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Health Services


In The United States
The system for reimbursing hospitals both by insurers and
by Medicare has been based on Retrospective Cost Based
Reimbursement(RCBR). This system of reimbursement
encourages hospitals to over charge in order to cover the
costs of the uninsured who utilize the hospital. Charges
have continued to rise year after year eventually putting
the employers at a point where they can no longer afford
the payments. 

For physician reimbursements, both insurers and Medicare
employed the Usual and Customary(U+C) approach. This
practice, which averaged the charges for a procedure in a
region, also encourages doctors to over-charge in order to
raise the average amount paid to them for a procedure.
These two systems, RCBR and U+C eventually started to suck
too much money out of the insurers, employers, and the
Medicare/Social Security trust fund so that interventions
were deemed necessary.
Perhaps the biggest intervention adopted by the private
sector to reduce medical service costs was the trend toward
businesses self-insuring. By doing so, they avoided
state-mandated benefits that were required if they hired a
third-party insurer. In addition, the money was now paid to
claims as they arose rather than prospectively so income
could be earned on this capital as it sat in the bank. 

Other intervention to reduce medical service costs mainly
involved private insurers as it was difficult for small
businesses to self-insure because of low-capitol.
Underwriting was a typical practice of insurance companies;
that is, excluding some employees from coverage if they
have preexisting conditions or if they are employed in
³high-risk² areas. Payment caps are also employed by
insurers as a way to save medical costs. This practice
meant setting limits for the total amount paid for selected

These interventions ultimately led to segmentation in the
insurance market. A shift occurred in the way that insurers
calculated premium charges. Community rating used to be the
norm. It involves placing all beneficiaries into a large
group and projecting their claims. Premiums were then
spread across the entire group as were risks. However, as a
result of the historical hospital and physician payments
schemes, insurers shifted to experience rating. That is, a
rating that bases a group¹s premiums on its experienced
cost. Therefore, by only including low-risk, low-cost
individuals under coverage, premiums for those individuals
may be minimized. This effect leaves small groups behind,
paying much more in premiums.
These interventions mentioned, as well as increased
experience-rating adopted by insurers, and the subsequent
phenomena of market segmentation, have had effects on many
levels of the health care system:
Premiums for small employers have skyrocketed for two
reasons. First, administrative costs for small employers
are proportionally higher than those for larger
firms(Congressional Research Service) and secondly, larger
firms have more market clout and are able to seal the
contracts that provide lower premiums to their employees.
Larger firms are also able to spread the risks of their
insured employees across a larger beneficiary base with
lots of capitol to absorb any abnormality in claims from
one year to the next. Small firms don¹t have this luxury
and as a result their premiums have increased.
As health care costs grew, many larger businesses opted to
self-insure and take the risks of their employees rather
than paying an insurance company to perform this role.
These employers also avoided the state mandated benefits
and could use capital not prospectively paid to earn
It was in the 1980's, when employers were becoming
increasingly concerned about soaring health care costs,
commercial insurers were concerned about the future of
traditional health insurance, and physicians were
increasingly joining health plans to guarantee a steady
flow of customers, that managed care really expanded
dramatically. The number of people enrolled in HMO's in
1976 was 6 million and by 1991 it had reached 38.6 million.
The higher costs of medical care forced different groups
into HMO's for different reasons. Doctors enrolled in HMO's
gave up some autonomy, but were guaranteed a steady flow of
patients. The patients enrolled were guaranteed care for a
fixed monthly premium at the expense of visiting only
providers covered in their plan. 

The draining of the Social Security trust fund by
traditional hospital RCBR method and physicians by U+C for
Medicare was tackled by alternative payment mechanisms. The
traditional U+C payment to doctors was replaced with the
Resource Based Relative Value Scale(RBRVS) 1n 1992. This
system of payment assigned a numerical value to every
procedure performed in order to attempt to objectify what
goes into a physician's service. In this way, the payments
to physicians could be regulated and controlled. 

Hospitals, which were traditionally reimbursed under RCBR
were paid by the Prospective Payment System(PPS) starting
in 1983. Under this system, each episode of illness was
associated with a fixed payment regardless of resources
consumed, time spent, or expenses incurred. All illnesses
were grouped into Diagnostic Related Groups(DRG)
effectively cataloguing hospitalized patients according to
fee payment.
The ever-increasing costs associated with health care
brought along many cost-saving interventions which have
been mentioned. These interventions had effects at all
levels of the health care industry but especially so in
hospitals as they represent 38% of our nation's health
expenditure. Hospital admissions declined sharply as the
new payment schemes for hospitals were introduced in 1983.
Since hospitals were being paid by a PPS system, the
incentive was to get the patients out as soon as possible.
Admitting patients is associated with high costs and
hospitals opted for more outpatient care rather than

This PPS payment structure also influenced the average
length of stay. Hospitals were now encouraged financially
to release patients as soon as possible since they were
reimbursed the same amount regardless of the duration of
the stay. Efficiency was now of paramount concern as a
person sitting in a bed represented a cost that could be
contained if the patient was released sooner than later. It
is no surprise then that occupancy rates for hospitals have
also declined since 1980.
This combination of reduced admissions and shorter length
of stay per visit resulted in few people in hospitals at
any given time. These trends present special problems for
smaller, rural hospitals which have more difficulty
gathering resources, staying technologically current, and
maintaining financial strength. As a result, more and more
smaller hospitals are closing, especially in these rural
The high level of unemployment in the early 1980's along
with stricter eligibility requirements for Medicaid led to
a rise in the number of uninsured individuals in the
U.S.(see diagram 2). Market segmentation beginning in the
early 80's also contributed to the number of uninsured as
those with pre-existing conditions or high-risk jobs were
denied coverage. Because of the highly competitive hospital
market created by payment changes, the incentive to treat
the uninsured is lost and these people are increasingly
marginalized. No longer may hospitals subsidize the
treatment of the uninsured by over-charging employers or
insurance companies.
Many cuts have been proposed by the Republicans in Congress
that aim to trim down the cost of health care. Medicare is
at the root of many of these proposed policy changes. Among
them are increases in co-payments made by beneficiaries,
caps on payments to beneficiaries, a reduction in the
amount paid to beneficiaries per episode of illness, a
holding of the rates of increase for hospitals and doctors
so that if services increase, payments decrease, and
letting the market naturally move people into HMOs. 

These proposed policy changes are likely to effect
hospitals in many ways, some of which are already being
seen. It is likely that hospital admissions will continue
to decline as hospitals have no incentive to admit.
Payments are the same to hospitals whether the treat
outpatient or they admit the patient, so to save money the
natural tendency is to treat with ambulatory or outpatient
care. Even more incentive is present for hospitals not to
admit a patient as the amount paid to them will decrease as
they increase services. OIncentive to not treat¹ is what it
may be called. 

For those that are admitted to hospitals, we will continue
to see a reduction in the number of days each patient stays
in the hospital. The motivation for the hospital to release
the patient persists because of the payment schemes in
place. For the patient who is paying a higher co-payment,
the incentive is also to leave the hospital as soon as they
feel well enough...and sometimes before! What we are likely
to see are increasing numbers of rural hospital closures as
they are unable to survive the drop in hospital visits and
stays. Empty beds mean administrative costs for the
hospital that need to be defrayed by treating people. If
there is nobody to treat, the hospital must inevitably shut

As people continue to move into HMO's to receive some sort
of coverage, hospitals will perhaps see an increase in the
number of visitors at hospitals but they will be required
to receive prior approval for most procedures and the
amount paid to the hospitals will remain the same
regardless of the number of procedures so the incentive to
treat more is lost.
As Medicare cuts continue to prevail, it is likely that
more and more beneficiaries of Medicare will be drawn into
HMO's. Just as this has led to increased market
segmentation in the private-insurance community so would it
lead to the same dynamic in the Medicare community. Those
hospitals or physicians that sign contracts with HMO's will
be securing their patient-base while the HMO will be
cornering more of the hospital/physician market. For those
who are not enrolled in HMO's, their costs will not be
controlled. Higher fees will be the likely result. Since
the Medicare reform proposals pay less per episode of
illness, the patient will be responsible for more of this
increased amount. 

The amount of Medigap payments for Medicare beneficiaries
is also likely to go up as a result of the current Medicare
reform proposals. Medicare will pay less per episode of
illness. If we assume that the charge per episode of
illness will not come down, then the amount that must come
out of the pocket of the beneficiary must increase. This
increase will be a direct result of the cuts to the
Medicare program.
Long-term care in the United States has received much
attention in recent years as the baby-boomers soon will be
the population requiring this type of care. 

For those seeking long-term care there are several options
available with different payments sources for each. They
are briefly outlined here:
Nursing Homes: 

Nursing home care may be provided in different settings
with differing payment options for each. They are consumer
payment-this type of care may include anything qualifying
as daily care for an elderly or mentally-ill patient
requiring long-term care. There is generally a daily charge
rate for the custodial care. Mediacaid covers custodial and
general care once personal funds are depleted. Medicare
covers skilled nursing and skilled therapies following
hospitalization This coverage is limited to 100 days
maximum per episode.
Home/Community-Based Care: 

This type of care consists of skilled nursing care and
therapies, homemaker/home health aid care, high technology
home therapy, and durable medical equipment. 

Consumer bought care may include personal care, including
the aforementioned home health aids and homemakers and
chore services. Also, any RN time spent beyond that
authorized would be covered by the patient. Medicaid covers
personal care and assistance for eligible frail elderly or
disabled individuals. Medicare covers skilled nursing,
physical or speech therapy.
Housing/Retirement Community: 

This is an enhanced service package and often includes more
supportive or custodial care. A combination of both
Medicare and Medicaid may be used to pay for this type of
service. One organized method to do just this is the
Program of All-Inclusive Care for the Elderly(PACE). The
idea is that for qualified individuals, PACE merges
Medicaid and Medicare funding into an integrated system
that enables a care-manager to allocate resources by need.
PACE must be seen for what it is, care for acute and
chronic conditions within a long-term care package.
Works cited:
U.S. Bureau of the Census, Unpublished Current Population
Survey Data, Health Insurance Coverage Status by State,
Table Hi-4.



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