8
Access to Health Insurance and the Role of Risk-Adjusted Payments to Health Plans

I have to go down my list of medications and choose which pills I can take and which ones I can’t…. Some months, I have a little extra money and I can take it, and other months I can’t…. I’ve just been picking and choosing…. I haven’t done myself any favors by doing that, but you have to do what you’ve got to do.

Maggie (woman with multiple sclerosis waiting for Medicare coverage) Quoted by Williams et al. (2004)


Maggie had to make decisions about which medications to take and which to forego, which is a dangerous dilemma. In her case, these hard choices are necessary because she has just started receiving Social Security Disability Insurance (SSDI) benefits but will not become eligible for Medicare for 2 more years. In the interim, she has no health insurance. For others, the complexities of the Medicare prescription drug program or the state-federal Medicaid program can lead to interruptions in access to services or medications as program rules change or individual circumstances fluctuate. Yet others lose coverage when they lose their job or their employer stops offering health insurance. Although people with disabilities are somewhat more likely than other people to have insurance (especially public insurance), the consequences of a lack of insurance can be more severe for them because they often have more needs for health care (DeJong and Sutton, 1998).

In 1991, the Institute of Medicine (IOM) report Disability in America observed that “a system that provided accessible, affordable, quality health care for all would have enormous beneficial effect on the prevention of dis-



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The Future of Disability in America 8 Access to Health Insurance and the Role of Risk-Adjusted Payments to Health Plans I have to go down my list of medications and choose which pills I can take and which ones I can’t…. Some months, I have a little extra money and I can take it, and other months I can’t…. I’ve just been picking and choosing…. I haven’t done myself any favors by doing that, but you have to do what you’ve got to do. Maggie (woman with multiple sclerosis waiting for Medicare coverage) Quoted by Williams et al. (2004) Maggie had to make decisions about which medications to take and which to forego, which is a dangerous dilemma. In her case, these hard choices are necessary because she has just started receiving Social Security Disability Insurance (SSDI) benefits but will not become eligible for Medicare for 2 more years. In the interim, she has no health insurance. For others, the complexities of the Medicare prescription drug program or the state-federal Medicaid program can lead to interruptions in access to services or medications as program rules change or individual circumstances fluctuate. Yet others lose coverage when they lose their job or their employer stops offering health insurance. Although people with disabilities are somewhat more likely than other people to have insurance (especially public insurance), the consequences of a lack of insurance can be more severe for them because they often have more needs for health care (DeJong and Sutton, 1998). In 1991, the Institute of Medicine (IOM) report Disability in America observed that “a system that provided accessible, affordable, quality health care for all would have enormous beneficial effect on the prevention of dis-

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The Future of Disability in America ability. Yet economic and political hurdles to that end are formidable, and a near-term solution is not in sight” (p. 281). Those observations about the obstacles to the creation of such a health system are as true today as they were 15 years ago. Recent renewed attention to the problem of uninsurance at the national level and the movement by some states toward universal coverage are encouraging (see, e.g., NCSL [2007]). Still, the barriers to affordable coverage for all Americans remain daunting. Moreover, as many have argued, even with better access to insurance, the American health care delivery and financing system was not and is not well designed to meet the needs of people with serious long-term health conditions or disabilities (see, e.g., Anderson and Knickman [2001], IOM [2001a,b], Wagner et al. [2001], DeJong et al. [2002], Vladeck [2002]. Eichner and Blumenthal [2003], Etheredge and Moore [2003], NCD [2005], Teitelbaum et al. [2005], Iezzoni and O’Day [2006], and Palsbo and Kailes [2006]). As the baby boom generation enters old age, these flaws in the design of the American health care delivery and financing system are likely to become even more troublesome—at the same time that general anxieties about the affordability and sustainability of the current acute and long-term care services grow. A comprehensive discussion of the deficiencies of the current system of health insurance and directions for reform is beyond the scope of this report, but this chapter and the next chapter highlight certain shortfalls that seriously affect people with disabilities. Chapter 4 discussed the improvements in the organization and coordination of services that could be made for young people with disabilities as they move from pediatric to adult care. Most of those improvements involve changes that would be applicable to care for people of any age. The charge to the IOM included two issues related to the financing of health care for people with disabilities. The first issue, which is discussed in this chapter, involves methods for adjusting Medicare, Medicaid, or employer payments to health maintenance organizations (HMOs) and other health plans to account fairly for the potentially high health care costs of health plan members with disabilities. The second issue, health insurance coverage of assistive technologies, is discussed in the next chapter, which also examines the coverage of personal assistance services. In addition, the next chapter reviews the fiscal context of decisions about expanding coverage, the constraints that rising costs place on policies to expand access to needed services, and the confusion surrounding complex federal and state changes in Medicaid. This chapter begins by reviewing data on health insurance coverage by age and disability status. It notes some areas of concern, including the waiting period before SSDI-based Medicare coverage begins and the instability in children’s enrollment in public insurance programs. The subsequent

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The Future of Disability in America sections summarize the characteristics and complexities of health insurance markets as a source of coverage for people with disabilities and the threats to future coverage posed by competitive market dynamics, including the avoidance by health plans of people at risk for higher-than-average health care costs. The chapter discusses strategies to respond to the latter dynamic by risk adjusting payments to health plans. Appendix C includes a more detailed examination of risk adjustment methods. The chapter concludes with recommendations. HEALTH INSURANCE COVERAGE FOR PEOPLE WITH DISABILITIES Today, as in 1991, when IOM published the report Disability in America, people with disabilities are somewhat more likely than people without disabilities to be insured. This is primarily because they are more likely to qualify for public health insurance, although insurance coverage status varies considerably among people with disabilities by age and type of disability. The major sources of health insurance for people with disabilities continue to be Medicare, Medicaid, and private employer-sponsored health plans. For many veterans with disabilities, especially those that are combat related, the Veterans Health Administration is an additional source of coverage.1 Nevertheless, as described below, depending on their age and type of disability, between 5 and 14 percent of people with disabilities who are under age 65 lack insurance. Lack of coverage creates a variety of problems for this population. For example, a survey reported by Hanson and colleagues (2003) found that people with disabilities who lacked insurance were more likely than their peers with insurance to have no regular physician, to have trouble finding physicians who understood their disabilities, and to have postponed or to have gone without care. Data on children with special health care needs likewise show higher rates of unmet needs among those without health insurance (see, e.g., Dusing et al. [2004] and Mayer et al. [2004]). Although it did not identify the health insurance status of the respondents, a 2004 Harris Poll found that 24 percent of respondents with severe disabilities, 11 percent of those with moderate or slight disabilities, and 7 percent of those reporting no disability reported going without needed health care (Harris Interactive, Inc., 2004a; see also Harris Interactive [2004b]). Beyond financial issues, these findings of unmet need 1 Data indicate that in 1999 about half of veterans had Medicare coverage (most because they were over age 64 but others because of serious disability) (Hynes, 2002). A recent analysis of data on veterans who had received care for stroke found that 30 percent used services only through the Veterans Health Administration (Jia et al., 2006).

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The Future of Disability in America may also reflect barriers to access in health care facilities, transportation, and other aspects of the environment. As discussed in the next chapter, even for people with insurance, the policies of Medicare, Medicaid, and private health plans often restrict access to assistive products and services that are particularly important to people with mobility, self-care, and certain other types of limitations. Moreover, individuals with disabilities are more likely than others to have low incomes that make deductibles, copayments, and coinsurance a burden, which may deter them from seeking these products and services. Health Insurance for Older Adults with Disabilities Approximately 36 million people age 65 or over are covered by the federal Medicare program without regard to their disability status or income (CMS, 2006a).2 About 9 in 10 Medicare beneficiaries have some additional public or private coverage that pays for certain costs or services that Medicare does not cover (e.g., the deductible for inpatient care, which is $992 per episode of illness for 2007) (Super, 2002; CMS, 2006j). This additional coverage (with the exception of traditional Medicaid) generally does not fill the gaps in coverage of long-term institutional or personal care services.3 The new Medicare drug program partly fills one major gap: the lack of coverage for drugs. In 2003, more than 60 percent of older Medicare beneficiaries had either individually purchased “Medigap” policies or employer-sponsored supplemental insurance (or both) to help pay for the deductibles and other expenses not paid for by Medicare (CMS, 2005a). This figure was down from the more than 70 percent of beneficiaries who had such coverage in 1994 (CMS, 1994). Employer sponsorship of retiree health benefits has dropped in recent years (particularly for new retirees), and the costs to retirees with employer-sponsored coverage have increased (Fronstin, 2005; Kaiser Commission and Health Research and Educational Trust, 2005). As is the case for Medicare itself, neither employer-sponsored nor individu- 2 Medicare eligibility depends on eligibility for Social Security, which is based on required payroll tax contributions to that system. National survey data show that nearly all (99 percent) of those over age 65 have health insurance. Other data suggest that perhaps 5 to 20 percent of older residents in some states may lack Medicare, although in New York City at least, the majority of those not covered by Medicare have private insurance or Medicaid coverage (Gray et al., 2006). Many, but not all, of those without Medicare coverage are immigrants. 3 For the purposes of this report, long-term care refers to supportive health, personal care, and related services that are provided over an extended period to people who are limited in their ability to care for themselves as a result of a chronic condition. Care may be provided in institutions or in the community. Regular use of primary and specialist physician services or periodic short-term hospitalizations as a result of a chronic condition that does not limit self-care is usually not characterized as long-term care.

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The Future of Disability in America ally purchased supplemental insurance is particularly tailored to meet the needs of individuals with disabilities; coverage of long-term care services is minimal or absent (see the summary of Medigap plan options in CMS [2006b]).4 With some exceptions, federal and state rules generally allow insurers offering Medigap policies to charge higher premiums or restrict sales to people with health problems or disabilities. To simplify comparisons and to reduce marketing abuses and other problems, federal rules establish 12 different, standardized benefit options for these policies (CMS, 2006b). In addition to employer-sponsored or individually purchased supplemental options, Medicare beneficiaries may also enroll in private Medicare Advantage (formerly Medicare+Choice) health plans. Although these plans vary, they generally offer extra benefits similar to those available in some or all Medicare supplemental policies. In 2005, approximately 5.5 million beneficiaries opted for these plans, which typically limit the choice of providers and are concentrated in urban areas (Gold, 2006). As discussed later in this chapter and in Appendix C, Medicare Advantage and other, similar health plans typically receive capitated payments (i.e., a per person payment for a defined time period) rather than per service payments. Finally, more than 4.7 million low-income beneficiaries age 65 and over, including many with serious disabilities, have additional coverage through the federal-state Medicaid program (CMS, 2005a). More than 80 percent of these dually eligible beneficiaries receive assistance with Medicare Part B premiums and cost sharing; the rest receive either assistance with premiums only or assistance with both premiums and cost sharing (Peters, 2005; Kaiser Commission, 2006b). More than two-thirds of Medicaid spending for dually eligible beneficiaries goes for long-term care, including home care (Kaiser Commission, 2005). In sum, nearly all adults age 65 and over have health coverage through Medicare, and most also have some form of supplemental private or public coverage. Those with very low incomes often have additional Medicaid coverage. The main concern for this group is the scope of coverage, for example, coverage of assistive technologies and personal care services, as discussed in Chapter 9. 4 The market for private long-term care insurance is growing but is still small and not relevant for people with existing disabilities. As of 2002, an estimated 9 million long-term care insurance policies had been sold since 1987, and an estimated 70 percent of these policies were still in force (AHIP, 2004). Industry statistics do not report the number of policies held by people age 65 and over.

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The Future of Disability in America Health Insurance for Younger Adults with Disabilities Health insurance coverage is more varied and uncertain for younger adults with disabilities than for older, Medicare-eligible adults. A recent analysis of data collected from 1997 to 2002 by Olin and Dougherty (2006) reported that people ages 18 to 64 who have functional or mobility limitations are more likely to have public insurance than people without such limitations and are slightly less likely to be uninsured altogether (Table 8-1). Nonetheless, more than 8 percent of people ages 18 to 64 who had difficulties with activities of daily living (ADLs) had neither public nor private insurance. TABLE 8-1 Insurance Status of Adults Ages 18 to 64 with Physical, ADL or IADL Limitations, Civilian, Noninstitutional Population, Pooled Data for 1997 to 2002 Characteristic Total Ages 18–49 Ages 50–64 Population (in 1,000s) 18 to 64a 170,805 128,906 41,899 Limitation and insurance status       Number (in 1,000s) with no limitation 156,380 121,286 35,095 Percent private insurance 79.0 77.3 84.8 Percent public insurance 5.7 6.0 4.5 Percent no insurance 15.3 16.7 10.7 Number (in 1,000s) with physical limitation 11,060 5,730 5,330 Percent private insurance 53.2 52.7 53.8 Percent public insurance 33.0 31.9 34.2 Percent no insurance 13.8 15.5 12.0 Number (in 1,000s) with IADLs 1,885 1,093 792 Percent private insurance 31.3 32.4 29.9 Percent public insurance 59.5 57.5 62.3 Percent no insurance 9.1 — — Number (in 1,000s) with any ADLs 1,480 798 682 Percent private insurance 32.9 33.3 32.6 Percent public insurance 58.8 60.3 57.1 Percent no insurance 8.3 — — NOTE: Any ADL = having activity of daily living limitations, regardless of other limitations; IADL = having instrumental activity of daily living (IADL) limitations but no ADLs; physical limitation = having no limitations in ADLs or IADLs, mobility limitations only; no limitation = having no activity or mobility limitations. Percentages may not add to 100 because of rounding. Dashes indicate less than 100 sample cases. aThe numbers of individuals for whom data on limitations were missing were not included in the population count. SOURCE: Olin and Dougherty (2006). Data from Medical Expenditure Panel Survey, 1997 to 2002.

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The Future of Disability in America Using different classifications of impairments and data from a single year (2001), Iezzoni and O’Day (2006) reported higher levels of uninsurance for people with certain self-reported vision, hearing, and mobility impairments than for people with no impairment. For example, 21 percent of those with major vision loss lacked insurance. Iezzoni and O’Day also found that approximately 20 percent of people under age 65 with a major impairment had Medicaid coverage only, almost 11 percent had Medicare only, and about 6 percent were dually eligible for Medicaid and Medicare coverage. Other data show that in 2003 about 37 percent of all dually eligible individuals were under age 65 (CMS, 2005a, Section 8). The analysis cited in Table 8-1 did not differentiate between employer-sponsored private insurance and individually purchased insurance. Companies that sell health insurance to individuals generally restrict the ability of people with serious chronic health conditions or disabilities to purchase coverage.5 In the Medical Expenditure Panel Survey for 2004, only 13 individuals of the 7,000 adults under age 65 with a disability (broadly defined) in the 30,000-person sample reported having nongroup insurance (Jeffrey Rhoades, survey statistician, Agency for Healthcare Research and Quality, personal communication, August 30, 2006). (Given a policy that requires a minimum sample size of 100 for estimation purposes, the survey analysts did not generate a population estimate for this group.) Based on the same source, an estimated 3.9 percent of younger adults without disabilities have this kind of insurance. As the severity of limitations increases, so does the percentage of expenses paid by Medicaid and Medicare (Table 8-2). For people ages 18 to 44 with disabilities, Medicaid is substantially more important as a source of payment than it is for people ages 45 to 64. Overall, about 8 million people between the ages of 18 and 64 who have disabilities are covered by Medicaid. They account for about 16 percent of total Medicaid program enrollment and about 43 percent of total expenditures (Kaiser Commission, 2005). Employment-Based Insurance For people with disabilities who are employed (and, often, for their family members), employer-based health insurance is an important resource that provides access to coverage that is often not available or not affordable in the market for individually purchased insurance. Individuals with 5 Various federal and state policies, which are too complex for a brief summary, impose some limitations on private insurance practices related to the issuance, renewal, and pricing of insurance as they affect people with health conditions (see, e.g., Williams and Fuchs [2004] and Buchmueller and Liu [2005]).

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The Future of Disability in America TABLE 8-2 Sources of Payment by Age Group and Disability Status for Adults Ages 18 to 64 with Functional Limitations, U.S. Civilian, Noninstitutionalized Population, 1997 to 2002 Age (Years) and Limitation Percent Distribution of Total Expenses by Source of Payment Self Medicare Medicaid Private Other Totala 23.5 4.8 10.1 52.0 9.6 All 18-49-year-olds 23.2 3.5 11.8 52.0 9.5 No limits 25.5 0.8 7.1 58.3 8.4 Physical limits 18.4 11.1 21.4 37.3 11.9 IADL only 14.8 10.2 31.2 25.5 18.4 Any ADL 9.2 15.7 39.0 23.2 12.9 All 50-64-year-olds 24.0 6.7 7.7 52.0 9.6 No limits 27.3 2.0 3.0 59.8 7.9 Physical limits 20.6 10.5 13.4 44.7 10.8 IADL only 19.4 16.4 19.1 33.9 11.2 Any ADL 13.5 22.4 16.9 30.2 17.0 NOTE: Any ADL = having activity of daily living limitations, regardless of other limitations; IADL only = having only instrumental activity of daily living limitations; physical limitation having no ADL or IADL limitations, i.e., mobility limitations only; no limitation having no activity or mobility limitations. Other category includes data for those with veterans’ health benefits. Percentages may not add up to 100 because of rounding. aOnly individuals who had a medical event were included in the total. Data for individuals who had eyeglass expenditures were not included in this table. SOURCE: Olin and Dougherty (2006). Data from Medical Expenditure Panel Survey, 1997 to 2002. employer-provided health insurance who become disabled (or whose family member becomes disabled) generally do not face a higher premium or the loss of coverage, as long as they remain in the employer group. The loss of employment can result in the loss of affordable insurance for the worker and his or her family members, although people who stop working as a result of a disability may be able to pay for continued employer coverage for up to 18 months. (This continuation coverage is available—without employer subsidy of the premium—under provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985. This coverage is often referred to as “COBRA coverage” for its legislation acronym.6) 6 If an individual without a disability qualifies for COBRA coverage as a result of job loss or reduction in hours and then becomes disabled under Social Security Administration criteria within the first 60 days of coverage, he or she can qualify for an additional 11 months of coverage (U.S. Department of Labor, 2007). This could bring that person nearly through the 29-month waiting period between becoming qualified for SSDI benefits and being eligible for Medicare.

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The Future of Disability in America Although employment-based health insurance has many advantages, especially in the present U.S. political culture, linking health insurance to employment can expose people with disabilities to an additional risk of discrimination. Notwithstanding antidiscrimination policies, employers, especially small employers, may be reluctant to hire people with disabilities or chronic health problems for fear of subsequent increases in health insurance premiums for their employees, although the policies of some states limit the size of yearly rate increases (see discussion below). Even large companies that self-fund most of their health plans’ costs (and pay only for insurance administration and perhaps reinsurance against very costly claims) may be reluctant to hire individuals whom they believe would further increase their costs. Data suggest that the highest-cost 10 percent of adults with employment-based coverage accounted for 60 percent of the health care costs for that group (Merlis, 2005). In addition, workers who have family members with serious chronic conditions or disabilities may fear discrimination. Employees with disabilities have some legal protections against certain kinds of discrimination, although discrimination can be hard to prove. Title I of the Americans with Disabilities Act (ADA) restricts an employer from discriminating in the “terms and conditions of employment,” for example, refusing to hire people with disabilities or excluding them from health insurance plans. The boundaries of the ADA provisions are not clear, and differential coverage of health conditions is allowed under some circumstances (Mathis, 2004). For example, an employer’s health insurance plan can generally exclude coverage for certain kinds of services (e.g., home health care), as long as the limitations apply to all plan members. In addition, as noted elsewhere in this report and in Appendix D, the U.S. Supreme Court has narrowly interpreted the ADA definition of disability so that fewer people are protected than lawmakers had anticipated when they passed the legislation. The ADA does not apply to discrimination against workers on the basis of the disability status of family members (Sara Rosenbaum, Hirsh Professor and Chair, Department of Health Policy, George Washington University, personal communication, December 18, 2006). Title V of the ADA contains explicit limitations on the application of the law to health insurers. Six years after passage of the ADA, however, the Health Insurance Portability and Accountability Act (PL 104-191) added some restrictions on insurer group health plans. Unlike insurers selling coverage directly to individuals, these group plans cannot charge individuals higher premiums on the basis of their health status or history and generally cannot limit coverage of preexisting conditions for more than 12 months and (U.S. Department of Labor, 2004a). (A preexisting condition is a condition for which medical advice or medical care was provided or recommended during the 6 months before an individual’s enrollment in a covered health plan.) In addition, the law includes “guaranteed issue”

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The Future of Disability in America provisions that prohibit insurers from refusing to renew policies for small employer groups (those with 2 to 50 employees) and from refusing to offer coverage to these groups—if the employers are willing and able to pay the premium. Under federal law, insurers can, however, charge one employer more than another on the basis of the claims experience or health status of its employees (Merlis, 2005). Other laws (e.g., the Mental Health Parity Act of 1996) also limit certain kinds of discrimination in health insurance. Insurance regulation has traditionally been the province of the states, and many states preceded the federal government in adopting policies similar to those cited above. Most states have also adopted other policies aimed at making health insurance more available, affordable, and stable for small employers and their employees, although assessments of their success vary (see, e.g., NAHU [2005], Chollet [2006], and Kofman and Pollitz [2006]).7 For example, many states have policies that restrict the extent to which insurers can take employee characteristics (e.g., age and health status) into account in setting rates for small groups. Some states also regulate insurer marketing practices, for example, forbidding insurers from marketing only to low-risk groups. Medicare and Medicaid Although Medicare is generally thought of as a program for older individuals, Medicare covered some 6,700,000 people under age 65 in 2005 (CMS, 2006f). These younger adults, who became eligible for Medicare after they qualified for SSDI benefits, account for about 15 percent of all Medicare beneficiaries. An analysis of 1995 data reported that 37 percent of younger beneficiaries had mental retardation, severe mental illness, or dementia (Foote and Hogan, 2001). In 2003, about 5 percent of younger Medicare beneficiaries, mostly individuals with the diagnoses just mentioned, lived in institutions (CMS, 2005a). As noted earlier, Medicare coverage of long-term institutional care is very limited. With few exceptions, adults under age 65 who qualify for SSDI benefits must wait 24 months after they start receiving benefits before they can enroll in Medicare.8 (The exceptions allow benefits to start earlier for qualifying individuals who have been diagnosed with amyotrophic lateral 7 The federal Employee Retirement Income Security Act restricts state regulation of large employers who use insurers to administer their insurance benefits but who self-insure the cost. 8 In 1971, when the House Committee on Ways and Means recommended the extension of Medicare to working-age adults with disabilities, it explained that the waiting period served several purposes, including to “help keep the costs within reasonable bounds, avoid overlapping private health insurance protection, particularly where a disabled worker may continue his membership in a group insurance plan for a period of time following the onset of his disability and minimize certain administrative problems that might otherwise arise…. Moreover,

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The Future of Disability in America sclerosis or end-stage renal disease or individuals who have had a kidney transplant [Whittaker, 2005].) The waiting period for Medicare coverage is a serious hardship for many individuals, most of whom qualify for disability insurance in the first place because they have a serious medical condition that precludes working and is expected to end in death or to last at least 1 year.9 One study estimated that approximately 400,000 of the 1.26 million individuals in the Medicare waiting period in 2002 lacked any form of health insurance (Dale and Verdier, 2003).10 Others are covered by a family member’s health plan or veterans health benefits, and some are able to pay for the continuation of employer-based coverage for up to 18 months under COBRA provisions. Roughly 40 percent of those who qualify for SSDI also qualify for Supplemental Security Income (SSI) and are enrolled in Medicaid (Whittaker, 2005). SSI provides cash benefits for low-income individuals with disabilities. In most states, people who qualify for SSI are automatically qualified for Medicaid in the month that they apply for SSI (and sometimes retroactively), although some states require a separate Medicaid application (Lopez-Soto and Sheldon, 2005). The U.S. Congress has also provided that some former SSI recipients remain eligible for Medicaid under certain conditions. Not surprisingly, interviews suggest that many SSDI beneficiaries who lack insurance during the Medicare waiting period forego necessary medical services, medications, and rehabilitation care (Williams et al., 2004). The final section of this chapter returns to the problems created by the SSDI waiting period and includes a recommendation for phasing it out. Health Insurance for Children As a group, children with disabilities are more likely than other children to be insured and are somewhat more likely than other children to have public insurance. In theory, children covered by Medicaid have more extensive coverage than adults through the Early Periodic Screening, Detection, and Treatment (EPSDT) program (see Chapters 4 and 9). Also, federal this approach provides assurance that the protection will be available to those whose disabilities have proven to be severe and long lasting” (U.S. House of Representatives, Committee on Ways and Means, 1971, p. 67, as cited in Whittaker [2005]). 9 Most recipients of SSDI benefits qualify on the basis of their own work experience, but some qualify as surviving disabled spouses or children of workers. In addition, adult children who become disabled before age 22 can obtain Social Security disability benefits if a parent who is retired, disabled, or deceased has paid qualifying amounts into the system (SSA, 2007b). 10 Another study reported that during the waiting period, 12 percent of beneficiaries died but 2 percent recovered and left SSDI (Riley, 2004).

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The Future of Disability in America tives for health plans to avoid high-risk beneficiaries and also jeopardize plans that do not (Blumenthal et al., 2005). Palsbo and Post reported in 2003 that only 12 Medicaid programs were using advanced risk adjustment methods. Private employers that offer multiple health plans to their employees also create the conditions for biased risk selection. Employees with chronic conditions may be disadvantaged by risk selection if the employer plans with more generous benefits are more costly, not just because they have more extensive benefits, but also because they have members with more chronic health problems. Also, if the process of risk selection contributes to the “natural” destruction of health plan options with more generous coverage, some employers may see the process as a means of reducing their costs that does not require an explicit decision to reduce benefits. A recent study found that the use of risk adjustment methods in the private sector is “uncommon and scattered” and that the methods used are sometimes proprietary and have not been subjected to the same kind of open validation process as methodologies used or considered by Medicare (Blumenthal et al., 2005; see also Keenan et al. [2001]). Interest in risk adjustment methods that specifically consider disability is growing, not only because policy makers continue to be concerned about apparent overpayments to health plans by the current methods, but also because policy makers have been promoting Medicare special needs plans, which focus specifically on people with disabilities. The U.S. Congress has identified individuals with special needs as people who live in institutional settings, people who are dually eligible for Medicare and Medicaid, or people who have severe or disabling chronic conditions (Section 231 of the Medicare Modernization Act of 2003). Any health plan interested in serving these individuals—whether they are served under Medicare or state Medicaid rules, or both—would be particularly concerned about the accuracy of the government’s risk adjustment method, including its accuracy for the entire group and particular subgroups within the population of those with special needs. Data show that health care expenditures are skewed even within groups of people with serious chronic health problems, although to a lesser degree than they are for the population overall (see, e.g., CBO [2005c]). As of 2006, CMS had 226 special needs plans for people dually eligible for Medicare and Medicaid, 37 plans for institutionalized beneficiaries, and 13 plans for other beneficiaries with a specific severe or disabling chronic condition (Verdier and Au, 2006). Most of these plans have contracted with Medicare only, although approximately 40 also had contracts with state Medicaid programs (Verdier, 2006). The committee notes that the success of these plans and their pluses and minuses for people with disabilities will be affected by many factors, in addition to the adequacy of the risk-adjusted

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The Future of Disability in America payment. These factors include Medicare and Medicaid administrative procedures, the complexities of integrating Medicare and Medicaid benefits, geographic differences in capitation rates, relationships with long-term care providers, and performance assessment methods and timetables (Verdier and Au, 2006). Many of the original special needs plans were sponsored by organizations that specialized in serving this group, but commercial HMOs have now set up many such plans. Although it is important for all health plans, the addition of data and methods to assess the quality of care and outcomes is particularly important for special needs populations. For fairness, these methods—like those for plan payment—need to adjust for the risk presented by a health plan’s membership (Iezzoni, 2003). Desirable Characteristics of a Risk Adjustment Method As Knutson writes in Appendix C, a perfect risk adjustment method would yield a health plan payment that “exactly fits the actual cost along the entire cost distribution for the population” with no systematic bias, only random sampling error (p. C-12). Under such conditions, more efficient plans should be able to serve their enrolled population at a cost below the cost projected by the risk adjustment model. Health plans would therefore not fear enrolling people with chronic conditions but might actually seek them both because they would bring in more income per enrollee and because they would offer more potential for profit through the efficient and economical management of services (especially if individuals were enrolling from fee-for-service Medicare). Despite substantial improvements in methodology, this perfect risk adjuster does not exist. Each method in use or proposed has pluses and minuses related to accuracy and fairness, complexity, credibility to clinicians, cost of data collection, and susceptibility to manipulation or gaming by health plans. Box 8-1 lists several criteria for evaluating risk adjustment methods. It does not include political acceptability, but this is also an issue. Health plans that benefit from the current approach to risk adjustment tend not to support methods that would significantly reduce that benefit or require major changes in their operations. In evaluations of various early risk adjustment methods, some analyses have considered risk selection and risk adjustment issues specific to people with disabilities (see, e.g., Lichtenstein and Thomas [1987], Tanenbaum and Hurley [1995], and Kronick and Drefus [1997]). Responding to the lack of disability-based adjustments, Kronick and colleagues (1996) developed the Disability Payment System and then the Chronic Illness and Disability Payment System (Kronick et al., 2000), which were created initially for Medicaid managed care programs serving people with disabilities and

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The Future of Disability in America BOX 8-1 Criteria for Assessing Risk Adjustment Methods Predictive power: ability to accurately explain the variation in the expenses of a given population Underlying logic: link to daily clinical practice and whether it is clinically meaningful to providers Incentives: the behavior encouraged among providers and health plans in the short and long term Resistance to “gaming”: the degree to which providers and plans cannot manipulate the tool to their benefit, including an ability to verify and/or audit the results Data availability: accessibility of the data upon which the tool is based, including the completeness, quality, and timeliness of the data Transparency: ability of stakeholders to understand the basis and operation of the tool Simplicity: how easy it is to implement and use Reliability: how stable the risk scores are over time and with data from different health plans Cost: monetary and non-monetary expense of the tool and of acquiring data. SOURCE: Martin et al. (2004). which were subsequently adapted to incorporate diagnoses (e.g., pregnancy) that are important to the general Medicaid population. The Chronic Illness and Disability Payment System method appears to be the most widely used method among the states that use risk adjustment (AHRQ, 2002; Martin et al., 2004). (Like the method recently adopted by Medicare, this method relies on diagnosis codes rather than measures of impairment or activity limitations as such.) Evolution of Risk Adjustment Methods Medicare’s early efforts to adjust health plan payments to reflect the financial risk presented by their enrollees were rudimentary. The initial method computed an average adjusted per capita cost (AAPCC) that relied primarily on easily available demographic data: age, sex, institutional status, and, for noninstitutionalized individuals, their welfare status (plus county of residence). For policy reasons (e.g., to avoid disincentives for health plans to manage or control health care use), Medicare did not want

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The Future of Disability in America to factor in the past use of health services, a primary variable that private health insurers use to establish “experience-rated” premiums for employer-based health plans. As noted above, a variety of early analyses showed that the use of demographic adjusters was not sufficient to compensate for risk selection. It resulted in overpayments to health plans with favorable selection (disproportionate enrollments of healthier individuals) and underpayments to plans with unfavorable selection. The payment implications of the failure of risk adjustment methods to consider health risk are illustrated by an analysis by Manton and Stallard (1992). They used disability data from the National Long-Term Care Survey to compare the Medicare risk adjustment method then in place with an alternative that included data on limitations in ADLs. The researchers reported that when a Medicare HMO enrolled only “nondisabled (noninstitutional)” beneficiaries, its expected profit would be $300 per person per year, whereas the enrollment of “the noninstitutional disabled” would lead to a loss of $1,957 per person per year. Acknowledging the inadequacies in the AAPCC, the U.S. Congress included in the Balanced Budget Act of 1997 provisions that directed the Health Care Financing Administration (which is now CMS) to take beneficiary health status into account in setting payments to managed care plans (Martin et al., 2004; Pope et al., 2004). In 2000, as a first step, CMS adopted the Principal Inpatient Diagnosis-Diagnostic Cost Group model. Then, in 2004, it switched to a 4-year phased-in implementation of the CMS Hierarchical Conditions Categories model (CMS-HCC). As described by its developers (Pope et al., 2004, pp. 122–123), the original classification system first classifies each of over 15,000 ICD-9-CM [International Classification of Diseases, 9th edition, Clinical Modification] codes into 804 diagnostic groups, or DxGroups. Each ICD-9-CM code maps to exactly one DxGroup, which represents a well-specified medical condition, such as DxGroup 28.01 Acute Liver Disease. DxGroups are further aggregated into 189 Condition Categories, or CCs.CCs describe a broader set of similar diseases, generally organized into body systems, somewhat like ICD-9-CM major diagnostic categories. Although they are not as homogeneous as DxGroups, CCs are both clinically- and cost-similar. An example is CC 28 Acute Liver Failure/Disease that includes DxGroups 28.01 and 28.02 Viral Hepatitis, Acute or Unspecified, with Hepatic Coma. Hierarchies are imposed among related CCs, so that a person is only coded for the most severe manifestation among related diseases…. Although HCCs reflect hierarchies among related disease categories, for unrelated diseases, HCCs accumulate. For example, a male with heart disease, stroke, and cancer has (at least) three separate HCCs coded, and his predicted cost will reflect increments for all three problems.

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The Future of Disability in America In response to concerns from health plans, the model modified for use by CMS cut the number of condition categories to 70, among other adjustments. Although the model improved the cost predictions for all beneficiaries by about 25 percent, it still underpredicted the costs for high-cost beneficiaries in the range of 12 to 15 percent. In addition to diagnostic information, the model also incorporates information about a beneficiary’s age, sex, Medicaid status, and basis of qualifying for Medicare, specifically, qualifying on the basis of disability rather than age. During the development of the current methodology, the analysts considered but rejected the inclusion of data on the rates of use of home health care services and durable medical equipment (Pope et al., 2000, 2004). These data, which take into account services disproportionately used by people with disabilities, improved the accuracy of the model but raised concerns about data reliability, possible manipulation by providers, and the administrative costs of collecting and auditing the data. The model does, however, take into account whether a beneficiary originally qualified for Medicare by virtue of disability (under SSDI). As discussed in Appendix C, the addition of information about an individual’s functional status adds modestly to the predictive power of methods that use diagnostic categories, primarily for individuals age 55 or over living in the community. One practical problem with using functional status information is that it is not routinely available for Medicare beneficiaries, for example, in claims data (Walsh et al., 2003; Kautter and Pope, 2004). Functional status information for the frailty adjuster discussed below must be collected through surveys of health plan participants. The new health-based risk adjustment methods are a significant improvement over the original AAPCC, but they still allow overpayment for healthy individuals and underpayment for people with chronic health conditions or disabilities. For example, Hwang and colleagues compared demographic adjustment with four different diagnosis-based adjustment methods using data for children with chronic health conditions enrolled in Maryland’s Medicaid program (Hwang et al., 2001). Although the researchers found that all four measures resulted in substantial improvement in accuracy over the demographic adjustment, they also found that all diagnosis-based methods had projected underpayments when the proportion of total health plan enrollment of children with chronic conditions reached 80 percent. The errors ranged from 5 to 10 percent. Kuhlthau and colleagues (2005) found similar results in an analysis of Medicaid data for three states and concluded that no method worked equally well in all situations. Similarly, a recent analysis by the Medicare Payment Advisory Commission (MedPAC, 2005a) described the new risk adjustment methodology as a substantial improvement over demographic adjustments. Nonetheless, it also found that the method overpredicts payments for beneficiaries in

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The Future of Disability in America better health and underpredicts the costliness of care for those in poorer health, as indicated by selected diagnoses or use of inpatient care or costliness in a previous year. Table 8-5 shows examples of how much Medicare overpaid or underpaid providers for different categories of beneficiaries. (For example, the new system overpaid by about 34 percent for the least costly 20 percent of beneficiaries and underpaid by about 17 percent for the most costly 20 percent.) As is typical of most analyses, the analysis did not consider predictions for beneficiaries by level of functional limitation or other indicator of disability. For certain community-based demonstration programs serving Medicare beneficiaries with significant functional impairments, CMS has included—in addition to the basic risk adjustment used for all plans (see below)—a “frailty adjuster” (measured at the organizational level). It is intended to adjust for costs that the basic method does not consider. As implied by the label, the target population for method is the frail older person with “age-related physiologic vulnerability” (Kautter and Pope, 2004). The adjuster for a health plan starts with information about a person’s difficulty TABLE 8-5 Prediction of Medicare Beneficiary Costliness by Risk Adjustment Method Beneficiary Group Predictive Ratios from Two Risk Adjusters CMS-HCCs Age and Sex Only Quintile of costliness in 2001     Lowest 1.34 2.53 Second 1.30 1.96 Third 1.19 1.47 Fourth 0.98 0.96 Highest 0.83 0.44 Number of impatient stays in 2001     Zero 1.07 1.38 One 0.96 0.65 Two 0.92 0.49 Three or more 0.80 0.29 Conditions diagnosed in 2001     Alcohol or drug dependence 0.99 0.39 Congestive heart failure 0.90 0.50 Chronic obstructive pulmonary disease 0.93 0.67 Cerebral hemorrhage 1.09 0.65 Hip fracture 1.08 0.80 NOTE: Predictive ratio for a group = the group’s mean costliness predicted by a risk adjuster divided by the mean of the group’s actual costliness. If a risk adjuster predicts a group’s costliness perfectly, predicted costliness equals actual costliness and the predictive ratio equals 1.0. SOURCE: MedPAC (2005a).

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The Future of Disability in America with the performance of ADLs collected from a sample survey of the beneficiaries in each health plan residing in the community. CMS is considering whether to apply this additional adjustment to all health plans, whether or not they specialize in care for frail populations (Verdier, 2006). One concern is whether the frailty adjuster designed for a frail elderly population is appropriate for other populations. For example, some research suggests cost-relevant (and thus payment-relevant) differences in frailty and disability (see, e.g., Fried et al. [2004] and Bringewatt [2006]). The issue of fair payment for health plan enrollees with disabilities remains a concern, despite analyses showing that, overall, Medicare is now paying Medicare Advantage plans considerably more per beneficiary than it would pay under fee for service (Biles et al., 2006; MedPAC, 2006). For example, one analysis estimated that Medicare’s additional payments to these plans averaged 12.4 percent more than the costs for beneficiaries in the traditional program, for a total of $5.2 billion in extra costs overall—or $922 in extra costs per health plan enrollee (Biles et al., 2006). The higher payments are not unintentional. The Congress sharply increased payments to plans after previous payment changes (which are no longer in place) had led some plans to leave Medicare. Even if Medicare is paying health plans generously overall, the additional payments to health plans do not correct the inaccuracies in risk adjustment methods, and thus they leave in place incentives to avoid high-risk individuals. Plans still profit more from enrolling healthier beneficiaries. Moreover, even if the new payment method reduces the disadvantage to plans that disproportionately enroll people with disabilities, those plans may still do poorly if they must compete against plans that seek or attract the people who are the best risks. In general, it is easier to profit from attracting low-risk individuals than from efficiently managing the care of those with chronic illnesses, and many health plans are responsible to shareholders for their financial performance. Thus, in addition to methods of adjusting health plan payments, it would be desirable to have risk-adjusted measures of the quality of care provided by health plans. RECOMMENDATIONS Improving Risk Adjustment Methods The committee recognizes the long history of work by CMS to develop methods for paying health plans that do not encourage plans to favor healthier Medicare beneficiaries over beneficiaries who have more serious health conditions. The analyses cited above indicate that recent changes in Medicare’s payment methods have significantly improved on previous demographic-based methods and have reduced the degree of underpayment for beneficiaries with costly health conditions. Nonetheless, it appears that

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The Future of Disability in America the current method still substantially overpays for the least costly beneficiaries and modestly underpays for the most costly. To the extent that the medical home and chronic care models discussed in Chapter 4 work most easily in organized systems of care and under capitated payment arrangements that allow flexibility in the use of clinical and other resources, inadequate risk adjustment methods are a particular threat to the potential of these plans to improve health care for people with disabilities. Although policy makers should be commended for their support of improved risk adjustment methods, they should not assume that improvements in risk adjustment methods are sufficient to the task of fairly paying health plans that serve people with disabilities and protecting the options of people with disabilities. As recommended below, they should continue to support research and data collection efforts to evaluate current and alternative methods and strategies to improve their accuracy and practicality. Evaluations of the effects of alternative payment methods (e.g., use of the frailty adjuster for different populations) and health plan designs (e.g., special needs plans of different kinds) on the quality of care for beneficiaries with disabilities are also important. Because state Medicaid programs are also primary promoters of enrollment of Medicaid beneficiaries (including people with disabilities) in private health plans and because many states appear not to be using contemporary risk adjustment techniques, it would be prudent for CMS to commission an evaluation of the potential consequences of different state approaches to health plan payment, including the potential effects on both health plans and beneficiaries with disabilities and the rationale for the U.S. Congress to require the use of health-based risk adjustment. Recommendation 8.1: The U.S. Congress should support continued research and data collection efforts to evaluate and improve the accuracy and fairness of methods of risk adjusting payments to health plans serving Medicare and Medicaid beneficiaries; assess how these methods affect the quality of health care for people with disabilities, including those enrolled in special needs plans; and evaluate differences in the risk adjustment methods that state Medicaid programs use to pay health plans that enroll people with disabilities. Risk adjustment does not stand by itself as a means of limiting the negative consequences of risk selection in a competitive market. For example, policy makers also need to consider limiting the diversity of choices offered to consumers to make comparisons of health plans easier and to restrict health plan tactics to attract low-cost enrollees and discourage high-

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The Future of Disability in America cost enrollees through benefit features. (As noted earlier, Congress has acted to standardize the options available in the Medigap policies.) Likewise, to supplement comparisons of plan price and features, consumers and policy makers need comparative information on the quality of plan processes and outcomes. Although the committee did not examine the use of risk adjustment methods for other purposes, such as assessing and comparing the quality of care offered by health plans or health care providers, the continued refinement of methods for health plan payment purposes will likely be useful for these purposes. In addition, risk-adjusted information on the characteristics of those disenrolling from different plans is another element of a comprehensive approach to limiting and monitoring the negative consequences of risk selection. The possible utility of including additional clinical information in risk adjustment tools is yet another issue for further evaluation. Inclusion of such information will likely require better health information systems. As noted in Chapter 4, the use of electronic medical records to support the coordination and evaluation of chronic care is still disappointingly limited. One further issue that the committee did not examine in depth but that requires careful attention is whether Medicare and Medicaid should consider explicitly promoting and supporting health plans that truly specialize in the care of people with disabilities and that are, in a sense, “health plans of excellence” for this population. Several possible strategies or tools to implement such an option exist, including devising special payment arrangements, quality management mechanisms, administrative rules, and qualifying requirements. Risk adjustment methods might serve various purposes for payment, quality, and performance management in this environment. In any case, evaluation of special needs plans and changes in policies related to such plans is important to gauge their effects on people with disabilities. Other Issues in Medicare and Medicaid Although this committee supports the extension of health insurance to all people with serious chronic health conditions or disabilities, recommendations for achieving this goal are beyond its charge. The committee commends the principles for extending coverage that were set forth by a recent IOM committee that examined uninsurance in America (see Box 9-5 in Chapter 9). Lack of insurance is a particularly serious problem for people with disabilities. On the basis of the review of coverage earlier in this chapter, the committee proposes more limited, albeit expensive, policy changes related to the SSDI-Medicare waiting period, incentives for work, and interruptions in SCHIP coverage. Chapter 9 includes additional recommendations related

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The Future of Disability in America to coverage for assistive technologies and personal care services. It also suggests the value of formally monitoring changes in the Medicaid program that may negatively affect beneficiaries with disabilities. Recommendation 8.2: To improve access to health insurance for people with disabling or potentially disabling health conditions, the U.S. Congress should adopt a phased-in or selective elimination of the 24-month waiting period for Medicare eligibility for people who have newly qualified for Social Security Disability Insurance; encourage continued testing of methods to reduce disincentives in public insurance programs for people with disabilities to return to work; and direct states to limit recertification and reenrollment for the State Children’s Health Insurance Program to no more than once a year for children with disabilities. Members of the U.S. Congress have introduced various proposals to reduce or eliminate the 24-month waiting period for all or some SSDI beneficiaries (e.g., terminally ill individuals or those with conditions that could prove fatal without treatment) (see, e.g., Whittaker [2005]). Most recently, in 2001, Congress authorized an exception for people with amyotrophic lateral sclerosis (PL 106-554). The primary current obstacle to the complete removal of the 24-month waiting period between the start of SSDI benefits and Medicare eligibility is cost. Dale and Verdier (2003) estimated that elimination of the waiting period at the start of 2002 would have cost Medicare $8.7 billion that year (for those qualifying on the basis of their own work records, in 2000 dollars). Some offsetting federal (and state) savings would accrue in the Medicaid program, but the estimated $2.5 billion in federal Medicaid savings would not offset the additional federal costs (the net cost to Medicare would thus have been $6.2 billion). Short of eliminating the waiting period, the Social Security Administration is conducting demonstration projects that would allow the agency, under certain circumstances, to provide medical benefits to people in the waiting period and, in some situations, to provide benefits to SSDI applicants (SSA, 2006d). For example, the Accelerated Benefits Demonstration project will provide immediate health benefits to new SSDI beneficiaries who have medical conditions that are expected to improve or that might improve if they obtain appropriate medical care. The project will also include employment supports. A primary objective of the demonstration is to help individuals improve their health and functioning enough that they might “improve their self-sufficiency through employment” (SSA, 2006d). The agency is considering another demonstration project that would pro-

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The Future of Disability in America vide interim medical benefits to certain applicants for SSDI who have no insurance, whose health would likely improve with treatment, and for whom additional medical information would assist the disability adjudication process. The committee strongly encourages the agency to pursue these demonstration projects and other strategies that would help reduce the features of the program that discourage work and thereby undermine the goals of independence and community participation that are the hallmarks of modern disability policies. Nonetheless, these approaches will affect only a subset of individuals, a subset that is likely to have the best chance of recovery, and will exclude the most vulnerable. In the absence of a complete phase out of the waiting period, the Congress could consider the expanded use of exceptions or other strategies that would target particularly vulnerable groups. The Congress has created some options for states to provide Medicaid coverage for certain low-income people with disabilities who have qualified for SSDI or SSI but who can work (Lopez-Soto and Sheldon, 2002; Teitelbaum et al., 2005). For example, among other provisions, the Ticket to Work and Work Incentives Improvement Act of 1999 enhances earlier legislation that allows states to continue Medicaid benefits for individuals with disabilities who enter or reenter the workforce and who meet certain income and asset criteria. Eligible individuals may, however, have to pay premiums (“buy in”) or cover other costs (e.g., make copayments for services). The legislation also extends to 8.5 years the period of premium-free Medicare Part A coverage for people receiving SSDI who return to work. As useful as these federal and state programs may be for some people, they lack the reach of federal and state policies that have extended insurance coverage for children. It is important that policy makers continue to develop and evaluate policies that remove or reduce economic and other barriers to work for people with disabilities, including barriers related to eligibility requirements for public insurance. Notwithstanding the successful expansion of health insurance for children through the SCHIP program, interruptions in coverage are a problem in this program. As discussed earlier in this chapter, studies have identified administrative practices that increase such interruptions, in particular, requirements for active recertification and reenrollment every 6 months. Requiring recertification no more often than every 12 months would reduce administrative barriers to continuing enrollment in SCHIP of children with disabilities or special health care needs. As noted above, Chapter 9 includes recommendations related to Medicare and Medicaid coverage for assistive technologies and personal care services. In addition, it cites examples of troubling and complicated actions taken by state Medicaid programs that may seriously affect people with disabilities, even when protections for this group supposedly exist.