Summary Chapter 1, Introduction (Mattias Fritz)

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Medicare consists of hospital insurance (Part A) and supplementary medical insurance (Part B). There is also a Part C called Medicare+Choice.

Part A: Provided automatically to persons age 65 and over who are entitled to Social Security. It includes the following:

  • Inpatient hospital care: Initial deductible and copayments after 60 days.

  • Skilled nursing facility (SNF) care: Covered only if it is within 30 days of a hospitalization of three or more days and certified as medically necessary.

  • Home health agency: Home health aide.

  • Hospice: For terminally ill persons with <6 months life expectancy.

Part B: Optional and requires payment of a monthly premium. It covers physician services, lab tests, diagnostic tests, ambulance services and blood. Almost all ehav for both A and B. Additional to the monthly premium, there is an annual deductible and coinsurance payments for services.

Part C: Beneficiaries can choose to get their benefits through a variety of risk-based programs. It includes coordinated care plans, which include HMOs, PSOs, PPOs and other forms of certified programs. It also includes medical savings accounts allowing beneficiaries to ehav in a high-deductible plan. After the deductible is paid, the MSA plan pays providers the lesser of 100% of specified expenses or 100% of the amount payable under the original fee-for-service Medicare program.

Program financing

Part A: Mandatory payroll deductions (FCA tax) at 1,45% of earnings paid by both employer and employee (=2,90%).

Part B: (1) Premium payments and (2) Contributions from general revenue of the US Treasury. Beneficiary premiums are set to cover 25% of the average expenditures.

Part A and B beneficiaries are responsible for charges not covered by Medicare and the cost-sharing features of the plan. These liabilities may be paid by a 3rd party such as a private “medigap” insurance policy or by Medicaid. Medicare covers 95% of the US aged population. In 1997, part A and B cost $138 and 73 billion, respectively, which equals $6300/ehavio.


Medicaid pays for medical assistance for the poorest, with emphasis on dependent children and their mothers, the disabled and the elderly. Medicare beneficiaries with low incomes may receive supplementary care covered by Medicaid (Medicaid is payer of last resort). Within broad national guidelines each state (1) establishes its own eligibility standards for Medicaid (2) determines the type, amount, duration and scope of services (3) sets the rate of payment (4) administers its own program.

Medicaid does not provide health care even for very poor unless they are in one of the designated groups, which are based on income and other criteria. States generally have broad discretion in determining eligibility, but must cover certain groups such as the following “categorically needy”:

  • Children under the age of six or pregnant women with family income <133% of the federal poverty level (FPL)

  • Children under the age of 19 in families with incomes at or below FPL

Payment for Medicaid services

Medicaid is a cost-sharing partnership between the federal government and the states. The Federal Medical Assistance Percentage (FMAP) cannot be lower than 50% or higher than 83%. States may impose deductibles, coinsurance or copayments on some Medicaid recipients for certain services, but some recipients are excluded from cost-sharing. All recipients must be exempt from copayments for emergency and family planning services.

Most Medicaid recipients require small average expenditures – in 1996, the cost was $1000/child (children make up 46% of those eligible). However, 50% of the total cost of nursing facilities or home health services was paid by Medicaid. The total expenditure for Medicaid in 1997 was $160 billion. With the elderly and/or disabled percentage of the population increasing faster than the younger groups, the need for long-term care is expected to increase.


The implementation of M&M coincided with a considerable increase in health care costs. The costs had been rising before that, but hospital care inflation grew larger after 1965. Growth of the ehavio population is often cited as the primary reason for growth in Medicaid payments. Contributing were also changed standards in the states, allowing more families to qualify, additional publicity for Medicaid and more states initiating the programs.

An increase in the population covered by M&M doesn’t fully account for the inflationary effects. Newhouse has proposed three ways in which insurance programs could affect prices and costs:

  1. Increased insurance has expansionary effects on the demand for care

  2. Insurance coverage may induce technological improvements and if these are more costly than previous ones, the price per unit of care will increase

  3. Increased inefficiency – when insurance covers more of the health care bill, the incentives for institutions, such as hospitals, to control costs decrease

According to empirical evidence, the general inflation was responsible for more than half of the inflation in hospital spending between 1971 and 1981. Population growth contributed 7,2%, growth in admissions 8,6%, and real expenses per admission (reflecting technological change) 20,8%.

More recent data suggest that medical spending over time has increased dramatically, especially for the very young and the old, mainly because of high-cost users in these groups (premature babies, cancer and severe cardiovascular problems). These data are consistent with the Newhouse theories. The data also suggest that M&M have succeeded in addressing the problems of access to which they have been directed – the elderly and the poor have increased their access dramatically (table 22.2 p.517).

Out-of-pocket expenditures were reduced sharply after the programs as a percentage of total expenditure. However, for 65+ persons these expenditures as a percentage of income and beneficiary liabilities as a share of total health expenditures have been held fairly constant since the beginning of the programs (table 22.3 p.518).

The inequalities in use rates between low-income and high-income groups still exist to some extent, according to Starr (1986). The poor show significantly lower levels of physician use at comparable levels of health.

Until recently, Medicaid was restricted to children in very low-income, single-parent families. The legislation has been changed to allow a higher proportion of children into Medicaid. Simultaneously, a reduction in children’s private insurance coverage has decreased, possibly because of (1) less generous employer-provided health insurance and (2) newly eligible families dropping private insurance.

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