The Increasing Cost of Health Care

The Increasing Cost of Health Care

HOW MUCH DOES HEALTH CARE COST?

U.S. society places a high value on human life and generally wants—and expects—quality medical care. However, quality care comes with an increasingly high cost. In 1970 the United States spent 7% of its gross domestic product (GDP; the value of all the goods and services produced by the nation) on health care. By 2000 health care had risen to 13.3% ($1.3 trillion) of the GDP, and in 2003 health care expenditures reached 15.3% ($1.7 trillion) of the GDP. Table 5.1 shows the growth in health care expenditures, the growth in the GDP, and the annual percent change from the previous year from 1960 to 2003.

For many years the consumer price index (CPI; a measure of the average change in prices paid by consumers) increased at a greater rate for medical care than for any other commodity. From 1980 to 1990 the average annual increase in the overall CPI was 4.7%, whereas the average annual increase in the medical care index stood at 8.1%. By 2000 the average annual growth in the medical care index had fallen to 3.4%, but in 2004 it had risen again to 4.4%, outpacing overall inflation, which was 2.7%. The medical care index has consistently outpaced the CPI in each decade. Of all the components of health care delivery, the sharpest price increases in 2004 were in hospital services at 6%. (See Table 5.2.)

The Centers for Medicare and Medicaid Services (CMS), an agency of the U.S. Department of Health and Human Services (HHS), projects that the national health expenditure will grow to $4 trillion—20% of the GDP—by 2015, twice the 2005 estimate of $2 trillion. (See Table 5.3.) (Because the numbers in Table 5.3 are projections, they necessarily differ from the actual numbers presented in some other tables and figures.) Medicare was projected to account for a staggering 25.6% of all health care expenditures in 2006.

Generally, projections are most accurate for the near future and less accurate for the distant future. For example, predictions for 2030 should be viewed more warily than predictions for 2008. Because it is unlikely that the conditions on which the projections are based will remain the same, the CMS cautions that its projections should not be viewed as predictions for the future. Rather, they are intended to help policy makers evaluate the costs or savings of proposed legislative or regulatory changes.

Total Health Care Spending

The CMS, along with the Centers for Disease Control and Prevention and the Government Accountability Office, maintain most of the nation's statistics on health care costs. The CMS reports that the United States spent $1.9 trillion for health care in 2004, up 7.9% from the previous year. This rate has decreased since the 9.1% increase in 2002 and is projected to stay relatively constant to 2015. (See Table 5.3.)

About 55% of 2004 health care expenditures, or over $1 trillion, came from private funds (out-of-pocket payments, private health insurance, and other private funds), whereas the remaining 45% ($847.3 billion) was paid with public money. (See Table 5.4.) This means that 55 cents of every dollar spent on health care came from private funds, and the remainder came from federal (32 cents) or state and local governments (13 cents). The 2004 per capita cost for health care (the average per individual if spending was divided equally among all people in the country) was $6,280. Furthermore, $309 million was spent to provide coverage for people enrolled in Medicare.

Of the nearly $1.9 trillion spent on health care in 2004, $1.6 trillion (84%) was spent on personal health services (expenses incurred by individuals as opposed to institutions). Some of the services included hospital care,

TABLE 5.1
National health expenditures in comparison to gross domestic product and government expenditures, selected years 1960–2003
[Data are compiled from various sources by the Centers for Medicare & Medicaid Services]
Gross domestic product, government expenditures, and national health expenditures 1960 1970 1980 1990 1995 2000 2001 2002 2003
—Category not applicable.
Source: "Table 119. Gross Domestic Product, Federal and State and Local Government Expenditures, National Health Expenditures, and Average Annual Percent Change: United States, Selected Years 1960–2003," in Health, United States, 2005, U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Health Statistics, 2006, http://www.cdc.gov/nchs/data/hus/hus05.pdf#summary (accessed April 17, 2006)
Amount in billions
Gross domestic product (GDP)$527$1,040$2,796$5,803$7,401$9,817$10,128$10,487$11,004
Federal government expenditures85.8198.6576.61,228.71,575.71,864.41,969.52,101.82,241.6
State and local government expenditures38.1107.5307.8660.8902.51,269.51,368.21,436.91,498.1
National health expenditures26.773.1245.8696.0990.21,309.91,426.41,559.01,678.9
    Private20.145.4140.9413.5533.6717.5771.8841.0913.2
    Public6.627.6104.8282.5456.6592.4654.6718.0765.7
       Federal government2.817.671.3192.7322.4416.0463.8508.6541.7
       State and local government3.810.033.589.8134.2176.4190.8209.4224.0
Amount per capita
National health expenditures$143$348$1,067$2,738$3,698$4,560$4,914$5,317$5,671
    Private1082166121,6271,9932,4982,6592,8693,084
    Public351314551,1111,7052,0622,2552,4492,586
Percent
National health expenditures as percent of GDP5.17.08.812.013.413.314.114.915.3
Health expenditures as a percent of total government expenditures
    Federal3.38.912.415.720.522.323.524.224.2
    State and local9.99.310.913.614.913.913.914.615.0
Percent distribution
National health expenditures100.0100.0100.0100.0100.0100.0100.0100.0100.0
    Private75.262.257.359.453.954.854.153.954.4
    Public24.837.842.740.646.145.245.946.145.6
Average annual percent change from previous year shown
Gross domestic product7.010.47.65.05.83.23.54.9
Federal government expenditures8.811.27.95.13.15.66.76.7
State and local government expenditures10.911.17.96.45.47.85.04.3
National health expenditures10.612.911.07.35.88.99.37.7
    Private8.512.011.45.26.17.69.08.6
    Public15.414.310.410.15.310.59.76.6
       Federal government20.115.010.510.85.211.59.76.5
       State and local government10.212.810.48.45.68.29.77.0
National health expenditures, per capita9.311.99.96.24.57.88.26.6
    Private7.211.010.34.14.96.57.97.5
    Public14.013.29.38.94.19.48.65.6

physician and dental services, nursing and home health care, prescription drugs, and durable medical equipment. (See Table 5.5.)

Table 5.5 shows the trends and annual percent changes in personal health care expenditures by category. In 2004 the nation spent $587.4 billion on professional services, by far the largest chunk of personal health care spending, followed by $570.8 billion (about 30% of all health expenditures) on hospital costs. This expense was followed by $399.9 billion for physician and clinical services, $188.5 billion for prescription drugs, and $158.4 billion for nursing home and home health care. Figure 5.1 shows general percentages of the payments made for medical care payments in 2004.

WHO PAYS THE BILL?

In general, the government is the fastest-growing payer of health care expenses. From 1999 to 2004 total public share of the nation's total health care bill rose from 44.1% to 45.1%, and it is projected to rise to 47.5% by 2015. In 2004 private health insurance, the major nongovernmental payer of health care costs, paid approximately 35.1% of all health expenditures, a proportion that has incrementally increased since 1999. The share of health care spending from private, out-of-pocket (paid by the patient) funds declined from 1999 to 2004, from nearly 14.5% to 12.6%. (See Table 5.4.)

Personal Health Care Bill

Much of the increase in government spending has occurred in the area of personal health care. In 1999

TABLE 5.2
Consumer Price Index and average annual percent change for all items, selected items, and medical care costs, selected years 1960–2004
[Data are based on reporting by samples of providers and other retail outlets]
Items and medical care components 1960 1970 1980 1990 1995 2000 2001 2002 2003 2004
Consumer price index (CPI)
All items29.638.882.4130.7152.4172.2177.1179.9184.0188.9
All items excluding medical care30.239.282.8128.8148.6167.3171.9174.3178.1182.7
All services24.135.077.9139.2168.7195.3203.4209.8216.5222.8
Food30.039.286.8132.4148.4167.8173.1176.2180.0186.2
Apparel45.759.290.9124.1132.0129.6127.3124.0120.9120.4
Housing36.481.1128.5148.5169.6176.4180.3184.8189.5
Energy22.425.586.0102.1105.2124.6129.3121.7136.5151.4
Medical care22.334.074.9162.8220.5260.8272.8285.6297.1310.1
Components of medical care
Medical care services19.532.374.8162.7224.2266.0278.8292.9306.0321.3
   Professional services37.077.9156.1201.0237.7246.5253.9261.2271.5
       Physicians' services21.934.576.5160.8208.8244.7253.6260.6267.7278.3
       Dental services27.039.278.9155.8206.8258.5269.0281.0292.5306.9
       Eye glasses and eye carea117.3137.0149.7154.5155.5155.9159.3
       Services by other medical professionalsa120.2143.9161.9167.3171.8177.1181.9
   Hospital and related services69.2178.0257.8317.3338.3367.8394.8417.9
      Hospital servicesb115.9123.6134.7144.7153.4
          Inpatient hospital servicesb, c113.8121.0131.2140.1148.1
          Outpatient hospital servicesa, c138.7204.6263.8281.1309.8337.9356.3
      Hospital rooms9.323.668.0175.4251.2
      Other inpatient servicesa142.7206.8
      Nursing homes and adult day careb117.0121.8127.9135.2140.4
Medical care commodities46.946.575.4163.4204.5238.1247.6256.4262.8269.3
   Prescription drugs and medical supplies54.047.472.5181.7235.0285.4300.9316.5326.3337.1
   Nonprescription drugs and medical suppliesa120.6140.5149.5150.6150.4152.0152.3
      Internal and respiratory over-the-counter drugs42.374.9145.9167.0176.9178.9178.8181.2180.9
      Nonprescription medical equipment and supplies79.2138.0166.3178.1178.2177.5178.1179.7
Average annual percent change from previous year shown
All items2.77.84.73.12.52.81.62.32.7
All items excluding medical care2.67.84.52.92.42.71.42.22.6
All services3.88.36.03.93.04.13.13.22.9
Food2.78.34.32.32.53.21.82.23.4
Apparel2.64.43.21.2−0.4−1.8−2.6−2.5−0.4
Housing8.34.72.92.74.02.22.52.5
Energy1.312.91.70.63.43.8−5.912.210.9
Medical care4.38.28.16.33.44.64.74.04.4
Components of medical care
Medical care services5.28.88.16.63.54.85.14.55.0
   Professional services7.77.25.23.43.73.02.93.9
       Physicians' services4.68.37.75.43.23.62.82.74.0
       Dental services3.87.27.05.84.64.14.54.14.9
       Eye glasses and eye carea3.21.83.20.60.32.2
       Services by other medical professionalsa3.72.43.32.73.12.7
   Hospital and related services9.97.74.26.68.77.35.9
       Hospital servicesb6.69.07.46.0
          Inpatient hospital servicesb, c6.38.46.85.7
          Outpatient hospital servicesa, c8.15.26.610.29.15.4
       Hospital rooms9.811.29.97.4
       Other inpatient servicesa7.7
       Nursing homes and adult day careb4.15.05.73.8

government sources paid 42.6% of personal health care expenditures; by 2004 they covered 44.4% ($692.4 billion) of the $1.58 trillion spent on personal health care services. (See Table 5.6.) Of the total expenditures, 33.9% came from the federal government and 10.5% came from state and local governments. Some of the federal increase was attributed to Medicaid spending, which grew from 16.1% of all personal health care expenditures in 1999 to 17.5% in 2004.

Milt Freudenheim reports in "Low Payments by U.S. Raise Medical Bills Billions a Year" (June 1, 2006, http://www.nytimes.com/2006/06/01/business/01health.html?ex=1306814400&en=938046b73d5ac32a&ei=5088&partner=rssnyt&emc=rss) that employers and health care consumers are paying an increasing proportion of the health care costs in response to sharply restricted government spending. According to Freudenheim, one study found that hospitals in Washington charged an additional $738

TABLE 5.2
Consumer Price Index and average annual percent change for all items, selected items, and medical care costs, selected years 1960–2004 [continued]
[Data are based on reporting by samples of providers and other retail outlets]
Items and medical care components 1960 1970 1980 1990 1995 2000 2001 2002 2003 2004
—Data not available.
… Category not applicable.
aDecember 1986=100.
bDecember 1996=100.
cSpecial index based on a substantially smaller sample.
Notes: Consumer Price Index for all urban consumers (CPI-U) U.S. city average, detailed expenditure categories. 1982−84=100, except where noted. Data are not seasonally adjusted.
Source: "Table 120. Consumer Price Index and Average Annual Percent Change for all Items, Selected Items, and Medical Care Components: United States, Selected Years 1960–2004," in Health, United States, 2005 U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Health Statistics, 2006, http://www.cdc.gov/nchs/data/hus/hus05.pdf#summary (accessed April 17, 2006)
Medical care commodities−0.15.08.04.63.14.03.62.52.5
   Prescription drugs and medical supplies−1.34.39.65.34.05.45.23.13.3
   Nonprescription drugs and medical suppliesa3.11.20.7−0.11.10.2
      Internal and respiratory over-the-counter drugs5.96.92.71.21.1−0.11.3−0.2
      Nonprescription medical equipment and supplies5.73.81.40.1−0.40.30.9

million—nearly 15% percent of their revenue—to private payers (employers, health plans, and consumers) to compensate for underpayments from the government programs. Another study reported that in California, health plans and consumers paid an additional $4.5 billion for hospital care to offset diminished Medicaid and Medicare payments. Other research, notes Freudenheim, finds that unpaid hospital bills, largely for the uninsured, are costing about $45 billion per year nationally and increasing health insurance costs by 8.5%.

WHY HAVE HEALTH CARE COSTS AND SPENDING INCREASED?

The increase in the cost of medical care is challenging to analyze, because the methods and quality of health care change constantly and as a result are often not comparable. A hospital stay in 1970 did not include the same services offered in 2006. Furthermore, the care received in a physician's office today is not comparable to that received a generation ago. One contributing factor to the rising cost of health care is the increase in biomedical technology, much of which is now available for use outside of a hospital.

Many other factors also contribute to the increase in health care costs. These include population growth, high salaries for physicians and some other health care workers, and the expense of malpractice insurance. Escalating malpractice insurance costs and professional liability premiums have prompted some physicians and other health care practitioners to refrain from performing high-risk procedures that increase their vulnerability or have caused them to relocate to states where malpractice premiums are lower. Furthermore, to protect themselves from malpractice suits, many health care practitioners routinely order diagnostic tests and prescribe treatments that are not medically necessary and do not serve to improve their patients' health. This practice is known as defensive medicine, and while its precise contribution to rising health care costs is difficult to gauge, industry observers agree that it is a significant factor.

Other factors include advanced biomedical procedures requiring high-technology expertise and equipment; redundant (excessive and unnecessary) technology in hospitals; cumbersome medical insurance programs and consumer demand for less restrictive insurance plans (ones that offer more choices, benefits, and coverage, but usually mean higher premiums); and consumer demand for the latest and most comprehensive testing and treatment. Legislation that increased Medicare spending and the growing number of older adults who use a disproportionate amount of health care services also acted to accelerate health care spending.

In an article in the New York Times (August 10, 2002), Drew Altman, the president of the Henry J. Kaiser Family Foundation, a health care research organization, expressed a concern shared by many health care industry observers: "No one has a big new answer about what to do about health care costs. And it's all made worse because health costs are rising in bad economic times." Some industry observers believe that combating health care inflation requires a major shift in how U.S. health care providers and consumers approach health care delivery. They feel Americans must learn to use health care services wisely, choosing only treatments that have proven effective and accepting that bigger facilities and more treatment do not necessarily produce better health.

TABLE 5.3
National health expenditures and annual percent change, selected years 1999–2015a
Items 1999 2000 2001 2002 2003 2004 Projected
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
aThe health spending projections were based on the 2004 version of the National Health Expenditures released in January 2006.
b2000 base year. Calculated as the difference between nominal personal health care spending and real personal health care spending. Real personal health care spending is produced by deflating spending on each service type by the appropriate deflator (PPI, CPI, etc.) HCFA is the Health Care Financing Administration (now the Centers for Medicare and Medicaid Services). and adding real spending by service type.
cJuly 1 Census resident based population estimates.
Note: Numbers and percents may not add to totals because of rounding.
Source: "Table 1. National Health Expenditures and Selected Economic Indicators, Levels and Annual Percent Change: Selected Calendar Years 1999–2015," in National Health Care Expenditures Projections: 2005–2015, U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, 2005, http://www.cms.hhs.gov/NationalHealthExpendData/downloads/proj2005.pdf (accessed April 25, 2006)
National health expenditures (billions)$1,270.3$1,358.5$1,474.2$1,607.9$1,740.6$1,877.6$2,016.0$2,163.9$2,319.6$2,498.1$2,689.0$2,879.4$3,078.1$3,297.6$3,533.1$3,776.2$4,031.7
National health expenditures as a percent of gross domestic product13.7%13.8%14.6%15.4%15.9%16.0%16.2%16.5%16.8%17.2%17.6%18.0%18.3%18.7%19.2%19.6%20.0%
National health expenditures per capita$4,471$4,729$5,079$5,485$5,879$6,280$6,683$7,110$7,556$8,069$8,613$9,148$9,700$10,310$10,961$11,626$12,320
Gross domestic product (billions)$9,268.4$9,817.0$10,128.0$10,469.6$10,971.2$11,734.3$12,450.1$13,134.8$13,831.0$14,536.4$15,263.2$16,026.4$16,811.6$17,618.6$18,446.7$19,295.2$20,197.9
Gross domestic product (billions of 2000 $)9,470.39,817.09,890.710,048.810,320.610,755.711,132.111,488.411,833.012,152.512,456.312,767.713,074.213,374.913,669.113,956.214,249.3
Gross domestic product implicit price deflator (chain weighted 2000 base year)0.9791.0001.0241.0421.0631.0911.1191.1451.1711.2001.2301.2601.2921.3241.3571.3911.426
Consumer price index (CPI-W)-1982–84 base)1.6661.7221.7711.7991.8401.8891.9341.9812.0282.0852.1432.2032.2652.3292.3942.4612.530
HCFA implicit medical price deflatorb0.9671.0001.0381.0781.1181.1631.2051.2501.2981.3481.4001.4531.5081.5651.6251.6871.752
U.S. populationc284.1287.3290.3293.2296.1299.0301.7304.3307.0309.6312.2314.8317.3319.8322.3324.8327.2
    Population age less than 65 years249.0251.9254.6257.2259.8262.3264.7266.9269.1271.1272.9274.6276.1277.4278.7279.8280.8
    Population age 65 years and older35.135.435.735.936.336.637.037.437.938.539.340.241.242.443.745.046.4
Private health insurance-NHE (billions)$417.8$454.8$497.7$552.2$606.3$658.5$706.4$745.0$806.2$875.5$950.5$1,017.7$1,086.9$1,162.6$1,242.1$1,320.2$1,397.1
Private health insurance-PHC (billions)371.8402.7441.0481.8519.9563.5608.1641.7693.3749.6808.8870.3934.2997.41,061.21,127.61,196.4
Annual percent change from previous year shown
National health expenditures (billions)6.98.59.18.27.97.47.37.27.77.67.16.97.17.16.96.8
National health expenditures as a percent of gross domestic product1.05.25.53.30.91.21.71.82.52.52.01.92.22.32.22.0
National health expenditures per capita5.77.48.07.26.86.46.46.36.86.76.26.06.36.36.16.0
Gross domestic product (billions)5.93.23.44.87.06.15.55.35.15.05.04.94.84.74.64.7
Gross domestic product (billions of 2000 $)3.70.81.62.74.23.53.23.02.72.52.52.42.32.22.12.1
Gross domestic product implicit price deflator (chain weighted 2000 base year)2.22.41.72.02.62.62.32.32.42.52.52.52.52.52.52.5
Consumer price index (CPI-W)-1982–84 base)3.42.81.62.32.72.42.42.42.82.82.82.82.82.82.82.8
HCFA implicit medical price deflatorb3.43.83.83.74.13.53.83.83.93.83.83.83.83.83.83.9
U.S. populationc1.11.01.01.01.00.90.90.90.90.80.80.80.80.80.80.8
    Population age less than 65 years1.21.11.01.01.00.90.80.80.70.70.60.50.50.40.40.4
    Population age 65 years and older0.80.70.71.01.01.01.21.41.62.02.32.62.93.03.13.1
Private health insurance-NHE8.99.411.09.88.67.35.58.28.68.67.16.87.06.86.35.8
Private health insurance-PHC8.39.59.37.98.47.95.58.08.17.97.67.36.86.46.36.1
TABLE 5.4
National health expenditures by source of funds, selected years 1999–2015a
Year Total Out-of-pocket payments Thir-party payments Medicarec Medicaidd
Total Private heath insurance Other private funds Public
Total Federalb State and localb
Historical estimatesAmount in bilions
    1999$1,270.3$183.9$1,086.4$417.8$108.6$560.1$390.0$170.1$213.2$184.2
    20001,358.5192.61,165.9454.8108.9602.2418.4183.8225.2201.6
    20011,474.2199.81,274.3497.7109.7667.0465.0202.0248.3225.3
    20021,607.9210.81,397.2552.2118.4726.5509.5217.1266.3249.0
    20031,740.6223.51,517.1606.3127.5783.4554.4229.0283.8271.2
    20041,877.6235.71,641.9658.5136.1847.3600.0247.3309.0292.7
Projected
    20052,016.0248.81,767.2706.4146.2914.6645.9268.7335.5315.2
    20062,163.9246.21,917.7745.0157.11,015.5742.0279.2420.1320.0
    20072,319.6261.92,057.7806.2169.01,082.6789.5299.2442.7347.3
    20082,498.1279.12,219.0875.5181.81,161.7846.7321.6472.6378.6
    20092,689.0297.52,391.5950.5195.91,245.1906.5345.8502.5413.3
    20102,879.4316.32,563.11,017.7210.61,334.7971.4371.2536.0450.4
    20113,078.1335.82,742.31,086.9226.11,429.31,040.0397.9572.1489.5
    20123,297.6356.32,941.21,162.6242.71,535.91,119.5425.8617.6530.3
    20133,533.1376.83,156.31,242.1260.11,654.11,209.1455.2671.4573.7
    20143,776.2398.33,377.91,320.2278.61,779.11,303.8486.3728.2620.1
    20154,031.7421.03,610.71,397.1298.31,915.31,407.8519.4792.0669.8
Historical estimatesPer capita amount
    1999$4,471$647$3,824$1,471$382$1,971$1,373$599ee
    20004,7296704,0581,5833792,0961,456640ee
    20015,0796884,3901,7153782,2981,602696ee
    20025,4857194,7661,8844042,4781,738740ee
    20035,8797555,1252,0484312,6461,873774ee
    20046,2807885,4922,2024552,8342,007827ee
Projected
    20056,6838255,8582,3424853,0322,141891ee
    20067,1108096,3012,4485163,3372,438917ee
    20077,5568536,7032,6265503,5272,572975ee
    20088,0699017,1682,8285873,7522,7351,039ee
    20098,6139537,6603,0456283,9882,9041,108ee
    20109,1481,0058,1433,2336694,2403,0861,179ee
    20119,7001,0588,6423,4257124,5043,2771,254ee
    201210,3101,1149,1963,6357594,8023,5001,331ee
    201310,9611,1699,7923,8538075,1313,7511,412ee
    201411,6261,22610,4004,0658585,4774,0141,497ee
    201512,3201,28711,0344,2699125,8534,3021,587ee
Historical estimatesPercent distribution
    1999100.014.585.532.98.544.130.713.416.814.5
    2000100.014.285.833.58.044.330.813.516.614.8
    2001100.013.686.433.87.445.231.513.716.815.3
    2002100.013.186.934.37.445.231.713.516.615.5
    2003100.012.887.234.87.345.031.913.216.315.6
    2004100.012.687.435.17.345.132.013.216.515.6
Projected
    2005100.012.387.735.07.345.432.013.316.615.6
    2006100.011.488.634.47.346.934.312.919.414.8
    2007100.011.388.734.87.346.734.012.919.115.0
    2008100.011.288.835.07.346.533.912.918.915.2
    2009100.011.188.935.37.346.333.712.918.715.4
    2010100.011.089.035.37.346.433.712.918.615.6
    2011100.010.989.135.37.346.433.812.918.615.9
    2012100.010.889.235.37.446.633.912.918.716.1
    2013100.010.789.335.27.446.834.212.919.016.2
    2014100.010.589.535.07.447.134.512.919.316.4
    2015100.010.489.634.77.447.534.912.919.616.6

In "Health Care Cost Misperceptions Contribute to Problems, Hubbard Says" (California Healthline, February 15, 2006, http://www.californiahealthline.org/index.cfm?action=dspItem&itemid=118735) and "The Health of a Nation" (New York Times, April 3, 2006, http://www.nytimes.com/2006/04/03/opinion/03hubbard.html?ex=1301716800&en=3f9eb443159b970f&ei=5088&partner=rssnyt&emc=rss), Alan Hubbard, the director of the National Economic Council (NEC), asserts that increasing health care costs are largely attributable to consumers' misperception that "health care is free," which prompts them to overuse services because their health

TABLE 5.4
National health expenditures by source of funds, selected years 1999–2015a [continued]
Year Total Out-of-pocket payments Thir-party payments Medicarec Medicaidd
Total Private heath insurance Other private funds Public
Total Federalb State and localb
aThe health spending projections were based on the 2004 version of the National Health Expenditures (NHE) released in January 2006.
bIncludes Medicaid SCHIP Expansion and SCHIP.
cSubset of federal funds.
dSubset of federal and state and local funds. Includes Medicaid SCHIP Expansion.
eCalculation of per capita estimates is inappropriate.
Notes: Per capita amounts based on July 1 census resident based population estimates. Numbers and percents may not add to totals because of rounding.
Source: "Table 3. National Health Expenditures; Aggregate and per Capita Amounts, Percent distribution and Annual Percent Change by Source of Funds: Selected Calendar Years 1999–2015," in National Health Expenditures Projections: 2005–2015, U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, 2005, http://www.cms.hhs.gov/NationalHealthExpendData/downloads/proj2005.pdf (accessed April 25, 2006)
Historical estimatesAnnual percent change from previous year shown
    1999
    20006.94.87.38.90.37.57.38.15.79.5
    20018.53.79.39.40.710.811.19.910.311.8
    20029.15.59.611.07.98.99.67.47.210.5
    20038.26.08.69.87.77.88.85.56.68.9
    20047.95.58.28.66.88.28.28.08.97.9
Projected
    20057.45.67.67.37.47.97.78.78.67.7
    20067.3−1.08.55.57.511.014.93.9−5.21.5
    20077.26.47.38.27.56.66.47.25.48.5
    20087.76.67.88.67.67.37.37.56.79.0
    20097.66.67.88.67.77.27.17.56.39.2
    20107.16.37.27.17.57.27.27.36.79.0
    20116.96.27.06.87.37.17.17.26.78.7
    20127.16.17.37.07.47.57.67.08.08.3
    20137.15.77.36.87.27.78.06.98.78.2
    20146.95.77.06.37.17.67.86.88.58.1
    20156.85.76.95.87.17.78.06.88.88.0

insurance foots the bulk of the bill. He believes that when consumers are forced to pay for more of their costs out-of-pocket, they will comparison shop for health services, which in turn will spur competition and drive prices down.

CONTROLLING HEALTH CARE SPENDING

In 2005 national health expenditures exceeded $2 trillion. Despite the continuing growth in health care spending from year to year between 2000 and 2005—from 6.9% in 2000 to 7.4% in 2005—these figures represent a decline from the skyrocketing costs that marked the beginning of the 1990s. (See Table 5.3.)

To achieve these results, the nation's health care system underwent some dramatic changes. Beginning in the late 1980s employers began looking for new ways to contain health benefit costs for their workers. Many enrolled their employees in managed care programs as alternatives to traditional, fee-for-service insurance. Managed care programs offered lower premiums by keeping a tighter control on costs and utilization and by emphasizing the importance of preventive care. Insurers negotiated discounts with providers (physicians, hospitals, clinical laboratories, and others) in exchange for guaranteed access to employer-insured groups. Private insurance and other private sources such as privately funded construction and philanthropy pay for about 42% of the nation's health costs, according to 2004 data. Public sources pick up about 46% of the nation's costs, and 13% of the costs come directly from consumers' pockets. (See Figure 5.2.)

There is heightened interest in developing treatments and technologies designed to reduce the health system's dependence on expensive, inpatient hospital care. After professional services ($587.4 billion), hospital care expenditures were the single-largest spending component of total health care expenses ($570.8), accounting for 32.5% of all national health care expenditures in 2004. While the annual hospital cost growth rate has fluctuated in the past, in 2000 it was 5.6%, and by 2004 it had risen to 8.6%. (See Table 5.5.)

Physician and clinical services accounted for 21.3% ($399.9 billion) of 2004 national health spending. According to the CMS (2002, http://www.cms.hhs.gov/statistics/nhe/projections-2003/t2.asp), however, the average annual increase in physician spending dropped steadily from 13.2% in 1988 to 4% in 1996. From 1997 to 2000 it fluctuated between 5 and 7.2%, and while it spiked to 9% in 2001, it dropped to 8.1% in 2004. (See Table 5.5.) Managed care has played a large role in the slowed growth observed in this sector of health care delivery.

TABLE 5.5
National health expenditures by type of expenditures, 1999–2015a
Type of expenditure 1999 2000 2001 2002 2003 2004 Projected
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
National health expenditures $1,270.3$1,358.5$1,474.2$1,607.9$1,740.6$1,877.6$2,016.0$2,163.9$2,319.6$2,498.1$2,689.0$2,879.4$3,078.1$3,297.6$3,533.1$3,776.2$4,031.7
Health services and supplies1,180.01,264.51,375.51,499.21,624.51,753.01,882.22,020.32,165.22,332.22,510.62,688.12,873.03,077.83,298.03,524.63,762.8
    Personal health care1,068.31,139.91,239.11,341.41,445.71,560.21,677.81,801.91,928.72,073.42,225.92,386.92,555.22,735.12,926.33,127.33,342.1
        Hospital care395.0417.0451.4488.6525.5570.8616.1662.5709.1763.2821.0882.4946.51,012.91,081.61,153.71,230.9
        Professional services397.9426.7465.4503.2543.3587.4631.3680.0729.6785.8843.6903.4964.91,032.61,105.41,181.11,261.4
            Physician and clinical services269.6288.6313.1337.9367.0399.9429.9463.3496.5533.8571.7610.7650.6695.5744.6795.5849.8
            Other professional services37.139.142.845.749.152.755.859.764.068.773.578.583.989.795.9102.5109.4
            Dental services57.162.067.573.376.981.587.494.3101.3109.0116.9124.9133.2141.7150.1158.6167.3
            Other personal health care34.037.141.946.350.453.358.162.767.874.381.589.297.3105.8114.8124.5134.8
        Nursing home and home health122.1125.8133.8140.0148.6158.4170.6181.5192.2204.7218.3232.8248.1264.5281.9300.5320.5
            Home health care31.630.632.234.338.143.248.953.157.362.167.072.377.983.890.096.6103.7
            Nursing home care90.595.3101.5105.7110.4115.2121.7128.4134.8142.7151.2160.5170.3180.7191.9203.9216.8
        Retail outlet sales of medical products153.4170.3188.5209.5228.3243.7259.8277.9297.8319.7343.0368.4395.7425.2457.4491.9529.3
            Prescription drugs104.7120.8138.6157.9174.1188.5203.5219.2236.8255.8276.6299.2323.8350.5379.9411.7446.2
            Other medical products48.849.549.951.654.255.256.358.761.163.966.469.171.974.777.580.383.1
                Durable medical equipment19.019.319.620.822.123.023.724.926.027.328.229.530.832.133.534.836.2
                Other non-durable medical products29.830.230.330.932.132.332.633.835.136.638.239.641.142.644.045.546.9
    Government administration and net cost of private health insurance70.981.289.6106.1124.9136.7142.4151.5164.2180.8200.5210.6220.1237.5258.5275.6289.8
    Government public health activities40.743.446.851.754.056.162.067.072.378.084.190.797.7105.2113.2121.7130.9
Investment90.394.098.7108.8116.1124.6133.8143.6154.4165.9178.4191.3205.1219.7235.2251.5268.9
    Researchb23.425.628.832.535.639.042.045.248.952.656.460.264.168.172.376.681.0
    Structures & equipment66.868.469.976.280.585.791.898.4105.5113.3122.0131.1141.0151.6162.9175.0187.9
Annual percent change from previous year shown
National health expenditures 6.98.59.18.27.97.47.37.27.77.67.16.97.17.16.96.8
Health services and supplies7.28.89.08.47.97.47.37.27.77.77.16.97.17.26.96.8
    Personal health care6.78.78.37.87.97.57.47.07.57.47.27.17.07.06.96.9
        Hospital care5.68.28.27.58.67.97.57.07.67.67.57.37.06.86.76.7
        Professional services7.39.08.18.08.17.57.77.37.77.47.16.87.07.06.96.8
            Physician and clinical services7.08.57.98.69.07.57.87.27.57.16.86.56.97.16.86.8
            Other professional services5.49.56.77.57.45.96.97.17.56.96.86.86.97.06.96.8
            Dental services8.59.08.64.86.17.27.97.47.57.36.96.66.35.95.75.5
            Other personal health care9.013.010.68.75.89.17.98.19.69.79.49.18.78.58.48.3
        Nursing home and home health3.16.34.76.16.67.76.45.96.66.66.66.66.66.66.66.6
            Home health care−3.15.56.411.113.313.28.67.98.38.07.87.77.67.57.37.3
            Nursing home care5.36.64.14.54.35.65.55.05.86.06.16.16.16.26.36.3
TABLE 5.5
National health expenditures by type of expenditures, 1999–2015a [continued]
Type of expenditure 1999 2000 2001 2002 2003 2004 Projected
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
aThe health spending projections were based on the 2004 version of the National Health Expenditures (NHE) released in January 2006.
bResearch and development expenditures of drug companies and other manufacturers and providers of medical equipment and supplies are excluded from research expenditures. These research expenditures are implicitly included in the expenditure class in which the product falls, in that they are covered by the payment received for that product.
Note: Numbers may not add to totals because of rounding.
Source: "Table 2. National Health Expenditure Amounts, and Annual Percent Change by Type of Expenditure: Selected Calendar Years 1999–2015," in National Health Expenditures Projections: 2005–2015, U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, 2005, http://www.cms.hhs.gov/NationalHealthExpendData/downloads/proj2005.pdf (accessed April 25, 2006)
        Retail outlet sales of medical products11.010.711.29.06.76.67.07.27.37.37.47.47.57.67.67.6
            Prescription drugs15.414.714.010.28.28.07.78.08.08.18.28.28.38.48.48.4
            Other medical products1.50.93.35.11.92.04.24.04.63.94.13.93.93.73.63.5
                Durable medical equipment1.81.65.76.44.03.35.14.44.83.64.54.34.34.14.03.9
                Other non-durable medical products1.40.51.84.20.41.13.53.84.54.23.83.63.63.43.33.2
    Government administration and net cost of private health insurance14.510.318.417.79.44.26.48.410.110.95.04.57.98.86.65.2
    Government public health activities6.57.910.44.44.010.58.07.97.97.97.77.77.77.67.57.5
Investment4.15.010.36.77.37.47.37.57.47.57.37.27.17.07.06.9
    Researchb9.212.313.29.59.37.97.78.17.67.26.86.56.36.15.95.8
    Structures & equipment2.32.29.15.56.57.17.27.37.47.77.57.57.57.47.47.4

In 2004 spending for nursing home care totaled $115.2 billion, and spending for home health care reached $43.2 billion. (See Table 5.5.) Although in 2002 nursing home expenses increased 4.1%, this increase followed four consecutive years of decelerating growth from a high of 9.1% annual growth in 1995, according to the CMS. The increase was caused by legislation that increased Medicare payments to nursing homes for selected complex medical conditions and for facilities specializing in the care of patients with acquired immunodeficiency syndrome (AIDS).

The fastest-growing component of health care was the market for prescription drugs. In 2004 Americans spent $188.5 billion on prescription medication—an 8.2% increase from the previous year. (See Table 5.5.) A large part of the increase was financed by private insurers, which paid 47.6% of drug costs in 2004, slightly lower than the high of 50% in 2001. (See Table 5.7.) Growth in this sector of health services has been fueled by the fact that prescription drugs are increasingly substituted for other types of health care. For example, antidepressant drugs have demonstrated effectiveness in place of more expensive psychotherapy.

Prescription Drug Prices Rose in 2005

In Trends in Manufacturer Prices of Prescription Drugs Used by Older Americans—2005 Year-End Update (2006, http://www.nlarx.org/policy/pdfs/AARPDrugPriceTrends_Report_4_06.pdf), David Gross et al. find that pharmaceutical companies increased the prices they charge drug wholesalers for the top 193 brand-name drugs an average of 6% in 2005, more than 75% higher than the cumulative general inflation rate of 3.4%. Gross et al. note that while the annual rate of increase in manufacturers' prices in 2005 continued to exceed the rate of inflation, it was the lowest since 2001, and substantially lower than the rates of increase in 2003 and 2004.

Ironically, these costs persisted under the new Medicare drug benefit intended to increase government spending for prescription drugs and provide prescription drug savings for older Americans and people with disabilities. The voluntary program allows Medicare beneficiaries to choose from dozens of plans offered by health insurers and health plans called pharmacy benefit managers. As noted by Susan Heavy in "Drug Prices Rise under U.S. Medicare Plan" (February 22, 2006, http://www.seniors.org/news.asp?ID=2052), a report released in February 2006 by the U.S. House of Representatives Government Reform Committee found that prices of some of the most popular brand-name (as opposed to generic) drugs used by older adults rose an average of 4% under the new Medicare drug benefit, with some drug prices rising as much as 10%. Medicare officials had claimed that allowing private companies to provide the benefit to the more than thirty million Americans enrolled in the program would offer consumers more choices and help to lower prices through competition. Peter Ashkenaz, a Medicare spokesperson, said the study findings did not factor in the effect of rising wholesale prices and asserted that the observed increase was not attributable to the new Medicare program.

HEALTH CARE FOR OLDER ADULTS, PEOPLE WITH DISABILITIES, AND THE POOR

The United States is one of the few industrialized nations that does not have a national health care program. Government-funded health care exists, and forms a major part of the health care system, but it is available only to specific segments of the U.S. population. In other developed countries government national medical care programs cover almost all of their citizens' 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 people age sixty-five and older, the poor, and people with disabilities. Before the existence of these programs, many 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.

TABLE 5.6
Personal health expenditures by source of funds, selected years 1999–2015a
Year Total Out-of-pocket payments Thir-party payments Medicarec Medicaidd
Total Private heath insurance Other private funds Public
Total Federalb State and localb
Historical estimatesAmount in bilions
    1999$1,068.3$183.9$884.5$371.8$57.5$455.3$347.0$108.3$206.4$171.9
    20001,139.9192.6947.3402.756.8487.7371.1116.6217.4187.9
    20011,239.1199.81,039.3441.056.3542.0413.3128.7240.5210.0
    20021,341.4210.81,130.6481.858.2590.6450.4140.2258.2231.9
    20031,445.7223.51,222.2519.963.8638.6489.4149.1275.9251.9
    20041,560.2235.71,324.5563.568.6692.4529.2163.2299.6272.6
Projected
    20051,677.8248.81,429.0608.173.4747.4568.5179.0325.4293.5
    20061,801.9246.21,555.7641.778.7835.3651.3184.0402.6296.6
    20071,928.7261.91,666.8693.384.2889.3691.2198.1423.9321.8
    20082,073.4279.11,794.4749.690.3954.4740.3214.2452.2350.8
    20092,225.9297.51,928.5808.896.81,022.8791.3231.5480.5383.0
    20102,386.9316.32,070.5870.3103.61,096.7847.0249.7512.1417.4
    20112,555.2335.82,219.4934.2110.41,174.8906.1268.7546.3453.7
    20122,735.1356.32,378.8997.4117.71,263.7975.2288.5589.6491.5
    20132,926.3376.82,549.51,061.2125.11,363.11,053.9309.3640.9531.8
    20143,127.3398.32,729.01,127.6132.91,468.51,137.1331.4695.2574.7
    20153,342.1421.02,921.11,196.4141.11,583.61,228.8354.8756.0620.8
Historical estimatesPer capita amount
    1999$3,761$647$3,113$1,309$202$1,603$1,221$381ee
    20003,9686703,2971,4021981,6981,292406ee
    20014,2696883,5801,5191941,8671,424443ee
    20024,5767193,8571,6441982,0151,536478ee
    20034,8837554,1281,7562152,1571,653504ee
    20045,2197884,4301,8852302,3161,770546ee
Projected
    20055,5628254,7372,0162432,4781,884593ee
    20065,9218095,1122,1092582,7452,140604ee
    20076,2838535,4302,2582742,8972,252645ee
    20086,6979015,7962,4212923,0832,391692ee
    20097,1309536,1772,5913103,2762,535742ee
    20107,5831,0056,5782,7653293,4842,691793ee
    20118,0531,0586,9942,9443483,7022,855847ee
    20128,5511,1147,4373,1183683,9513,049902ee
    20139,0781,1697,9093,2923884,2293,269959ee
    20149,6281,2268,4023,4724094,5213,5011,020ee
    201510,2131,2878,9273,6564314,8393,7551,084ee
Historical estimatesPercent distribution
    1999100.017.282.834.85.442.632.510.119.316.1
    2000100.016.983.135.35.042.832.610.219.116.5
    2001100.016.183.935.64.543.733.410.419.416.9
    2002100.015.784.335.94.344.033.610.519.317.3
    2003100.015.584.536.04.444.233.910.319.117.4
    2004100.015.184.936.14.444.433.910.519.217.5
Projected
    2005100.014.885.236.24.444.533.910.719.417.5
    2006100.013.786.335.64.446.436.110.222.316.5
    2007100.013.686.435.94.446.135.810.322.016.7
    2008100.013.586.536.24.446.035.710.321.816.9
    2009100.013.486.636.34.446.035.610.421.617.2
    2010100.013.386.736.54.345.935.510.521.517.5
    2011100.013.186.936.64.346.035.510.521.417.8
    2012100.013.087.036.54.346.235.710.521.618.0
    2013100.012.987.136.34.346.636.010.621.918.2
    2014100.012.787.336.14.347.036.410.622.218.4
    2015100.012.687.435.84.247.436.810.622.618.6

Medicare

The Medicare program, which was enacted under Title XVIII (Health Insurance for the Aged) of the Social Security Act (PL 89-97), was approved in July 1966. The program is composed of four 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,
    TABLE 5.6
    Personal health expenditures by source of funds, selected years 1999–2015a [continued]
    Year Total Out-of-pocket payments Thir-party payments Medicarec Medicaidd
    Total Private heath insurance Other private funds Public
    Total Federalb State and localb
    aThe health spending projections were based on the 2004 version of the National Health Expenditures (NHE) released in January 2006.
    bIncludes Medicaid SCHIP Expansion and SCHIP.
    cSubset of federal funds.
    dSubset of federal and state and local funds. Includes Medicaid SCHIP Expansion.
    eCalculation of per capita estimates is inappropriate.
    Notes: Per capita amounts based on July 1 census resident based population estimates. Numbers and percents may not add to totals because of rounding.
    Source: "Table 5. Personal Health Care Expenditures; Aggregate and per Capital Amounts, Percent distribution and annual Percent Change by Source of Funds: Selected Calendar Years 1999–2015 in National Health Expenditures Projections: 2005–2015, U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, 2005, http://www.cms.hhs.gov/NationalHealthExpendData/downloads/proj2005.pdf (accessed April 25, 2006)
    Historical estimatesAnnual percent change from previous year shown
        1999
        20006.74.87.18.3−1.17.17.07.75.39.3
        20018.73.79.79.5−1.011.111.410.310.611.8
        20028.35.58.89.33.39.09.08.97.310.4
        20037.86.08.17.99.68.18.76.46.88.6
        20047.95.58.48.47.78.48.19.48.68.2
    Projected
        20057.55.67.97.96.98.07.49.78.67.7
        20067.4−1.08.95.57.111.814.62.823.71.0
        20077.06.47.18.07.16.56.17.75.38.5
        20087.56.67.78.17.27.37.18.16.79.0
        20097.46.67.57.97.27.26.98.16.39.2
        20107.26.37.47.67.07.27.07.86.69.0
        20117.16.27.27.36.67.17.07.66.78.7
        20127.06.17.26.86.67.67.67.47.98.3
        20137.05.77.26.46.37.98.17.28.78.2
        20146.95.77.06.36.27.77.97.18.58.1
        20156.95.77.06.16.27.88.17.18.78.0
    limited posthospital 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.
  • Part C is the Medicare+Choice program, which was established by the Balanced Budget Act of 1997 to expand beneficiaries' options and allow them to participate in private-sector health plans.
  • Part D is also elective and provides voluntary, subsidized access to prescription drug insurance coverage, for a premium, to individuals entitled to Part A or enrolled in Part B. Part D also has provisions—premium and cost-sharing subsidies—for low-income enrollees. Part D coverage began in 2006 and includes most Food and Drug Administration (FDA) approved prescription drugs.

In general, Medicare reimburses physicians on a fee-for-service basis, as opposed to per capita (per head) or

TABLE 5.7
Prescription drug expenditures, by source of funds, selected years 1999–2015a
Year Total Out-of-pocket payments Thir-party payments Medicarec Medicaidd
Total Private heath insurance Other private funds Public
Total Federalb State and localb
Historical estimatesAmount in bilions
    1999$104.7$30.4$74.3$51.2$23.1$13.2$9.9$1.9$17.1
    2000120.833.487.459.727.615.811.82.120.3
    2001138.636.2102.469.333.019.213.82.424.0
    2002157.940.0117.978.739.223.116.22.428.0
    2003174.143.7130.484.246.128.118.12.432.9
    2004188.546.9141.689.751.931.920.03.436.6
Projected
    2005203.550.6152.997.455.533.522.03.538.9
    2006219.235.6183.687.696.080.215.858.323.5
    2007236.838.2198.692.1106.588.917.664.127.1
    2008255.841.0214.896.8118.098.519.571.130.3
    2009276.644.3232.4102.1130.3108.821.578.533.9
    2010299.247.9251.4107.5143.9120.223.786.837.7
    2011323.851.8272.0113.7158.3132.325.995.941.5
    2012350.556.2294.3120.3174.1145.928.2106.345.3
    2013379.960.8319.1128.1191.0160.530.5117.749.0
    2014411.765.9345.8136.6209.2176.332.9130.352.7
    2015446.271.4374.8145.8229.0193.635.3144.256.4
Historical estimatesPer capita amount
    1999$368$107$261$180$81$46$35ee
    2000420116304208965541ee
    20014771253532391146648ee
    20025391364022681347955ee
    20035881484402851569561ee
    200463015747430017310767ee
Projected
    200567516850732318411173ee
    200672011760328831526352ee
    200777112464730034729057ee
    200882613269431338131863ee
    200988614274432741734869ee
    201095115279934145738275ee
    20111,02116385735849941782ee
    20121,09617692037654445688ee
    20131,17918999039759349895ee
    20141,2672031,065421644543101ee
    20151,3642181,145446700592108ee
Historical estimatesPerent distribution
    1999100.029.071.048.922.112.69.51.816.3
    2000100.027.772.349.422.913.19.81.716.8
    2001100.026.173.950.023.813.910.01.717.3
    2002100.025.374.749.824.814.610.21.517.7
    2003100.025.174.948.426.516.110.41.418.9
    2004100.024.975.147.627.516.910.61.819.4
Projected
    2005100.024.975.147.927.316.510.81.719.1
    2006100.016.283.840.043.836.67.226.610.7
    2007100.016.183.938.945.037.57.427.111.5
    2008100.016.084.037.946.138.57.627.811.8
    2009100.016.084.036.947.139.37.828.412.2
    2010100.016.084.035.948.140.27.929.012.6
    2011100.016.084.035.148.940.98.029.612.8
    2012100.016.084.034.349.741.68.030.312.9
    2013100.016.084.033.750.342.28.031.012.9
    2014100.016.084.033.250.842.88.031.612.8
    2015100.016.084.032.751.343.47.932.312.6

per member per month. 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.

TABLE 5.7
Prescription drug expenditures, by source of funds, selected years 1999–2015a [continued]
Year Total Out-of-pocket payments Third-party payments Medicarec Medicaidd
Total Private health insurance Other private funds Public
Total Federalb State and localb
aThe health spending projections were based on the 2004 version of the National Health Expenditures (NHE) released in January 2006.
bIncludes Medicaid SCHIP Expansion and SCHIP.
cSubset of federal funds.
dSubset of federal and state and local funds. Includes Medicaid SCHIP Expansion.
eCalculation of per capita estimates is inappropriate.
Notes: Per capita amounts based on July 1 census resident based population estimates. Numbers and percents may not add to totals because of rounding.
Source: "Table 11. Prescription Drug Expenditures; Aggregate and per Capita Amounts, Percent Distribution and Annual Percent Change by Source of Funds: Selected Calendar Years 1999–2015," in National Health Expenditures Projections: 2005–2015, U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, 2005, http://www.cms.hhs.gov/NationalHealthExpendData/downloads/proj2005.pdf (accessed April 25, 2006)
Historical estimatesAnnual percent change from previous year shown
    1999
    200015.410.017.616.719.720.418.810.119.0
    200114.78.317.216.119.521.117.317.618.2
    200214.010.515.213.518.820.216.90.016.7
    200310.29.410.57.017.621.711.7_2.117.6
    20048.27.18.66.512.513.610.742.611.1
Projected
    20058.08.08.08.66.95.19.93.16.4
    20067.7−29.720.1−10.173.1139.4−28.11,576.3−39.6
    20078.07.38.25.111.010.911.69.915.2
    20088.07.48.25.210.710.810.410.911.7
    20098.18.08.25.410.510.410.510.411.8
    20108.28.18.25.310.410.510.110.711.2
    20118.28.38.25.810.010.19.510.410.2
    20128.38.58.25.710.010.28.710.99.0
    20138.48.28.46.59.710.08.210.88.2
    20148.48.48.46.69.59.87.710.77.5
20158.48.48.46.89.59.87.510.77.1

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-on prepayments. Beginning in 1985 the Health Care Financing Administration (now known as the CMS) could contract to pay health care providers, such as health maintenance organizations (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).

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-year-old 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 2006, 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. This plan offers Medicare beneficiaries a wider range of managed care plan options than just HMOs—older adults may join preferred provider organizations and provider-sponsored organizations that generally offer greater freedom of choice of providers (physicians and hospitals) than what is available through HMO membership.

Medicare Faces Challenges

The Medicare program's continuing financial viability is in jeopardy. In 1995, for the first time since 1972, the Medicare trust fund lost money, a sign that the financial condition of Medicare was worse than previously assumed. The CMS had not expected a deficit until 1997; however, income to the trust fund, primarily from payroll taxes, was less than expected and spending was higher. The deficit is significant because losses are anticipated to grow from year to year. As of 2006 there were no tax increases scheduled, and there was no reason to expect a reduction in the rate of spending.

A NATIONAL BIPARTISAN COMMISSION CONSIDERS THE FUTURE OF MEDICARE

The National Bipartisan Commission on the Future of Medicare was created by Congress in the Balanced Budget Act of 1997. The commission was chaired by Senator John Breaux, a Democrat from Louisiana, and Representative William Thomas, a Republican from California, and was charged with examining the Medicare program and drafting recommendations to avert a future financial crisis and reinforce the program in anticipation of the retirement of the baby boomers.

The commission observed that much like Social Security, Medicare would suffer because there would be fewer workers per retiree to fund it. It predicted that beneficiaries' out-of-pocket costs would rise and forecast soaring Medicare enrollment. (See Figure 5.3.) Perhaps the direst prediction was the commission's determination that without reform the Medicare Part A fund would be bankrupt in 2008. (See Figure 5.4.)

When the commission disbanded in March 1999, it was unable to forward an official recommendation to Congress because a plan endorsed by Senator Breaux fell one vote short of the required majority needed to authorize an official recommendation. The plan backed by Senator Breaux would have changed Medicare into a premium system, where instead of Medicare directly covering beneficiaries, the beneficiaries would be given a fixed amount of money to purchase private health insurance. The plan would have also raised the age of eligibility from sixty-five to sixty-seven, as has already been done with Social Security, and provided prescription drug coverage for low-income beneficiaries, much like the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

MEDICARE PRESCRIPTION DRUG, IMPROVEMENT, AND MODERNIZATION ACT AIMS TO REFORM MEDICARE

Supported by Senator Breaux, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 was a measure intended to introduce private-sector enterprise into a Medicare model in urgent need of a reform. According to the Henry J. Kaiser Family Foundation (September 2005, http://www.greenlining.org/program/health/advocacy/medicare-part-d.pdf), the Part D drug benefit is one of the biggest components of the Medicare reform in terms of political capital and dollars and is projected to cost $724 billion between 2006 and 2015.

Under the act, premiums and deductibles may rise quickly, because they are indexed to the growth in per-capita Medicare expenditures. For example, the deductible for Medicare Part D, the drug benefit, is expected to rise from $250 to $445 by 2013, and the threshold for drug coverage that covers 95% of expenses is expected to rise to $9,066 from $5,100, according to Henry J. Kaiser Family Foundation (March 2004, http://www.kaiseredu.org/topics_im.asp?id=131&parentID=68&imID=1).

Older adults with substantial incomes will face increasing premium costs. In 2005 older adults paid 25% of the Medicare Part B premium cost and the government paid the remaining 75%. The Foundation for Health in Aging (2002, http://www.healthinaging.org/public_education/medicarePrescDrug_bill.php) notes that beginning in 2007 older adults with annual incomes of $80,000 to $100,000 (or couples earning $160,000 to $199,000) will pay 35%; those earning between $100,000 and $149,000 ($200,000 to $299,000 for couples) will pay 50%; $150,000 to $199,000 ($300,000 to $399,000 for couples) will pay 65%; and anyone earning more than $200,000 ($400,000 for couples) will pay 80% of the premium cost.

The act also expands coverage of preventive medical services. According to the CMS, new beneficiaries will receive a free physical examination along with laboratory tests to screen for heart disease and diabetes. The act also provides employers with $89 billion in subsidies and tax breaks to help offset the costs associated with maintaining retiree health benefits.

Medicare reform continues to be hotly contested. One of the issues that attracted attention from policy makers, legislators, and the public in 2005 and 2006 was the safe, legal reimportation of prescription drugs from other countries. In the face of skyrocketing drug prices, many older adults traveled to Canada to purchase prescription drugs because the costs were 40% less than those in the United States. Other issues debated included drug prices, gaps in prescription drug coverage under the new legislation, allowances to change coverage plans from traditional fee-for-service Medicare to competing private health plans, and the role of health savings accounts and other cost sharing proposals. Health care industry observers predict that increased federal spending as a result of the new drug benefit will intensify demands for cost containment, which will increase as the baby boomer generation becomes eligible for Medicare coverage. The immediate and long-term impact of private plan participation is not yet known, although the increase in Medicare+Choice payments may generate new insurance options and benefits as health plans compete and expand coverage to attract enrollees.

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, people who are blind or disabled, or financially struggling families with dependent children. Medicaid covers hospitalization, physicians' fees, laboratory and radiology fees, and long-term care in nursing homes. It is the largest source of funds for medical and health-related services for the United States's poorest people and the second-largest public payer of health care costs, after Medicare.

In "National Health Spending in 2004: Recent Slowdown Led by Prescription Drug Spending" (Health Affairs, 2006), Cynthia Smith et al. note that in 2005 more than fifty million people received Medicaid services. Of the $292.7 billion Medicaid dollars spent in 2004—15.6% of national health expenditures—$51.1 billion went to nursing home care, while $99 billion was spent on hospital care. Although home health services currently account for a small share of Medicaid expenditures for older adults, they are the fastest-growing expense.

In February 2006 President George W. Bush signed the Deficit Reduction Act (DRA) into law. The DRA changes many aspects of the Medicaid program. Some of the changes are mandatory provisions that the states must enact, such as proof of citizenship and other criteria that will make it more difficult for people to qualify for or enroll in Medicaid. Other changes are optional; they allow the states to make drastic changes to the Medicaid program through state plan amendments. For example, states can choose to require anyone with family income more than 150% of the poverty level to pay a premium of as much as 5% of their income. Before the DRA the states had to provide a mandatory set of services to Medicaid recipients. As of March 31, 2006, the states could modify their Medicaid benefits such that they were comparable to those offered to federal and state employees, the benefits provided by the HMO with the largest non-Medicaid enrollment, or coverage approved by the secretary of the HHS.

LONG-TERM HEALTH CARE

One of the most urgent health care problems facing Americans today is the growing need for long-term care. Long-term care refers to health and social services for people with chronic illnesses or mental or physical conditions so disabling that they cannot live independently without assistance—they require care daily. Longer life spans and improved life-sustaining technologies are increasing the likelihood that more people than ever before may eventually require costly, long-term care.

Limited and Expensive Options

Caring for chronically ill or elderly patients presents difficult and expensive choices for Americans: They must either provide long-term care at home or rely on nursing homes. Home health care was the fastest-growing segment of the health care industry during the first half of the 1990s. Although the rate of growth slowed during the late 1990s, the CMS projects that the home health care sector will more than double, from $43.2 billion in 2004 to $103.7 billion in 2015. (See Table 5.8.)

High Cost of Long-Term Care

The options for quality, affordable long-term care in the United States are limited but improving. Nursing home costs average about $75,000 per year depending on services and location. The MetLife Market Survey of Nursing Home and Home Care Costs (September 2005, http://www.metlife.com/WPSAssets/41453139101127828650V1F2005%20NH%20and%20HC%20Market%20Survey.pdf) reports that in 2005 nursing home care cost an average of $203 per day for a private room, or about $74,095 per year. Many nursing home residents rely on Medicaid to pay these fees. In 2004 Medicaid covered 44.3% of nursing home costs for older Americans. (See Table 5.9.) The second most common source of payment at admission is private insurance, the prospective resident's own income, or family support, followed by Medicare (which only pays for short-term stays after hospitalization). The primary source of payment changes as a stay lengthens. After their funds are exhausted, nursing home residents on Medicare shift to Medicaid.

To be eligible for Medicaid, a person must have no more than $2,500 in assets. (In the case of a married couple where only one spouse is in a nursing home, the remaining spouse can retain a house, a car, up to $75,000 in assets, and $2,000 in monthly income.) Many elderly people must "spend down" to deplete their life savings to qualify for Medicaid assistance. This term refers to a provision in Medicaid coverage that provides care for seniors whose income exceeds eligibility requirements. For example, if their monthly income is $100 over the state Medicaid eligibility line, they can spend $100 per month on their medical care, and Medicaid will cover the remainder.

Although nursing home care may seem cost-prohibitive, even an unskilled caregiver who makes home visits can cost more than $25,000 per year; skilled care costs much more, and most older adults cannot afford this expense. Lifetime savings may be exhausted long before the need for care ends. The Congressional Budget Office (CBO; April 2004, http://www.cbo.gov/showdoc.cfm?index=5400&sequence=2) estimates that total expenditures for long-term care services for the older adults in 2004—excluding the value of donated care from relatives and friends—totaled about $135 billion, or approximately $15,000 per older adult.

The CBO projects that the population over age eighty-five, those most likely to require long-term care, will more than triple by 2040. Even though disability rates among older adults have declined in recent years, reducing somewhat the need for long-term care, the CBO (March 1999, http://www.cbo.gov/ftpdocs/11xx/doc1123/ltcare.pdf) anticipates that spending for long-term care will reach $346 billion (in inflation-adjusted dollars) by 2040 for the older population alone.

MENTAL HEALTH SPENDING

In U.S. Spending for Mental Health and Substance Abuse Treatment (March 29, 2005, http://www.csat.samhsa.gov/IDBSE/spendEst/reports/Trends_USSpendingForMhAndSaTxt.pdf), a study funded by the Substance Abuse and Mental Health Services Administration (SAMHSA), Tami L. Mark et al. find that spending for mental health and substance abuse (alcohol and chemical dependency) treatment in the United States totaled $104 billion in 2001, representing 7.6% of all health care spending. Between 1991 and 2001 the annual rate of spending grew about 5.6%, almost 1% less than the growth rate for all health care (6.5%) during the same period. Figure 5.5 shows the growth of mental health expenditures compared with all health care expenditures by source of payments between 1991 and 2001. Medicaid is the single largest payer for mental health care, and prescription drugs are the fastest-growing component of mental health expenditures. Figure 5.6 shows that in 2001 Medicaid paid 44% of the $53.6 billion spent by public payers for mental health services.

Mark et al. also report that:

  • Public sources paid for nearly two-thirds (63%) of mental health services in 2001, up from 57% in 1991, and for three-quarters (76%) of substance abuse treatment in 2001, compared with 62% in 1991.
TABLE 5.8
Home health care expenditures by source of funds, 1999–2015a
Year Total Out-of-pocket payments Third-party payments Medicarec Medicaidd
Total Private health insurance Other private funds Public
Total Federalb State and localb
Historical estimatesAmount in billions
    1999$31.6$6.1$25.4$7.9$1.6$15.9$11.6$4.3$8.3$5.9
    200030.65.325.37.01.217.012.44.68.76.8
    200132.25.426.95.81.020.114.65.510.08.4
    200234.34.929.45.10.823.517.36.211.710.0
    200338.14.833.45.20.927.320.66.713.811.8
    200443.24.938.25.20.932.124.27.916.413.7
Projected
    200548.95.243.75.41.037.327.89.518.916.3
    200653.15.547.65.61.140.830.610.320.817.7
    200757.35.851.55.91.244.433.111.322.319.7
    200862.16.255.96.21.248.536.112.424.022.0
    200967.06.560.66.51.352.839.113.725.624.5
    201072.36.865.56.81.357.442.315.127.327.2
    201177.97.170.87.21.462.345.716.529.130.2
    201283.87.476.47.51.467.549.418.131.133.3
    201390.07.682.47.71.573.253.419.833.336.6
    201496.67.988.78.01.579.257.721.635.640.2
    2015103.78.195.58.31.585.762.223.538.044.1
Historical estimatesPer capita amount
    1999$111$22$90$28$6$56$41$15ee
    20001061888244594316ee
    20011111893203695019ee
    200211717100183805921ee
    200312916113173927023ee
    2004144171281731078126ee
Projected
    2005162171451831249231ee
    20061741815619413410034ee
    20071871916819414510837ee
    20082002018120415711640ee
    20092152119421416912544ee
    20102302120822418213448ee
    20112452222323419614452ee
    20122622323923421115557ee
    20132792425624522716661ee
    20142972427325524417766ee
    20153172529225526219072ee
Historical estimatesPercent distribution
    1999100.019.480.625.15.250.436.713.726.118.8
    2000100.017.282.823.04.155.740.715.028.422.1
    2001100.016.683.417.93.162.445.317.030.926.0
    2002100.014.285.815.02.468.450.418.034.029.3
    2003100.012.587.513.62.471.654.117.536.230.9
    2004100.011.588.512.02.274.356.018.338.031.7
Projected
    2005100.010.689.411.02.176.357.019.438.733.3
    2006100.010.489.610.62.176.957.619.339.333.3
    2007100.010.289.810.32.077.457.819.738.934.4
    2008100.09.990.110.02.078.158.120.038.635.4
    2009100.09.790.39.71.978.758.320.438.236.5
    2010100.09.490.69.51.879.358.520.837.837.7
    2011100.09.190.99.21.880.058.721.237.438.7
    2012100.08.891.28.91.780.659.021.637.239.7
    2013100.08.591.58.61.681.359.422.037.040.6
    2014100.08.291.88.31.682.059.722.336.841.6
    2015100.07.892.28.01.582.760.022.736.742.6
  • Public spending for mental health services and substance abuse treatment in 2001 totaled $67.4 billion, compared with $36.3 billion in private spending.
  • Prescription drug spending for mental health patients increased 17.1% annually between 1991 and 2001, while spending for all prescription drugs increased 12% during that time period.
  • Mental health spending for inpatient services dropped 12% (from 40% to 28%) between 1991 and 2001.
TABLE 5.8
Home health care expenditures by source of funds, 1999–2015a [continued]
Year Total Out-of-pocket payments Third-party payments Medicarec Medicaidd
Total Private health insurance Other private funds Public
Total Federalb State and localb
aThe health spending projections were based on the 2004 version of the National Health Expenditures (NHE) released in January 2006.
bIncludes Medicaid SCHIP Expansion and SCHIP.
cSubset of federal funds.
dSubset of federal and state and local funds. Includes Medicaid SCHIP Expansion.
eCalculation of per capita estimates is inappropriate.
Notes: Per capita amounts based on July 1 census resident based population estimates. Numbers and percents may not add to totals because of rounding.
Source: "Table 10. Home Health Care Expenditures; Aggregate and per Capita Amounts, Percent Distribution and Annual Percent Change by Source of Funds: Selected Calendar Years 1999–2015," in National Health Expenditures Projections: 2005–2015, U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, 2005, http://www.cms.hhs.gov/NationalHealthExpendData/downloads/proj2005.pdf (accessed April 25, 2006)
Historical estimatesAnnual percent change from previous year shown
    1999
    2000−3.1−14.0−0.5−11.1−23.77.17.46.45.113.7
    20015.52.06.2−17.9−19.618.117.419.915.023.9
    20026.4−9.39.5−11.0−16.816.718.312.417.020.0
    200311.1−2.213.30.67.916.319.38.118.317.4
    200413.34.014.60.55.217.617.418.119.016.2
Projected
    200513.24.914.33.16.816.315.120.115.318.6
    20068.66.58.95.18.69.49.88.310.18.9
    20077.95.78.25.16.08.78.39.86.811.3
    20088.35.38.65.05.09.28.910.27.611.5
    20098.05.28.35.14.28.98.410.36.811.5
    20107.84.58.24.84.08.78.210.16.711.2
    20117.74.58.14.53.78.68.19.86.710.7
    20127.64.17.94.33.68.48.19.46.910.3
    20137.53.77.93.73.28.48.19.27.010.0
    20147.33.47.73.52.88.27.99.16.79.9
    20157.33.07.73.22.58.27.99.16.89.7

Health care industry observers attribute the decrease in mental health inpatient services to increased emphasis on drug treatment of mental health disorders, the increasing frequency of outpatient (clinic and office-based) treatment, closure of psychiatric hospitals, and cost containment efforts of managed care. Figure 5.7 shows how retail drugs were just 7% of the $48.9 billion spent on mental health in 1991 but by 2001 had tripled, accounting for 21% of mental health expenditures totaling $85.4 billion. Despite the higher spending for these psychoactive prescription drugs, some industry observers feel that the increased availability of effective drug therapy actually served to contain mental health spending by enabling providers to offer drug therapy instead of more costly inpatient treatment.

SAMHSA Spending

As reported in the article "President Proposes $3.3 Billion Budget for SAMHSA" (March-April 2006, http://www.samhsa.gov/SAMHSA_News/VolumeXIV_2/article3.htm), the fiscal year (FY) 2007 budget for SAMHSA was $3.3 billion, $67 million less than the FY 2006 budget. The funds were used to continue to expand suicide prevention programs and reduce youth drug use and to transform the nation's mental health system such that:

  • The public understands that mental health is essential for overall health and well-being and that mental health care is consumer and family driven.
  • Disparities in mental health care are eliminated.
  • Early mental health screening, assessment, and referral to services become routine practices.
  • Research is accelerated and quality care and treatment are delivered.
  • Technology is effectively deployed to access and manage mental health care and information.

The FY 2007 budget contained $849 million, a decrease of $35 million from FY 2006, to provide mental health services for the estimated fifty-four million Americans who suffer from mental illness. The 2007 budget earmarked $2.3 billion, a decrease of $36 million from FY 2006, to help the estimated twenty-three million Americans who need treatment for substance abuse.

State Mental Health Agency Expenditures

A number of court rulings during the 1970s and an evolution in professional thinking prompted the release of many people with serious mental illness from institutions

TABLE 5.9
Nursing home care expenditures by source of funds, 1999–2015a
Year Total Out-of-pocket payments Third-party payments Medicarec Medicaidd
Total Private health insurance Other private funds Public
Total Federalb State and localb
Historical estimatesAmount in billions
    1999$90.5$27.4$63.1$8.2$5.0$50.0$33.0$17.0$9.1$38.9
    200095.328.666.77.94.554.336.517.810.342.0
    2001101.528.872.78.14.060.642.218.412.645.8
    2002105.729.576.28.64.063.644.618.914.147.1
    2003110.430.580.08.74.067.246.520.714.949.6
    2004115.231.983.39.04.270.048.421.616.051.1
Projected
    2005121.733.488.39.34.474.651.023.617.753.7
    2006128.434.993.59.84.679.153.625.518.057.8
    2007134.836.798.110.24.883.156.226.918.760.9
    2008142.738.7104.010.75.088.359.528.819.365.2
    2009151.240.8110.411.15.294.163.230.920.169.9
    2010160.543.0117.511.55.4100.667.533.221.275.1
    2011170.345.3125.011.85.6107.672.035.622.480.6
    2012180.747.6133.012.15.8115.176.938.223.886.4
    2013191.950.1141.812.46.1123.382.341.025.492.7
    2014203.952.8151.112.76.3132.188.144.027.099.7
    2015216.855.5161.413.16.5141.894.547.428.8107.2
Historical estimatesPer capita amount
    1999$319$97$222$29$17$176$116$60ee
    2000332100232271618912762ee
    200135099250281420914563ee
    2002361101260291421715265ee
    2003373103270291422715770ee
    2004385107278301423416272ee
Projected
    2005403111293311524716978ee
    2006422115307321526017684ee
    2007439120320331627118388ee
    2008461125336351628519293ee
    2009484131354361730120399ee
    20105101373733617320214105ee
    20115371433943718339227112ee
    20125651494163818360241119ee
    20135951564403919382255127ee
    20146281624653919407271136ee
    20156631694934020433289145ee
Historical estimatesPercent distribution
    1999100.030.369.79.05.555.236.518.710.143.0
    2000100.030.070.08.24.757.038.418.610.844.1
    2001100.028.471.68.03.959.741.518.112.445.1
    2002100.027.972.18.23.860.142.217.913.344.6
    2003100.027.672.47.93.660.942.118.813.544.9
    2004100.027.772.37.83.660.842.018.813.944.3
Projected
    2005100.027.472.67.63.661.341.919.414.644.1
    2006100.027.272.87.63.661.641.819.914.045.0
    2007100.027.272.87.63.661.641.719.913.845.2
    2008100.027.172.97.53.561.941.720.213.545.7
    2009100.027.073.07.33.462.241.820.413.346.2
    2010100.026.873.27.13.462.742.020.713.246.8
    2011100.026.673.46.93.363.242.320.913.247.3
    2012100.026.473.66.73.263.742.621.113.247.8
    2013100.026.173.96.53.264.242.921.313.248.3
    2014100.025.974.16.33.164.843.221.613.248.9
    2015100.025.674.46.03.065.443.621.813.349.4

to community treatment programs. The census (the number of patients or occupants, which is frequently referred to as a rate) of public mental hospitals sharply declined, and there was increasing pressure on the states to deliver community-based treatment.

State mental health agencies (SMHAs) operate the public mental health system that acts as a safety net for poor, uninsured, and otherwise indigent people suffering from mental illness. In "Key Elements of the National Statistical Picture" (2000,

TABLE 5.9
Nursing home care expenditures by source of funds, 1999–2015a [continued]
Year Total Out-of-pocket payments Third-party payments Medicarec Medicaidd
Total Private health insurance Other private funds Public
Total Federalb State and localb
aThe health spending projections were based on the 2004 version of the National Health Expenditures (NHE) released in January 2006.
bIncludes Medicaid SCHIP Expansion and SCHIP.
cSubset of federal funds.
dSubset of federal and state and local funds. Includes Medicaid SCHIP Expansion.
eCalculation of per capita estimates is inappropriate.
Notes: Per capita amounts based on July 1 census resident based population estimates. Numbers and percents may not add to totals because of rounding.
Source: "Table 13. Nursing Home Care Expenditures; Aggregate and per Capita Amounts, Percent Distribution and Annual Percent Change by Source of Funds: Selected Calendar Years 1999–2015," in National Health Expenditures Projections: 2005–2015, U.S. Department of Health and Human Services, Centers for Medicare & Medicaid Services, 2005, http://www.cms.hhs.gov/NationalHealthExpendData/downloads/proj2005.pdf (accessed April 25, 2006)
Historical estimatesAnnual percent change from previous year shown
    1999
    20005.34.35.7−3.6−9.18.710.74.812.57.9
    20016.60.99.02.8−11.311.615.43.723.08.9
    20024.12.34.96.90.24.95.82.811.63.0
    20034.53.24.91.00.15.84.29.65.75.3
    20044.34.94.13.54.64.24.14.37.43.0
Projected
    20055.64.56.12.74.46.65.49.210.95.1
    20065.54.65.95.25.06.05.17.91.27.5
    20075.05.25.04.84.15.04.85.43.85.4
    20085.85.36.04.84.46.35.97.13.67.0
    20096.05.56.23.54.16.66.27.34.17.3
    20106.15.46.43.23.96.96.77.45.57.3
    20116.15.26.42.83.86.96.87.35.77.3
    20126.15.36.42.83.87.06.87.36.27.2
    20136.25.26.52.73.77.17.07.36.57.3
    20146.35.26.62.63.77.27.07.56.47.5
    20156.35.16.82.53.67.37.27.66.87.6

http://www.mentalhealth.samhsa.gov/publications/allpubs/SMA01-3537/chapter16.asp), Ted Lutterman and Michael Hogan characterize these public mental health systems "as a safety valve for an inadequate private sector response to mental illness." SMHAs vary from state to state—some purchase, regulate, administer, manage, and provide care and treatment; others simply purchase care using public funds that include general state revenues and federal funds. Generally, the federal funds are Medicare and Medicaid payments made to state-owned or state-operated facilities, although SMHAs also administer additional Medicaid payments when the state Medicaid agency grants the SHMA control of all Medicaid mental health expenditures.

Similar to the movement of privately insured people into managed care, during the 1990s state Medicaid programs turned to managed care organizations (MCOs) and behavioral health services in an effort to contain costs. More than half the states have separated the administration and financing of physical health and mental health in their MCO contracts.

There is considerable regional variation in SMHA spending—in general, northeastern and northwestern states had the highest expenditures while southern states spent the least. Table 5.10 shows changes in spending by SHMAs from 1981 to 2002 and the geographic variations in per capita spending.

SMHAs manage funds from the SAMHSA Community Mental Health Block Grant Program (MHBG). The MHBG was created in 1982 and its flexible funding enables states to innovate, develop, and expand successful community-based programs. Block grants are awarded based on a formula that considers each state's population, service costs, income, and taxable resources, and the funds enable the states to finance community mental health treatment programs. According to Lutterman and Hogan, MHBG expenditures dropped by 49% in inflation-adjusted dollars during the 1990s, but in 1999 Congress appropriated an additional $13.4 million to the MHBG. The SAMHSA provided $356 million in block grant funding in FY 2000. The HHS reports in Budget in Brief: Fiscal Year 2007 (2006, http://www.hhs.gov/budget/07budget/2007BudgetInBrief.pdf) that in FY 2007 MHBG funding had risen to $428 million, slightly less than the dollar amounts included in the 2005 budget and 2006 budget ($433 and $429 million, respectively).

HIGH COSTS OF RESEARCH

Medical and pharmaceutical research, disease prevention research, and the work to develop and conduct clinical trials of new drugs are expensive. In its FY 2007 budget the National Institutes of Health (NIH; March 10, 2006, http://www.nih.gov/news/fundingresearchareas.htm) allocated an estimated $2.9 billion for human immunodeficiency virus (HIV) and AIDS research, compared with about $519 million to investigate obesity prevention and treatment. Pharmaceutical manufacturers also spend millions of dollars researching and developing new medicines. According to the Pharmaceutical Research and Manufacturers of America, U.S. pharmaceutical companies spend more money each year on research and development activities than the annual budget of the NIH.

Decisions about how much is spent to research a particular disease are not based solely on how many people develop the disease or die from it. Rightly or wrongly, economists base the societal value of an individual on his or her earning potential and productivity—the ability to contribute to society as a worker. The bulk of the people who die from heart disease, stroke, and cancer are older adults. Many have retired from the workforce, and their potential economic productivity is usually low or nonexistent. (This is not an observation about how society values older adults; instead, it is simply an economic measure of present and future financial productivity.)

In contrast, AIDS patients are often much younger and die in their twenties, thirties, and forties. Until they developed AIDS, their potential productivity, measured in economic terms, was high. The number of work years lost when they die is considerable. Using this economic equation to determine how disease research should be funded, it may be considered economically wise to invest more money to research AIDS because the losses, which are measured in potential work years rather than lives, is so much greater.

Once a new drug receives FDA approval, its manufacturer is ordinarily allowed to hold the patent on the drug to recoup its investment. During that time, the drug is priced much higher than if other manufacturers were allowed to compete by producing generic versions of the same drug. After the patent expires, competition between pharmaceutical manufacturers generally lowers the price. In contrast, HIV/AIDS drugs are granted only seven years of exclusivity under legislation to encourage research and promote development of new treatments.

The pharmaceutical manufacturer must cover the cost not only of research and development for the approximately three out of ten drugs that succeed but also for many—seven out of ten—that have failed. In contrast, the producer of generic drugs has the formula and must simply manufacture the drugs properly. In "Waiting to Hit the Generic Drug Jackpot" (Star Tribune, February 15, 2006), David Phelps interviewed Alan Goldhammer, the associate vice president for Pharmaceutical Research and Manufacturers of America, who explains that manufacturers spend an average of $800 million to bring brand-name drugs to market, including the expense of ten to twelve years of product development. The generic manufacturer does not have to pay for successful and unsuccessful research and development of new drugs, nor does it have to pursue the complicated, time-consuming process of seeking and obtaining FDA approval. Generic manufacturers' FDA submissions need only reference the original manufacturer's clinical data supporting the safety and efficacy of the drug.

HARDSHIP OF HIGH HEALTH CARE COSTS ON FAMILIES

Families USA is a national, nonprofit, nonpartisan consumer organization based in Washington, D.C., and is dedicated to achieving affordable, quality health care and long-term care for all American families. The organization describes itself as "the voice for American consumers" and contends that American families pay about two-thirds of the nation's health care bill, while American businesses pay the other third. This ratio is based on the premise that families and businesses pay for health care in several ways:

  • Directly, through out-of-pocket payments and insurance expenses. These include premiums, deductibles (annual amounts that must be paid by the employee before the insurance plan begins paying), and co-payments.
  • Indirectly, through Medicare payroll, income, and other federal, state, and local taxes that support public health programs. These include veterans' health benefits, military health benefits, the Medicaid program, and a variety of smaller public health programs.

As a result, Families USA estimates of per capita health care spending differ from other reports, such as those from the CMS and the U.S. Census Bureau, which take into account only direct payments.

Families also purchase insurance themselves when they work for employers that do not offer group health insurance or when insurers refuse to insure certain groups they consider to be at high risk (such as people with chronic diseases). Workers who retire before reaching age sixty-five and are not yet eligible for Medicare coverage must also purchase insurance on their own. Furthermore, many Medicare beneficiaries pay insurance premiums for supplemental (Medigap) insurance to cover the difference in charges that Medicare does not pay, as well as uncovered costs, such as durable medical equipment.

High Cost of Prescription Drugs

Although it has slowed somewhat in recent years, spending for prescription drugs remains the fastest-growing component of health care spending. In 2004

TABLE 5.10
State mental health agency per capita expenditures by geographic region and state, selected years 1981–2002
[Data are based on reporting by state mental health agencies]
Geographic region and statea Amount per capita Average annual percent change
1981 1983 1985 1987 1990 1993 1997 2001 2002 1981–90 1990–2002
United States $27$31$35$38$48$54$64$81$886.65.2
New England:
Connecticut323944567382991291389.65.4
Maine2532364267708810711811.64.8
Massachusetts3236466284839010710711.32.0
New Hampshire353942366378991121166.75.2
Rhode Island3632354150616388883.74.8
Vermont324044445474921301456.08.6
Mideast:
Delaware4451464155567393862.53.8
District of Columbiab23281302683153373984093.6
Maryland333740496164761271367.16.9
New Jersey26313643576869901209.16.4
New York677490991181311131761846.53.8
Pennsylvania414752505768681521663.79.3
Great Lakes:
Illinois1821242534365164697.36.1
Indiana19232731473940656910.63.3
Michigan3339496174758790919.41.7
Ohio2529303441475261615.73.4
Wisconsin2227283137354472915.97.8
Plains:
Iowa810111217132973538.79.9
Kansas1822272835485960707.75.9
Minnesotac173032425469871051158.86.5
Missouri2425283235415660694.35.8
Nebraska1719212129343951566.15.6
North Dakota3942364240434879820.36.2
South Dakota1721222725475461654.48.3
Southeast:
Alabama2024282938434757607.43.9
Arkansas1720242426303028284.80.6
Florida2023262537314435447.11.5
Georgia2526233251494746478.2−0.7
Kentucky1517192323253549514.96.9
Louisiana1923262528394345484.44.6
Mississippi14162422344156878910.48.3
North Carolina2429384146506276507.50.7
South Carolina3133334551566474705.72.7
Tennessee1820232429372369845.49.3
Virginia2329323545404965677.73.4
West Virginia2020222324222326472.05.8
Southwest:
Arizona101012162760688910211.711.7
New Mexico242525242324313329−0.52.0
Oklahoma2233313036384139415.61.1
Texas1316171923313938386.54.3
Rocky Mountains:
Colorado2425283034415764673.95.8
Idaho1315151720262946404.95.9
Montana252829282834931241321.313.8
Utah1316171921252833695.510.4
Wyoming2328313035424361784.86.9

prescription drug expenditures topped $188 billion and were projected to more than double by 2015. (See Table 5.7.) In the report Sticker Shock: Rising Prescription Drug Prices for Seniors (June 2004, http://www.familiesusa.org/assets/pdfs/Sticker_Shock5942.pdf), Families USA notes that between January 2003 and January 2004 the prices of the thirty most commonly prescribed drugs for older adults rose nearly 4.3 times the rate of inflation. Because many older adults live on fixed incomes, these dramatic price increases may prevent them from obtaining lifesaving medications. This report observes that drug prices have outpaced inflation for at least a decade and that generic drug prices rose more slowly than brand-name pharmaceuticals.

TABLE 5.10
State mental health agency per capita expenditures by geographic region and state, selected years 1981–2002 [continued]
[Data are based on reporting by state mental health agencies]
Geographic region and statea Amount per capita Average annual percent change
1981 1983 1985 1987 1990 1993 1997 2001 2002 1981–90 1990–2002
—Data not available.
aData are shown for Bureau of Economic Analysis (BEA) regions that are constructed to show economically interdependent states.
bTransfer of St. Elizabeths Hospital from the National Institute of Mental Health to the District of Columbia Office of Mental Health took place over the years 1985–93.
cData for 1981 not comparable with later years' data for Minnesota. Average annual percent change is for 1983–90.
Notes: Expenditures are for mental illness, excluding mental retardation and substance abuse. Starting in 1990 data for Puerto Rico, and starting in1993 data for Guam are included in the U.S. total. States may vary in type of funds included in mental health expenditures. Medicaid revenues for community programs and children's mental health expenditures are not included by some states. Funds for mental health services in jails or prisons are included by some states. State data omissions and inclusions are likely to be consistent across years.
Source: "Table 152. State Mental Health Agency per Capita Expenditures for Mental Health Services and Average Annual Percent Change by Geographic Region and State: United States, Selected Fiscal Years 1981–2002," in Health, United States, 2005, U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Health Statistics, 2006, http://www.cdc.gov/nchs/data/hus/hus05.pdf#summary (accessed April 17, 2006). Data from the National Association of State Mental Health Program Directors and National Association of State Mental Health Program Directors Research Institute.
Far West:
Alaska$38$41$45$50$72$86$79$81$887.41.7
California28293430425058921054.67.9
Hawaii192223263871851751628.012.8
Nevada2225262833324557594.65.0
Oregon2121252841606897607.73.2
Washington18243037436679889210.26.5

Families USA also refutes the pharmaceutical companies' claims that high drug prices simply reflect the companies' efforts to recoup their investments in drug research and development. Families USA asserts that prices for drugs that have been on the market for more than ten years continued to rise more sharply than the rate of inflation, long after the pharmaceutical companies should have regained their initial investments and realized substantial profits. Its 2004 analysis of the nine U.S. pharmaceutical companies that manufacture or market the thirty top-selling drugs for older adults revealed that profits consistently exceeded spending on research and development.

To control prescription drug expenditures, many hospitals, health plans, employers, and other group purchasers have attempted to obtain discounts and rebates for bulk purchases from pharmaceutical companies. Some have developed programs to encourage health care practitioners and consumers to use less costly generic drugs, and others have limited, reduced, or even eliminated prescription drug coverage.

In Prescription Drug Trends (November 2005, http://www.kff.org/insurance/upload/3057–04.pdf), the Henry J. Kaiser Family Foundation states that consumers are attempting to reduce their prescription drug costs by asking their physicians for less expensive or generic drugs, comparison shopping to find the best prices for their prescription drugs, using mail-order pharmacies, purchasing drugs from vendors on the Internet, buying drugs in bulk, using over-the-counter drugs instead of prescription medications, and participating in pharmaceutical company- and state-sponsored drug assistance programs. Some consumers are ordering less expensive pharmaceuticals from Canada. In 2004 Canadian drug orders accounted for a total of $760 million, or 0.3%, of the U.S. market.

In another report, Views on Prescription Drugs and the Pharmaceutical Industry (February 2005, http://www.kff.org/healthpollreport/feb_2005/), the Henry J. Kaiser Family Foundation describes consumers as somewhat skeptical about the motivations of pharmaceutical companies. Although in 2004 the overwhelming majority of adults (91%) felt that drug companies contribute by researching and developing new drugs, seven in ten (70%) opined that drug companies put profits ahead of people.

Consumers also consider pharmaceutical companies as major contributors to rising health care costs. In 2004 seven in ten (69%) adults named high profits made by drug companies as a "very important" factor contributing to rising health care costs, and almost a quarter (24%) said drug company profits are the biggest contributor to rising costs, ahead of malpractice lawsuits (20%) and greed and waste in the health care system (20%).

Furthermore, an argument that prescription drugs decrease overall medical costs by reducing the need for other services does not ring true with most adults: Fewer than a quarter (23%) agree with this assertion, and six in ten (59%) said that prescription drugs increase overall medical costs. And finally, most consumers do not believe that research and development drive the cost of prescription drugs. In 2004 three-quarters (74%) named drug company profits or marketing costs as the biggest contributors to the price of prescription drugs, and 81% felt that pharmaceutical companies charged more for medications than necessary.

Generic Drugs Promise Cost Savings

When patents expire on popular brand-name drugs, the entry of generic versions of these drugs to the market promises cost savings for consumers and payers as well as increased profits for pharmacies. Generic drugs usually cost from 10% to 30% less when they first enter the market and even less once additional generic manufacturers join in the competition. Among the drugs with patents that expired in 2006 were the cholesterol-lowering drugs Zocor and Prevachol, the antidepressant Zoloft, and Ambien, a drug prescribed to help people with sleep problems. Industry observers predict that consumers can expect to pay from $5 to $20 less per prescription when they opt for generic rather than brand-name drugs and payers. For example, Phelps reports that Blue Cross and Blue Shield of Minnesota, the largest insurer in Minnesota, may save as much as $44 million when it substitutes generic drugs for eight popular brand-name prescription drugs.

RATIONING HEALTH CARE

When health care rationing—allocating medical resources—is defined as "all care that is expected to be beneficial is not always available to all patients," most health care practitioners, policy makers, and consumers accept that rationing has been, and will continue to be, a feature of the U.S. health care system. Most U.S. opinion leaders and industry observers accept that even a country as wealthy as the United States cannot afford all the care that is likely to benefit its citizens. The practical considerations of allocating health care resources involve establishing priorities and determining how these resources should be rationed.

Opponents of Rationing

There is widespread agreement among Americans that rationing according to patients' ability to pay for health care services or insurance is unfair. Ideally, health care should be equitably allocated on the basis of need and the potential benefit derived from the care. Those who argue against rationing fear that society's most vulnerable populations—older adults, the poor, and people with chronic illnesses—suffer most from the present rationing of health care.

Many observers believe that improving the efficiency of the U.S. health care system would save enough money to supply basic health care services to all Americans. They suggest that because expenditures for the same medical procedures vary greatly in different areas of the country, standardizing fees and costs could realize great savings. They also believe that money could be saved if greater emphasis was placed on preventive care and on effective strategies to prevent or reduce behaviors that increase health risk such as smoking, alcohol and drug abuse, and unsafe sexual practices. Furthermore, they insist that the high cost of administering the U.S. health system could be streamlined with a single payer for health care—as in the Canadian system.

Supporters of Rationing

Those who endorse rationing argue that the spiraling cost of health care stems from more than simple inefficiency. They attribute escalating costs to the aging population, rapid technological innovation, and the increasing price tags for labor and supplies.

Not everyone who supports rationing thinks that the U.S. health care system is working well. Some rationing supporters believe that the nation's health care system charges too much for the services it delivers and that it fails altogether to deliver to millions of uninsured. In fact, they point out that the United States already rations health care by not covering the uninsured. Other health care-rationing advocates argue that the problem is one of basic cultural assumptions, not the economics of the health care industry. Americans value human life, believe in the promise of health and quality health care for all, and insist that diseases can be cured. They contend that the issue is not whether health care should be rationed but how care is rationed. They believe that the United States spends too much on health compared with other societal needs; too much on the old rather than the young; more on curing and not enough on caring; and too much on extending the length of life and not enough on enhancing the quality of life. Supporters of rationing argue instead for a system that guarantees a minimally acceptable level of health care for all, while reining in the expensive excesses of the current system, which often acts to prolong life at any cost.

The Oregon Health Plan: An Experiment in Rationing

In 1987 Oregon designed a new, universal health care plan that would simultaneously expand coverage and contain costs by limiting services. Unlike other states, which trimmed budgets by eliminating people from Medicaid eligibility, Oregon chose to eliminate low-priority services. The Oregon Health Plan, which was approved in August 1993, aimed to provide Medicaid to 120,000 additional residents living below the federal poverty level. The plan also established a high-risk insurance pool for people who were refused health insurance coverage because of preexisting medical conditions, offered more insurance options for small businesses, and improved employees' abilities to retain their health insurance benefits when they changed jobs. A ten-cent increase in the state cigarette tax (providing approximately $45 million annually) helped fund the additional estimated $400 million needed over the next several years.

Oregon developed a table of health care services and performed a cost-benefit analysis to rank them. (See Table 5.11.) It was decided that Oregon Medicaid would cover the top 565 services on a list of 696 medical procedures. Services that fell below the cutoff point and thus would not be covered included liver transplants for patients with liver cancer; nutritional counseling for obese people; fertility services; and treatment for the common cold, chronic back pain, and viral hepatitis.

When setting the priorities, those making the list decided that disease prevention and quality of life were the factors that most influenced the ranking of the treatments. Quality of life (quality of well-being, or QWB, in the Oregon plan) drew fire from those who felt such judgments could not be decided subjectively. Active medical or surgical treatment of terminally ill patients also ranked low on the QWB scale, while comfort and hospice care ranked high. The Oregon Health Services Commission (HSC) emphasized that their QWB judgments were not based on an individual's quality of life at a given time; such judgments were considered ethically questionable. Instead, they focused on the potential for change in an individual's life, posing questions such as: "After treatment, how much better or worse off would the patient be?"

Critics countered that the plan obtained its funding by reducing services that were currently offered to Medicaid recipients (often poor women and children) rather than by emphasizing cost control. Others objected to the ranking and the ethical questions raised by choosing to support some treatments over others.

By 1998 the Oregon Health Plan had encountered major problems. The state was no longer promising universal care, physicians were seeking and finding ways to get around the rationing restrictions, and friction with federal Medicaid regulators was blocking Oregon's efforts to deny more treatments. A plan to require that employers insure all their workers or contribute to a fund to cover them failed. Spending for the health plan climbed to $2.1 billion in the 1997–99 state budget period, up from $1.7 billion in the 1995–97 period. Higher cigarette taxes did not offset the increase, thereby requiring more money from the state's general fund.

According to the Ash Institute for Democratic Governance and Innovation (December 2004, http://www.ashinstitute.harvard.edu/Ash/orhealthplan.htm), the Oregon Health Plan did serve to reduce the percentage of uninsured Oregonians, from 17% in 1992 to 11% in 1996, placing Oregon among the states with the lowest rates of uninsured residents. Still, by the fall of 1996, three years

TABLE 5.11
Health-care services categories and rankings
Rank Category ID no.
Source: "Health-care Services Categories and Rankings," in Oregon Basic Health Services Program, February 22, 1991.
"Essential" services
1. Acute fatal, prevents death, full recovery15
        Examples: Repair of deep, open wound of neck. Appendectomy for appendicitis. Medical therapy for myocarditis.
2. Maternity care (including care for newborn in first 28 days of life)12
        Examples: Obstetrical care for pregnancy. Medical therapy for drug reactions and intoxications specific to newborn. Medical therapy for low birthweight babies.
3. Acute fatal, prevents death, w/o full recovery16
        Examples: Surgical treatment for head injury with prolonged loss of consciousness. Medical therapy for acute bacterial meningitis. Reduction of an open fracture of a joint.
4. Preventive care for children01
        Examples: Immunizations. Medical therapy for streptococcal sore throat and scarlet fever (reduces disability, prevents spread). Screening for specific problems such as vision or hearing problems, or anemia.
5. Chronic fatal, improves life span and QWB (Quality of well-being)20
        Examples: Medical therapy for type I diabetes mellitus. Medical and surgical treatment for treatable cancer of the uterus. Medical therapy for asthma.
6. Reproductive services (excluding maternity and infertility)13
        Examples: Contraceptive management, vasectomy, tubal ligation.
7. Comfort care26
        Example: Palliative therapy for conditions in which death is imminent.
8. Preventive dental (children and adults)03/07
        Example: Cleaning and flouride.
9. Preventive care for adults (A-B-C)04
        Examples: Mammograms, blood pressure screening, medical therapy and chemoprophylaxis for primary tuberculosis.
"Very important" services
10. Acute nonfatal, return to previous health17
        Examples: Medical therapy for acute thyroiditis. Medical therapy for vaginitis. Restorative dental service for dental caries.
11. Chronic nonfatal, one time treatment improves QWB23
        Examples: Hip replacement. Laser surgery for diabetic retinopathy. Medical therapy for rheumatic fever.
12. Acute nonfatal, w/o return to previous health18
        Examples: Relocation of dislocation of elbow. Arthroscopic repair of internal derangement of knee. Repair of corneal laceration.
13. Chronic nonfatal, repetitive treatment improves QWB24
        Examples: Medical therapy for chronic sinusitis. Medical therapy for migraine. Medical therapy for psoriasis.
Services "Valuable to certain individuals"
14. Acute nonfatal, expedites recovery19
        Examples: Medical therapy for diaper rash. Medical therapy for acute conjunctivitis. Medical therapy for acute pharyngitis.
15. Infertility services14
        Examples: Medical therapy for anovulation. Microsurgery for tubal disease. In-vitro fertilization.
16. Preventive care for adults (D-E)05
        Examples: Dipstick urinalysis for hematuria in adults less than 60 years of age. Sigmoidoscopy for persons less than 40 years of age. Screening of nonpregnant adults for type I diabetes mellitus.
17. Fatal or nonfatal, minimal or no improvement in QWB (non-self-limited)25
        Examples: Repair fingertip avulsion that does not include fingernail. Medical therapy for gallstones without cholecystitis. Medical therapy for viral warts.

after the Oregon plan was initiated with the goal of having no uninsured people in the state, coverage was far from universal. Despite the Oregon plan's best efforts, there were still approximately 410,000 people in Oregon who had no insurance. The plan's supporters observed that the downward trend in the rates of uninsured was a measure of the plan's success and hailed the state's pioneering efforts.

The Oregon HSC continued to modify the plan's covered benefits. The HSC's most recent effort to refine the list of covered services began in January 2002. The HSC sought to reduce the overall costs of the plan by eliminating less effective treatments and determining if any covered medical conditions could be more effectively treated using standardized clinical practice guidelines (step-by-step instructions for diagnosis and treatment of specific illnesses or disorders) while preserving basic coverage. The benefit review process will be ongoing with the HSC submitting a new prioritized list of benefits on July 1 of each even-numbered year for review by legislative assembly. In April 2006 the HSC issued an updated prioritized list of 710 pairs of health services—medical conditions and treatments—for 2005–07.

Rationing by HMOs

Until the year 2000, steadily increasing numbers of Americans received their health care from HMOs or other managed care systems. According to the Henry J. Kaiser Family Foundation's Trends and Indicators in the Changing Health Care Marketplace, 2005 Update (February 2005, http://www.kff.org/insurance/7031/index.cfm), by 2004 national enrollment in HMOs topped sixty-nine million, more than four times as many as were enrolled two decades earlier (15.1 million). The number of enrollees, however, has steadily declined since 2000. The number of HMOs operating in the United States also dropped from 560 in July 2000 to fewer than 500 in 2005.

Managed care programs have sought to control costs by limiting coverage for expensive experimental, duplicative, and unnecessary treatments. Before physicians can perform experimental procedures or prescribe new treatment plans, they must obtain prior authorization—approval from the patient's managed care plan—to ensure that the expenses will be covered.

Increasingly, patients and physicians are battling HMOs for approval to use and receive reimbursement for new technology and experimental treatments. Judges and juries, moved by the desperate situations of patients, have frequently decided cases against HMOs, regardless of whether the new treatment had been shown to be effective.

"SILENT RATIONING"

Physicians and health care consumers are concerned that limiting coverage for new, high-cost technology will discourage research and development for new treatments before they have even been developed. This has been called "silent rationing," because patients will never know what they have missed.

In an effort to control costs, some HMOs have discouraged physicians from informing patients about certain treatment options—those that are very expensive or not covered by the HMO. This has proved to be a highly controversial issue, both politically and ethically. In December 1996 the HHS ruled that HMOs and other health plans cannot prevent physicians from telling Medicare patients about all available treatment options.

Could Less Health Care Be Better Than More?

Although health care providers and consumers fear that rationing sharply limits access to medical care and will ultimately result in poorer health among affected Americans, researchers are also concerned about the effects of too much care on the health of the nation. Several studies suggest that an oversupply of medical care may be as harmful as an undersupply.

F. W. Young, in "An Explanation of the Persistent Doctor-Mortality Association" (Journal of Epidemiology and Community Health, February 2001), asserts that supply appears to drive demand in areas with more physicians and hospitals—people visit physicians more often and spend more days in hospitals with no apparent improvement in their health status.

In "Geography and the Debate over Medicare Reform" (February 13, 2002, http://content.healthaffairs.org/cgi/reprint/hlthaff.w2.96v1), John E. Wennberg, Elliott S. Fisher, and Jonathan S. Skinner find tremendous regional variation in both utilization and the cost of health care that they believe is explained, at least in part, by the distribution of health care providers. They also suggest that variations in physicians' practice styles—whether they favor outpatient treatment over hospitalization for specific procedures such as biopsies (surgical procedures to examine tissue to detect cancer cells)—greatly affects demand for hospital care.

Variation in demand for health care services in turn produces variation in health care expenditures. Wennberg, Fisher, and Skinner report wide geographic variation in Medicare spending. Medicare paid more than twice as much to care for a sixty-five-year-old in Miami, where the supply of health care providers is overabundant, than it spent on care for a sixty-five-year-old in Minneapolis, a city with an average supply of health care providers. To be certain that the difference was not simply higher fees and charges in Miami, the investigators also compared rates of utilization and found that older adults in Miami visited physicians and hospitals much more often than their counterparts in Minneapolis.

Wennberg, Fisher, and Skinner also wanted to be sure that the differences were not caused by the severity of illness, so they compared care during the last six months of life to control for any underlying regional differences in the health of the population. Remarkably, the widest variations were observed in care during the last six months of life when older adults in Miami saw physician specialists six times as often as those in Minneapolis. Wennberg, Fisher, and Skinner assert that higher expenditures, particularly at the end of life, do not purchase better care. Instead, they finance generally unpleasant and futile interventions intended to prolong life rather than improve the quality of patients' lives. Wennberg, Fisher, and Skinner conclude that areas with more medical care, higher utilization, and higher costs fared no better in terms of life expectancy, morbidity, or mortality, and the care they received was no different in quality from care received by people in areas with average supplies of health care providers.

In "The Care of Patients with Severe Chronic Illness: A Report on the Medicare Program by the Dartmouth Atlas Project" (May 16, 2006, http://www.dartmouthatlas.org/atlases/2006_Chronic_Care_Atlas.pdf), John E. Wennberg et al. detail differences in the management of Medicare enrollees with severe chronic illnesses. The investigators find that average utilization and health care spending varied by state, region, and even by hospital in the same regions. Expenditures were not linked with rates of illness in different parts of the country; instead, they reflected how intensively selected resources—acute care hospital beds, specialist physician visits, tests, and other services—were used to care for patients who were very ill but could not be cured. Because other research has demonstrated that, for these chronically ill Americans, receiving more services does not result in improved health outcomes, and because most Americans say they prefer to avoid excessively high-tech end-of-life care, the investigators conclude that Medicare spending for the care of the chronically ill could be reduced by as much as 30%, while improving quality, patient satisfaction, and outcomes. Wennberg et al.'s research and similar studies pose two important and as yet unanswered questions: How much health care is needed to deliver the best health to a population? Are Americans getting the best value for the dollars spent on health care?

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