CHAPTER 6
Health Services Financing
HEALTHCARE DELIVERY FUNCTIONS
• Financing—by employers, government, or individuals, to purchase health insurance
• Insurance—commercial insurance, managed care, self-insurance (government and large
companies)
ROLE AND SCOPE OF HEALTH SERVICES FINANCING
Insurance increases demand for health care services. Demand translates into utilization of
services. Insurance leads to greater consumption of health care services than if the same were to
be paid out of pocket—moral hazard.
• Financing also influences supply of health care services. New services proliferate when
they are covered by health insurance. Financing has given rise to new subindustries (e.g.,
FINANCING AND COST CONTROL
• Expenditures can be controlled by restricting financing; expansion of health insurance
will increase expenditures without controlling supply and access
• Increase in health insurance premiums increases expenditures
THE INSURANCE FUNCTION
• Risk—Possibility of a substantial financial loss from some event; probability that the event
will occur is small.
• Predictability of loss
– For individuals—unpredictable
PRIVATE HEALTH INSURANCE
• The insured (beneficiary)
• Premium
2) Community rating: Risk is spread among a larger community; pure community
3) Adjusted community rating or modified community rating—price can differ on
account of age and sex while ignoring other factors that may influence risk
• Cost sharing
– Deductible: The insured must pay before insurance pays anything. Generally, an
annual out-of-pocket cost
Types of Private insurance
• Group insurance—A dollar of health insurance received from the employer is worth more than
the same amount received in taxable wages. An incentive to obtain employer-sponsored health
insurance.
• Self-insurance—eliminates the insurance company. ERISA1974—exemption from having to
provide certain mandatory benefits. Also, premiums are not taxed because they do not constitute
revenue as they would for an insurer. Exempt from mandatory benefits. Self-insured plans are
also exempt from some of the requirements imposed by the ACA.
Trends in Employment-Based Health Insurance
A declining number of small businesses are offering health insurance, workers are paying an
increasing share of the total health insurance costs (that is, decreasing subsidies from the
employers), and cost sharing associated with health care utilization has been increasing. Changes
in insurance coverage follow the patterns of economic growth and decline. COBRA allows
Private Health Insurance Under the ACA
Grandfathered plans are exempt from some of the requirements.
Compliance requirements for health plans: Coverage of young adults (under the age of 26) under
their parents’ plans; coverage for people with preexisting medical conditions; coverage for
preventive services without cost sharing; elimination of yearly or lifetime benefit dollar limits;
caps on annual cost sharing; and targets for medical loss ratios.
The individual mandate: With some exceptions, all legal residents must have “minimum
essential coverage” or pay a tax penalty. The minimum essential coverage must include
PUBLIC HEALTH INSURANCE
Categorical programs: Designed to benefit specified categories of people who meet the required
eligibility criteria.
• MEDICARE—covers the elderly, disabled on Social Security, and people with end-stage renal
program. Consistent eligibility criteria and benefits across the nation.
Four parts of Medicare:
• Part A (HI)—Entitlement. Financed through a mandatory payroll tax. Employer and
employee pay equally into the Hospital Insurance Trust Fund. Covered services: inpatient
hospital care, skilled nursing facility, home care, hospice. Benefits are determined
needs plans are available in some locations.
• Part D (Prescription Drug Coverage)—Voluntary. Created under MMA, 2003.
Implemented in 2006. Premium costs are shared between the government and
beneficiary. Enrollees can choose between a stand-alone prescription drug
plan (for those not enrolled in Part C) or Part C in which all services are
Medicare financing:
For accounting purposes two trust funds are kept, one for HI and the other for SMI and
Part D. In 2012, both trust funds faced deficits. Unless they are turned around, they face
• MEDICAID—The Supreme Court’s decision leaves the program in an uncertain situation for
many people as states have a choice to either comply with or not comply with the requirements
of the ACA. States that refuse to comply will carry out the traditional program that was designed
for the most financially needy; income and asset requirements will have to be met (means test).
Medicaid under the ACA
Coverage for legal residents under the age of 65 with income up to 138% of the FPL.
States can no longer use the assets test. Federal matching at 100% for newly eligible
Old Medicaid option
States determine eligibility based on income and assets. Three main categories of people
are automatically eligible: (1) Families with children receiving support under the
Dual-eligible beneficiaries qualify for both Medicare and Medicaid. Under the ACA,
Medicaid will become the new vehicle for health care services for this population group;
both income and asset tests will apply.
• CHIP
Children’s Health Insurance Program, Title XXI of the Social Security Act.
• Enacted under the Balanced Budget Act of 1997, but a state-based program.
• Covers children up to age 19 from low-income families who are not covered under a
• Health Care for the Military and TRICARE
• Army, Navy, and Air Force hospitals and clinics; services are also purchased from
civilian providers.
• Veterans Health Administration
• Operated by the Department of Veterans Affairs (VA); VHA operates the largest
integrated health services system in the US
• Indian Health Service (IHS)
• Federal program
• Comprehensive care to native Americans living on reservations and in rural areas
THE PAYMENT FUNCTION
Includes reimbursement and disbursement
• Reimbursement—determination of the method and amount of reimbursement to be paid to
providers
• Disbursement—actual payment after services have been delivered
• Charge/rate: Price
Reimbursement Methods
1. Fee-for-service: Charges (prices) are established by providers. Each service is
separately billed. There is an incentive to provide nonessential care.
3. Resource Based Relative Value Scale (RBRVS):
– A “relative value” is assigned to each CPT (current procedural terminology)
coded physician service
4. Managed care approaches
a. Preferred provider approach. Discounted fee schedule. Fee-for-service charges are
5. Reimbursement for inpatient services
A. Cost-plus (retrospective)—per diem rate based on historical costs, no longer in use
except for critical access hospitals.
B. Prospective—based on preestablished criteria. Rate is established in advance of the
Types of prospective methods:
• Diagnosis-Related Groups (DRGs)—used for hospitals.
Fixed rate per discharge (a bundled charge) based on principal diagnosis at the time of
admission. The hospital must provide whatever services the patient needs.
Adjustments—prevailing wages, rural vs. urban location, teaching hospital,
disproportionate share of low-income patients to support safety-net hospitals located in
(1) Resource Utilization Groups (RUGs)—for Skilled Nursing Facilities (SNFs). A
case-mix method is used to determine the composite level of clinical intensity by
(2) Case-Mix Groups (CMGs)—for inpatient rehabilitation facilities based on
assessment at admission and discharge.
• Home Health Resource Groups (HHRGs)—the PPS for home health pays a fixed,
predetermined rate for each 60-day episode of care based on case-mix. All services
• Disbursement of Funds
• Internal claims departments or outsourcing of claims processing by insurance
companies and MCOs
• Self-insured employers—TPAs
• Medicare and Medicaid—fiscal intermediaries and carriers
NATIONAL HEALTH CARE EXPENDITURES
Four main components:
2. Administrative costs
3. Expenditures for public health activities
4. Investment
– Noncommercial research
– Structures and equipment
CURRENT DIRECTIONS AND ISSUES
Inspite of the Supreme Court’s ruling, much uncertainty remains, and even the best
current estimates on coverage and costs are likely to be far off.
• Value and affordability
According to CBO estimates, the ACA will still leave 15 million uninsured in 2017. Cost
• Favorable risk selection and adverse selection
The modified community rating required by the ACA may draw employers with 100 or
fewer workers and younger workforces toward self-insuring. This type of risk selection
• Cost Shifting
The ACA coverage expansion will be paid in part by reducing payments to hospitals. The
extent of cost shifting by hospitals and its likely effects on private insurance costs will
not be known for some time.
• Fraud and Abuse
o A significant problem particularly in Medicare and Medicaid
o Fraudulent billings may amount to 3 to 10% of total health care spending
TERMINOLOGY
• Adjusted community rating (or modified community rating)—A method of determining health
insurance premiums that takes into account demographic factors such as age, gender, geography,
and family composition, while ignoring other risk factors.
• Adverse selection— It occurs when high-risk individuals, i.e., people who are likely to use
more health care services than others because of their poor health status, enroll in greater
numbers in health insurance plans compared with people who are healthy.
• Balance bill—The amount a provider bills to the patient for the portion not paid by insurance.
determined by an assessment of each patient’s condition and an estimate of the amount of
resources the patient will need.
• Categorical programs—Public health insurance programs, each designed to benefit a certain
category of people. Examples are Medicare for the elderly and certain disabled individuals,
Medicaid for the indigent, Defense Department’s programs for active service people, and VA for
experience of the whole community. For a set of benefits, the same rate applies to everyone
regardless of age, gender, occupation, or any other indicator of health risk.
• Consumer-driven health plan—A high-deductible health plan that carries a savings option to
pay for routine health care expenses.
• Copayment—The portion of total medical costs that the insured has to pay out of pocket each
For example, the elderly are entitled to Medicare benefits regardless of the amount of income
and assets they may have.
• Experience rating—A method for the determination of health insurance premiums that is based
on a group’s own medical claims experience. Under this method, premiums differ from group to
group because different groups have different risks.