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OCR for page 150
8
The Financing of Health Care Services
for the Elderly
INTRODUCTION
Spending on health care services for the elderly has been increas-
ing since 1965; between 1977 and 1984 it increased at an annual rate
of 14.5 percent (Waldo and Lazenby, 1984~. The increase in expen-
ditures is reflected in the increasing cost to the federal and state
governments of operating the Medicare and Medicaid programs as
well as in the increase in out-of-pocket payments made by the elderly.
As a consequence, health care financing has become one of the more
critical policy issues to be addressed by the nation.
The methods used to finance health care services have important
effects on the use of health care services by the elderly and their level
of health and well being, as well as on the growth and development of
the health care sector itself. In addition, the methods used to finance
health care services influence the distribution of income between the
sick and the well, the old and the young, the general taxpayer and
the recipients of care.
Many types of data are required to provide a factual basis for pol-
icy issues related to the financing of health care services for an aging
population. Although a policy issue is seldom resolved by using only
data from a national information system, such data are frequently
used to address some elements of a policy issue. For example, in
the list of policy issues that follows, the first would probably require
an evaluation study, but Medicare records could provide historical
information on the cost of the fee-for-service systems and the HMOs.
150
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THE FINANCING OF HEALTH CARE SERVICES
151
To address the second issue, data from the National Medical Expen-
diture Survey could be used to identify the most costly of the various
chronic illnesses and help to limit the illnesses to be addressed by the
policy analyst. Selected emerging policy questions that need to be
addressed follow:
.
.
Will health maintenance organizations, social health mainte-
nance organizations (SHMOs), and preferred provider organi-
zations (PPOs) serve as less costly alternatives to the current
fee-for-service system?
How can we control expenditures for health and long-term
care in the face of the projected growth of the elderly who
are at risk of chronic illness often requiring extensive medical
and long-term care services? Will people have to do without
medical care?
What aspects of the growing health needs of an aging society
are most affected by the pressures to constrain budgetary and
economic resources devoted to health care?
What mechanisms are needed to share the burden of health
care expenditures for an aging society more equitably among
ad members of society?
What is the ~rnpact of the Medicare prospective payment sys-
tem based on diagnosis-related groups on providers, patients,
expenditures, and access to and quality of care?
With the growing financial burden of out-of-pocket expendi-
tures for certain groups of the elderly who are disabled and
require extensive treatment, what are the alternative equi-
table financing mechanisms to pay for these services?
What alternative financing mechanisms for the supply of long-
term care services should be supported and by whom?
What changes in funding mechanisms, legislation, and public
policy are necessary to shift the emphasis away from hospital
and nursing home care toward less costly alternatives?
Can less costly and less restrictive alternative services to in-
stitutionalization be developed to maintain the independence
of the elderly? Can economic incentives be developed for in-
home and community-based services to maintain the elderly
at home?
What is the viability of tax credits, reverse mortgages, in-
dependent retirement accounts, and the like in assisting the
elderly to pay for a greater share of their health and long-term
care costs? Are there other private-sector alternatives?
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152
AGING POPULATION IN THE TWENTY-FIRST CENTURY
.
What are the costs (direct and indirect) of chronic illnesses
such as Alzheimer's disease and what are the implications of
helping to meet those costs through public funding?
To what extent is there an emerging intergenerational in-
equity with the aging of the baby boom generation Amer-
icans born between 1946 and 1964 and low fertility rates in
which a smaller number of the working population will bear
the burden of support of the larger number of retired elderly
beginning about the year 2010?
This section of the report focuses on specific aspects of the
financing of health care services for the elderly population. First, it
describes the major public programs that cover health care services
for the aged as well as the other sources of funding for health care.
Since many of these programs are undergoing significant changes, the
direction of that change is outlined. Next it presents information on
the level of expenditures and source of payment by type of service for
the aged, including the distribution of expenditures across the aged
population. Data needs and recommendations are presented with
reference to the policy issues emerging from the current proposed
changes in financing mechanisms.
Sources of llunding
In describing the current methods of financing care for the el-
derly, it is appropriate to begin with a brief description of the public
programs, in particular Medicare and Medicaid. These are the most
important sources of funding, and the structure of these program
affects the nature of the insurance policies that are offered by the
private sector.
Medicare
Approximately 95 percent of all people age 65 and over in the
United States are covered by the Medicare program. Medicare con-
sists of two separate but complementary programs: Hospital In-
surance (HI) for services furnished in hospitals, in skilled nursing
facilities, and by home health agencies; and Supplementary Medical
Insurance (SMI) for the services of physicians, home health visits
(for people who may not be covered by HI), outpatient services, and
the costs of durable medical equipment and prostheses. Coverage
for outpatient mental health services is very restricted. In addition,
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THE FINANCING OF HEALTH CARE SERVICES
153
some services frequently used by the elderly, such as outpatient drugs,
dental services, and eyeglasses, are not covered.
The Medicare program was explicitly designed to cover the major
costs associated with episodes of acute illness or the acute manifes-
tations of chronic illness. The extent to which the program actually
pays for services such as skilled nursing facilities and home health,
usually considered long-term care services is therefore very limited.
People are automatically enrolled in HI within a short time of
reaching their sixty-fifth birthday. The costs of HI are covered by
Social Security payroll taxes paid into a trust fund by employers and
employees. Enrollment in SM} is contingent on paying a premium
that covers about 25 percent of the cost. There is some beneficiary
cost sharing on Medicare-covered services. The cost-sharing provi-
sions were included in the original legislation both to control federal
budget expenditures as well as to deter unnecessary utilization. The
actual cost-sharing provisions are complicated and vary from service
to service.
When Medicare was first enacted, the Congress incorporated into
the program many of the standard features of the Blue Cross/Blue
Shield plans that were then the dominant form of private health
insurance. The most important features were beneficiary freedom
of choice of providers, cost-based reimbursement of institutional
providers, and fee-for-service reimbursements based on reasonable
charges for physicians' services. With the exception of long-term
care services, there were few limitations placed on the use of covered
services. There were no incentives for hospitals to control costs and
no rewards for improving efficiency. The reimbursement provisions
are currently undergoing major changes. In 1982, changes were made
in the law to stimulate the enrollment of Medicare recipients into pre-
paid group practices; in 1983 the cost-based reimbursement system
for hospitals was replaced with a prospective payment system under
which hospitals are paid a fixed amount for taking care of patients
based on their discharge diagnosis. In 1985 the Reagan administra-
tion proposed replacing the current physician reimbursement system
with a fee schedule. The federal government is also evaluating ways
for bringing other providers of care under prospective payment (Davis
and Rowland, 1986:Chapter 3~.
Between 1977 and 1984, payments for services under Medicare
increased at an annual rate of 17.3 percent per year. By 1984 Medi-
care expenditures for the elderly amounted to $58.5 billion, making
it the third largest federal program (Waldo and Lazenby, 1984~. As
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154
AGING POPULATION IN THE TWENTY-FIRST CENTURY
a result of the rapid escalation in the cost of the program, the reim-
bursement changes outlined above were made. In addition to those
changes, the administration and Congress are seeking other ways of
lowering the costs of the program, such as increasing the cost-sharing
requirements, changing the age for eligibility, increasing the premium
costs, making Medicare the second payer for those who are employed
and eligible for employer-provided health insurance, increasing Medi-
care enrollment in HMOs, and changing the Medicare program to a
voucher program. (This description of the Medicare program and
the following discussion of Medicaid are based heavily on Sawyer et
al., 1983.)
Medicaid
Medicaid, a program to provide medical services to the poor, is
administered by the states under federal guidelines. With respect to
the elderly, Medicaid pays for the medical care for those who meet
Supplementary Security Income (SSI) standards. States have the
option of covering medically needy individuals (those with incomes
slightly above the SST levels) and individuals who have incurred
sufficiently high medical expenditures that they "spend down" to
Medicaid income eligibility levels.
For dually eligible recipients, Medicare ~ the first payer for
Medicare-covered services and Medicaid is the second payer; that is,
Medicaid will pay the cost-sharing amounts that would normally fall
to the patient. Depending on the state's program, Medicaid may
also pay for the cost of services not covered by Medicare, such as
outpatient, drug, optical, and dental services. More important, as
Medicare fulfilled its purpose of covering most of the costs related to
acute episodes, Medicaid has evolved into the primary public funding
source for long-term services for the elderly.
Like the Medicare program, the costs of the Medicaid program
have been increasing at a rapid rate. Between 1977 and 1984, Medi-
caid expenditures on behalf of the elderly increased at an annual rate
of 14.2 percent" largely due to coverage of nursing home care. In
1984, expenditures for the population age 65 and over were approxi-
mately $12.8 billion (Waldo and Lazenby, 1984~. As with Medicare,
there is a concerted effort to reevaluate the structure of the program,
in particular with respect to long-term services, to revise the meth-
ods used to reimburse providers, especially nursing homes, and to
change the income eligibility levels.
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THE FINANCING OF HEALTH CARE SERVICES
155
The Veterans A`l~ninistration
Until recently, all veterans age 65 years and over were eligible for
Veterans Administration (VA) services. A recent law made several
changes in a veteran's eligibility for VA health care regardless of
age, which became effective July 1, 1986. Actual access to health
care services is now determined through an eligibility assessment,
with first priority being given to veterans with service-connected
disabilities or to those who meet a means test known as the category
A means test. These veterans are eligible for hospital care in VA
facilities. Outpatient and nursing home care may be provided in VA
facilities if space is available. Veterans with nonservice-connected
disabilities and with income above the category A means test but
below a higher level, known as the category B means test, may
receive hospital, outpatient, and nursing home care in VA facilities
if space is available. Veterans with nonservice-connected disabilities
and with income above the category B means test may receive VA
services if space is available, but they must agree to pay a deductible
amount for care equivalent to the payment that would be required
by Medicare. In addition to the VA-owned and operated facilities,
which include hospitals and their associated outpatient departments
and nursing homes, the Veterans Adrn~nistration contracts for skilled
and intermediate care at community nursing homes on a per diem
basis. However, with the exception of care provided to veterans with
service-connected disabilities, the VA will not pay for more than 6
months of care in community facilities. In 1984, $3.3 billion was
spent for health care of aged veterans.
The actual use of the VA system by elderly veterans is contin-
gent on the characteristics of the elderly that define eligibility, the
availability of VA-owned facilities, and the access to the private sec-
tor by VA eligibles. Since most veterans are covered by Medicare,
the service that is likely to be most attractive to the older veteran
is nursing home care. However, the main factor that will influence
the veteran's use of nursing home services is the number of nursing
home beds available within the VA system. Before July 1986, ap-
prox~mately 10 to 12 percent of elderly veterans actually used the
system (U.S. Congressional Budget Office, 1984~. This number may
change as a result of the current and proposed changes in Medicare
ancI the new eligibility procedures for VA health care.
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156
AGING POPULATION IN THE TWENTY-FIRST CENTURY
Other Government Programs
There are a number of other programs that have been developed
to finance health care expenditures for the elderly. Included are
the Department of Defense Civilian Health and Medical Program of
the Uniformed Services, which provides care for active and retired
military forces and their dependents, state and local government
hospitals providing community and psychiatric hospital services to
older citizens, federal grant programs, and state and local public
assistance programs providing services that are not eligible for federal
matching funds under the Medicaid program. In 1984, a total of $3.4
billion was spent for the elderly by government programs other than
Medicare, Medicaid, and the VA.
Private Insurance Progr~'ns
There are a number of private insurance policies that have been
specifically designed for the elderly. In general, most of these policies
fill the gaps in Medicare-covered services, such as the coinsurance
and deductible provisions, rather than extending insurance protec-
tion against uncovered services such as long-term care services or
outpatient drugs (Rice and McCall, 1985~. With the projected large
increase in the number' of people age 65 and over, especially those
age 85 and over, there is increased interest in finding mechanisms
for stimulating the development of private insurance coverage for
long-term care services (Meiners, 1985a).
Of the noninstitutionaTized elderly, approximately 65 percent
have private policies that supplement Medicare, 10 percent are cov-
ered by Medicaid, 20 percent are covered by Medicare only, and
4 percent had some other form of coverage (Garfinke! and Corder,
1984~. Among the elderly not eligible for Medicaid, those who are
better educated, have higher incomes, and are in slightly better
health are more likely to purchase a supplemental health insurance
policy.
Expenditures on Health Care
In 1984, personal health care expenditures for the elderly amoun-
ted to $119.9 billion, or $4,202 per person age 65 and over (Waldo
and Lazenby, 1984~. Of this total, 25.2 percent was paid by the
consumer directly, 7.2 percent through private insurance, 48.8 per-
cent by Medicare, 12.8 percent by Medicaid, and 5.6 percent by
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THE FINANCING OF HEALTH CARE SERVICES
TABLE 8.1 Health Care Expenditures for the Noninstitutionalized Elderly,
1980 (percentage)
Proportion of
Health Care Noninstitutionalized Proportion of
Expenditures Elderly Expenditures
Less than $500 60 6
$500-$3,000 26 19
Over $3,000 14 75
Source: Ko~rar (19863.
157
other government programs, primarily the Veterans Administration.
However, these averages mask the wide differences in the funding
sources for different types of medical services. The extremes are rep-
resented by sources of expenditures on hospitals and nursing homes.
In 1984, hospital expenditures for the elderly amounted to $54.9 bil-
lion ($1,900 per capita) of which 3.1 percent was paid by the patient
directly, 7.9 percent through private insurance, 74.8 percent by Medi-
care, 4.8 percent by Medicaid, and 9.1 percent by other government
programs. Nursing home expenditures in the same year amounted
to $25.1 billion ($880 per capita), of which 50.1 percent was paid for
by the patient directly, 1.1 percent by private insurance, 2.1 percent
by Medicare, 41.5 percent by Medicaid, and 4.4 percent by other
government programs (Waldo and Lazenby, 19843.
Since the elderly population is heterogeneous, average expendi-
tures provide an incomplete picture of the cost of illness and the
sources of funding. For example, consider the 1980 National Medi-
cal Care Utilization and Expenditure Survey expenditures data for
three groups of the noninstitutionalized elderly: the "low-cost" users,
those with expenditures less than $500, "medium-cost" users, with
expenditures between $500 and $3,000, and the "high-cost" users,
those with expenditures over $3,00~0. Although these categories are
somewhat arbitrary, they help to establish the well-known fact that
health care expenditures are concentrated on a small number of sick
people. As shown in Table 8.1, only 14 percent of the noninstitu-
tionaTized elderly had health care expenditures over $3,000, but they
accounted for 75 percent of total expenditure of health care services
made on behalf of the elderly.
Five percent of the elderly in the survey were institutionalized
or died during 1980. Expenditures for this group emphasize even
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158
AGING POPULATION IN THE TWENTY-FIRST CENTURY
more strikingly the concentration of dollar costs for the seriously ill.
During the part of the year that these persons were in the community,
they accounted for 22 percent of the total health care expenditures
for the elderly.
As noted earlier, the share of expenditures paid directly by the
consumer also varied by the nature of the health care received. El-
derly persons who were not hospitalized paid, on average, 67 percent
of their medical care charges, while the elderly who had been hospital-
ized paid 18 percent. Because the total hospital charges are high, this
out-of-pocket charge for the hospitalized group was about $650, while
the nonhospitalized paid $202 (Kovar, 1986~. It should be stressed,
moreover, that these numbers conceal differences in out-of-pocket li-
ability for the institutionalized population. People in nursing homes,
who incur large out-of-pocket expenditures- because both the cost
of the service is so high and insurance is so limited are not included
in the National Medical Care Utilization and Expenditure Survey,
the source of the above data.
The EYai] Elderly
One group of elderly that is receiving considerable attention are
those with potential needs for long-term care services- the frail and
dependent elderly. In 1982 approximately 19 percent of the elderly
age 65 and over (4.6 million people) needed help in activities of
daily living or in instrumental activities of daily living, and the size
of this group will increase with the aging of the population (Liu
et al., 1985~. We actually know very little about the total cost
of care for this population: they represent such a small part of the
general population that they have not been adequately represented in
national household surveys (such as the 1977 National Medical Care
Expenditure Survey and the 1980 National Medical Care Utilization
and Expenditure Survey), the major sources of information on the
distribution of health care services across the aged population.
This group is of particular interest because there is currently
limited public and private insurance to help them meet the cost of
long-term care services and because it is believed that fostering home-
based care may over a cost-effective alternative to nursing home care.
Thus, one major health financing issue is the extent to which public
insurance programs should support home-based programs.
This is a very complicated issue because most of the home care
services received by this group of people are provided by family
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THE FINANCING OF NE24LTN CARE SERVICES
159
members or by members of the helping organizations. In fact, ap-
proximately 72 percent of the services rendered are provided by
family members (Liu et al., 1985~. Although the use of formal (i.e.,
paid for) services increases with the level of disability, 65 percent of
people with many limitations in activities of daily living relied solely
on informal care (Liu et al., 1985~. The current extensive use of
unpaid health care makes it very difficult to design a public financing
program for health care services that will encourage the efficient sub-
stitution of home-based services for nursing home services, because
any such program is also likely to lead to a substitution of services
provided by the family or already paid for by the individuals or their
families for publicly funded home care services.
Thus in evaluating proposals to change the financing of long-term
care services for the elderly, data are needed to assess the extent that
financing mechanisms will lead to an increase in the use of services or
to a substitution of publicly funded services for services previously
provided by the family free of charge or paid by the individuals and
their families If new services are used, to what extent will they act
as complements or as substitutes for nursing home care? In addition,
what is the effect of the use of new services on the health status of
the elderly, to what extent do these services lead to an increase in
their quality of life, and what is the effect of this new financing on
the proportion of the family's income that is spent on health care?
Future Changes
All aspects of health care financing programs are currently being
reevaluated: program eligibility, in particular the extent to which
income and assets should determine access to public programs; ap-
propriate roles of public versus private sources of funding; the scope
of the covered services, appropriate levels of beneficiary cost sharing;
the level and basis of payments to providers; the level of quality of
care that should be guaranteed by public funds; and the types of
services to be promoted by public funds.
As the organization, delivery, and financing of medical care ser-
vices are changed, we need data that will allow us to address the
following questions: How do the changes affect the cost of care, the
distribution of the burden of paying for the care across public and
private sources of funding and among individuals, and the health
status and quality of life of the elderly?
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160
AGING POPULATION IN THE TWENTY-FIRST CENTURY
DATA REQUIREMENTS
In order to develop and guide policy for financing health care
for the elderly and to monitor the impact of changes in such financ-
ing, it is necessary to have a variety of data, including person-based
survey data, administrative record data, and actuarial data. Survey
data should include information on health status, income, assets,
medical care expenditures, and sources of payment for medical care.
Data need to be sufficiently detailed so that reliable statistics can
be created for the most vulnerable of the elderly the frail elderly,
low-income elderly, and minorities. This information should be col-
lected on both people residing in institutions and people living in the
community.
Additional data that are useful in the analysis of financing med-
ical care services are the administrative records of the Health Care
Financing Administration, the Social Security Administration and
the Internal Revenue Service. These data are by-products of admin-
istering large programs, and their statistical systems are reasonably
inexpensive. There are two major constraints impeding the useful-
ness of these data for policy purposes. The first is that the agencies
do not have adequate staffs to analyze the data, a fact that results in
significant lags in the production of data and analyses. This problem
is likely to become more acute over time. The second is that there
are many restrictions imposed on making public use of data tapes, a
subject that is discussed in more detail in Chapter 11.
Actuarial data from private insurers are also needed for estab-
lishing the costs of alternative Tong-term care policies. Minimal data
are available on costs and utilization of long-term care insurance,
and very little of the data reflects actual experience. A further com-
plicating factor is that private insurers are reluctant to share their
limited data bases to enable the development and marketing of long-
term care insurance. Although the number of companies providing
long-term care insurance is growing, there is also active discussion
of federal coverage of Tong-term care costs for the population not
covered by Medicaid.
Timely Data on Expenditures for the El(lerly
The Health Care Financing Administration periodically pub
fishes data on health care expenditures of the population age 65 and
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THE FINANCING OF HEALTH CARE SERVICES
167
primarily to assist with administration and monitoring of the Medi-
care program. In order to make the Medicare administrative data
more accessible and less costly for research use, a new file has been
designed the Medicare Automated Data Retrieval System. The
MADRS is intended to reorganize and merge Medicare Part A and
Part B claims files to shorten search time. Beginning with the 1982
data year, this file will contain all Medicare claims data and patient
provider identifiers. The claims records in the Medicare files will be
sorted first by year of service rendered, next by geographic region of
residence of beneficiaries, and then by the health insurance number
of the beneficiaries. It will be possible to create a longitudinal file
for cohort analysis by combining data in the annual files (Office of
Technology Assessment, 1985a, Appendix E:199; I,ichtenstein et al.,
no date; National Research Council, 1986~.
The MAD RS file will enable researchers to identify groups of
special interest and analyze them by age, sex, and/or admitting di-
agnosis, for example, and examine the care they have received over
time. The development of the Medicare Automated Data Retrieval
System is a positive step toward facilitating the analysis of Medi-
care data, thus gaining a better understanding of health services
utilization trends among the elderly.
Recommendation 8.7: The pane! recommends that the
Health Care Financing Administration develop files designed
for easy access to the Medicare Statistical System, including
the Medicare Automated Data Retrieval System, that would
facilitate use by researchers for policy analysis related to the
Medicare program.
Making data from administrative records available to researchers
would be expected to result in information useful to both program
agencies and policy makers. The Health Care Financing Administra-
tion should develop new approaches to improving access by nonfed-
eral users, such as interns and postdoctoral fellows. More use should
also be made of the Intergovernmental Personnel Act of 1970, which
provides for agreements between federal agencies and state agencies
for assignment or exchange of personnel for a specified period. Such
exchanges are usually beneficial to both agencies.
Recommendation 8.8: The pane! recommends that the
Health Care Financing Administration complete the devel-
opment of the Medicare Automated Data Retrieval System
and maintain it on a current basis.
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168
AGING POPULATIONIN THE TWENTY-FIRST CENTURY
The Health Care Financing A`lm;nistration Data System for Capi-
tation
An alternative to fee-for-service reimbursement types of insur-
ance is payment on a per capita basis without regard to the volume
or type of service. HMOs have been the major systems that charge
a fixed monthly fee (capitation fee) to cover all services except for
small copayments. With the passage of the Tax Equity and Fiscal
Responsibility Act (TEFRA) in 1982 and the issuance of regulations
to implement the HMO provisions of TEFRA in January 1984, the
number of HMOs participating in Medicare is expected to grow, as
is the number of Medicare enrollees in HMOs. There are currently
over 1 million Medicare beneficiaries in HMOs (i.e., prepayment for
services). Historically, the Medicare Statistical System has provided
summary data on beneficiary demographics and extensive data on
the use and costs of Medicare benefits on both the beneficiary level
and on the level of institutional providers (hospitals, skilled nursing
facilities, home health agencies, hospital outpatient departments).
The data have been used for program administration, monitoring,
and evaluation. However, the use and cost data are by and large
derived from claims for payment of service. Capitated payment sys-
tems such as HMOs are paid an overall capitation amount by HCFA
so there is no transaction record to describe services rendered and
payment made. As more beneficiaries leave the fee-for-service sector,
the information gap on use of services will grow.
Data will be needed from HMO s to monitor the care received by
beneficiaries of public programs and to gather information required
for setting and evaluating capitation rates. The pane! recognizes
that, in some cases, HMOs may have to establish new data systems
to obtain such information. HCFA will need data from HMOs to
address a number of issues, differences in patterns of care by plan
type, access to specialty services, and monitoring the appropriateness
of payment formulas for HMOs. Some of these issues are common
to the fee-for-service sector, but others, such as biased selection, are
unique to capitation.
Recommendation 8.9: The pane] recommends that the
Health Care Financing Administration develop a data sys-
tem for information on Medicare beneficiaries in capitated
systems that is beneficiary-based, able to accommodate dif-
ferent types of capitated plans, reflect differences in services
offered and in cost sharing, and utilizes uniform and consis-
tent data definitions and formats among different types of
plans.
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THE FINANCING OF HEALTH CARE SERVICES
169
This recommendation complements the more general Recornmenda-
tion 9.1 to modify national health data systems to reflect changing
patterns and sources of service delivery.
Disability-Medicare Linked File
The long-term effects of disability are an important component of
functional limitations in the older population, medical care, utiliza-
tion, and expenditures. The Social Security Administration, which
administers the Disability Insurance program, maintains a Continu-
ous Disability History Sample, a file stratified by state and including
from 5 to 20 percent of each state's newly disabled individuals who
have been determined to be eligible for future benefits awarded to
the disabled population. The disabled are eligible for benefits un-
der the Medicare program two years after the disability insurance
award is made. In 1983, Medicare per capita expenditures for the
disabled ($1,900) at ages under 65 (excluding persons covered un-
der the End Stage Renal Disease program) were higher than for the
elderly ($1,724~. The Medicare disabled, as a group, accounted for
about $5.5 billion of a total $57.4 billion, for the entire Medicare
program (Health Care Financing Administration, 1985a). As the
disabled population ages, they will constitute a significant subgroup
of the elderly population requiring considerable medical care out-
lays. The Medicare experience of the disabled population under age
65 should be analyzed as a basis for forecasting their medical care
utilization patterns and future Medicare outlays when they become
65 and older.
HCFA has developed a file detailing the Medicare experience for
1977-1981 for the cohort of persons becoming entitled to disability
benefits in 1972. Utilization and expenditures for Medicare-covered
services can thus be related to the diagnosis or type of disability that
justified the disability award. Analyses of the linked file is now under
way. When it is completed, it can serve as a baseline for a more
current study, using the population entitled to disability benefits in
1980 linked to 1982-1986 data.
Recommendation 8.10: The pane! recommends that stud-
ies of the Continuous Disability History Sample linked to
Medicare files be fully supported jointly by the Health Care
Financing Administration and the Social Security Admin-
istration and that a public use tape be prepared for this
linked file with identifiers deleted as necessary to comply
with confidentiality requirements.
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170
AGING POPULATION IN THE TWENTY-FIRST CENTURY
Data for Policy Analysis of the Prospective Payment System
In 1983, HCFA introduced the prospective payment system
(PPS) for reimbursing hospitals treating Medicare patients. Each
discharged patient is classified into one of 468 diagnoses called
diagnosis-related groups based on the information on the hospital
bill. The hospital is paid the fixed predetermined amount for that
DRG.
Implementation of the prospective payment system has resulted
in shortening the average length of stay for Medicare patients. Stud-
ies are under way to determine whether patients discharged under
PPS were not yet ready for self-care and, if so, where they obtained
needed care. The HCFA hospital bill includes items for patients
discharged to home under care of organized home health services,
discharged to skilled nursing home or to intermediate nursing fa-
cility, in addition to the items on the Uniform Hospital Discharge
Data Set (UHDDS): routine discharge, left against medical advice,
discharged to another short-term hospital, discharged to a long-term
care institution, died, and not stated.
The original Uniform Hospital Discharge Data Set was promul-
gated by the secretary of the Department of Health, Education, and
Welfare in 1974. The additional detail for "Disposition of Patient"
has been made part of the Uniform Bill required for each hospital
discharge by HCFA.
The UHDDS was reviewed without change in 1980 (U.S. Depart-
ment of Health and Human Services, 1980c) and by the Health Infor-
mation Policy Council in 1984 (Federal Register, July 31, 1985:31038-
9~. The council review served to clarify some categories and defini-
tions but did not add more detailed categories to "Disposition of
Patient." More detailed information, similar to that on the Medicare
billing form, could be useful in studying length of hospital stay in con-
junction with diagnostic information (including multiple diagnoses)
and severity of illness. Diagnostic information is available in hospital
bill reports, which provide for up to five diagnoses for each discharge,
and in the National Hospital Discharge Survey, which provides for
seven. Severity of illness information is not available currently for
analysis.
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THE FINANCING OF HEALTH CARE SERVICES
Recommendation 8.11: The pane! recommends that the
National Committee on Vital and Health Statistics recon-
sider the Disposition of Patient items on the Uniform Hospi-
tal Discharge Data Set with reference to the changing data
needs resulting from implementation of the prospective pay-
ment system.
Medicaid Data
171
The Medicaid program is unlike the Medicare program, in which
data are available on the individual elderly or disabled and his or
her use of medical care services. Medicaid is administered by the
states, and HCFA does not receive any person-level data on Medicaid
eligibles, recipients, or payments made for their medical services.
The lack of detailed and uniform administrative data has limited
evaluation of the program at the national level.
The Medicaid Tape-To-Tape Project was initiated to expand
HCFA's ability to collect data to analyze the Medicaid program. The
main data base consists of 100-percent data from five participating
states (California, Georgia, Michigan, New York, and Tennessee) in
uniform codes and formats. These states cover about one-third of
the national Medicaid population. States send HCFA their Medicaid
Management Information System (MMIS) tapes, which are edited
into a comparable format for analysis. Uniform files are produced
for each participating state and year. Separated files are maintained
for enrollment, claims, and provider data. Claims, provider, and
reimbursements can be linked to the Medicaid enrollee who received
the service and to the provider who furnished it. The 1980-1982 data
from the five participating states have been collected and uniform
files completed; 1983-1984 data from participating states are being
collected at this time.
The tapes prepared by HCFA contain utilization and expendi-
ture information on all Medicaid enrollees in the five participating
states. The tapes include four different person identifiers on each
enrollee, making it possible to link the data with other data sets
and national surveys. Experimental studies conducted inside and
outside the Health Care Financing Administration-some of which
have involved elderly utilization patterns have yielded high match
rates. In addition, for that portion of elderly Medicaid users who
are also enrolled in Medicare in these five states (a subset of the
"dually eligible" elderly), it has also been found that their Medicaid
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172
AGING POPULATION IN THE TWENTY-FIRST CENTURY
and Medicare records can be reliably linked, with match rates as
high as the high 70s to the low 90s (personal communication, David
Baugh, Health Care Financing Administration). HCFA staff are cur-
rently working on linking the Medicaid tape-to-tape records to the
Medicare files.
Recommendation 8.12: The pane! recommends that the
Medicaid Tape-to-Tape Project be continued, and that the
Health Care Financing Administration continue to conduct
studies on utilization patterns and expenditures of the el-
derly using this data base and create sample files and public
use tapes for use by outside researchers.
HCFA has undertaken a project to modernize the agency's infor-
mation system called Project to Redesign Information System Man-
agement (PRISM) (Health Care Financing Administration, 1985b).
The first stage, development of the system's design concept, was
completed in April 1985. Implementation of the entire system is
projected for installation by the end of fiscal 1989. Among its goals
are increased support of the Medicare/Medicaid Statistical Systems.
Completion of PRISM wiD facilitate implementation of the panel's
recommendation.
Medicaid Eligibility Quality Control System
The Medicaid Eligibility Quality Control system (MEQC) was
designed to ensure that public funds are spent only on behalf of people
who are eligible under federal and state law. It is concerned with
identifying ineligible people enrolled in Medicaid and with payments
made in error to providers on behalf of those persons. State-leve]
samples are drawn monthly from the Medicaid population in both
civilian and institutionalized settings, using the Medicaid case as the
sampling unit. The sample cases are checked for errors.
In 1982, the federal agencies responsible for the AFDC, Medicaid,
and Food Stamps programs completed a seven-year effort to design
a single form: the Integrated Quality Control System (IQCS) form
for use In all programs. Although the medical claims may not be
useful because they are added together for the entire case and are
not collected on a person-by-person basis, there are other valuable
data on the form, such as demographics, detailed income and assets,
employment, occupation, spend-down amounts, insurance coverage,
utilization, diagnoses, and types of services. The ~QCS forms are
used extensively by the research units in the AFDC and Food Stamps
programs, but HCFA does not use them for research.
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THE FINANCING OF HEALTH CARE SERVICES
173
The pane! recognizes that the MEQC system may have potential
for research purposes. A national data base on Medicaid cases could
be constructed from the re-review sample (a subsample of the {QC
sample), which might be less costly than other alternatives, such as
sample surveys of individuals and their associated claims or obtaining
the entire claims files. Many issues need to be resolved, and despite
its interesting prospects the pane] is not making a recommendation
on the MEQC system. The National Research Council's Panel on
Quality Control of Family Assistance Programs recently completed a
study of other aspects of monitoring and analytic needs of the MEQC
system (Kramer, 1988~.
Data Resources Required to Study the Medicaid Spend
down Phenomenon
A small group of the elderly have medical expenses that exceed
the coverage provided by Medicare and any private insurance they
may have. These expenses are chiefly incurred for nursing home
services. The costs are high, may continue for years, and are rarely
covered by private insurance. Although many elderly people think
nursing home services are covered by Medicare, they are not. The
Medicaid program is the principal source of public financing for
nursing home care, paying for services provided to the indigent and
the "medically needy" those whose income and assets fall below a
legally defined level.
Many elderly persons deplete both income and assets in meet-
ing their medical expenses. When they have reached the "medically
needy" level, they become eligible for the Medicaid program in the
District of Columbia and in the 30 states that have programs for the
medically needy. Medicaid then covers all their medical expenses,
with few exceptions. Income from pensions or Social Security ben-
efits paid to retired wage-earners who need nursing home care may
support not only the retired person but also the spouse and other de-
pendents. When the source of support for a family must spend-down
to required levels for nursing home care, the fondly may be left with
insufficient income for survival. To revise the legislation for eligibility
for Medicaid to eliminate family hardship, data will be required on
how often spend-down occurs, the amount of out-of-pocket expenses
paid before the Medicaid program takes over, and the effect of the
spend-down on other family members.
There are two sources of data for persons in nursing homes.
One is the National Nursing Home Survey. In 1985, this survey
included an adrn~ssions component that collected data for a sample
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174
AGING POPULATION IN THE TWENTY-FIRST CENTURY
of admissions and was designed to produce estunates on the spend-
down issue.
A second source of data is the Medicaid Quality Control sample.
The sample collects information (among other items) on how eligibil-
ity was established for Medicaid. Information on persons involved in
the spend-down can be compiled for the 5 percent of Medicaid ben-
eficiaries who are in nursing homes and are selected in the Quality
Control sample of 400,000 persons nationwide.
Information about the effect of spend-down on the family may
be obtained from two ongoing surveys. The Survey of Income and
Program Participation in its health care module collects information
on insurance coverage, including Medicare and Medicaid for the
sample household. It should be possible to examine the detailed data
on income and assets in relation to health insurance coverage during
the 2 1/2 year period in which the same pane] remains in the sample.
Changes in coverage and assets could be related. The value of this
data source would be greatly enhanced if the recommendation in
Chapter 10 to increase the size of the sample of persons of age 65
and over is implemented. Sample augmentation would double the
number of those ages 75-84, and 85 and over the ages in which
nursing home admissions are highest.
The NHIS Supplement on Aging, and the subsequent follow-up
through the Longitudinal Study on Aging, will also develop informa-
tion on the family and the individual admitted to the nursing home,
if pane} recommendation 7.3 on a biennial follow-up is implemented.
The pane] reaffirms the need for the expansion of the SIPP
sample of the elderly, and for continuation of the Longitudinal Study
on Aging in order to study the spend-down phenomenon. In addition,
data from the Medicaid quality control data base and from the
Nursing Home Survey should be analyzed for information on this
problem.
Private :[nsurance Data
Although at least 25 companies now offer free-standing Tong-term
care insurance, insurers are reluctant to offer and market long-term
care policies aggressively. Insurance industry representatives point
to concerns about adverse selection, insurance-induced demand, pric-
ing difficulties, and lack of consumer education as barriers to product
development. Some insurers have expressed fear that the open-ended
liability that can result from Tong-term care policies could be finan-
cially devastating to their companies. There is also concern about
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THE FINANCING OF HEALTH CARE SERVICES
175
the long lag time between purchase of policies and payment of sub-
stantial Tong-term costs and that nonmedical, personal services such
as homemaker care and respite care are not insurable.
Insurers also find that actuarial estimates and premium deter-
m~nations for long-term care policies are difficult to make. Minimal
data are available on costs and utilization of long-term care insur-
ance, and very little of the data reflects actual experience. Some
are concerned that problems could occur if only high-risk individuals
are attracted to long-term care insurance. At present, there is no
reliable actuarial mode] applicable to a long-term care policy that
would differentiate the high-risk purchaser from the low-r~sk one and
allow for a variable rate scale.
Private insurance companies are beginning to gain experience
with long-term care insurance. The pane} recognizes the need for
improved data on utilization of covered services, costs, risk manage-
ment, marketing, and the impact of long-term care coverage.
Cost-of-Tllness Data
Cost-of-iliness data play an important role in decision making
regarding the allocation of resources in the health sector. Ilinesses,
such as Alzheimer's disease, that primarily affect the elderly will
require more resources in the future with the growing number of
elderly persons who may be at risk. Alzheimer's disease, affecting
an estimated 1.5 million Americans, has become a major priority
for federal research organizations (e.g., the National Institute on
Aging, the National Institute of Neurological and Communicative
Disorders and Stroke, and the National Institute of Mental Health).
Many other diseases and impairments that affect the elderly include
heart disease, cancer, arthritis, stroke, as well as visual and hearing
impairments.
In addition to data on prevalence, incidence, and use of medical
care and long-term care services for the elderly suffering from these
and other conditions, the costs of these conditions are needed by
policy makers, health planners, and researchers to set priorities,
make program policy decisions, and prepare and deliver congressional
testimony to support program policy decisions and agency budgets.
The economic costs of illness represent the monetary burden
on society of illness and premature death. They represent foregone
alternatives and are measured in terms of the direct and indirect
costs. Direct costs are the value of resources that could be allocated
to other uses in the absence of disease, and indirect costs are the
value of lost output because of cessation or reduction of productivity
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176
AGING POPULATION IN THE TWENTY-FIRST CENTURY
due to morbidity and mortality. Morbidity costs are lost wages for
people unable to work due to illness and disability and an imputed
value for those persons too sick to perform their usual housekeeping
services. Mortality costs are the present value of future earnings lost
for people who die prematurely, employing discounting to convert a
stream of future earnings into present values.
Total economic costs of illness in 1980 amounted to $455 billion
based on a 4 percent discount rate of the value of productivity
foregone in succeeding years as a result of premature mortality in
that year. The elderly (persons age 65 and over) comprised 11.3
percent of the total population In 1980 and 18.2 percent of the total
economic costs (Rice et al., 1985~.
The rankings by major diagnostic category of the economic costs
of illness vary substantially by age. For the population under age 65,
the medical condition that ranks highest in economic costs is "injury
and poisoning," costing $78 billion, accounting for 21 percent of the
total for this age group, and reflecting the relatively high value of lost
productivity for the large number of premature deaths at younger
ages from this cause. Diseases of the circulatory system rank second
in economic costs for persons under age 65, representing 15 percent of
the total. For the elderly, the economic costs of diseases of circulatory
system far outrank all other diseases, amounting to $29 billion, or 35
percent of the total. In second place are neoplasm, constituting 11
percent of total economic costs for the elderly.
These cost-of-illness est~rnates are for the major diagnostic cat-
egories and are not disaggregated to specific diseases. There have
been more than 200 separate cost-of-illness studies in the last 20
years (Hu and Sandifer, 1981~. Some of these are national in scope,
but most are limited to a selected population or geographic area, and
all but a few are restricted to one or a few disease categories. Varying
methodologies are used so that the costs of different diseases cannot
be compared.
Estimation of the costs of illness depend to a great extent on the
data available and on the methodologies used. Although the U.S.
Public Health Service has developed guidelines for estimation of the
costs of illness (Hodgson and Meiners, 1982), few studies follow them
rigorously. For the further development of cost-of-illness studies, data
will be available from several surveys including the 1987 National
Medical Care Expenditure Survey, the 1985 National Nursing Home
Survey, the annual National Hospital Discharge Survey, and the
annual National Health Interview Survey. Additional sources of data
are the Medicare, Medicaid, and other public program administrative
records.
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-~c ~ ~~ ^~E ~
Rec_udatlon 8.13: Tbe panel recommends that the
National Center for Herb Servlces Hesearcb, the Oblong
Center far Heabb Stat~tlcs, Id the HeaRb Care Flnanclng
Ad~lnlstratlon continue to collect the detailed data neces-
sary to estimate the economic costs of illnesses, especl~Ry
those ^ctlog the elderly populatlon, and that the Nylons
Center ~r Healtb Servlces Hesearcb support cost-oLlDness
studles uslng =~le guldeUnes ~r uD~rm metbodology.
177
Representative terms from entire chapter:
care financing
