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Health Care Costs and Financing

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Working poor unlikely to receive employment-related insurance

The working poor in the United States are only one-third as likely to receive health insurance from their employers and are over five times as likely to be without insurance from any source when compared with the nonpoor. It is ironic that the working poor are playing by the "rules" and are productive members of the economic system, yet they are without coverage for themselves and their families, assert University of Florida researchers. In a study supported in part by the Agency for Health Care Policy and Research, Karen Seccombe, Ph.D., and Cheryl Amey analyzed a sample of 7,734 employed, nonelderly adults from the National Medical Expenditure Survey (NMES), which provides detailed national estimates of health insurance coverage in the United States.

The researchers classified as "poor" those who had household incomes below the poverty line, which in 1987 was $11,519 for a family of four (including two children); as "economically vulnerable" persons with household incomes between $11,520 and $23,040 (200 percent of the poverty level); and as "nonpoor" those with household incomes over $23,040. Analysis showed that nearly half (48.4 percent) of the working poor had no health insurance from any source, compared with only 9.1 percent of nonpoor persons. Persons who were employed less than full-time, were not members of a union, did not work for multiple-site employers, worked in firms with fewer than 100 employees, earned less than $7.50 per hour, and had less than 1-year tenure on the job, were more likely than other workers to lack employer-sponsored insurance in their own names.

According to the researchers, future discussions of options for financing health care should consider the importance of either mandating employers to provide benefits to workers, as is the case in Hawaii, or doing away with the employer-financing mechanism altogether, which is the case in nearly every other industrialized country in the world.

Details are in "Playing by the rules and losing: Health insurance and the working poor," by Karen Seccombe and Cheryl Amey, which appears in the Journal of Health and Social Behavior 36, pp. 168-181, 1995.

Researchers provide new estimates of the underinsured younger than 65 years of age

If they had been faced with catastrophic illness in 1987, at least 29 million Americans with private health insurance would have been underinsured, that is, their out-of-pocket expenses would have exceeded 10 percent of family income. According to this estimate, 9 million more persons were without adequate protection against large medical bills than a decade previously, says Pamela Farley Short, Ph.D., formerly of the Agency for Health Care Policy and Research and currently with RAND Corporation, and Jessica S. Banthin, Ph.D., of AHCPR's Center for Health Expenditures and Insurance Studies.

They used insurance data from the 1987 National Medical Expenditure Survey to determine which expenses would be covered by individual insurance plans given a person's risk of catastrophic illness. They estimated expenditures based on observed average expenses for people in various risk groups who were hospitalized, using a representative cross-section of the U.S. population under age 65. Finally, the researchers projected estimates from the 1987 survey to 1994, with adjustments for population growth and changes in the demographic composition and insurance status of the population. The projected estimates show that the 29 million figure remains stable.

Projected estimates showed that the plans of 49.2 percent of the insured would have failed to cap out-of-pocket expenses at $1,500 or less per person ($3,000 or less per family) had enrollees incurred a catastrophic expense. Traditional policies with standard cost-sharing limits did not provide adequate protection for low-income families. Because cost-sharing required by a typical policy was large in relation to income, 61.6 percent of people with private insurance living below 125 percent of poverty were at significant financial risk in 1994 had they experienced a catastrophic illness.

The 1994 projections show that the privately insured who were enrolled in nongroup plans or through small groups (with 25 or fewer members) were more likely to be underinsured. Of people with nongroup insurance plans, 40.7 percent were underinsured when judged by a catastrophic illness; 23.9 percent were underinsured when judged by actuarial values (the amount of total covered expenses paid by the insurer). Approximately 24 percent of people enrolled in very small groups were underinsured at about twice the rate of those enrolled in very large groups.

Details are in "New estimates of the underinsured," by Drs. Short and Banthin, in the October 25, 1995, Journal of the American Medical Association 274, pp. 1302-1306.

Nonprofit hospitals respond to Medicare's PPS with higher prices for private payers

Enactment by Medicare of the Prospective Payment System (PPS) in 1983—which pays hospitals a designated amount for patients with a specific diagnosis regardless of hospital costs for the patient—provided a strong incentive for hospitals to seek ways to reduce their financial risks. A new study shows that nonprofit hospitals tended to increase prices for private insurers in order to cope with the risks associated with Medicare patients. However, hospitals did not seem to respond to the riskier PPS environment by selectively admitting less costly patients, perhaps because in some cases, Medicare shares the risk by special allowances (about 5 percent of PPS inpatient spending) for "outlier" patients with unusually high costs for their diagnostic group.

Hospitals in States with hospital rate-setting programs had lower prices for privately insured patients and less risk-reduction behavior irrespective of PPS. State programs that establish rates for certain procedures not only restrain prices but also deliberately spread the costs for indigent and high-risk patients across payers and hospitals during the 1980s.

More recently, private health insurers have attempted to protect themselves against hospital price increases by seeking new contractual arrangements with hospitals through preferred provider organizations (PPOs) and exclusive contracts. If such developments strongly limit the ability of hospitals to raise prices, then more patient selectivity (preference for lower-risk and less costly patients) and lower cost treatments (reduced testing and length of stay) may result, caution the study's authors, Bernard Friedman, Ph.D., of the Agency for Health Care Policy and Research's Center for Delivery Systems Research, and Dean Farley, Ph.D., M.P.A., formerly of AHCPR and now with HCIA Software Systems, Inc. Their findings are based on data from the National Hospital Cost and Utilization Project (HCUP-2), a database maintained by AHCPR that includes a national panel of over 400 hospitals providing information from patient discharge abstracts, hospital financial reports, and county-level information from 1980-1987.

Details are in "Strategic responses by hospitals to increased financial risk in the 1980s," by Drs. Friedman and Farley, HSR: Health Services Research 30(3), pp. 467-488, 1995.

Health plans that restrict choice of provider attract healthier members

Health maintenance organizations (HMOs) and exclusive provider organizations (EPOs), which restrict enrollees' choices of health care providers, attract healthier elderly and nonelderly members than traditional fee-for-service (indemnity) health insurance plans, concludes Fred J. Hellinger, Ph.D., of the Center for Cost and Financing, Agency for Health Care Policy and Research. His review of the literature suggests that the most important reason HMOs and EPOs attract healthier members is that individuals who use large amounts of health resources often are unwilling to sever ties with their health care providers and switch to providers who are affiliated with an HMO or EPO (preferred provider organization [PPO] that does not provide reimbursement for services supplied outside the network).

For example, employees of a large Midwestern manufacturing firm were offered an option in 1986 of staying in the company's traditional indemnity plan or joining one of two EPOs. The average expenditure per eligible individual during the year immediately before the EPO offering was $821 for those who remained in the standard indemnity plan and $596 (27 percent less) for those who switched to the EPO. In addition, it may be that HMOs and PPOs with large networks of providers experience less favorable selection than HMOs and PPOs with smaller networks, since persons who have strong ties to health providers are more likely to join if their provider is a member of the network.

For more information, see "Selection bias in HMOs and PPOs: A review of the evidence," by Dr. Hellinger, in the Summer 1995 issue of Inquiry 32, pp. 135-142.

HMOs enroll younger members than fee-for-service plans

A new study by researchers at the Agency for Health Care Policy and Research suggests otherwise. It shows that health maintenance organizations (HMOs) tend to enroll younger members who use fewer services than traditional fee-for-service (FFS) plans. Amy K. Taylor, Ph.D., Karen M. Beauregard, M.H.A., and Jessica P. Vistnes, Ph.D., of AHCPR's Center for Health Expenditures and Insurance Studies, compared the health status and sociodemographic characteristics of HMO and FFS enrollees. They used data from the 1987 National Medical Expenditure Survey, a nationally representative survey of the civilian noninstitutionalized population, and the Health Insurance Plans Survey.

Comparisons showed that a higher percentage of HMO than FFS members were younger than 17 years and between 25 and 44 years of age, and a smaller percentage of HMO members were over age 45. However, perceived health status, days confined to bed, work limitations, and proportion of persons with three or more chronic conditions or health risks (such as smoking or lack of regular exercise) were similar for the two groups. The percentage of enrollees with diabetes, cardiovascular disease, or cancer was lower among HMO than FFS members. Although these differences were statistically significant, they were a small proportion of the insured population.

The researchers suggest that HMOs attract younger people who are planning their families and having children, because pediatric preventive health care services and maternity care often have lower out-of-pocket costs in HMO than FFS plans. Also, unlike many older patients, young families have not yet formed strong ties to physicians who may not be part of the HMO provider network. The researchers conclude that style of medical care delivery, such as physician compensation method and controlling the use of medical services, may be more important than enrollee health status in determining the costs of medical care in different types of health insurance plans.

See "Who belongs to HMOs: A comparison of fee-for-service versus HMO enrollees," by Dr. Taylor, Ms. Beauregard, and Dr. Vistnes, in the September 1995 Medical Care Research and Review 52(3), pp. 389-408.

Direct costs for TB exceed $700 million per year

The resurgence of tuberculosis (TB), which increased in incidence by 20 percent between 1985 and 1992, has taken a heavy toll in terms of the Nation's health care expenditures, according to Lynn Bosco, M.D., M.P.H., of the Center for Outcomes and Effectiveness Research, Agency for Health Care Policy and Research, and her coauthors. Estimated direct costs for TB amounted to $703.1 million in the United States in 1991, and more than half of these costs were for inpatient care, due to the trend toward hospitalizing TB patients, notes Dr. Bosco.

The researchers used existing databases, surveys of State and local TB programs, and interviews of organizations that conduct large-scale TB screening to estimate the 1991 direct expenditures for TB-related diagnosis, treatment, and surveillance activities. They calculated a total of $703.1 million in direct costs, including $423.8 million for inpatient care. Other expenditures included $182.3 million for outpatient care, $72.1 million for screening, $3.4 million for contact investigations, $17.9 million for preventive therapy, and $3.6 million for surveillance and outbreak investigations.

Expenditures for prevention (including screening, contact investigations, and administration of preventive therapy for latent TB infection) and surveillance activities accounted for only 14 percent of total TB expenditures compared with 86 percent for care of patients with active or suspected disease.

The researchers conclude that improved use of TB preventive therapy and outpatient therapy in high-risk populations may be cost-beneficial, given the high costs associated with inpatient treatment for TB. They also express concerns about the lack of cost accounting systems in State and local health departments.

See "Health-care expenditures for tuberculosis in the United States," by Ruth E. Brown, M.S., Bess Miller, M.D., M.Sc., William R. Taylor, M.D., M.P.H., Cynthia Palmer, M.S., Lynn Bosco, M.D., M.P.H., and others, in the Archives of Internal Medicine 155, pp. 1595-1600, 1995.

Tort laws and other factors influence dentists' decisions to carry more malpractice insurance

Dental malpractice claims rose 2.5 times in 5 years, and claims payment per award increased about five-fold between 1988 and 1991. A dentist's decision to purchase greater amounts of malpractice liability insurance (with a higher payment limit per incident) is influenced by State tort law, the State population-to-lawyer ratio, and whether or not the dentist has been sued for malpractice in the past, according to a study supported by the Agency for Health Care Policy and Research (HS06554).

Peter Milgrom, D.D.S., and colleagues at the University of Washington surveyed a random sample of 3,048 dentists drawn from data of the American Dental Association (ADA) in 1992. For dentists who were carrying insurance, the policy limits per incident ranged from $100,000 to more than $2 million. The most common limit per incident was $1 million (55 percent) with an additional 4 percent of policies having a limit of $2 million or more. Policy limits per year ranged from $200,000 to more than $3 million, with the latter being the most common limit specified (43.9 percent).

The likelihood of maintaining the higher per-incident limit was increased for dentists who had a complaint filed against them within the last 5 years. The larger group of dentists, with a per-incident limit of less than $1 million, lived in areas that averaged 513 people per lawyer, compared with dentists living in areas with an average of 490 people per lawyer, who had policies with a per-incident limit of at least $1 million.

Pro-defendant provisions of percentage fault liability, limits on joint and several liability, and period payment allowances, reduced the probability that a dentist would elect higher per-incident policy limits from 1.3 to 1.6 times. Tort limits on damage recovery had opposite and unexplained effects. Binding arbitration increased the probability that dentists would choose higher policy limits, since the costs of such arbitration are likely to increase premiums in a system where most claims are settled out of court (about 70 percent), and many are settled without the involvement of attorneys.

Details are in "Tort reform and malpractice liability insurance," by Dr. Milgrom, Coralyn Whitney, Ph.D., Douglas Conrad, M.H.A., M.B.A., Ph.D., and others, in Medical Care 33(8), pp. 755-764, 1995.

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