The Increasing Cost of Health Care - Health Care For Older Adults, Persons With Disabilities, And The Poor

The United States is one of the few industrialized nations that does not have a national health care program. In most other developed countries, government national medical care programs cover almost all health-related costs, from maternity care to long-term care.

In the United States the major government health care entitlement programs are Medicare and Medicaid. They provide financial assistance for persons age sixty-five and older, the poor, and people with disabilities. Before the existence of these programs, a large number of older Americans could not afford adequate medical care. For older adults who are beneficiaries, the Medicare program provides reimbursement for hospital and physician care, while Medicaid pays for the cost of nursing home care.

Medicare

The Medicare program, enacted under Title XVIII (Health Insurance for the Aged) of the Social Security Act (PL 89-97), went into effect on July 1, 1966. The program is composed of two parts:

• Part A provides hospital insurance. Coverage includes physicians' fees, nursing services, meals, semiprivate rooms, special-care units, operating room costs, laboratory tests, and some drugs and supplies. Part A also covers rehabilitation services, limited post-hospital care in a skilled nursing facility, home health care, and hospice care for the terminally ill.
• Part B (Supplemental Medical Insurance, or SMI) is elective medical insurance; that is, enrollees must pay premiums to obtain coverage. SMI covers outpatient physicians' services, diagnostic tests, outpatient hospital services, outpatient physical therapy, speech pathology services, home health services, and medical equipment and supplies.

In 2002 more than $267 million was spent to provide coverage for the forty million persons enrolled in Medicare. (See Table 5.9.) Most Medicare recipients were sixty-five and older; more than half of these older adults were between the ages of sixty-five and seventy-four; a third were between the ages of seventy-five and eighty-four; and 12.1% were eighty-five and older. The CMS estimated that by 2050, sixty-nine million people age sixty-five and older would be eligible for Medicare; of those, fifteen million would be eighty-five or older.

In general, Medicare reimburses physicians on a feefor-service basis, as opposed to per capita (per head) or per member per month (PMPM). In response to the increasing administrative burden of paperwork, reduced compensation, and delays in reimbursements, some physicians opt out of Medicare participation—they do not provide services under the Medicare program and choose not to accept Medicare patients into their practices. Others still provide services to Medicare beneficiaries but do not "accept assignment," meaning that patients must pay out-of-pocket for services and then seek reimbursement from Medicare.

Because of these problems, the Tax Equity and Fiscal Responsibility Act of 1982 (PL 97-248) authorized a "risk managed care" option for Medicare, based on agreed-upon prepayments. Beginning in 1985, the HCFA (now known as CMS) could contract to pay health care providers, such as HMOs or health care prepayment plans, to serve Medicare and Medicaid patients. These groups are paid a predetermined cost per patient for their services.

Medicare-Risk HMOs Control Costs, but Some Senior Health Plans Do Not Survive

During the 1980s and 1990s the federal government, employers that provided health coverage for retiring employees, and many states sought to control costs by encouraging Medicare and Medicaid beneficiaries to enroll in HMOs. From the early 1980s through the late 1990s "Medicare-risk HMOs" did contain costs because, essentially, the federal government paid the health plans that operated them with fixed fees—a predetermined dollar amount per member per month (PMPM). For this fixed fee, Medicare recipients were to receive a fairly comprehensive, preset array of benefits. PMPM payment provided financial incentives for Medicare-risk HMO physicians to control costs, unlike physicians who were reimbursed on a fee-for-service basis (paid for each visit, procedure, or treatment delivered).

TABLE 5.9

Expenditures for health services and supplies1 under public programs, by type of expenditure and program, 2002
	Personal health care
Program area	All expenditures	Total	Hospital care	Physician and clinical services	Dental services	Other professional services	Home health care	Prescription drugs	Other nondurable medical products	Durable medical equipment	Nursing home care	Other personal health care	Administration	Public health activities
1Includes durable medical products and over-the-counter medicines and sundries.
2Excludes funds paid into the Medicare trust funds by states under buy-in-agreements to cover premiums for Medicaid recipients.
3Includes care for retirees and military dependents.
4Expenditures not offset by revenues.
5Includes program spending for Medicaid SCHIP Expansion & SCHIP; maternal and child health; vocational rehabilitation medical payments; temporary disability insurance medical payments; Public Health Service and other Federal hospitals; Indian health services; alcoholism, drug abuse, and mental health; and school health. SCHIP is State Children's Health Insurance Program.
Notes: The figure 0.0 denotes amounts less than $50 million. Numbers may not add to total because of rounding.
SOURCE: "Table 10. Expenditures for Health Services and Supplies under Public Programs, by Type of Expenditure and Program: Calendar Year 2002," Centers for Medicare and Medicaid Services, 2002, http://www.cms.hhs.gov/statistics/nhe/projections-2003/t2.asp (accessed July 6, 2004)
	Amount in billions
Public and private spending	$1,496.3	$1,340.2	$486.5	$339.5	$70.3	$45.9	$36.1	$162.4	$31.7	$18.8	$103.2	$45.8	$105.0	$51.2
All public programs	676.6	592.2	286.4	114.8	4.5	12.6	21.9	36.2	1.6	6.8	66.1	41.2	33.3	51.2
Federal funds	476.5	450.5	229.9	94.7	2.7	8.2	16.2	20.9	1.6	6.6	45.5	24.1	19.0	7.0
State and local funds	200.1	141.7	56.5	20.1	1.8	4.4	5.7	15.4	—	0.2	20.5	17.1	14.3	44.1
Medicare	267.1	259.1	149.2	68.8	0.1	6.4	11.4	2.6	1.6	5.9	12.9	—	8.0	—
Medicaid2	249.0	232.4	83.1	24.5	3.7	2.4	8.4	28.4	—	—	50.9	31.0	16.6	—
Federal	146.6	137.0	49.8	14.5	2.1	1.3	4.6	16.5	—	—	30.5	17.8	9.5	—
State and local	102.5	95.4	33.3	10.0	1.6	1.0	3.8	11.9	—	—	20.4	13.3	7.1	—
Other state and local public assistance programs	6.6	6.4	2.4	0.9	0.2	0.1	0.0	2.3	—	0.0	0.2	0.2	0.3	—
Department of Veterans Affairs	22.3	22.2	16.6	1.4	0.0	—	0.2	0.1	—	0.6	2.0	1.3	0.1	—
Department of Defense3	17.2	16.7	10.3	3.6	0.0	—	—	1.2	—	—	—	1.5	0.6	—
Workers' compensation	30.0	23.2	10.0	9.0	—	3.1	—	1.0	—	0.1	—	—	6.8	—
Federal	0.7	0.7	0.4	0.1	—	0.2	—	0.0	—	0.0	—	—	0.0	—
State and local	29.3	22.5	9.6	8.9	—	3.0	—	0.9	—	0.1	—	—	6.8	—
State and local hospitals4	15.2	15.2	11.0	—	—	—	1.8	—	—	—	—	2.4	—	—
Other public programs for personal health care5	18.0	17.0	3.9	6.5	0.5	0.6	0.0	0.6	—	0.2	0.0	4.7	0.9	—
Federal	15.5	14.8	3.7	6.3	0.5	0.3	0.0	0.5	—	0.1	0.0	3.5	0.7	—
State and local	2.4	2.2	0.2	0.2	0.0	0.4	—	0.1	—	0.1	0.0	1.2	0.2	—
Government public health activities	51.2	—	—	—	—	—	—	—	—	—	—	—	—	51.2
Federal	7.0	—	—	—	—	—	—	—	—	—	—	—	—	7.0
State and local	44.1	—	—	—	—	—	—	—	—	—	—	—	—	44.1
CMS programs Medicare, Medicaid SCHIP	521.8	496.3	234.1	94.6	4.4	8.9	19.9	31.6	1.6	6.0	63.8	31.4	25.5	—

Although Medicare recipients were generally pleased with these HMOs (even when enrolling meant they had to change physicians and thereby end longstanding relationships with their family doctors), many of the health plans did not fare well financially. The health plans suffered for a variety of reasons: some plans had underestimated the service utilization rates of older adults, and some were unable to provide the stipulated range of services as cost effectively as they had believed possible. Other plans found that the PMPM payment was simply not sufficient to enable them to cover all the clinical services and their administrative overhead.

Still, the health plans providing these "senior HMOs" competed fiercely to market to and enroll older adults. Some health plans feared that closing their Medicare-risk programs would be viewed negatively by employer groups, which, when faced with the choice of plans that offered coverage for both younger workers and retirees or one that only covered the younger workers, would choose the plans that covered both. Despite losing money, most health plans maintained their Medicare-risk programs to avoid alienating the employers they depended on to enroll workers who were younger, healthier, and less expensive to serve than the older adults.

About ten years into operations some of the Medicare-risk plans faced a challenge that proved daunting. Their enrollees had aged and required even more health care services than they had previously. For example, a senior HMO member who had joined as a healthy sixty-five-year old could now be a frail seventy-five-yearold with multiple chronic health conditions requiring many costly health services. While the PMPM had increased over the years, for some plans it was simply insufficient to cover their costs. Many Medicare-risk plans, especially those operated by smaller health plans, were forced to end their programs abruptly, leaving thousands of older adults scrambling to join other health plans. Others have endured to year 2004, offering older adults comprehensive care and generating substantial cost savings for employers and the federal government.

The Balanced Budget Act of 1997 produced another plan for Medicare recipients called "Medicare+Choice." These plans offer Medicare beneficiaries a wider range of managed care plan options than just HMOs—older adults may join preferred provider organizations (PPOs) and provider-sponsored organizations (PSOs) that generally offer greater freedom of choice of providers (physicians and hospitals) than available through HMO membership.

Medicaid

Medicaid was enacted by Congress in 1965 under "Grants to States for Medical Assistance Programs," Title XIX of the Social Security Act. It is a joint federal/state program that provides medical assistance to selected categories of low-income Americans: the aged, persons who are blind, persons who are disabled, or financially struggling families with dependent children. Medicaid covers hospitalization, physicians' fees, laboratory and radiology fees, and long-term care in nursing homes.

In 2002 more than forty million people received Medicaid services—an estimated 13% of non-elderly females in the United States and about 11% of the non-elderly male population. Of 249 billion Medicaid dollars spent in 2002, 20.4% went to nursing home care, while 33.4% was spent on hospital care. (See Table 5.9.)

The Personal Responsibility and Work Opportunity Reconciliation Act (PL 104-193)—federal welfare reform—was signed into law in August 1996, replacing the Aid to Families with Dependent Children program (AFDC) with Temporary Assistance for Needy Families (TANF). Under TANF, Medicaid coverage was no longer guaranteed, as it had been for recipients of AFDC. The new law, however, required states to continue benefits to those who would have been eligible under the AFDC requirements that each state had in place on July 16, 1996.

Medicaid is the largest third-party payer of long-term care in the United States, financing about one half of all nursing home care. Under current law, an elderly person must have less than $2,500 in savings or assets (with some exceptions) to qualify for nursing home care paid for by Medicaid. Although home health services currently account for a small share of Medicaid expenditures for older adults, they are the fastest-growing expense.