Chapter 8 Healthcare Financing Introduction .docx

Chapter 8
Healthcare Financing
Introduction
Unlike countries that have universal healthcare systems,
payment of healthcare services in the US is derived from
out-of-pocket payments from patients who pay entirely or
partially for services rendered;
health insurance plans, such as indemnity plans or managed care
organizations;
public/ government funding such as Medicare, Medicaid, and
other government programs;
and health savings accounts
© 2010 Jones and Bartlett Publishers, LLC
Did you know that?
Nearly 60% of Medicare enrollees are female which
corresponds to the longer life expectancy of a U.S. female.
Medicare and Medicaid are the two largest government
sponsored health insurance programs in the U.S.
Approximately 84% of the U.S. population is covered by some
form of health insurance.

Introduction
The Center for Medicare and Medicaid Services projects that
health services will consume nearly 20% of the GDP by 2016.
According to CMS 2007 statistics, U.S. health care
expenditures increased 6.1 percent compared to 6.7 percent in
2006.
Total health expenditures reached $2.2 trillion which translates
to 16.2% of the gross domestic product.
Since 1970, health care spending has grown 2.5% faster than the
rest of the U.S. economy.
Average Annual Growth Rates for Nominal NHE and GDP for
Selected Time Periods
Source: Centers for Medicare and Medicaid Services, Office of
the Actuary, National Health Statistics Group, at
http://www.cms.hhs.gov/NationalHealthExpendData/ (see
Historical; NHE summary including share of GDP, CY 1960-
2008; file nhegdp08.zip).
National Health Expenditures per Capita and Their Share of
Gross Domestic Product, 1960-2008
Source: Centers for Medicare and Medicaid Services, Office of
the Actuary, National Health Statistics Group, at
Historical; NHE summary including share of GDP, CY 1960-

2008; file nhegdp08.zip).
5.2% 7.2% 9.1% 12.3% 13.5% 13.5% 13.6% 14.3%
15.1% 15.6% 15.6% 15.7% 15.8% 15.9% 16.2%
Causes of rising costs
The increase in health care spending can be attributed to three
causes:
1) When prices increase in an economy overall, the cost of
medical care will increase and even when prices are adjusted for
inflation, medical prices have increased;
2) as life expectancy increases in the U.S., more individuals
will require more medical care which means there will be more
health care expenses; and
3) as health care technology and research provides for more
sophisticated and more expensive procedures, there will be an
increase in health care expenses.
Who pays?
Payment of health care services is derived from
1) out of pocket payments from patients who pay entirely or
partially for services rendered,
2) health insurance such as indemnity plans or managed care
organizations,
3) public/government funding such as Medicare, Medicaid and
other government programs and
4) health spending accounts (HSAs).

Health Insurance
Much of the burden of health care expenditures has been borne
by private sources—employers and their health insurance
programs have borne much of the cost.
In 2007, approximately 60% of Americans (180 million) has
private health insurance coverage.
Not just you and your doctor
There are three parties involved in providing health care: the
provider, the patient and the fiscal intermediary such as a health
insurance company or the government.
HEALTH CARE SPENDING BY SERVICE TYPE
In 2007, hospital spending was nearly $700 billion, physician
and clinical services was $480 billion and other professional
services such as chiropractors, optometrists and podiatrists was
$62 billion.
Dental services were $95 billion and community center and
school spending was $66 billion.
Home health care services were $59 billion which was an
increase of 11% from 2006.
Nursing home spending was $131 billion, prescriptions drugs
was $227 billion and medical equipment w as $61 billion.
Hospital spending accounted for the largest percentage of
national health care expenditures with physician and other

services, prescription drugs and nursing and home health the
next three largest.
COSTS: Distribution of National Health Expenditures, by Type
of Service, 2008
Note: Other Personal Health Care includes, for example, dental
and other professional health services, durable medical
equipment, etc. Other Health Spending includes, for example,
administration and net cost of private health insurance, public
health activity, research, and structures and equipment, etc.
Source: Kaiser Family Foundation calculations using NHE data
from Centers for Medicare and Medicaid Services, Office of the
Actuary, National Health Statistics Group, at
Historical; National Health Expenditures by type of service and
source of funds, CY 1960-2008; file nhe2008.zip).
HEALTH CARE SPENDING BY MAJOR SOURCES OF
FUNDS
In 2007, Medicare spending was $431 billion which is an
increase of 7.2% from 2006.
Medicaid spending was $329 billion which was a slight decrease
from 2006.
Private health insurance premiums grew 6% while benefit
payments decreased because of a decline in spending on
prescription drugs.
Out of pocket payments grew 5% in 2007 which was a result of
prescription drugs costs, nursing home services and medical

equipment.
Out of pocket spending accounted for 12% of national health
spending in 2007 which has declined over the past 10 years
HEALTH CARE SPENDING BY AGE AND GENDER
These numbers correlate with the fact that the longer we age,
the more chronic conditions occur which result in higher
spending and that female life expectancy is higher than male
life expectancy,
Distribution of Average Spending
Per Person by Age, 2006Average Spending Per PersonAge (in
years)<5$1,5085-171,26718-241,44125-442,30545-
644,863>648,776SexMale$3,002Female3,886
Notes: Includes individuals without any spending in 2006.
Source: Kaiser Family Foundation calculations using data from
U.S. Department of Health and Human Services, Agency for
Healthcare Research and Quality, Medical Expenditure Panel
Survey (MEPS), 2006.
Characteristics of the Uninsured, 2008
Family Income
Family Work Status
Total = 45.7 million uninsured

1 or More Full-Time Workers
66%
No
Workers
19%
Part-Time
Workers
14%
Age
55-64
9%
30-54
43%
19-29
30%
0-18
18%
The federal poverty level was $22,025 for a family of four in
2008. Data may not total 100% due to rounding.
SOURCE: KCMU/Urban Institute analysis of 2009 ASEC
Supplement to the CPS.
Nonelderly’s Health Insurance Coverage by Family Poverty
Level, 2008
50.2 M
46.0 M
41.5 M

125.1 M
Number
Under 100%
100% - 199%
200% - 299%
300% +
NOTES: Data may not total 100% due to rounding. The Federal
Poverty Level for a family of four in 2008 was $22,025
(according to the U.S. Census Bureau’s poverty threshold).
Family size and total family income are grouped by insurance
eligibility.
SOURCE: Kaiser Commission on Medicaid and the
Uninsured/Urban Institute analysis of 2009 ASEC Supplement
to the CPS.
2015 Federal Poverty Guidelines
Uninsured Nonelderly vs. All Nonelderly,
by Family Work Status, 2008
Two full-time workers
One full-time worker
Only part time
No workers
45.7 Million
262.8 Million
NOTES: Data may not total 100% due to rounding.
SOURCE: Kaiser Commission on Medicaid and the
Uninsured/Urban Institute analysis of 2009 ASEC Supplement
to the CPS.

Average Annual Health Insurance Premiums and Worker
Contributions for Family Coverage, 2005-2010
Note: The average worker contribution and the average
employer contribution may not add to the average total premium
due to rounding.
Source: Kaiser/HRET Survey of Employer-Sponsored Health
Benefits, 2005-2010.
$10,880
$13,770
$1,284
Worker Contribution Increase
47%
20%
27%
Average Health Insurance Premiums and
Worker Contributions for Family Coverage, 1999-2009
Note: The average worker contribution and the average
employer contribution
may not add to the average total premium due to rounding.

$5,791
128% Worker Contribution Increase
131% Premium Increase
$13,375
Average Monthly Worker Premium Contributions Paid by
Covered Workers for Single and Family Coverage, 1999-2010
*Estimate is statistically different from estimate for the
previous year shown (p<.05).
Average Annual Worker and Employer Contributions to
Premiums and Total Premiums for Family Coverage, 1999-2010
* Estimate is statistically different from estimate for the
previous year shown (p<.05).
$5,791
$6,438*
$7,061*
$8,003*
$9,068*
$9,950*
$10,880*

$11,480*
$12,106*
$12,680*
$13,375*
$13,770*
HEALTH INSURANCE AS
A PAYER FOR HEALTH CARE SERVICES
Like life insurance or homeowner’s insurance, health insurance
was developed to provide protection should a covered individual
experience an event that required health care.
Health Insurance as a Payer
In the 1960s, President Johnson signed Medicare and Medicaid
into law which protects the elderly, disabled and indigent.
President Nixon signed into law the Health Maintenance Act of
1973 which focused on effective cost measures for health
delivery which was the basis for the current Health Maintenance
Organizations (HMOs).
Also, in the 1980s, diagnostic related groups or (DRGs) and
prospective payment guidelines were established to provide
guidelines for treatment.

health coverage program was proposed during Clinton’s
administration in the 1990s, it was never passed.
In 2005, Massachusetts proposed mandatory health coverage for
all citizens so it may be that universal health coverage may
begin at the state level.
The Consolidated Omnibus Budget Reconciliation Act
(COBRA) was passed to provide health insurance protection if
an individual changes jobs.
In 1993, the Family Medical Leave Act (FMLA) was passed to
protect an employee if there is a family illness. They can
receive up to 12 weeks of unpaid leave and their health
insurance during this period.
Also, in 1996, the Health Insurance Portability and
Accountability Act (HIPAA) were passed that provided stricter
confidentiality regarding the health information of individuals.
Types of Health Insurance
Health insurance, particularly employer provided health
insurance, is the primary source for payment of health care
services in the U.S.
Administrative costs are estimated at $120 billion annually.
There are approximately 850 health insurance companies that
contract with millions of employers to provide coverage.
Healthcare Spending By Type
In 2010, hospital spending accounted for nearly 36% of personal

healthcare expenditures, prescription drugs for 12%, physician
care for 24%, and nursing care and continuing care communities
for 7%.
In 2010, private health insurance paid 46.4% of total personal
health care, the federal government 34%, state and local
governments 11%, and out-of-pocket payments 15%.
In 2011, private health insurance premiums on a per enrollee
basis grew only 3.2%, which was a decrease from 4.6% in 2010.
Out-of-pocket payments grew 2.8% in 2011 to $307.7 billion,
which was a result of higher cost sharing for healthcare services
(CMS, 2013c).
In 2011, Medicare spending was $554 billion, 21% of national
health spending, and grew 6.2%, an increase from 4.3% in 2010.
The spending increase is attributed to skilled nursing facility
and physician service reimbursements.
Medicaid spending was $407.7 billion (2.5%), a decrease from a
5.9% growth rate in 2010.
This was due to a slower enrollment rate in Medicaid in 2011.
Hospital
According to CMS, hospital spending increased 4.3% to $851
billion compared to a 4.9% growth in 2010.
There was slower growth in 2011 due to price growth slowdown
and less use of hospital services.
Medicaid spending for hospital use decreased while Medicare
and private health insurance hospital spending and physician
spending increased.

Clinical and Other Professional Services
Private health insurance and Medicare spending on clinical
services increased in 2011 because there was an increase in
clinical service usage by consumers with a 4.3% growth rate
from 2010, which had experienced a 3.1% growth rate.
Spending on specialty care such as chiropractic services,
podiatry, and optometry increased nearly 5% compared to a
growth rate of 4.6% in 2010.
Clinical and Other Professional Services
Dental services increased 3% in 2011, which was a slight
increase of 0.3% from 2010.
Out-of-pocket spending for dental services, which accounts for
40% of dental spending, increased 4.1% in 2011, compared to a
growth rate of 0.7% in 2010.
Home Healthcare and Nursing Care/Continuing Care
Home health-care agency spending slowed from a 5.3% growth
rate in 2010 to a 4.5% growth rate ($74.3 billion) in 2011.
In 2011, Medicare and Medicaid spending for home health care,
which account for over 80% of home healthcare spending,
increased slightly from 2010.
Nursing care and continuing care spending increased 4.4% in
2011 compared to 3.2% in 2010.
These statistics can be attributed to Medicare spending, which
increased in 2011 to 16.5% compared to 7.2% growth in 2010.
Prescription Drugs
Prescription drug spending grew nearly 3% in 2011, a stark
increase from a growth rate of 0.4% in 2010.
The difference in the growth rates were due to prescription drug
price increases for brand name drugs, although consumers are
continuing to purchase more generic drugs.

Healthcare Spending by State
In 2009, the highest per capita of personal healthcare spending
was the District of Columbia at $10,349, compared to a low of
$5,031 in Utah.
The states with the highest Medicare spending per enrollee were
New Jersey and Florida.
Conclusion
As healthcare expenditures continue to increase, the major focus
of the healthcare industry is cost control in both the public and
private sector.
Retrospective reimbursement methods for healthcare services,
which means that a provider submitted a bill to a health
insurance company that automatically reimbursed the provider,
had no incentive to control costs in health care.
Conclusion
The establishment of a prospective reimbursement system for
Medicare—developed based on care criteria for certain
conditions regardless of provider costs—was an incentive
system for providers to manage how they were providing
services
Medicare
Part A: Hospitalization insurance
Part B: Medicare Part B is a supplemental health plan to cover
physician services. It is financed 24% from enrollee premiums
and 76% from federal treasury funds.
Part C: Medicare Advantage: It covers all services in Parts A
and B. It is voluntary and available when an individual enrolls
in Parts A and B. This program was designed to move Medicare

patients into more cost-effective health insurance programs such
as HMOs or PPOs.
Medicare
Part D: Prescription Drug Plan: Affordable drugs
Medigap or Medicare Supplemental Plan: Medsup plans cover
copays, deductibles, and coinsurance, which can be very
expensive. Medicare has created 10 medsup plans that vary by
state.
Medicaid
Title XIX of the Social Security Act
Provides health insurance to the medically indigent.
It is a welfare program that is administered at the state
government level.
The program serves 45 million low-income Americans.
Medicaid spending varies based on the status of the U.S.
economy.
It is not a federally mandated program, however, all states have
Medicaid except Arizona.
Medicaid
The ACA created Community First Choice as an optional
Medicaid benefit, which focuses on community health services
to Medicaid enrollees with disabilities.
This will enable consumers to receive care at home or at
community health centers rather than going to a hospital or their
facility.
PACE
Also authorized by the Balanced Budget Act of 1997, Program
of All-Inclusive Care for the Elderly (PACE) is a

comprehensive healthcare delivery system funded by Medicare
and Medicaid.
The PACE model focuses on providing community-based care
and services to people who otherwise need nursing home levels
of care.
Their philosophy is that seniors with chronic care needs are
better served in the community when possible.
Children’s Health Insurance Program (CHIP)
Authorized by the Balanced Budget Act of 1997, and codified as
Title XXI of the Social Security Act, the State Children's Health
Insurance Program (SCHIP), now Children's Health Insurance
Program (CHIP), was initiated in response to the number of
children who are uninsured in the United States.
Government - Hospital Reimbursement
In 1982, Congress passed the Tax Equity and Fiscal
Responsibility Act (TEFRA) and the Social Security
Amendments of 1983 to manage Medicare cost controls.
There was a mandate to hospitals for a prospective payment
system (PPS) to establish reimbursement rates for certain
conditions.
Each DRG group represents similar diagnoses of diseases that
are expected to have similar use of hospital services.
Government - Hospital Reimbursement
The amount of reimbursement is set per discharge of a patient.
CMS reimburses hospitals per admission and per diagnosis,
which is based on a DRG—a prospective payment system for
hospitals established through the Social Security Amendments
of 1983.

Government Resource-Based Relative Value Scale
Reimbursement
Medicare developed a new initiative of RBRVS to reimburse
physicians according to a relative value assigned to a service.
This reimbursement is divided into three components: physician
work, practice expenses and malpractice insurance.
Medicare pays a flat fee for physician visit and is based on the
Healthcare Common Procedure Coding System which is used to
code professional services.
The RBRVS, implemented in 1992, has become a standard
Medicare Part B reimbursement method
Government Reimbursement
Resource Utilization Group (RUG)
This type of prospective payment systems for skilled nursing
facilities, used by Medicare, provides for a per diem based on
the clinical severity of patients.
A classification system called resource utilization group (RUG),
which is a type of DRG, was designed to differentiate patients
based on how much they use the resources of the facility.
As the patient’s condition changes, the rate of reimbursement
changes.
Government Reimbursement
Home Health Resource Group (HHRG)
Implemented in October 2000, the home health resource group
(HHRG), which is a prospective payment used by Medicare,
pays a fixed predetermined rate for each 60 day episode of care,
regardless of the services.
All services are bundled under a home health agency.
The HHRG uses 80 distinct groups to classify patients’
condition

CMS Innovation: 4 Models
1: The Bundled Payments Initiative: Link payments that
multiple service beneficiaries receive during an episode of care.
2 and 3: Retrospective bundled payment arrangement where
actual expenditures are reconciled against a target price for an
episode of care.
4: Model 4 involves a prospective bundled payment
arrangement, where a lump sum payment is made to a provider
for the entire episode of care.
Table 8-1
7.8%
5.5%
4.8%
7.2%
12.7%
10.8%
6.6%
7.1%
9.5%
10.6%
0%
2%
4%
6%
8%
10%
12%
14%

1970s1980s1990s2000-20081970-2008
GDPNHE
$148
$356
$1,100
$2,814
$4,295
$4,522
$4,789
$5,150
$5,564
$5,973
$6,327
$6,701
$7,071
$7,423
$7,681
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
19601970198019901998199920002001200220032004200520062
0072008
NHE as a Share of GDP
Physician/
Clinical
Services
21.2%
Hospital Care
30.7%

Other Personal
Health Care
12.9%
Nursing Home
Care, 5.9%
Prescription
Drugs
10.0%
Home Health
Care, 2.8%
Other Health
Spending
16.5%
400% FPL
and Above
10%
200-399% FPL
23%
100-199% FPL
29%
<100% FPL
38%
20%
89%
45%
29%
12%
5%
42%
71%
6%
18%
29%
35%
PrivateMedicaid/PublicUninsured
12%

27%
55%
52%
19%
14%
8%
12%
UninsuredAll Nonelderly
$8,167
$9,773
$2,713
$3,997
20052010
Worker Contribution
Employer Contribution
Chart12005200520102010
Worker Contribution
8167
2713
9772.6814
3997.1688
Sheet1Employer ContributionWorker
Contribution20058167.0000271320109772.68143997.1688
$4,247
$9,860
$1,543
$3,515
19992009
Worker Contribution
Chart119991999200020002001200120022002200320032004200
4200520052006200620072007200820082009200920102010
Single Coverage
Family Coverage
$39*

$58*
$75*
$149*
$178*
$201*
$222*
$248*
$273*
$333*
27
129
28
135
30
149
39
178
42
201
47
222
51
226
52
248
57.8197
273.4412
60
280
65
293
75
333
Sheet119992000200120022003200420052006200720082009201
0Single Coverage272830394247515258606575Family
Coverage129135149178201222226248273280293333

Chart120102010200920092008200820072007200620062005200
5200420042003200320022002200120012000200019991999
Worker Contribution
$3,997*
$3,281*
$2,973*
$2,661*
$2,412*
$2,137*
$1,787*
$9,860*
$9,325*
$8,508*
$8,167*
$7,289*
$6,657*
$5,866*
$5,269*
$4,819*
3997
9773
3515
9860
3354
9325
3281
8824
2973
8508
2713
8167
2661
7289
2412
6657

2137
5866
1787
5269
1619
4819
1543
4247
Sheet120102009200820072006200520042003200220012000199
9Worker
Contribution$3,997$3,515$3,354$3,281$2,973$2,713$2,661$2,4
12$2,137$1,787$1,619$1,543Employer
Contribution$9,773$9,860$9,325$8,824$8,508$8,167$7,289$6,6
57$5,866$5,269$4,819$4,247
YOU DO NOT HAVE TO ANSWER EACH QUESTION ON
THIS SHEET. THE QUESTIONS ARE THERE TO HELP
ORGANIZE THE THOUGHTS AND GIVE YOU A GENERAL
IDEA OF WHAT INFORMATION TO INCLUDE IN THE
PAPER.
Document Analysis and/or Website Analysis Worksheet
1. Type of document? (i.e.,: brochure, newsletter, website, etc.)
2. What is this document or website used for?
3. Are there any unique or interesting characteristics about this
document or website?
4. For what audience was the document written or website
created?
5. What are the key messages this document or website
conveys?
6. Specifically HOW are the messages conveyed?

7. List 2-3 things this document or website tells you about life
or culture in that region (or in the U.S.) during the time it
was/is written
8. In what ways is this document or website
effective/ineffective in conveying its messages?
9. Based on the information you can gather from the document
or website, what do you believe are the underlying values (or
assumptions, or beliefs) of the place where these documents
originated?
10. Was the document or website easy to use? Easy to read?
Well organized? Up-to-date? Interesting to look at?
Informative? What might this say about the place where the
document or website originated?
11. Provide other general comments about the document or
website that might be useful to know or consider
Informal Overview of Assessment Practices at a Chosen College
or University
Selected College – Alabama State University in Montgomery,
AL
Each student will choose a college or university and will be
expected to make inquiries via the web about the various
assessment practices or instruments this college or university
uses. This will require you to browse the institution’s Office of
Institutional Research, Office of Institutional Effectiveness,
Office of Assessment, etc.
You will need to do some research to figure out where the
college houses its assessment information. On the scheduled day
on the syllabus, you will submit the assignment through the
assignment link in the designated learning module AND post on

the Discussion Boardinside of Blackboard a 2 typed-page
discussion of your findings including:
(1) a reflection on how easy or difficult it was to find the
information,
(2) a discussion of how much importance you think the college
or university places on assessment based on your findings, and
(3) a brief discussion of their assessment practices.
Please make sure your assignment is formatted in APA, 6th
edition and includes an APA title page. Also, while this is an
informal assignment, students are expected to complete this
assignment in a fashion that is reflective of graduate-level work
to include correct grammar, etc.
Rising Costs Healthcare USA
HE362W Contemporary Health Issues
After reading Chapter 8 and watching “The Other Drug War”
you have enough information to analyze what factors are
contributing to rising healthcare costs? Also see specific US
Healthcare Costs and Prescription Drug Costs, both summaries
on Kaiser Family Foundation website.
You may use other sources of information, remember to
properly cite each. Use citations in the text of the paper and
Works Cited at the end of the paper, APA style.
Criteria
Points
Score
Introduction/ opening statement:
· Define factors contributing to rising costs in the USA

2
Discussion/ description of issue
· How are healthcare costs measured, and how are these
numbers increasing?
· What are the main areas of healthcare expenditures?
· Pharmaceutical companies- how do they justify their high
prices? How is this contributing to rising costs?
· Cite evidence (facts and examples) to support your view
4
Concluding statement
· Make inferences-how is this relevant to health and healthcare
· Summarize your professional response and thoughts
2
Grammar/ Syntax/ Spelling
· Well written and well organized
· Work cited in text and referenced
2
Total
10

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