-payment● New ACA regulations

PREMIUMS BY INCOME:

Part B: Means Testing

● Implemented in 2007o Approved by 2003 Medicare Act and modified by Deficit

Reduction Act of 2005● Effects less than 5% of beneficiaries● Helps to pay for high cost and increases quality of care for low

income recipientso “Balancing Factor”o If 25% of non-poor paid half of Medicare, overall financial burden

would be reduced by 10% (Pauly, 2004)

● Means testing most greatly affects middle class, not high income beneficiaries (Moon, 2004)

High Income = Higher Monthly Premium

Part B: Effects on patient access

Late enrollment penalty- 12.5% of enrollees delay service for at least 2 years (Sloan, 2012)

Less physician access than private insurance- less payment generosity means less willingness by physicians to accept

new Medicare patients (Brunt, 2013)

Copayments - For some low income recipients, 20% copayment is too large to justify the

cost of some medical services (Rogowski, 2008)

- ACA has changed standards for copayment eligible services and increased access to certain services

Part B: Payments to Physicians

Flat rate billing system (OPPS)

(1997, effective 2000)

- Curb costs to beneficiaries and government

- Officially increase by Sustainable Growth Rate (SGR)

- Adjusted through wage index- Each case different, costs differ- Pays physicians for more, not better

care

Balance Billing- Common at start of Medicare- Still done by some non

participating physicians - limited to 115% rate (1991)

Part B: Balanced Budget Act of 1997

Response to Medicare expenditures exceeding private insurance expenditures growth 1992-1997 (Coulam, 2011)

● Outpatient Prospective Payment System founded (Merk, 2000)

● Established the Sustainable Growth Rateo Shortsighted plan

● Target level of growth set for Medicare expenditureso Only below target level 4 out of 25 years (Foster, 2010)

Part B: Sustainable Growth Rate (SGR)

Original IntentOnly for Physician fees for service, so strictly Medicare part BTie Medicare budget to the National budgetReign in increasing Medicare costs for national savingsNo accounting for growth in health care costs or economic variancy

Current Issues SGR never sufficient to cover physician costs (KFF, 2014)

Covered by many “doc fixes” - 17 different stopgap legislations since 2003 (Foster, 2010)

- ensure patient access to care- ~20% drop in physician payments if not- Cost over $150 billion- 18th patch has to occur before April 1st

Limit the annual increase in cost per Medicare beneficiary to the growth in the national economy (CBO, 2011)

Part B: Proposed SGR Solutions

Solution? Quality v. Quantity Medicare Provider Payment Modernization Act of 2014

- Introduced February 2014

- Died in Senate in 113th Session

- Pushed funding forward to March 2015

New system proposed in Congress give choice to physicians: - Performance based payments- Added payments if participate in system with both spending and

quality factorsEstimated cost is 175 to 200 billion over 10 years (CBO, 2014)

Beneficiary payment offset?

Part B: SGR Solutions Impacts

● Beneficiaries absorb $58 billion of the costs to repeal SGR in 10 years (Boccuti, 2015)

● Accounting with costs to Federal government, true costs of implementation equals $233 billion

● Beneficiaries pay for portion of $175 billiono Increased deductible o Increased premium for higher incomes

Gaps in Coverage

Premiums relatively low, but still unaffordable to some:- Low deductible, but looming higher premiums with possible Medicare

reform- No limits on out of pocket spending- Preventative care that is cheaper than hospital care

Does not cover essential elderly care:- Vision Care- Dental Care- Hearing Aids

Part C Overview

• Need for Supplemental Coverage• Covered Services• Spread of Medicare Advantage• Impact:

• Costs• Patients

• Legislation

Need for More Coverage → Medigap• Part A Insurance:

• Made patients responsible for a significant deductible

• (as much as ~$700 annually)

• Part B Insurance:• Required a premium• Reimbursed only 80% of physician

charges• No reimbursement for prescription

costs

• Thus, a need for supplemental “gap insurance” existed

• Medigap Plans - supplemental insurance that help fill in coverage gaps

• Provides coverage for:• Co-pays/Co-insurance• Home Health Care• Ambulance costs• Durable Medical Equipment• Doctor Charges

• Potentially expensive• Premiums averaged $183 per

month in 2010 (Jacobson, Huang, Neuman 2014)

How Medigap Works• When combined with Original Medicare:

• Medicare pays its portion of the Medicare-approved amount for covered health care costs

• THEN, your chosen Medigap policy pays its share of the cost• Employers may provide Medigap coverage as part of retiree benefits

• The coverage provided, or the “gap covered”, is proportional to the premium paid

• In 2006, 18% of Medicare beneficiaries were covered by a Medigap policy (KFF 2008)

Medicare Part C - Medicare Advantage

• Formalized in 1997 after the passage of the Balanced Budget Act

• Initially available in 1985• Became known as

Medicare+Choice in 1997

• Designed to give enrollees more choices and thereby provide higher-value care

• Different from Medigap• Part C exists as an alternative

method to receive Medicare benefits, while Medigap only supplements Original Medicare benefits

• Medicare Part C generally provides access to all services covered by Parts A and B

• Beneficiary’s pay copayments for covered services to private insurance companies

Covered Services and Types of PlansThose Under Part A and B in addition to:

• Emergency and Urgent Care• Vision Services• Hearing Services• Dental Services• Health and Wellness Programs• Medicare Part D prescription Drug Coverage

MA plans are available to join if:1. You are entitled to Part A 2. Enrolled in Part B3. Live in the plan’s service area4. You do not have end-stage renal

disease

Medicare Cost Plans• Available in certain areas of the country• Non-network provider - services are

covered under Original Medicare (Pay Part B and a monthly health plan premium)

• Join anytime even if you only have Plan B• Leave anytime and return to Original

MedicareMedicare Special Needs• Plan for people with additional health care

needs or limited incomes• Chronic or disabling conditions• Live in a nursing home or other institution• Are eligible for both Medicare and state

Medicaid benefits

Types of Plans (contd.)HMO Plans• Offer benefits in addition to Original

Medicare• May include Medicare Part D• Network of providers• Out-of-network provider -> payment

Regional PPO Plans (MMA-2006)• Established to provide rural beneficiaries

greater access to MA• Cover statewide or multi-state regions• Includes a network of providers with less

restrictions on seeing non-network providers than HMOs

Spread of Medicare Advantage• Today, most beneficiaries have

some type of supplemental coverage (MA plans or Medigap)

• 18% of Medicare beneficiaries with traditional Medicare had no supplemental coverage in 2010

• In 1985 only 2% of beneficiaries enrolled (Newhouse, Mcguire 2014)

• Today, 28% of beneficiaries have chosen MA over traditional Medicare (Centers for Medicare and Medicaid Services 2014)

Cost to Beneficiary• Each month, Medicare pays a fixed amount for your care to the company

offering your MA plan through a combination of capitation and risk adjustment

• The insurance company can charge the beneficiary:1. Higher Copayments2. Higher Coinsurance rates3. Monthly Premiums - the average premium for MA plans in 2014 was $35 per month (KFF 2014)4. Yearly Deductibles

• The beneficiary also continues to pay Part B• Without MA, the beneficiary would pay Part B and Medigap plan cost

• Total of $319 in TM vs $115 in MA with zero premium (Glazer, Mcguire 2013)

Effects To Patients• Medicare Advantage (MA), on average, scores more highly than

Traditional Medicare (TM) on preventative care • MA rated lower than TM on access and quality (overall care and plan

rating) if beneficiaries had a chronic illness• Difference in ratings has narrowed since 2009

• MA and TM have similar vaccination rates and are rated similarly on the ease of getting care and access to a specialist (Medicare Payment Advisory Commission 2011)

• Based on six studies, MA beneficiaries are less likely to be hospitalized for potentially avoidable admissions than beneficiaries in TM

Source: Kaiser Family Foundation

Effects To Patients (contd.)• MA plans have a financial incentive

to manage chronic illness• Given the low likelihood of

disenrollment, incentives exist to minimize progression of disease and avoid hospitalization (Health Affairs 2013)

• MA provides a less resource-intensive style of practice than TM

Source: Kaiser Family Foundation

Effects To Patients (contd.)

•As of 2010, almost 50% of MA plan premiums were $0 - suggesting beneficiaries pay too much attention to upfront premium costs (Newhouse, Mcguire 2014)

Legislation – Balanced Budget Act, 1997

Primary Goal: Could Medicare Advantage be reformed so that Medicare could participate in managed care? (Mcguire, Newhouse, Sinaiko 2011)

• Intended to encourage competition and growth of health care plans available to Medicare beneficiaries

Secondary Goal: Reduce the deficit by cutting excess Medicare costs

Effects:

• Introduced adverse selection, costs

Legislation - Medicare Modernization and Improvement

Act, 2003Solutions to Medicare’s Problems:• Previous risk adjustment methods presented adverse

selection problems:1. Plans previously entered high-payment, high-cost counties

(Mcguire, Newhouse, Sinaiko 2011)2. Beneficiaries were allowed to enroll and disenroll in a Part C

plan each month (Newhouse 2002)• Hierarchical Condition Categories• Payments rates now decided on average annual costs per

region• Directs money towards organizations with the sickest

patients (Pope et al. 2004)

Effects:• MA became far more inclusive and cost-effective• MA contracts increased to more than 600 and 91% of

beneficiaries had access to MA (Mcguire, Newhouse, Sinaiko 2011)

Overpayment to MA Plans• Ideally, Medicare should pay less to beneficiaries in MA than in TM• However, since 2003 MA plans have been generously paid

• This payment resulted in expanded choice and enrollment, but cost Medicare more money than traditional Medicare

• $14 billion more in 2009 (Mcguire, Newhouse, Sinaiko 2011)

Legislation - Affordable Care Act • Plans bid vary according to how a county’s Traditional Medicare

spending compares to other counties•New reimbursement guidelines → lower projected spending → smaller number of plan offerings → decreased access

• Effects: ?

• “The Nation’s long-term fiscal balance will be determined primarily by the future rate of health care cost growth” (Orszag 2007)

• A Medicare Advantage program that is able to weigh quality and cost has the ability to improve performance and sustainability of Medicare (Mcguire, Newhouse, Sinaiko 2011)

Medicare Part D: Overview

• Need for the Benefit• Establishment of Part D• Impact

• Costs• Patients• Firms

Part D: Need for Prescription Benefit● 1990s: High levels of prescription drug spending

○ 4.5% of NHE in 1982, 10.1% in 2005○ 50% of elderly in 1995 have drug expenditures

>$1,200● Prescription drug coverage formerly covered by

employer-sponsored insurance for retirees○ Amount of Medicare beneficiaries covered:

■ 28-35% in 1990s■ 22.5% in 2000

● Cost-related nonadherence - increased costs in Parts A and B, adverse health outcomes

○ 20.1% of elderly with chronic conditions experienced in 2005 (Naci et al. 2014)

Part D: Establishment of the Benefit

• Medicare Part D established to limit the cost burden and non-adherence problems○ Medicare Modernization Act

of 2003○ Launched on January 1, 2006

Part D: Program Overview

● Voluntary benefit except for dually eligible beneficiaries

● Delivered through private plans○ 1,001 plans available in 2015○ Stand-alone prescription drug

plans (PDPs)○ Medicare Advantage

prescription drug plans (MA-PDs)

● All have unique formularies and structures

○ Must provide at least the standard benefit

Part D: Program Overview2006 2015

Enrollment 24 million 37 million

Standard benefit

Deductible $250 $320

Coverage limit $2,250 $2,960

Doughnut hole coverage 0% 45% of generics55% of brand name

Out of pocket limit $5,100 $7,062

Total program cost $61.8 billion $76 billion

Part D: The Doughnut Hole/Coverage Gap

Part D: The Doughnut Hole● Demand-side cost control measure

○ Increases the price that high-spending beneficiaries experience■ 25% of beneficiaries reach coverage gap; 40% of those with employer

sponsored coverage (Yang et al. 2009)■ Prescription use decreases by 14% (Kaplan and Yang 2013)■ Healthier people respond more (Chandra, Gruber and McKnight 2007)

● Problem: Limiting prescription drug use for the sick○ Patients with cancer, osteoporosis, and rheumatoid arthritis most likely to reach

(79%, 92%, 58%) and less likely to be able to stop use (Esposito et al. 2009)○ Myocardial Infarction patients use of beta blockers initially, after they hit the

coverage gap (Kaplan and Zhang 2013)

● ACA: Gradually phasing out the doughnut hole between 2015-2020

Part D: Adverse Selection● Voluntary benefit with heavily regulated plans● Extensive information available online

○ Self-selection problems● Evidence:

○ Enrollees in the Low Income Subsidy spent $2,364 compared to $1,649 (Riley et al. 2009)

○ Beneficiaries in very poor health more likely to enroll than those in excellent health (Goedken et al. 2008)

● Measures to combat:○ Six protected classes of drugs○ Late enrollment penalty○ Risk adjustment

Part D: Price Negotiations

● Part D established to be market based - plans responsible for negotiating prices○ Enrollees pick plans based on drug offerings - incentives for

providers to negotiate○ Wide patient base - incentives for drug companies to reduce prices

● Drug market implications○ 13% reduction in pharmaceutical prices (Duggan and Scott Morton 2008)

● Limitation: Six protected classes○ No bargaining power - these drugs have less substitutes○ Duggan and Scott Morton: No price reduction

Part D: Disparities in Coverage

● Goal: Increasing Medicare beneficiary access to pharmaceuticals

○ 90% have coverage● Before Part D: Racial disparities in

coverage○ Hispanics and African Americans spent 60%

less than whites● After Part D: Divergent effects

○ Disparities between African Americans and whites ; between Hispanics and whites (Mahmoudi and Jensen 2014)

○ Hispanics 35% less likely to have coverage (McGarry et al. 2014)

● Coverage gap:○ Women, minorities, and mentally ill most

susceptible to interruption in meds (Bakk et al. 2014)

Part D: Administrative Barriers, Low Income Subsidy

● Complicated program○ Over 1,000 plans with different benefit structures○ Difficult for disabled, mentally ill, or those with complex needs

● Low-Income Subsidy○ Means-tested program for beneficiaries at or below 150% of the

FPL○ Dually eligible patients automatically enrolled○ Non-dually eligible - complex application process

■ Davidoff et al. 2010: Of those eligible, only 35-42% are enrolled

● Cost-related non-adherence dropped to 14.4% (Lau et al. 2011)○ Usage trends increased for almost all classes of drugs (Schneeweiss et al. 2009)

○ Limited by the coverage gap■ Adherence for patients treated after heart attack, but once patients hit the

coverage gap; generics more protected from this (Stuart et al. 2013)○ Non-adherence has risen to 17% - result of the economic downturn

● Evidence that Part D promotes use of underused medications, but also creates moral hazard problems

○ Polinski et al. 2012:■ Antibiotics used appropriately for pneumonia 3.07 times as much, but

inappropriately for respiratory tract infections 2.32 times as much■ Anti-diabetic drugs used 44% more frequently, antipsychotics 18% more

frequently

Part D: Adherence and Over/Underuse

Part D: Pharmaceutical Research and Development

● Overall revenues increased for pharmaceutical firms following implementation, despite reductions in drug costs (Duggan and Scott Morton 2010)

○ Economic theory: More revenues, more investments in research and development

● Part D’s implementation spurred a 31-33% increase in drugs entering preclinical trials, 18% increase in clinical trials (Blume Kohout and Sood 2013)

○ Limitation:

■ Mostly therapeutic or maintenance drugs

■ No increases to research on drugs in the protected classes

Questions?