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Chapter 16: Health Care Reform


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Title: Chapter 16: Health Care Reform

Chapter 16 Health Care Reform
  • Hospital Fees Hit the Middle Class Hard Present
    System Favors the Rich and Poor Medical Men
    Suggest Ways to Lower the Cost of Illness The
    New York Times

Problems with Current System
  • High Costs over 13 percent of GDP.
  • High percentage of population without health
    insurance about 14.6 percent.
  • Proper Access to Care for those covered by
  • Practices such as Cream-skimming.

Comparison of G-8 Countries, 1999
Note that all but the US have universal or near
universal health insurance coverage,
single-payer systems, and a much greater role for
How Much Does the Government Spend on Health Care
in the US?
  • According to data published by the Centers for
    Medicare and Medicaid Services (CMS), government,
    at all levels, has been responsible for paying
    for roughly 40 to 45 percent of all health care
    over the last three decades (http//
  • Relative to government, this figure suggests
    that the private sector has continued to exert
    greater control over the health care purse
  • Woolhandler and Himmelstein (2002), however,
    scrutinize the method CMS uses to measure
    government spending in the national health
    accounts and show that government has much more
    control over health care spending than the
    private sector does in the US.
  • Steffie Woolhandler and David Himmelstein are
    both professors at Harvard Medical School,
    primary care physicians, and founders of
    Physicians for a National Health Program, a
    nationwide group with more than 9,000 members
    (visit http//

Government Spending on Health Care - continued
  • Woolhandler and Himmelstein explain that CMS
    includes only direct purchasing of medical care
    for programs such as Medicare, Medicaid, and
    government-owned hospitals in its measure of
    government spending.
  • Consequently, public employee benefits, such as
    the Federal Employees Health Benefits Program,
    are missing from the reported figure by CMS
    because although the government supports these
    public programs with tax-financing, private
    insurers are responsible for writing the actual
    check because they administer the program on
    behalf of the government.
  • In addition, Woolhandler and Himmelstein point
    out that health insurance premiums are exempted
    from various types of federal, state, and city
    taxes so implicitly government also pays for this
    portion of health care by granting these tax

Government Spending on Health Care - continued
  • To get a better idea about tax-financing of
    health care, the authors add the direct
    purchasing of medical care by government,
    expenditures on public employee health benefits
    that are tax-financed but administered by the
    private sector, and the value of the health
    insurance premium tax preference.
  • In 1999, they showed that direct spending of
    government equaled 45 percent of all health care
    spending. Public employees benefits accounted for
    another 5.4 percent and the tax subsidy for
    health insurance premiums amounted to another 9.1
  • Thus government, at all levels, was responsible
    for financing nearly 60 percent of all health
    care costs in the US, indicating that
    tax-financing accounts for the largest source of
    health care funds.

Government Spending on Health Care - continued
  • On a per capita basis, their estimates for 1999
    revealed that the US government spends more on
    health care than Switzerland, Canada, Germany,
    France, Australia, Italy, Japan, Sweden, and the
    UK. These are countries where government
    traditionally has played a much greater role in
    the financing and reimbursing of health care.
  • Of course the much higher overall health care
    spending in the US provides part of the
    explanation for the greater per capita spending
    figure by the government.
  • These estimates are certainly provocative because
    they show that tax-financing represents the major
    source of funds for health care in the United
    States. Indeed, tax-financing accounts for an
    even greater share of health care costs
    considering that not-for-profit health care
    organizations such as hospitals and nursing homes
    are also granted tax preferences.

Federal Employees Health Benefits Program
  • Did you ever wonder which physician attends to
    your doctor when she feels ill? Or consider to
    which clinic your dentist goes when he requires
    dental care? Or speculate about who provides
    health insurance coverage to those federal
    employees overseeing the operation of the
    Medicare and Medicaid programs in the U.S?
  • Lets examine the latter speculation.

FEHPB - continued
  • Active federal employees, such as those working
    in the Center for Medicare and Medicaid Services,
    receive their health insurance through the
    Federal Employees Health Benefits Program
  • The FEHBP is the largest employment-based health
    benefit plan in the nation, covering over 9
    million people, including in addition to active
    employees, retired federal employees, dependents
    of active and retired federal employees, and
    members of the U.S. Congress.
  • The total cost of the program amounted to 20
    billion in 2000 and the Office of Personnel
    Management, a federal agency, runs the FEHBP.

FEHBP - continued
  • In 2003, the FEHMP offers enrollees tremendous
    choice among 188 different plans. The idea is
    that choice promotes competition among health
    insurers, which helps to contain costs and spur
  • Choices include national and regional traditional
    fee for service, PPO, HMO, and POS plans. All
    enrollees have at least a dozen fee-for-service
    options in addition to local HMOs. The federal
    government pays 75 percent of the plans premium
    up to a maximum of 72 percent of the enrollment
    weighted average of all premiums.
  • The subscriber is responsible for paying any
    remaining amount above the subsidy cap. Creating
    consumer cost consciousness is the motivation
    behind the subsidy cap.
  • To help federal employees make informed
    decisions, the FEHBP and other organizations
    distribute information about the various health
    plans including consumer satisfaction surveys.

FEHBP - continued
  • The FEHBP has been fairly successful at
    controlling health insurance premiums. For
    example, over the period 1992 to 1999, premiums
    of regional FEHBP plans increased by an annual
    average of 3.3 percent compared to a 5 percent
    increase for all private health insurance plans.
  • As another point of comparison, the FEHBP premium
    increase compared very favorably to the average
    increase of premiums for CALPERS, the California
    Public Employees Retirement System, which
    amounted to 2.8 percent over the same 7-year
  • Moreover, in 2003, premiums of FEHPB plans
    increased by 11.1 percent significantly less than
    the 20 to 25 percent premium increase for CALPER
  • CALPERS is the nations largest public pension
    fund and provides health insurance to 1.2 million
    state and local government employees and their
    families in California.

FEHBP - continued
  • Many have pointed to the FEHBP as a model for
    reforming Medicare and a mechanism to expand
    health insurance coverage.
  • For example, when running for president, Senator
    Bill Bradley proposed that uninsured individuals
    should be given income-related vouchers to enroll
    in the FEHBP.
  • Researchers and policy analysts continue to
    discuss the merits of broadening enrollment in
    the FEHBP.

Proposals for
Health Care Reform
  • Takes a market-oriented approach.
  • Develops tax-free accounts to pay for medical
    care expenses.
  • Part of funds put towards a high deductible,
    catastrophic plan and part towards routine
    medical care.
  • Fund allocation for routine care earns interest
    and can be rolled over into future years, or used
    to buy into health plan.
  • Each family makes the choice based on price,
    income, health status, degree of risk aversion
    and other factors.

MSAs - continued
  • Does not call for universal coverage but gives
    freedom of choice.
  • Because contributions to the MSA are tax
    deductible up to a preset limit, the price of
    health care is reduced, making it more
  • Risk-adjusted tax credits might also be made
    available for poorer households
  • Unused portion of the MSA continues to grow and
    could replace Medicare and/or used for financing
    long-term care.
  • Cost containment is achieved through price
    consciousness and elimination of many small claims

Criticism of MSAs
  • Consumers are not sufficiently informed to make
    price conscious decisions.
  • Consumers will forgo necessary or preventive care
    to save money.
  • Lead to adverse selection
  • Deductible insufficient to control health care
  • Plan is regressive

Responses to Criticisms
  • Demand studies show that consumers are conscious
    of health care prices, even very small
    out-of-pocket prices. MSAs will create an
    incentive for consumers to become even more
  • Point to success of MSAs already in use.
  • Present system is more regressive than MSAs.

MSAs The Case of Singapore
  • The pressure to contain rising health care costs
    has brought a considerable amount of attention to
    Singapores health care system because it relies
    on medical savings accounts.
  • Current figures indicate that Singapore spends
    between 3 and 4 percent of GDP on health care and
    that is a far cry from the 13 percent of GDP the
    United States currently allocates to health care.
  • Some attribute the ability of Singapore to tame
    health care spending on the cost containment
    incentives that comes into play with medical
    savings accounts.

MSAs in Singapore - continued
  • Singapore health care system is composed of three
    basic arrangements.
  • The Medisave program is a compulsory savings plan
    that forms the basis for the individual medical
    savings accounts. The contribution rates range
    from 6 to 8 percent of monthly income and are
    shared between employee and employer.
    Self-employed individuals must pay the entire
    amount and caps are placed on monthly
    contributions which prohibit more affluent
    individuals from accumulating unreasonably high
    savings balances.
  • Medisave accounts are used primarily to finance
    inpatient hospital care and strict payment
    schedules are in place to protect the accounts
    from being depleted too rapidly.

MSAs in Singapore - continued
  • To protect individuals from the financial burden
    of a major illness, a catastrophic illness
    insurance plan, called MediShield, is available.
  • This insurance plan is optional and pays for 80
    percent of hospital expenses after a rather
    substantial deductible has been met.
  • The third institutional component of the
    Singapore health care system is the Medifund,
    which is an endowment established by the
    government to finance the health care needs of
    the poor.

MSAs in Singapore - continued
  • Barr (2001) contends that the ability of the
    Singapore health care system to contain costs can
    only partially be explained by the implementation
    of medical savings accounts.
  • Strict government controls on inputs and prices
    along with the rationing of medical care have
    played an even greater role in controlling costs.
  • Other explanations include a relatively young
    population and the existence of a number of
    traditional Chinese medical practitioners that
    are not funded under the government sponsored
    health care programs.

Michael D. Barr. Medical Savings Accounts in
Singapore. Journal of Health Politics, Policy
and Law. 26(August, 2001). pp. 709-726.
  • Like MSAs, places the responsibility for
    insurance on the individual but not coverage is
  • Individuals are required by law to purchase a
    basic medical insurance plan as defined by the
    federal government but individuals are not
    precluded from purchasing more comprehensive
    coverage or prevents employers from sponsoring
    the coverage.
  • Universal coverage is achieved through a
    combination of the mandated coverage and the
    governments guarantee of a fall back plan.

Individual Mandates - continued
  • Risk adjusted tax credits and vouchers are
    offered for those with insufficient income. The
    Medicaid and Medicare programs are eventually
    phased out.
  • Fall back plans are created through competitive
  • Cost containment is achieved through competition
    which is heightened because federal government
    plays no direct role.
  • Critics complain about lack of information, moral
    hazard problem, and loss of freedom.

  • Basis of Clinton Health Plan.
  • Builds on existing system of employer-provided
    medical coverage.
  • Employers are mandated to provide medical
    coverage for basic medical services or pay, for
    example, an 8 percent payroll tax on the first
    22,500 of wages for employees not covered.
  • Self-employed individuals and early retirees must
    pay for health care coverage with an 8 percent
    tax on adjusted income up to a preset maximum.
    The tax is collected through the income tax

Management Competition - continued
  • Novelty is the creation across of the country of
    government buyer organizations called health
    alliances, that use their purchasing power to
    negotiate competitive prices for health insurance
    from private companies.
  • The alliances also serve as brokers that collect
    premiums, manage enrollment, and carry out other
    administrative duties.
  • Each alliance is supposed to offer a number of
    competing plans for enrollees.

Managed Competition - continued
  • Universal coverage is achieved through employer
    mandates and subsidies provided to low-income
  • Employers pay 80 of premiums and consumers pay
    20. Consumer portion creates incentive to reduce
    the likelihood of excessively generous plans.
  • Medicaid and Medicare are maintained and
    eventually take advantage of the alliances.
  • Cost containment results from the competition
    among private insurers as they vie for customers
    through the alliances. All plans must offer a
    uniform benefit package.

Managed Competition - continued
  • One criticism is that not enough competition will
    exist in rural areas.
  • Another is that the alliances will result in
    one-size-fits-all health insurance plans.
  • The employer mandate will result in unemployment
    especially among the low income workers.

  • Creation of an insurance system similar to the
    one presently existing in Canada.
  • Current multipayer system is replaced by a
    single-payer public system. Health insurance
    companies are eliminated.
  • Universal coverage is guaranteed with
    first-dollar coverage. Financed through general
  • Medicare and Medicaid are ended so funds can be
    used to support the NHI. Employers pay taxes
    equal to the current premium contribution.

NHI - continued
  • Cost containment based primarily on the
    efficiencies associated with using a single payer
    system and elimination of the costs associated
    with risk selection, taxes, and profits
    (administrative costs without benefits).
  • Health care expenditures are controlled by
    establishing a link with GDP.
  • Global budgets for hospitals and fee schedules
    for physicians are implemented.

NHI - continued
  • Employment effects are felt in the private health
    insurance market and health care administration.
  • Critics worry about that government enterprise is
    monopoly enterprise little variety and response
    to consumer demands.

Attempts at State Health
System Reform
Health System Reform in Hawaii The Case of
Employer Mandates
  • The Prepaid Health Act of 1974 mandates with few
    exceptions that employers provide health
    insurance to all employees.
  • Each medical plan must provide minimum set of
    benefits and the employees premium contribution
    is limited to 1.5 percent of monthly salary.
  • The rest of the population covered by the State
    Health Insurance Program (SHIP) of Hawaii.
  • SHIP later rolled into QUEST program that was
    designed to provide health insurance to those
    individuals with incomes up to 300 percent of the
    federal poverty level. Premium contributions base
    on sliding scale. Program provides a standard
    package and MCOs compete for QUEST contracts.

Health System Reform in Hawaii
  • Unfortunately the uninsured rate in Hawaii
    increased from 5.8 in 1995 to slightly under 10
    in 2001 for a number of reasons
  • High cost of Quest has caused eligibility to be
  • Low employment growth
  • Growing number of employers that provide health
    insurance to employees but not family members
  • Only two dominant health insurers

Health System Reform in Maryland The Case of
  • In the early 1970s Maryland established an All
    Payer Hospital Payment System.
  • In 1994, a Comprehensive Standard Health Benefit
    Plan was established to provide small to medium
    size firms with access to health insurance,
    although employers are not mandated to provide
  • Any health insurance company doing business in
    Maryland must offer a standard plan to all
    businesses employing 50 or fewer workers. Plans
    must be community rated except for minor
    adjustments and no benefit denial allowed for
    preexisting conditions.
  • To control costs, premiums can be no greater than
    12 percent of the average wage in the state.
  • About 11.3 uninsured in 2001.

Health System Reform in Minnesota The Case of
Regulated Competition
  • In 1992, Minnesota approved MinnesotaCare that
    addressed the issues of cost containment and
  • Cost containment plan placed great emphasis on
    competition along with some degree of regulation.
  • The competitive aspect focused on integrated
    service networks (ISNs), which were prepaid
    health care plans that compete on the basis of
    price and quality. Competition was made possible
    by the mandatory disclosure of price and quality
    information and standardization of health

Health System Reform in Minnesota
  • Regulatory component called for the state
    commissioner of health to set a cap on the growth
    of ISN premiums and control fees of
    out-of-network providers through an all payer
    rate setting system.
  • Other cost controls included targets for health
    care expenditure growth and CON laws.
  • Uninsured persons were offered state subsidized
    coverage based on a sliding fee scale financed by
    taxes on health care providers and the cigarette
  • Any company providing health insurance must
    guarantee coverage regardless of health status
    and change modified community rated premiums.

Health System Reform in Minnesota
  • In 1995, the Minnesota legislature began to
    repeal or modify many of the reforms. The
    legislature repealed the all payer rate setting
    legislation and curtailed the expansion of
    MinnesotaCare subsidies to childless households
    with incomes up to 275 percent of the poverty
  • In 1997, other provisions were also repealed. In
    particular, the state repealed revenue limits on
    HCPs and changed the growth limits on health care
    expenditures to cost containment goals which are
    now voluntary.
  • Close to 8 percent of the population uninsured in
    Minnesota in 2001.

Health System Reform in Oregon The Case of
  • Oregon Health Plan in the early 1990s prioritized
    a list of 740 medical procedures. Each medical
    procedure was rank based on its ability to
    improve health, its cost, and perceived community
    value. For example, treatment for appendicitis
    was ranked 12th and medical therapy for a stroke
    was ranked 287th.
  • Once the legislature determined the level of
    funding for Medicaid, the Health Services
    Commission determines the number of medical
    procedures the state can cover.
  • In Oct. 2002, the state financed 566 out of 736
    illnesses or disorders. For example, any Medicaid
    recipient in need of a liver transplant because
    of cancer (ranked 608th) would be denied coverage
    under the Oregon Plan.

Health System Reform in Oregon
  • Proponents of the Oregon Plan argue that the
    state is trading off comprehensive coverage for a
    few to make greater access available to many.
  • Prior to the plan, the Oregon Medicaid program
    covered only individuals with incomes at or below
    58 of the federal poverty level. With the plan,
    individuals with income at or below 100 of the
    FPL and pregnant women with incomes at or below
    133 of the FPL are now eligible.
  • Critics of the system point out the the poor
    primarily bare the burden of cost containment
    under the Oregon Plan and that prioritizing is
    best left to the marketplace.
  • Effective February 1, 2003, Oregon is
    implementing 3 new health plans with varying
    levels of eligibility and consumer costs as a way
    of expanding health insurance coverage.
  • In 2001, about 13 percent of all Oregonians were
    covered by health insurance.