Discussion-3

By William H. Shrank, Nancy-Ann DeParle, Scott Gottlieb, Sachin H. Jain, Peter Orszag, Brian W. Powers,
and Gail R. Wilensky

Commentary

Health Costs And Financing:
Challenges And Strategies For A
New Administration

ABSTRACT It is likely that 2021 will be a dynamic year for US health care
policy. There is pressing need and opportunity for health reform that
helps achieve better access, affordability, and equity. In this commentary,
which is part of the National Academy of Medicine’s Vital Directions for
Health and Health Care: Priorities for 2021 initiative, we draw on our
collective backgrounds in health financing, delivery, and innovation to
offer consensus-based policy recommendations focused on health costs
and financing. We organize our recommendations around five policy
priorities: expanding insurance coverage, accelerating the transition to
value-based care, advancing home-based care, improving the affordability
of drugs and other therapeutics, and developing a high-value workforce.
Within each priority we provide recommendations for key elected
officials and political appointees that could be used as starting points for
evidence-based policy making that supports a more effective, efficient,
and equitable health system in the US.

I
tis likelythat 2021willbe adynamic year
for US health care policy. More than a
decade after the Affordable Care Act
(ACA) was passed, health reform re-
mains a top concern for the American

public.1 The number of uninsured Americans is
rising. Affordability—at both the system and in-
dividual levels—is eroding. And the numerous
ways in which racism and prejudice drive unac-
ceptable disparities in health and well-being
are increasingly evident. The coronavirus dis-
ease 2019 (COVID-19) pandemic, which placed
historic stress on an already strained system, has
only exacerbated many of these shortcomings.
Against this backdrop, the National Academy

of Medicine convened the Vital Directions for
Health and Health Care: Priorities for 2021 ini-
tiative, which, following a 2016 initiative of the
same name,2 aims to provide expert guidance on
several focus areas for US health policy. In this
article we draw on our collective backgrounds in

healthfinancing,delivery,andinnovationtooffer
a setofconsensus-based policyrecommendations
focused on health care costs and financing.

System Goals
Our recommendations are grounded in three
overarching goals for the US health system: ac-
cess, affordability, and equity.
Access Every American should have access to

health care. However, the US has a large and
growing uninsured population. After reaching
a nadir of 28.7 million (8.9 percent of the popu-
lation) in 2016, the number of uninsured people
is expected to rise to 37.2 million (10.6 percent of
the population) by 2028.3 This comes at a time
when a growing body of research links insurance
coverage to improvements in financial security,
health, and longevity.4–6

Affordability Every American should have
access to affordable health care. However, health

doi: 10.1377/hlthaff.2020.01560
HEALTH AFFAIRS 40,
NO. 2 (2021): 235–242
This open access article is
distributed in accordance with the
terms of the Creative Commons
Attribution (CC BY-NC-ND 4.0)
license.

William H. Shrank
([email protected]) is
chief medical and corporate
affairs officer of Humana in
Louisville, Kentucky.

Nancy-Ann DeParle is a
managing partner and
cofounder of Consonance
Capital Partners, in New York,
New York.

Scott Gottlieb is a resident
fellow at the American
Enterprise Institute, in
Washington, D.C.

Sachin H. Jain is president
and CEO of the SCAN Group
and Health Plan and an
adjunct professor of medicine,
Stanford University School of
Medicine, in Stanford,
California.

Peter Orszag is the CEO of
Financial Advisory at Lazard
Freres and Co., LLC, in New
York, New York.

Brian W. Powers is deputy
chief medical officer at
Humana in Boston,
Massachusetts.

Gail R. Wilensky is a senior
fellow at Project HOPE, in
Bethesda, Maryland.

February 2021 40:2 Health Affairs 235

Health Care Finance

Downloaded from HealthAffairs.org on February 14, 2022.
Copyright Project HOPE—The People-to-People Health Foundation, Inc.

For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.

care spending continues to grow at an unsustain-
able rate. Whereas spending growth initially
slowed after implementation of the ACA, it has
accelerated once again.3,7 The consequences of
this acceleration are well established and include
a growing national debt; strained federal, state,
and local budgets; stagnant wages; and in-
creased financial insecurity for Americans.2,8,9

Even for those with insurance coverage, health
care is increasingly unaffordable: Roughly half of
US adults have delayed or avoided care because
of cost.10

Equity Every American should have equal ac-
cess to affordable health care. However, there
remain unacceptable inequities in health care
access and outcomes by race, ethnicity, socioeco-
nomic status, and other dimensions.11,12 This has
been made painfully obvious during the COVID-
19 pandemic, which has taken an unacceptably
high and disparate toll on underserved commu-
nities and people of color.13–15

Interrelated Goals These three goals of ac-
cess, affordability, and equity are deeply interre-
lated. In some cases, improvements are comple-
mentary. Increased access can improve equity.16

In others, conflicts arise. Expanding access pre-
sents a substantial affordability challenge at the
system level. Although difficult trade-offs are in-
evitable, we believe there are opportunities to
simultaneously improve access, affordability,
and equity. When identifying policy recommen-
dations, we aimed to identify those most likely
to yield balanced improvements across all three
areas.

Policy Priorities
We propose five policy priorities to advance these
system goals: expand insurance coverage, accel-
erate the transition to value-based care, advance
home-based care, improve the affordability of
drugs and other therapeutics, and develop a
high-value workforce. Within the broad domain
of health costs and financing, there surely are
many other policy priorities worth considering.
These five represent our view of the most prom-
ising near-term opportunities to leverage health
care financing and payment to improve access,
affordability, and equity.
Expand Insurance Coverage From 2010 to

2016, policies in the ACA led to a steady decline
in the number of uninsured Americans.17 These
coverage gains have led to improved health, eq-
uity, and financial well-being.4–6,16 When the orig-
inal Vital Directions initiative was convened in
2016,2 the uninsurance rate was at an all-time
low. Since then, the number of uninsured Amer-
icans has risen steadily.3,17 The COVID-19 pan-
demic will only accelerate this trend and has

highlighted the limitations of employer-spon-
sored insurance. During the height of the pan-
demic, millions of Americans lost their jobs and
their access to employer-based insurance cover-
age over the span of several months.18,19

Multifaceted and fiscally prudent approaches
to closing the growing coverage gap are neces-
sary but face significant barriers. There remains
political resistance to expanding coverage
through mechanisms set forth in the ACA.
Twelve states have not expanded Medicaid, sev-
eral coverage-related provisions in the ACA
have been repealed, and support of the Market-
places for individual coverage has been uneven.
Bipartisan approaches and public-private part-
nerships are needed.
Sustainable financing presents another chal-

lenge. Mechanisms for publicly financing cover-
age expansion—through deficit spending, new
revenue sources, or revenue transfers—come
with inherent trade-offs and will require biparti-
san compromise.We believe that reallocating the
substantial resources spent on care that does not
improve health20 represents an opportunity to
expand coverage without sacrificing affordabili-
ty or quality, but the impact of associated reve-
nue reductions on providers needs to be closely
considered.
Accelerate Transition To Value-Based

Care A central action priority identified in the
original Vital Directions initiative was to “pay for
value”—specifically, to “drive health care pay-
ment innovation providing incentives for out-
comes and value.”2 Since that time, value-based
payment has grown notably. According to the
Health Care Payment Learning and Action Net-
work, the share of health care payments admin-
istered via alternative payment models increased
from 23percent in2015 to 36 percentin 2018.21,22

Although selected models have generated signif-
icant savings,23–25 the overall impact of new
payment models on cost and quality has been
mixed.26–28

We believe that significant potential remains
for payment models to accelerate value-based
care delivery, but several barriers must be ad-
dressed. First, most alternative payment models
remain anchored in a fee-for-service architec-
ture. Only 5 percent of health care payments
in 2018 were population based (for example,
global budgets).22 Broader adoption of advanced
population-based payment is needed. Second,
the penetration of value-based payment lags
among commercial and Medicaid payers. In
2018, 40.9 percent of payments in traditional
Medicare and 53.6 percent of payments in Medi-
care Advantage occurred through advanced
value-based models, compared with 23.3 percent
in Medicaid and 30.1 percent among commercial

Health Care Finance

236 Health Affairs February 2021 40:2
Downloaded from HealthAffairs.org on February 14, 2022.

Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.

payers.22 Medicare can serve as a catalyst for
payment reform, but fundamental changes in
the delivery system will not occur without multi-
payer alignment. Finally, there are growing con-
cerns that certain value-based payment models
may exacerbate inequities or penalize organiza-
tions that care for vulnerable populations.29 It is
essential that value-based payment help amelio-
rate, not exacerbate, disparities.
Accelerating the transition to value-based care

necessitates more than new payment models.
Redesigning care delivery to provide more value
to patients requires new tools, competencies,
and infrastructure.2,30 To that end, it is necessary
that payment models be accompanied by techni-
cal assistance and infrastructure support. This
will be especially important to encourage partic-
ipation and ensure success for independent pro-
viders, who appear to be most successful when
engaging in value-based models.24

Infrastructure improvements at the system
level are also needed. Robust, interoperable data
exchange is a prerequisite for value-based care.31

There has been important progress on interop-
erability since the original Vital Directions ini-
tiative.2 In early 2020 the Department of Health
and Human Services (HHS) issued a final rule
implementing interoperability and the patient
access provisions of the 21st Century Cures Act
of 2016, although enforcement has been delayed
because of the COVID-19 pandemic.

Advance Home-Based Care Improvements in
internet, video, and remote monitoring capabil-
ities increasingly allow for the delivery of health
care services in more cost-effective, patient-
centered settings. Patients now can receive
home-based acute care,32 primary care,33 and be-
havioral health services34 of equal or better qual-

ity compared with facility-based delivery, and at
a lower cost. Despite promising evidence, few
programs have reached meaningful scale. In
2018 only 2 percent of commercially insured
people had a telehealth visit with a provider, with
rates even lower in Medicare and Medicaid.35

Home-based acute, postacute, and long-term
care occur at even lower rates.
As the logistics and infrastructure to support

home-based care mature, reimbursement and
financing models present a substantial barrier
to widespread adoption. Although telehealth ser-
vices were reimbursed by many payers before
2020, payment rates did not support the process
and workflow changes needed for adoption at
scale. For other home-based services such as
acute, postacute, and long-term care, there are
scant reimbursement models outside of small
pilots. The COVID-19 pandemic has made clear
the drastic impact that reimbursement policy
can have on the adoption of telehealth and
home-based care. Facilitated by the introduction
of reimbursement parity, there has been a rapid
transition to virtual visits in the ambulatory set-
ting during the pandemic.36 Shifting care to the
most appropriate and cost-effective settings will
require permanent reimbursement changes for
telehealth and tailored financing models for
home-based care across the continuum of dis-
ease severity.
Improve The Affordability Of Drugs And

Other Therapeutics Access to novel therapeu-
tics is a distinguishing feature of the US health
system, but also a key driver of high spending.37–39

The crisis of affordability for drugs and other
therapeutics has only intensified since the origi-
nal Vital Directions initiative was convened in
2016.2,37 Highly effective therapeutics may lower
aggregate spending by reducing the need for
costly interventions or hospitalizations, but
many of these novel medicines command high
prices.40 More challenging is the fact that high
prices are not always aligned with value. Prices
on existing, branded drugs have increased sub-
stantially during the past decade, limiting afford-
ability and access.37,41,42 And even in circumstanc-
es where the benefits are unclear or modest,
many new therapeutics are still reimbursed at
high rates.37,43

With continued innovation on the horizon—
including gene therapy—these challenges will
become more acute. Broadening the pool of
Americans who can obtain and afford high-value
therapeutics will require reimbursement struc-
tures that align payment with value and balance
affordability with the continued need for inno-
vation. Such efforts face a number of challenges:
regulatory barriers that limit generic and bio-
similar development; a lack of robust informa-

Although difficult
trade-offs are
inevitable, we believe
there are
opportunities to
simultaneously
improve access,
affordability, and
equity.

February 2021 40:2 Health Affairs 237
Downloaded from HealthAffairs.org on February 14, 2022.

Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.

tion from which to base comparative effective-
ness, coverage, and reimbursement decisions;
and societal discomfort around limiting access
to any therapies, including those that are of
low value.
Develop A High-Value Workforce The US

benefits from a highly skilled health care work-
force and is home to premier training institu-
tions. But there are significant and growing
workforce shortages in the areas of primary care,
behavioral health, and dental care.44 A coordinat-
edstrategytotrain, deploy,and supporta diverse
health care workforce is an essential enabler of
access, quality, and value, particularly in under-
resourced communities.
Regulatory restrictions remain a key barrier

to progress. Current licensure and credentialing
requirements and state-by-state variation in
scope-of-practice laws limit the opportunity to
leverage technology and advanced practice pro-
viders to address workforce shortages, improve
access, and provide the most cost-effective
care.45,46 The response to COVID-19 has shown
the benefit of relaxing such structures. During
the pandemic, regulatory bodies and payers
moved quickly to augment in-person workforce
capacity in regions experiencing surges in
COVID-19 cases and to allow for telehealth to
serve as a substitute for in-person care. Many
state medical boards waived licensing require-
ments for telehealth and provided expedited,
temporary licenses for out-of-state providers.47

Formalizing these changes outside of the pan-
demic will be important.
Alongside reducing regulatory barriers, devel-

oping a high-value workforce will also require a
better use of community members and less spe-
cialized individuals (for example, community
health workers and navigators) to support care
delivery in uniquely effective, efficient, and cul-
turally appropriate ways.48

Recommendations For Key Elected
Officials And Political Appointees
The priorities we have outlined represent near-
term opportunities to improve access, afford-
ability, and equity. To help catalyze action along
these dimensions, we developed a short list of
recommendations for key stakeholders.We focus
on three key federal leaders—the secretary of
HHS, the administrator of the Centers for Medi-
care and Medicaid Services (CMS), and the com-
missioner of the Food and Drug Administration
(FDA)—and state governors, because of their
ability to quickly and effectively affect change.
Comprehensive reform will require close collab-
oration with other elected officials and political
appointees and commensurate attention, activi-

ty, and innovation from the private sector.
Expand Insurance Coverage The HHS sec-

retary should develop alternative pathways to
insurance coverage, including strengthening
and better supporting the individual insurance
Marketplaces and working with Congress to de-
crease the age of Medicare eligibility to fifty-five.
Doing so will help ensure coverage, improve
affordability, and offer greater choice for older
Americans unable to obtain employer-based
coverage.
Governors should also create opportunities

for expanded coverage in their states. Optimal
use of the Medicaid program offers the greatest
opportunity to expand coverage and promote
health equity. Governors in states that have
not yet expanded Medicaid should work closely
with their legislative bodies to do so. Outside of
Medicaid expansion, governors—working with
their insurance commissioners—should support
the individual Marketplace by offering risk-
management mechanisms to private payers
providing individual coverage via state-based
exchanges and by extending open enrollment
periods.
Accelerate Transition To Value-Based

Care The CMS administrator should increase
the adoption of advanced value-based payment
models. Value-based payment in Medicare has
grown, but most value-based payments remain
anchored in a fee-for-service architecture. Popu-
lation-based payment has the greatest potential
to improve outcomes and lower costs. The CMS
administrator should set a goal of having 25 per-
cent of Medicare payments administered via
population-based payments by 2025.
The CMS administrator also must align pay-

ment models with equity. Value-based payment
has the potential to advance health equity but
may inadvertently exacerbate health disparities.
The administrator should conduct a thorough
review of existing payment models to evaluate
their impact on equity while developing new
payment models that create financing flexibility
to address structural racism and social determi-
nants of health and explicitly reward reductions
in health disparities.
It will also be important for CMS to help stabi-

lize independent primary care providers.
COVID-19 has placed significant financial strain
on independent primary care providers. This is
especially troubling, as these clinicians provide
critical access to health care for much of the US
population and have been uniquely successful at
delivering value-based care.24 The administrator
should take action to stabilize finances for inde-
pendent primary care providers by providing
prepayment to offset lost fee-for-service revenue
as a path to population-based payment.

Health Care Finance

238 Health Affairs February 2021 40:2
Downloaded from HealthAffairs.org on February 14, 2022.

Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.

The CMS administrator can also play an im-
portant role in broadening value-based insur-
ance design. Expanding on existing pilot
programs in Medicare Advantage, the adminis-
trator should use the authority of the Center for
Medicare and Medicaid Innovation (CMMI) to
reduce cost sharing for cost-effective, high-value
services in traditional Medicare and Medicare
Advantage.
In addition, Medicare Advantage should be

strengthened. More than a third of Medicare
beneficiaries are now enrolled in Medicare Ad-
vantage plans.49 The program benefits from
strong bipartisan support50 and has catalyzed
the adoption of advanced value-based payment
models.21 Strengthening the program could po-
sition it to serve as a chassis for coverage expan-
sion. To achieve this goal, the administrator
should continue to increase flexibility for Medi-
care Advantage plans to design new benefit pack-
ages, incentivize healthy choices, and redistrib-
ute funding to reduce disparities and improve
equity. As voluntary enrollment in Medicare Ad-
vantage begins to outpace that in traditional
Medicare in some regions, the administrator will
need to reconsider financial models that deter-
mine benchmark payments as well. Finally, the
administrator should continue to explore new
approaches to sustainable risk adjustment for
Medicare Advantage plans.
The CMS administrator can help accelerate the

transition to value-based care by enforcing reg-
ulations that promote interoperability. Interop-
erable data exchange supports care coordination
and the delivery of high-quality, cost-effective
care.30 Although it was appropriate to delay en-
forcement of key interoperability provisions of
the 21st Century Cures Act in the context of the
COVID-19 pandemic, the administrator should
avoid any further delays.
State governors can also play an important

role in accelerating the transition to value-based
care models by expanding their use in Medicaid.
The penetration of value-based care in Medicaid
lags behind Medicare and commercial markets,
limiting the ability to achieve cost-effective,
high-quality care for vulnerable populations.

Governors, working with their Medicaid direc-
tors, should expand the use of value-based pay-
ment through Medicaid managed care contract-
ing and Section 1115 waivers. Governors should
aim to achieve the goal set by the Health Care
Payment Learning and Action Network of having
50 percent of Medicaid payments in advanced
value-based payment models with downside risk
by 2025.51

Advance Home-Based Care To advance home-
based care, the CMS administrator should for-
malize changes to telehealth reimbursement.
Working with Congress where needed, the ad-
ministrator should make permanent some of the
changes to telehealth reimbursement that were
instituted under the COVID-19 public health
emergency. Approaches could include continued
reimbursement at parity for audiovisual tele-
health visits, with more modest payments for
telephonic and asynchronous interactions. It
will be important to ensure that reimbursement
policies position telehealth as a substitute for
more expensive and less accessible sites of care
and do not induce unnecessary spending and
utilization.
The CMS administrator should also develop

reimbursement models for home-based care.
Under the authority of CMMI, the administrator
should create and test new payment models for
home-based acute, postacute, and long-term
care.
Improve Affordability Of Drugs And Oth-

er Therapeutics The FDA commissioner
should expand on recent efforts to reduce bar-
riers to generic and biosimilar development and
market entry with the goal of increasing compe-
tition, improving access, and reducing prices.
Potential strategies include enabling more effi-
cient pathways for the approval of safe and effec-
tive generic and biosimilar versions of complex
drugs that often face no or limited competition,
even after patents and exclusivities have lapsed;
closing regulatory loopholes that can be ex-
ploited to maintain a monopoly through the
granting of patents and other exclusivities; har-
monizing regulatory filing requirements for ge-
neric medicines with other global regulators;
and fostering the development of advanced
manufacturing platforms that lower costs and
improve quality and reliability. This is especially
important for biologics, for which manufactur-
ing challenges are a barrier to the entry of bio-
similars.
The FDA commissioner also should accelerate

efforts to build a robust real-world evidence pro-
gram and develop rigorous, science-based crite-
ria for how real-world evidence can be used to
inform decisions about the safety and effective-
ness of new therapeutics. Such a framework not

Any effort at reform
will occur in the
shadow of the COVID-
19 pandemic.

February 2021 40:2 Health Affairs 239
Downloaded from HealthAffairs.org on February 14, 2022.

Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.

only would expand opportunities for pre- and
postmarket evidence on safety and efficacy but
also would be available to payers and other enti-
ties to support comparative effectiveness and
cost-effectiveness analyses. This infrastructure
is a prerequisite for any effort at value-based
pricing for therapeutics.
The CMS administrator can also play a key role

in improving the affordability of drugs by devel-
oping value-based reimbursement models for
high-value therapeutics. Under the authority of
CMMI, the administrator should expand on re-
cent efforts to create and test new payment mod-
els for prescription drugs,52 including reference
pricing, outcomes-based payment, and Medicare
Part B payment reform. As multiple models of
reimbursement are tested, it will be important to
both guard against and monitor for efforts at
gaming different pricing models.
Develop A High-Value Workforce Through

a partnership with state governments and pri-
vate payers, the HHS secretary should facilitate
the development and deployment of a national
workforce of community health workers. Evi-
dence suggests that such a program could reduce
disparities, improve health outcomes, and lower
health care spending.53–55 This workforce could
also aid in pandemic response (for example, con-
tact tracing) and support insurance education
and enrollment. Outside of the benefit to pa-
tients, it would provide valuable economic op-
portunity for the workers themselves, who
should be recruited from the historically disad-
vantaged communities they serve.
Governors could promote the development of

a high-value health care workforce by removing
barriers to affordable telehealth access. They
should, in collaboration with state licensing bod-
ies, formalize changes to state licensure laws
made during the COVID-19 pandemic that re-
duce or eliminate the barriers facing out-of-state
providers who wish to provide telehealth ser-
vices and coordinate care across state lines.

Conclusion
As 2021 begins, there is pressing need and op-
portunity to reform health care financing to bet-
ter support access, affordability, and equity. Any
effort at reform will occur amidst the COVID-19
pandemic, which has placed unprecedented
strain on policy makers and public institutions.
There will simply not be the same capacity or
appetite for sweeping regulatory changes that
would have been present in other circumstances.
Limited attention and resources will require dis-
ciplined prioritization and a willingness to ac-
cept incremental progress and small wins. Fur-
thermore, reforms will need to occur under
increasingly strained federal and state budgets.
Achieving meaningful change in this environ-
ment will require significant resolve from policy
makers and public support for difficult decisions
(forexample, lesscoveragefor low-valueservices
and technologies). We hope that the policy pri-
orities and recommendations articulated in this
commentary provide a focused starting point for
evidence-based policy making that supports a
more effective, efficient, and equitable health
system in the US. ▪

William Shrank reports equity holdings
in Humana and serving as a director at
GetWellNetwork. Nancy-Ann DeParle
(administrator of the Health Care
Financing Administration [HCFA], now
the Centers for Medicare and Medicaid
Services [CMS], from November 1997 to
September 2000) reports being a
director of CVS Health, HCA Healthcare,
Psychiatric Medical Care, and Sellers
Dorsey. Scott Gottlieb (commissioner of
the Food and Drug Administration from
2017 until April 2019) is affiliated with
New Enterprise Associates and CVS
Health and sits on the boards of Pfizer,
Illumina, Tempus, and Aetion. Sachin Jain
reports equity holdings in Anthem,

Merck, Blink Health, DataVant, Thrive,
Curisium, Valera, Firefly, and Vital and
serving as a director at Abode Hospice.
Peter Orszag (head of the Office of
Management and Budget from 2008
until July 2010) reports employment by
Bloomberg. Brian Powers reports
employment by Mass General Brigham,
prior employment by Anthem and
Fidelity Investments, and equity
holdings in Humana. He is the editor of
Healthcare: The Journal of Delivery
Science and Innovation (Elsevier). Gail
Wilensky (administrator of HCFA [now
CMS] from 1990 until 1992) is a
director for Quest Diagnostics Inc. and
UnitedHealth Group and a trustee for

the United Mineworkers of America
Combined Benefits Fund. The views
expressed in this article are those of
the authors and do not necessarily
reflect the position or policy of their
employers. This is an open access article
distributed in accordance with the terms
of the Creative Commons Attribution
(CC BY-NC-ND 4.0) license, which
permits others to distribute this work
provided the original work is properly
cited, not altered, and not used for
commercial purposes. See https://
creativecommons.org/licenses/by-nc-nd/
4.0/. [Published online January 21, 2021.]

Health Care Finance

240 Health Affairs February 2021 40:2
Downloaded from HealthAffairs.org on February 14, 2022.

Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.

NOTES

1 Kirzinger A, Kearney A, Brodie M.
KFF Health Tracking Poll—Febru-
ary 2020: health care in the 2020
election [Internet]. San Francisco
(CA): Henry J. Kaiser Family Foun-
dation; 2020 Feb 21 [cited 2020 Dec
3]. Available from: https://www.kff
.org/health-reform/poll-finding/kff-
health-tracking-poll-february-2020/

2 Dzau VJ, McClellan MB, McGinnis
JM, Finkelman EM, editors. Vital
directions for health and health care
[Internet]. Washington (DC): Na-
tional Academies Press; 2017 [cited
2020 Dec 3]. Available from: https://
nam.edu/wp-content/uploads/
2018/02/Vital-Directions-for-
Health-and-Health-Care-Final-
Publication-022718.pdf

3 Keehan SP, Cuckler GA, Poisal JA,
Sisko AM, Smith SD, Madison AJ,
et al. National health expenditure
projections, 2019–28: expected re-
bound in prices drives rising
spending growth. Health Aff
(Millwood). 2020;39(4):704–14

4 Sommers BD, Baicker K, Epstein
AM. Mortality and access to care
among adults after state Medicaid
expansions. N Engl J Med. 2012;
367(11):1025–34

5 Sommers BD, Maylone B, Blendon
RJ, Orav EJ, Epstein AM. Three-year
impacts of the Affordable Care Act:
improved medical care and health
among low-income adults. Health
Aff (Millwood). 2017;36(6):1119–28

6 Sommers BD, Gawande AA, Baicker
K. Health insurance coverage and
health—what the recent evidence
tells us. N Engl J Med. 2017;377(6):
586–93

7 Hartman M, Martin AB, Espinosa N,
Catlin A, The National Health Ex-
penditure Accounts Team. National
health care spending in 2016:
spending and enrollment growth
slow after initial coverage expan-
sions. Health Aff (Millwood). 2018;
37(1):150–60

8 Yong PL, Saunders RS, Olsen L, ed-
itors. The healthcare imperative:
lowering costs and improving out-
comes: workshop series summary
[Internet]. Washington (DC): Na-
tional Academies Press; 2010 [cited
2020 Dec 3]. Available from: https://
www.nap.edu/catalog/12750/the-
healthcare-imperative-lowering-
costs-and-improving-outcomes-
workshop-series

9 Smith M, Saunders R, Stuckhardt L,
McGinnis JM, editors. Best care at
lower cost: the path to continuously
learning health care in America
[Internet]. Washington (DC): Na-
tional Academies Press; 2013 [cited
2020 Dec 3]. Available from: https://
www.nap.edu/catalog/13444/best-
care-at-lower-cost-the-path-to-
continuously-learning

10 Kirzinger A, Muñana C,Wu B, Brodie
M. Data note: Americans’ challenges

with health care costs [Internet]. San
Francisco (CA): Henry J. Kaiser
Family Foundation; 2019 Jun 11
[cited 2020 Dec 3]. Available from:

issue-brief/data-note-americans-
challenges-health-care-costs/

11 Agency for Healthcare Research and
Quality. 2018 national healthcare
quality and disparities report [In-
ternet]. Rockville (MD): AHRQ;
2019 Sep [last updated 2020 Apr;
cited 2020 Dec 3]. Available from:
https://www.ahrq.gov/research/
findings/nhqrdr/nhqdr18/index
.html

12 Department of Health and Human
Services, Office of the Assistant
Secretary for Planning and Evalua-
tion. HHS action plan to reduce ra-
cial and ethnic health disparities:
implementation progress report
2011–2014 [Internet]. Washington
(DC): ASPE; 2015 Nov 1 [cited 2020
Dec 3]. Available from: https://
aspe.hhs.gov/basic-report/hhs-
action-plan-reduce-racial-and-
ethnic-health-disparities-
implementation-progress-report-
2011-2014

13 Azar KMJ, Shen Z, Romanelli RJ,
Lockhart SH, Smits K, Robinson S,
et al. Disparities in outcomes among
COVID-19 patients in a large health
care system in California. Health Aff
(Millwood). 2020;39(7):1253–62

14 Chowkwanyun M, Reed AL Jr. Racial
health disparities and Covid-19—
caution and context. N Engl J Med.
2020;383(3):201–3

15 Webb Hooper M, Nápoles AM,
Pérez-Stable EJ. COVID-19 and
racial/ethnic disparities. JAMA.
2020;323(24):2466–7

16 Buchmueller TC, Levy HG. The ACA’s
impact on racial and ethnic dispar-
ities in health insurance coverage
and access to care. Health Aff
(Millwood). 2020;39(3):395–402

17 Blumenthal D, Collins SR, Fowler EJ.
The Affordable Care Act at 10 years—
its coverage and access provisions. N
Engl J Med. 2020;382(10):963–9

18 Collins SR, Gunja MZ, Aboulafia GN,
Czyzewicz E, Kline CH, Rapoport R,
et al. An early look at the potential
implications of the COVID-19 pan-
demic for health insurance coverage
[Internet]. New York (NY): Com-
monwealth Fund; 2020 Jun 23 [cited
2020 Dec 3]. Available from: https://
www.commonwealthfund.org/
publications/issue-briefs/2020/jun/
implications-covid-19-pandemic-
health-insurance-survey

19 Garfield R, Claxton G, Damico A,
Levitt L. Eligibility for ACA health
coverage following job loss [Inter-
net]. San Francisco (CA): Henry J.
Kaiser Family Foundation; 2020
May 13 [cited 2020 Dec 3]. Available
from: https://www.kff.org/corona
virus-covid-19/issue-brief/eligibility-

for-aca-health-coverage-following-
job-loss/

20 Shrank WH, Rogstad TL, Parekh N.
Waste in the US health care system:
estimated costs and potential for
savings. JAMA. 2019;322(15):1501–9

21 Health Care Payment Learning &
Action Network. Measuring prog-
ress: adoption of alternative pay-
ment models in commercial, Med-
icaid, Medicare Advantage, and state
Medicare programs [Internet].
McLean (VA): MITRE Corporation;
2016 [cited 2020 Dec 3]. Available
from: https://hcp-lan.org/work
products/apm-measurement-final
.pdf

22 Health Care Payment Learning &
Action Network. Measuring prog-
ress: adoption of alternative pay-
ment models in commercial, Med-
icaid, Medicare Advantage, and
fee-for-service Medicare programs
[Internet]. McLean (VA): MITRE
Corporation; 2019 [cited 2021 Jan
14]. Available from: http://hcp-lan
.org/workproducts/apm-
methodology-2019.pdf

23 Navathe AS, Emanuel EJ,
Venkataramani AS, Huang Q, Gupta
A, Dinh CT, et al. Spending and
quality after three years of Medi-
care’s voluntary bundled payment
for joint replacement surgery.
Health Aff (Millwood). 2020;
39(1):58–66

24 McWilliams JM, Hatfield LA, Landon
BE, Hamed P, Chernew ME. Medi-
care spending after 3 years of the
Medicare Shared Savings Program.
N Engl J Med. 2018;379(12):1139–49

25 Song Z, Ji Y, Safran DG, Chernew
ME. Health care spending, utiliza-
tion, and quality 8 years into global
payment. N Engl J Med. 2019;
381(3):252–63

26 Joynt Maddox KE, Orav EJ, Zheng J,
Epstein AM. Evaluation of Medi-
care’s bundled payments initiative
for medical conditions. N Engl J
Med. 2018;379(3):260–9

27 Figueroa JF, Horneffer KE, Jha AK.
Disappointment in the value-based
era: time for a fresh approach?
JAMA. 2019;322(17):1649–50

28 Blumenthal D, Abrams M. The Af-
fordable Care Act at 10 years—
payment and delivery system re-
forms. N Engl J Med. 2020;
382(11):1057–63

29 Joynt KE, Jha AK. Characteristics of
hospitals receiving penalties under
the Hospital Readmissions Reduc-
tion Program. JAMA. 2013;309(4):
342–3

30 Colbert J, Kocot SL, Brenner R,
Monterastelli M, Seidman J, White
R. Adopting accountable care: an
implementation guide for physician
practices [Internet]. Washington
(DC): Brookings Institution; 2014
Nov [cited 2020 Dec 3]. Available
from: https://www.brookings.edu/

February 2021 40:2 Health Affairs 241
Downloaded from HealthAffairs.org on February 14, 2022.

Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.

wp-content/uploads/2016/06/ACO-
Toolkit-Full-Version-Text.pdf

31 Bipartisan Policy Center. Advancing
interoperability, information shar-
ing, and data access: improving
health and healthcare for Americans
[Internet]. Washington (DC):
Bipartisan Policy Center; 2019 Feb 12
[cited 2020 Dec 3]. Available from:
https://bipartisanpolicy.org/report/
advancing-interoperability-
information-sharing-and-data-
access-improving-health-and-health
care-for-americans/

32 Cryer L, Shannon SB, Van
Amsterdam M, Leff B. Costs for
“Hospital at Home” patients were 19
percent lower, with equal or better
outcomes compared to similar in-
patients. Health Aff (Millwood).
2012;31(6):1237–43

33 De Jonge KE, Jamshed N, Gilden D,
Kubisiak J, Bruce SR, Taler G. Effects
of home-based primary care on
Medicare costs in high-risk elders. J
Am Geriatr Soc. 2014;62(10):
1825–31

34 Fortney JC, Pyne JM, Mouden SB,
Mittal D, Hudson TJ, Schroeder GW,
et al. Practice-based versus telemed-
icine-based collaborative care for
depression in rural federally quali-
fied health centers: a pragmatic
randomized comparative effective-
ness trial. Am J Psychiatry. 2013;
170(4):414–25

35 Weigel G, Ramaswamy A, Sobel L,
Salganicoff A, Cubanski J, Freed M.
Opportunities and barriers for tele-
medicine in the U.S. during the
COVID-19 emergency and beyond
[Internet]. San Francisco (CA):
Henry J. Kaiser Family Foundation;
2020 May 11 [cited 2020 Dec 3].
Available from: https://www.kff
.org/womens-health-policy/issue-
brief/opportunities-and-barriers-
for-telemedicine-in-the-u-s-during-
the-covid-19-emergency-and-
beyond/

36 Mehrotra A, Chernew M, Linetsky D,
Hatch H, Cutler D. The impact of the
COVID-19 pandemic on outpatient
visits: practices are adapting to the
new normal [Internet]. New York
(NY): Commonwealth Fund; 2020
Jun 25 [cited 2020 Dec 3]. Available
from: https://www.commonwealth
fund.org/publications/2020/jun/
impact-covid-19-pandemic-
outpatient-visits-practices-adapting-
new-normal

37 Augustine NR, Madhavan G, Nass
SJ, editors. Making medicines af-

fordable: a national imperative [In-
ternet]. Washington (DC): National
Academies Press; 2018 [cited 2020
Dec 3]. Available from: https://
www.nap.edu/catalog/24946/
making-medicines-affordable-a-
national-imperative

38 Papanicolas I, Woskie LR, Jha AK.
Health care spending in the United
States and other high-income coun-
tries. JAMA. 2018;319(10):1024–39

39 Squires DS, Anderson C. U.S. health
care from a global perspective:
spending, use of services, prices, and
health in 13 countries [Internet].
New York (NY): Commonwealth
Fund; 2015 Oct [cited 2020 Dec 3].
Available from: https://www.issue
lab.org/permalink/download/25051

40 Hoofnagle JH, Sherker AH. Therapy
for hepatitis C—the costs of success.
N Engl J Med. 2014;370(16):1552–3

41 Hernandez I, San-Juan-Rodriguez A,
Good CB, Gellad WF. Changes in list
prices, net prices, and discounts for
branded drugs in the US, 2007–
2018. JAMA. 2020;323(9):854–62

42 Hernandez I, Good CB, Cutler DM,
Gellad WF, Parekh N, Shrank WH.
The contribution of new product
entry versus existing product infla-
tion in the rising costs of drugs.
Health Aff (Millwood). 2019;38(1):
76–83

43 Prasad V, De Jesús K, Mailankody S.
The high price of anticancer drugs:
origins, implications, barriers, sol-
utions. Nat Rev Clin Oncol. 2017;
14(6):381–90

44 Health Resources and Services Ad-
ministration. Health workforce pro-
jections [Internet]. Rockville (MD):
HRSA; 2020 [cited 2020 Dec 3].
Available from: https://bhw.hrsa
.gov/health-workforce-analysis/
research/projections

45 Tuckson RV, Edmunds M, Hodgkins
ML. Telehealth. N Engl J Med.
2017;377(16):1585–92

46 Dower C, Moore J, Langelier M. It is
time to restructure health profes-
sions scope-of-practice regulations
to remove barriers to care. Health Aff
(Millwood). 2013;32(11):1971–6

47 Federation of State Medical Boards.
U.S. states and territories modifying
requirements for telehealth in re-
sponse to COVID-19 [Internet].
Jefferson City (MO): FSMB; 2020
Nov 30 [cited 2020 Dec 3]. Available
from: https://www.fsmb.org/site
assets/advocacy/pdf/states-waiving-
licensure-requirements-for-
telehealth-in-response-to-covid-19

.pdf
48 Mobula LM, Okoye MT, Boulware

LE, Carson KA, Marsteller JA,
Cooper LA. Cultural competence and
perceptions of community health
workers’ effectiveness for reducing
health care disparities. J Prim Care
Community Health. 2015;6(1):10–5

49 Freed M, Damico A, Neuman T. A
dozen facts about Medicare Advan-
tage in 2020 [Internet]. San
Francisco (CA): Henry J. Kaiser
Family Foundation; 2020 Apr 22
[cited 2020 Dec 3]. Available from:

issue-brief/a-dozen-facts-about-
medicare-advantage-in-2020/

50 Members of Congress letter to Ad-
ministrator Verma [Internet].
Washington (DC): US Congress;
2020 Feb 5 [cited 2020 Dec 3].
Available from: https://guthrie
.house.gov/uploadedfiles/2020-02-
05_medicare_advantage_support_
letter.pdf

51 Health Care Payment Learning &
Action Network. Overview [Inter-
net]. McLean (VA): MITRE Corpo-
ration; 2020 Jul 21 [cited 2020 Dec
3]. Available from: http://hcp-lan
.org/workproducts/2020-Road-
show-Deck-508.pdf

52 Verma S. CMS’s proposed rule on
value-based purchasing for pre-
scription drugs: new tools for nego-
tiating prices for the next generation
of therapies. Health Affairs Blog
[blog on the Internet]. 2020 Jun 17
[cited 2020 Dec 3]. Available from:
https://www.healthaffairs.org/do/
10.1377/hblog20200617.728496/
full/

53 Kangovi S, Mitra N, Grande D, Long
JA, Asch DA. Evidence-based com-
munity health worker program ad-
dresses unmet social needs and
generates positive return on invest-
ment. Health Aff (Millwood). 2020;
39(2):207–13

54 Kangovi S, Mitra N, Grande D,White
ML, McCollum S, Sellman J, et al.
Patient-centered community health
worker intervention to improve
posthospital outcomes: a random-
ized clinical trial. JAMA Intern Med.
2014;174(4):535–43

55 Kangovi S, Mitra N, Norton L, Harte
R, Zhao X, Carter T, et al. Effect of
community health worker support
on clinical outcomes of low-income
patients across primary care facili-
ties: a randomized clinical trial.
JAMA Intern Med. 2018;178(12):
1635–43

Health Care Finance

242 Health Affairs February 2021 40:2
Downloaded from HealthAffairs.org on February 14, 2022.

Copyright Project HOPE—The People-to-People Health Foundation, Inc.
For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.

2/14/22, 9:41 PM Types of Health Systems | Columbia Public Health

https://www.publichealth.columbia.edu/research/comparative-health-policy-library/types-health-systems-0 1/3

Last Updated 12:03pm Wed Feb 2

See Coronavirus Updates for information on campus protocols. Booster documentation is due by February 28,

2022.

Types of Health Systems

There are about 200 countries on the planet, only 40 of which adopt a formal system. Below is a list of the four

different types of health care models.

BEVERIDGE MODEL

Named after William Beveridge, the U.K. social reformer who helped create the National Health
System

Health care both paid for and provided by the government
Free at point of service
Financed through taxation – sometimes dedicated taxation, sometimes general tax revenues,

and sometimes both
Examples: United Kingdom, New Zealand, Spain, U.S. Veterans Health Administration

BISMARCK MODELBISMARCK

Named after Prussian Chancellor Bismarck
Health care paid for by non-profit insurance firms and provided by public and private actors
Financed by employees and employers, generally through payroll deductions; often

complemented by general tax revenues
Examples: Germany, France, Netherlands, Japan, Switzerland

NATIONAL HEALTH INSURANCE OR SINGLE-PAYER MODEL

Health care paid for by government-run insurance programs and provided by public and private
actors

Financed through taxation – sometimes dedicated taxation, sometimes general revenues, and
sometimes both

Examples: Canada (at a provincial level), South Korea, U.S. Medicare

OUT-OF-POCKET

< Back to Columbia Public Health

Comparative Health Policy Library

– Select –

1

2

Comparative Health Policy Library… Health Systems

2/14/22, 9:41 PM Types of Health Systems | Columbia Public Health

https://www.publichealth.columbia.edu/research/comparative-health-policy-library/types-health-systems-0 2/3

Health care paid for by consumers to public and private care providers
Little to no insurance coverage
This model is used by most low- and middle-income countries
Examples: Chad, India, Rwanda

Connect with Us

Columbia University Mailman School of Public Health | 722 West 168th St. NY, NY 10032

Site Map Privacy

Columbia University Irving Medical Center

References

Suggest Additional Subjects and Resources
Other topics or articles you’d like to see included in the Comparative Health Policy Library?

F E E D B A C K F O R M

Public Health Now

Academics

Research

People

Become a Student

2/14/22, 9:41 PM Types of Health Systems | Columbia Public Health

https://www.publichealth.columbia.edu/research/comparative-health-policy-library/types-health-systems-0 3/3

Current Students Faculty & Staff

Alumni Employers

Copyright © Columbia University 2019

I N F O R M AT I O N F O R

High Level Overview of Major International Models

1

Specification Beveridge Model
National Health Insurance

Model
Bismarck Model “Out of Pocket”

Description National health service National health insurance Social health insurance model Market-driven health
care

Country
Examples

The United Kingdom, Ireland,
Denmark, Norway, Sweden,
Finland, Iceland, Australia**,
New Zealand, Cuba

Shifted from Bismarck Model
in the 70s/80s to this model:
Greece, Italy, Portugal, Spain,
Italy; South Korea

Canada, Taiwan Austria, Germany, Belgium,
Japan, Switzerland, France, The
Netherlands

Market-Based Plans:
South Africa*, Uruguay,
The Bahamas, Chile,
Argentina

Minimal health plan
structures: Rural areas
of India; China, Sudan,
Nigeria; Cambodia

Similarities in
the US

Like the Veterans Health
Administration; Indian Health
Service

Like Medicare Like employer-based health care
plans and some aspects of
Medicaid

Like US market-based
health plans with
options limited for
uninsured or
underinsured

Historical
Points

Developed by Sir William
Beveridge in 1948, started in
the United Kingdom

Evolved as a mix of the
Beveridge and Bismarck
models

Developed at end of the 19th
century by Otto von Bismarck in
Germany

Has evolved in each
country considering its
wealth/structures

General
Structure

Government acts as the single
payer through the
establishment of a central
national health service that
delivers the care

• Publicly run insurance
program that every
citizen pays into

• Uses private sector
providers

• The universal insurance
does not deny claims

• De-centralized
• Employers and employees

fund “sickness funds”
created by compulsory
payroll deductions.

• Private insurance plans cover
everyone regardless of pre-
existing conditions

• Wealthier able to
purchase
commercially
offered insurance

• If no insurance
available or can’t
afford – patients
must pay for their
procedures out-of-
pocket.

Eligibility All legal citizens All legal citizens All legal citizens NA

High Level Overview of Major International Models

2

Specification Beveridge Model
National Health Insurance

Model
Bismarck Model “Out of Pocket”

Benefits • Access to a standardized
set of benefits available
across the country

• Evidence-based decision-
making in benefit
selection

• Medically necessary
defined federally, but
local decisions vary on
benefit package

• Evidence-based
decision-making

• Set by a federal committee
in collaboration with the
regional “sickness funds”

• Use evidence in decision
making

Varies

Costs • Free at point of service;
no out of pocket costs

• Government controls
prices

• Government
processes all claims;
aims to reduce the
amount of
duplication of
services

• Financial barriers to
treatment are
generally low

• Patients usually can
choose their
healthcare
providers

• Some copays in Germany for
nursing homes,
pharmaceuticals,
and medical aids

• Government tightly controls
prices while insurers do not
make a profit, even if more
than one health plan option

No cost controls in
place

Administration Central/national government
administration

Administered by provinces
and territories in Canada

De-centralized regional
administration with national role

NA

Delivery
System

• The government owns
majority of hospitals and
clinics

• Most doctors are
government employees

• Hospitals and providers
remain private

•

• Health providers are
generally private institutions

• Social health insurance funds
are considered public

• Majority are private
entities

• Some countries
have some public
investment in
hospitals

Health Plans Government run; eliminates
competition in the market

In some countries, can
purchase private insurance
for additional needs or in
substitution

Some with a single insurer
(France, Korea); other countries
may have multiple, competing
insurers (Germany, Czech

More availability of
health plans emerging;
if can afford

High Level Overview of Major International Models

3

Specification Beveridge Model
National Health Insurance

Model
Bismarck Model “Out of Pocket”

Republic) or multiple, non-
competing insurers (Japan).

Funding Income taxes Income taxes Payroll deductions Predominately self-pay
Additional
information

• Tighter cost controls than
Bismarck Model

• Waiting lists for obtaining
some services

• Overuse of services
• Maintain adequate tax

funding; especially in an
emergency crisis or rising
costs

• Standardized population
health-focused efforts on
prevention

• Sweden has some
features of a national
health service such as
hospitals run by county
government; but other
features of national
health insurance such as
physicians being paid on
an FFS basis

• See notes below re
Australia

• Waiting list to obtain
elective services, but
also for some
subspecialty care

• Aging population issue
• Some note overuse of

services

• Some countries have shifted
to move to include elements
of the Beveridge model (i.e.
Germany and Hungary)

• Can substitute private
insurance

• Higher rates of cost growth
noted than Beveridge model

• Can see overuse of services
• Some evidence of increased

satisfaction with de-
centralized administration
(by region)i

• Issue of increased retired
population to employed
citizens

• Payroll tax may impact
interest by international
companies to locate in the
country

Poorer citizens unable
to afford needed care

See notes below re
South Africa

Notes:

* South Africa is developing a Social Health Insurance Scheme through which all South Africans will be covered; providers are a mix of public and
private entities.

High Level Overview of Major International Models

4

**Australia: The federal government funds Medicare, a universal public health insurance program providing free or subsidized access to care for
Australian citizens, residents with a permanent visa, and New Zealand citizens following their enrollment in the program and confirmation of
identity. Restricted access is provided to citizens of certain other countries through formal agreements. Other visitors to Australia do not have
access to Medicare. Three levels of government are collectively responsible for providing universal health care: federal; state and territory; and
local. The federal government mainly provides funding and indirect support to the states and health professions, subsidizing primary care
providers through the Medicare Benefits Scheme (MBS) and the Pharmaceutical Benefits Scheme (PBS) and providing funds for state services. It
has only a limited role in direct service delivery. Australian states have most of the responsibility for public hospitals, ambulance services, public
dental care, community health services, and mental health care. They contribute their own funding in addition to that provided by federal
government. Local governments play a role in the delivery of community health and preventive health programs, such as immunization and the
regulation of food standards.

The table’s content is from several sources, including the following;

• Commonwealth Fund’s detailed profiles of several industrialized countries are available at:
https://international.commonwealthfund.org/

• John Hopkins overview of international models available at:
http://web.jhu.edu/administration/provost/docs/101014%20Minor%20Speech%20PP.pdf

• Oregon’s Universal Access to Care Work Group Meeting materials and Final Report December 2018 – Available at:
https://www.oregonlegislature.gov/salinas/HealthCareDocuments/UAC%20Work%20Group%20Report%20%20FINAL%2012.10.18%20.p
df

• Princeton University article on the Four Models: available at: https://pphr.princeton.edu/2017/12/02/unhealthy-health-care-a-cursory-
overview-of-major-health-care-systems/

o Concluding notes from Princeton article: “Each country faces different concerns when attempting to construct a system for
health care delivery. No health care system is completely alike, and none are completely free of problems; a method that works
for one country is not likely to be completely transferrable to another due to different health concerns, priorities, and mindsets.
Though complicated, considering the implications of various models is essential to implementing an American health care
system that is fair and just to all citizens, not just the wealthiest. Its construction should emerge from the collaboration between
policy experts, health providers, politicians, and other stakeholders to attempt to address the many complicated aspects of the
health insurance market”

CHAPTER 15

Public Health Insurance

OBJECTIVES

1. Identify the key policy goals of public health insurance plans.
2. Describe the Medicare and Medicaid programs in terms of

populations covered, services included, financing
arrangements, reimbursement strategies, and pro-
competition policies.

3. Explain some of the key issues surrounding public health
insurance.

4. Identify the key types of policies required for the delivery of a
public health insurance program and indicate their effect on
the achievement of social goals.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.1 Introduction

This chapter presents an economic framework that can be used to
analyze selected aspects of public health insurance coverage in
the United States. Health insurance coverage is a critical element
of the healthcare system, and public policies related to health
insurance influence the functioning of the healthcare market. In
this chapter, a discussion of how the economic framework can be
used to analyze policy choices, a discussion of policy goals in
relation to the economic framework, and an assessment of policy
choices in terms of the social objectives are provided.

In Section 15.2, an overview of public health insurance in the
United States is presented. The focus is on the Medicare and
Medicaid programs, two of the major national public health
insurance plans in the U.S. In Section 15.3, the issue of health
insurance coverage is discussed. In Section 15.4, information on
recent trends in public health insurance is presented. In Section
15.5, the social goals of Medicare are discussed. In Section 15.6,
a sample of solutions proposed in recent years is described and
discussion on how each solution contributes to or obstructs the
achievement of specific health policy goals is described. Section
15.7 considers alternatives to Medicaid as approaches to
addressing issues of inequity and access to needed healthcare
services.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.2 Public Health Insurance

Public health insurance in the United States for nonmilitary
populations involves two key programs aimed at specific target
populations. These are the federal Medicare program and the
state-federal Medicaid programs. The majority of states also
participate in Medicaid expansion. Some states also provide
additional public health insurance programs. Often these
additional state programs will be tied in some way to Medicaid, but
in some circumstances they are not. In this chapter, the focus is on
Medicare and Medicaid, including Medicaid expansion.

15.2.1 Medicare

15.2.1.1 Who Is Covered
Medicare is a national health insurance program for a subset of
the U.S. population. Medicare was established in 1965 under Title
XVIII of the Social Security Act and began coverage of
beneficiaries on January 1, 1966. Originally, Medicare covered
individuals 65 years of age or older, regardless of income or
medical history, as long as they or their spouse contributed to
Social Security for at least 10 years (40 quarters), Railroad
Retirement, or federal retirement programs. In 1972, Medicare
was expanded to cover individuals under 65 with certain
permanent disabilities or who had end-stage renal disease
(ESRD), the permanent failure of kidneys requiring dialysis or a
transplanted kidney. Medicare was again expanded in 2001 to
cover individuals with amyotrophic lateral sclerosis (ALS, or Lou
Gehrig’s disease).

In 2019, Medicare covered about 64 million people of which 22
million, or almost 34%, were enrolled in Medicare Advantage
plans. Of the individuals covered by Medicare, about 85% were 65

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

and older and 15% were disabled. Medicare covered about 18% of
the total population (Annual Report of the Boards of Trustees,
2019; Kaiser Family Foundation, 2019). Between 1966 and
2000, the population covered by Medicare doubled and is
projected to double again to about 80 million by 2030.

The population served is also diverse. For example, in 2017, about
55% of the beneficiaries were female, 75% were White, and 12%
were under 100% of the national poverty level and another 20%
were between 100% and 199% of the federal poverty level. As the
characteristics of the population change over time, the diversity of
the covered population will become more racially and ethnically
diverse. About 25% of beneficiaries reported only fair to poor
health in 2017, with disproportionate representation in the
nonelderly, Black, Hispanic, and lower-income populations. Also,
about 90% of noninstitutionalized Medicare beneficiaries have one
or more chronic illnesses, with 68% with two or more chronic
conditions, and 17% with six or more chronic conditions (CMS,
2018).

15.2.1.2 What Is Covered?
Medicare consists of four parts: Part A, Hospital Insurance; Part B,
Supplemental Medical Insurance; Part C, Medicare Advantage;
and Part D, Prescription Drugs. Each of these will be discussed in
more detail in the following paragraphs.

Part A, Hospital Insurance (HI), covers inpatient hospital services,
limited skilled-nursing facility services for rehabilitation, home
health care, and hospice services. Most individuals are
automatically eligible for Part A coverage if they are a U.S. citizen
or permanent resident, if they or their spouse are eligible for Social
Security payments, have made payroll tax contributions for 40
quarters (10 years), and are age 65 or older. These individuals are

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

eligible regardless of income or asset level or any preexisting
medical condition.

Individuals under age 65 qualify for Medicare Part A if they have
received Social Security Disability Income (SSDI) payments for at
least 24 months; these individuals do not have to have made
payroll tax contributions for 40 quarters. In addition, people with
end-stage renal disease or Lou Gehrig’s disease are eligible for
Medicare as soon as they begin receiving SSDI payments.
Individuals age 65 and older not eligible (e.g., who have not
contributed to payroll tax for 40 quarters) can enroll in Part A by
paying a monthly premium.

Individuals who are eligible for Medicare Part A do not pay a
premium. Part A beneficiaries on original Medicare (not Medicare
Advantage) are responsible for a deductible before Medicare
begins to pay; in 2019, the Part A deductible was $1364 for each
episode or “spell of illness” for an in-hospital stay during the
benefit period. In addition, beneficiaries generally pay a
coinsurance amount for extended hospital stays (days 61–90) or
skilled-nursing facility stays (days 21–100). In 2019, the cost per
day of extended hospital stay was $341.04 for days 61–90 and
$682 for each lifetime reserve day after day 90 (up to 60 days over
the beneficiary’s lifetime). Beyond the lifetime reserve days the
beneficiary is responsible for all costs. For extended nursing
facility stay beneficiaries paid $175.50 per day for days 21–100,
and were responsible for all costs beyond 100 days. If an
individual is enrolled in a Medicare Advantage Plan, the rules may
differ, but the plan must provide at least the same coverage as
original Medicare.

If an individual has Part A (hospital insurance), then the individual
is eligible for hospice care. To qualify for hospice care, a physician
must certify that the individual is terminally ill with a life expectancy
of 6 months or less. And, the individual agrees to accept palliative

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

care instead of curative care, and the individual signs a statement
choosing hospice instead of other Medicare-covered benefits to
treat the terminal illness and related conditions. Then, the
beneficiary pays nothing for hospice care. There may be a
copayment of 5 dollars for each prescription drug and other similar
products for pain relief and symptom control while at home. The
individual may, however, be required to pay 5% of the Medicare-
average amount for inpatient respite care. Respite care is short-
term inpatient care provided to the beneficiary in order to relieve
family members or other caregivers that are caring for the
beneficiary at home. It is reimbursed for no more than five
consecutive days per respite period. Medicare does not cover
room and board for hospice care in the home or other facility (like
a nursing home).

Part B, Supplementary Medical Insurance (SMI), Original
Medicare assists beneficiaries paying for medically necessary
physician services, outpatient services, home health services,
preventive services, ambulance services, clinical laboratory
services, durable medical equipment (DME), kidney supply and
services, outpatient, inpatient, and partial hospitalization for mental
health services, and diagnostic tests. In addition, it covers an
annual comprehensive wellness visit and personalized prevention
plan. Beneficiaries pay nothing for preventive services if the
provider accepts assignment. Assignment means that the provider
agrees (or is required by law) to accept the Medicare-approved
amount as full payment for covered services. Unlike Part A,
however, Part B is voluntary and beneficiaries are required to pay
a premium for the program (in 2019 the base premium was
$135.50 per month, and additional premium amounts were
charged for individuals with higher incomes).

About 95% of the rate of increase in the premium is limited to the
cost-of-living increase in Social Security benefits. Also, the

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

premium paid is related to income; single individuals with an
income greater than $85,000, or couples filing separately with
income greater than $85,000, or couples with an income greater
than $170,000 in 2019 pay a higher premium, ranging from
$189.60 to $460.50 per month. Part B benefits are also subject to
annual deductibles ($185 in 2019) and a 20% coinsurance rate,
although the preventative services are exempt from the
coinsurance and deductible. Over 90% of eligible beneficiaries
enroll in Part B.

Part C, Medicare Advantage plans, are alternatives to the Original
Medicare plan. Part C allows beneficiaries to enroll in a private
plan, such as a health maintenance organization (HMO), preferred
provider organization (PPO) or a private fee-for-service plan with
specific characteristics, such as an accountable care organization.
These Medicare Advantage plans contract with Medicare and
must cover all of the medically necessary services that Original
Medicare covers, although Original Medicare still covers the cost
of hospice care, some new Medicare benefits, and some costs of
clinical research studies. In addition, most Medicare Advantage
plans offer coverage for items not covered under Original
Medicare, such as vision, hearing, dental, and some wellness
programs like gym memberships. Many of the plans cover other
health-related services that promote health and wellness. Most
include Medicare prescription drug (Part D) coverage. In addition
to the Part B plan, most plans charge an additional premium.

Part D, Outpatient Prescription Drug Benefit, is a relatively recent
addition to Medicare, implemented in 2006. It is an optional benefit
offered to all Medicare beneficiaries. If an individual does not
enroll in Part D when first eligible, then usually a late enrollment
penalty is required for the delayed enrollment, which is applied as
long as the individual is enrolled in the prescription drug coverage.
Private plans contract with Medicare to provide coverage to

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

voluntarily enrolled beneficiaries. Beneficiaries enrolled in the plan
typically pay a monthly premium, and individuals with modest
income and assets are eligible for assistance. Beginning in 2011,
the health reform law establishes a new Part D premium program
similar to the Part B program and gradually phases in coverage of
the Part D coverage gap (the donut hole) by 2020. Beneficiaries
then pay 100% of drug costs until they have spent $4550 out-of-
pocket for prescriptions. Both original Medicare and Medicare
Advantage plans offer Part D coverage.

Each Part D drug plan under Medicare is required to provide at
least a standard level of coverage set by Medicare. Plans are
permitted to vary the list of prescription drugs they cover (their
formulary) and how they place drugs in two different “tiers” on their
formulary. These formularies cover both generic and brand-name
prescription drugs. The formularies are required to include at least
two drugs in the most commonly prescribed categories and
classes, but can select which specific drugs are covered.
Beginning in 2019, drug plans that meet certain requirements can
immediately remove brand-name drugs from the formularies and
replace them with new generic drugs or change the cost of
coverage rules for brand names when adding new generic drugs.
Table 15-1 provides information on the premiums for Part D
coverage in 2019. The additional paid above the plan’s premium is
paid directly to Medicare, and not to a Medicare Advantage plan.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

Table 15-1 Filing Status and Yearly Income in 2017*

Deductibles charged by plans vary across the plans, but the
maximum deductible in 2019 was $415. Some plans do not have a
deductible. Many plans also have a copayment per tier (a fixed
amount) or a coinsurance rate (percent of the cost of the drug) per
prescription.

15.2.1.3 Financing Medicare
The primary sources of Medicare funding are general revenues
(43%), payroll tax revenues (36%), and premiums (15%) paid by
beneficiaries. In addition, taxation of Social Security benefits (2%),
transfers from states (1%), and other sources, such as interest
(1%) also help fund Medicare.

Part A, the Hospital Insurance Trust Fund, receives funding
through a dedicated tax levied against earnings (88%). This tax
(2.9%) is paid equally by employers and employees (1.45% each),
with self-employed individuals paying both parts. Beginning in
2013, the health reform law increases the tax for higher-income
individuals (greater than $200,000 per individual and greater than
$250,000 per couple) to 2.35% from 1.45%. This tax is levied
against earnings (salary and wages), not total income. Part A
receives about 1% from premiums, 8% from taxation of Social
Security benefits, 2% from interest, and 1% from other sources.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

Part B, the Supplementary Medical Insurance Trust Fund, is
financed in part from general revenues (72%) and in part by
premiums (26%) paid by beneficiaries voluntarily enrolled in the
program. The goal is to have premiums to cover about 25% of the
costs of Part B, and general revenues cover about 75%, interest
and other sources cover approximately 1% each. Higher-income
individuals pay a larger share toward the premiums.

Part C, the Medicare Advantage program, is not separately
funded. It provides benefits under Parts A, B, and D and so
receives its funding through these sources.

Part D, the Prescription Drug program, receives funding from
general revenues (71%), premiums from beneficiaries (17%), and
state payments for dual eligible individuals (12%). The monthly
premiums from beneficiaries are established to cover 25.5% of the
costs of the standard plan and Medicare funds the other 74.5%.
As under Part B, higher-income individuals pay a larger share of
the coverage and therefore receive a smaller subsidy from
Medicare.

Financing the Medicare program continues to face a number of
challenges. These challenges include rising healthcare costs, a
population that continues to age, and a declining ratio of workers
contributing to the system to beneficiaries enrolled in the program.
Efforts to control the costs of Medicare remain a federal priority
because it accounted for about 15% of the total federal budget in
2018 and is projected to increase to 18% in 2029 (Cubanski,
Neuman, & Freed, 2019; Potetz, Cubanski, & Neuman, 2011).

15.2.1.4 Paying Providers
Except for Medicare Advantage (Part C) arrangements, Medicare
pays most providers on a fee-for-service basis, with bundling of
services occurring under the hospital prospective payment system
with MS-DRGs. Physician fees include an aggregation of elements

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

under the RBRVS system, and home health is paid a bundled,
capitated amount. Medicare has implemented a number of
programs to improve quality and control costs that will be
discussed later.

Medicare benefit payments totaled $731 billion in 2018, up from
$462 billion in 2008. During this period spending on Part A benefits
decreased from 50% to 41%, while Part B spending increased
from 39% to 46%. Spending on Part D increased from 11% to
13%. Medicare financed about 20% of total national healthcare
expenditures in 2017, with its share varying by the type of service.
For example, Medicare funded about 23% of the total spending on
physician services. The most rapidly growing service funded by
Medicare is prescription drugs, in which Medicare financed about
30% of national retail drug sales in 2017, compared to only 3% in
2005, the year prior to implementation of Part D. Hospitals
received about 25% of their funding from Medicare in 2017
(Cubanski, Neuman, & Freed, 2019).

Payments to Medicare Advantage plans have increased
substantially in recent years as more and more beneficiaries have
elected to enroll in these plans instead of Original Medicare. In
2018, 34% of Medicare beneficiaries were enrolled in Medicare
Advantage plans. Payments to Medicare Advantage plans for
Parts A and B benefits increased from $99 billion (21%) in $2008
to $233 billion (32%) in 2018. Total Part D benefit payments
increased from $49 billion (11%) in 2008 to $95 billion (13%) in
2018.

Medicare has experienced slower growth in spending in recent
years, mainly because of the implementation of the Patient
Protection and Affordable Care Act (ACA) and the Budget Control
Act (BCA) of 2011. The ACA introduced system reforms to
improve efficiency and quality of patient care and reduce costs.
These reforms included Accountable Care Organizations (ACOs),

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

medical homes, bundled payments, and value-based purchasing
initiatives. The ACA also included reductions in payments to plans
and providers. The BCA, through sequestration, reduced
payments to providers and plans by 2% beginning in 2013. And
while Medicare has seen an increase in enrollment as the “baby
boomer” generation begins to age into the Medicare program,
these individuals tend to help lower the average age of the
Medicare population and are healthier (Cubanski, Neuman, &
Freed, 2019).

15.2.1.5 Supplemental Insurance Coverage
Because of the risk of substantial out-of-pocket costs to Medicare
beneficiaries through deductibles, coinsurance, and uncovered
services, about 90% of Medicare beneficiaries have purchased
supplemental insurance coverage (a.k.a. Medigap plans). This
supplemental coverage takes several forms, but the goal is to
assist the beneficiaries in covering the relatively high cost-sharing
expenses of Medicare and also to cover benefits that Medicare
does not cover currently. While traditionally the primary source of
supplemental coverage was employer-sponsored benefits, large
employers offering retiree health benefits have declined
substantially due to rising costs and the economic environment.
However, the number of beneficiaries enrolled in Medicare
Advantage plans has been increasing, and the additional coverage
offered by these plans has helped to cushion some of these
changes.

Another source of supplemental coverage comes from state
Medicaid programs, which provide some assistance to low-income
Medicare beneficiaries who also have modest assets. The
Medicaid programs often pay the Parts B and D premiums for
these eligible beneficiaries to ensure they have coverage under
these voluntary programs. Medicaid may also pay premiums for
individuals who don’t qualify for subsidized enrollment but are

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

eligible to pay premiums to join the program. More about these
“dual-eligible” beneficiaries will be provided in the Medicaid
section.

Medicare beneficiaries also have the ability to purchase
supplemental private insurance plans, usually called Medigap
plans. These Medigap policies help cover the cost-sharing
requirements of Medicare and fill in the gaps in the benefits. These
policies are designed to cover the deductibles, coinsurance, and
copayments associated with Medicare-covered services. While
these plans reduce financial burdens to the beneficiaries, they do
reduce the typical incentives associated with having beneficiaries
retain some financial responsibility, impacting the price
consciousness of consumers. In general, these Medigap policies
must conform to 1 of 10 standard benefit packages. Each of these
packages offers coverage of a different set of benefits from which
the beneficiaries can select. The monthly premium charged varies
by the benefits covered, the insurer, the age of the beneficiary, and
the place of residence. Beginning in 2020, Medigap plans
purchased by new Medicare enrollees will not be allowed to cover
the Part B deductible.

Some beneficiaries enroll in multiple supplementary plans to
provide more complete coverage of medical expenses. Even with
all these supplemental policies, many Medicare beneficiaries still
experience substantial out-of-pocket expenses. For example,
Medicare beneficiaries spent over 14% of their income out-of-
pocket for health care in 2013, and that percentage has been
increasing with economic conditions and changes in premiums
and services covered. In 2013, one-fourth of Original Medicare
enrollees spent about 30% of their income on out-of-pocket cost,
even with Medigap coverage. As out-of-pocket costs increase,
Medicare beneficiaries face additional challenges to maintaining
daily necessities. As cost-sharing increases, more Medicare

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

beneficiaries may have to choose between basic necessities and
health care, with the results being adversely impacted health.

15.2.2 Medicaid

15.2.2.1 Who Is Covered?
Medicaid is another public insurance program. Medicaid was
established in 1965 as part of the “Great Society” program under
Title XIX of the Social Security Act; it was implemented as of July
1, 1966. Medicaid was established as an entitlement program to
provide financial assistance for healthcare services and long-term
care services for certain low-income individuals and families who
were receiving cash assistance (welfare recipients). However,
since its beginning, it has been expanded to increase eligibility to
cover additional individuals living below or near the poverty level.
Today, Medicaid covers both working and jobless families and
children, pregnant women, individuals with a variety of physical
and mental conditions, and elderly individuals. The role of
Medicaid has expanded substantially under health reform.

Unlike Medicare, which is a federal program operated under
guidelines established by the Social Security Administration and
administered through the Centers for Medicare and Medicaid
Services (CMS), Medicaid is a state-federal partnership program.
The administration of Medicaid is at the state level, according to
federal requirements. Medicaid participation by states is voluntary,
although all states currently participate in the original Medicaid
program, and it is financed jointly by federal and state
governments, with the federal government “matching” dollars
expended by the states. The federal match rate (Federal Medical
Assistance Percentage, or FMAP) to the states varies and is
based on average state per capita income relative to the national
average. By law, FMAP is at least 50% (meaning that for every
dollar the state spends on Medicaid, the federal government will

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

provide another dollar for Medicaid services) and reached as high
as 74.94% for the fiscal year 2020. The higher the FMAP, the
greater the percentage of total Medicaid costs that are financed by
the federal government.

In 2009, the American Recovery and Reinvestment Act
temporarily increased the FMAP, and for 2010, the FMAP ranged
from 50% to 85%. This increased the federal share of total
Medicaid spending in 2010 from 57% to 66%, enabling states to
cover additional individuals due to the economic conditions.

Because most private insurance is obtained through place of
employment, when individuals lose employment, they also usually
lose insurance coverage. The expansion in Medicaid during the
period covered by the American Recovery and Reinvestment Act
was designed to provide financial assistance to individuals until
they became reemployed and began receiving insurance coverage
again (Doty, Collins, Robertson, & Garber, 2011).

Under the partnership, Medicaid is administered by the states
under broad federal guidelines and oversight by CMS. The broad
federal guidelines enable states to exercise considerable variation
in the design of their programs. While state participation in
Medicaid is voluntary, currently all states participate. The federal
government defines minimum requirements that states must meet,
but the states have broad authority to establish eligibility criteria,
benefits covered, provider payments, delivery systems, and a
number of other conditions for their program. As a result, the
percentage of the population covered across states varies widely.

In addition, states may request a waiver from the federal
government, enabling them to design and operate their program
outside the federal guidelines. A typical reason for requesting a
waiver is to adopt a new model of coverage and delivery system
for their low-income population. The waiver capability and the
inherent flexibility of the Medicaid program have enabled states to

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

adapt and evolve to meet the needs of their populations better.
States can adjust more quickly to changing economic conditions or
medical conditions (such as the HIV/AIDS pandemic) to coordinate
and manage the health of their populations. The flexibility also
means that there is substantial diversity in who is covered across
the states.

In general terms, not only must an individual qualify based on
financial criteria, but the individual must also belong to a group
designated as “categorically” eligible for coverage. The federal
government mandates that pregnant women and children under 6
with family incomes less than 133% of the federal poverty level
(FPL) be covered. In addition, children age 6–18 with family
income below 100% of the FPL must be covered, as must parents
below states’ 1996 welfare eligibility levels. Most elderly
populations and individuals with disabilities and on SSI must also
be covered. States do, however, have flexibility in determining
what counts as income for the program, with most states including
assets in the measure. In addition to the minimum mandatory
groups, states have the option of expanding coverage to additional
groups. These optional groups covered typically extend the upper
income levels for covered groups.

Medicaid is an entitlement program. Once a state has established
the eligibility criteria for its Medicaid program, then all individuals in
the state meeting the criteria have a federal right to Medicaid
coverage; the individuals are entitled to coverage, and enrollment
cannot be limited by the state, nor can waiting lists be applied.
One federal criterion is that individuals must be American citizens
or specific categories of lawfully residing immigrants who have
resided in the United States for 5 years.

Medicaid is currently core to the financing structure of the U.S.
healthcare system and expanded substantially under health
reform. Currently, more children are covered under Medicaid than

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

any other source. Also, the majority of adults who are covered
under Medicaid are in working families, holding low-paying jobs
without access to employer-based health insurance. Many
nonelderly individuals with disabilities unable to obtain coverage in
the private market or for whom the coverage available does not
meet all their needs, rely on Medicaid. Medicaid also covers
pregnant women, with about 40% of all births occurring to
Medicaid mothers.

Another group of enrollees in Medicaid are the low-income
individuals on Medicare, the “dual-eligible” individuals. In 2017,
there were 12 million individuals dually enrolled. The dual-eligible
populations are poorer than the other Medicare populations and
also tend to have poorer health, with higher rates of chronic
illness, require more long-term care needs, and have greater
social risk factors. In 2017, 41% of the dually enrolled individuals
had at least one mental health diagnosis.

About one in six Medicare beneficiaries are also enrolled in
Medicaid, which assists enrollees in paying their premiums for
Parts B and D, cover the cost-sharing obligations of Medicare, and
cover services not covered under Medicare, especially custodial
long-term care in nursing facilities. Because of poorer health and
services needed, these individuals place greater financial strain on
the Medicaid program than the typical Medicaid recipient.
Typically, Medicare pays for covered services first, with Medicaid
the payer of last resort. Medicaid may also pay for services
Medicare does not cover and will pay the premium for those
individuals to enroll in Medicare Parts B and D plans.

In 1997, the Children’s Health Insurance Program (CHIP) was
created under Title XXI of the Social Security Act. CHIP is another
insurance program that provides federal matching funds to states
to provide health coverage to children in families that have
incomes that are too high to allow them to qualify for Medicaid but

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

do not have sufficient income to enable them to purchase private
health insurance coverage. CHIP allowed states substantial
flexibility in the expansion of insurance coverage of children, but
every state now covers children and families to at least 200% of
the federal poverty level.

This program can either be included with the state’s Medicaid
program or established as an independent program or as a
combination. The independent design allows states more flexibility
and requires states to describe the characteristics of their program
in a state health plan. If the state includes CHIP in their Medicaid
program, then the same rules apply as to other recipients,
although eligibility is extended to higher-income individuals. As
eligibility for coverage became more expansive, concerns were
raised that the public insurance program would “crowd out” private
insurance coverage. The concern was that the lower, subsidized
premium of CHIP would cause parents to drop dependent children
from their private insurance plan and enroll them in the public
program.

The goal of the Affordable Care Act (ACA) was to reduce the
number of uninsured individuals in the United States by providing
a number of affordable care options through Medicaid and the
health insurance marketplace. The ACA authorized states to
expand Medicaid eligibility if they wished to enroll individuals
under 65 and families with incomes below 138% of the federal
poverty level (FPL). It also standardized the rules for determining
eligibility and providing benefits through Medicaid, CHIP, and the
health insurance marketplace. In June 2012, the Supreme Court
ruled that participation by states to expand Medicaid coverage had
to be voluntary.

Under Medicaid expansion, the cost-share of the new enrollees
covered was financed 100% by the federal government for the
years 2014 through 2017, and then gradually declining until it

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

reached 90% federal share in 2022 and beyond. This federal
share percent is much more generous than the 50%–75%
(averaging 57%) for existing Medicaid expenditures. As of 2019,
14 states were still not participating in Medicaid expansion.

Even with the expanded coverage under Medicaid, there are still
groups, or categories, of individuals who are not eligible for
Medicaid, regardless of income level. Low income is a necessary
condition but not a sufficient condition for coverage. One group of
the uninsured is the parents of children who are on Medicaid
because the income requirements are more restrictive for adults
than for children. Another group is adults without dependent
children, who no matter how low their income is, unless they are
pregnant or disabled, do not qualify for Medicaid. This latter group
was the primary focus of the Medicaid expansion program. Most
states do not cover lawfully resident immigrants during their first 5
years in the United States. Federal law prohibits undocumented
immigrants from being covered by Medicaid.

15.2.2.2 What Is Covered?
Medicaid covers a broad array of services, both mandatory and
optional. The federal government mandates each state offer a
specific set of services in order to participate in the program. The
federal government also allows states to cover additional optional
services under the Medicaid allowable services. These optional
services qualify for the same federal match as the mandated
services. The specific optional services covered vary across
states.

Because of the rather diverse needs of the Medicaid population,
not only are the typical benefits covered under private insurance
provided, but Medicaid programs also typically cover dental,
vision, transportation, translation services, and long-term care
services and support. Table 15-2 provides a list of mandatory

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

services as well as typical optional services covered. States
employ a number of strategies to limit utilization of services, such
as concurrent and retrospective utilization review, prior
authorization, restrictive definitions of medical necessity, and case
management, especially for high-risk/high-cost cases.

Table 15-2 Services Covered by Medicaid Programs

Mandatory Services
Commonly Offered Optional
Services

Inpatient hospital services Prescription drugs

Outpatient hospital services Clinic services

Early and periodic screening, diagnostic, and

treatment (EPSDT) services for individuals under 21

years of age

Physical therapy

Nursing facility services Occupational therapy

Home health services Speech, hearing, and language

disorder services

Physician services Respiratory care services

Rural health clinic services Other diagnostic, screening,

preventive, and rehabilitative

services

Federally qualified health center services Podiatry services

Laboratory and X-ray services Optometry services

Family planning services Dental services

Nurse midwife services TB-related services

Certified pediatric and family nurse practitioner

services

Dentures

Freestanding birth center services (when licenses or

otherwise recognized by the state)

Prosthetics

Transportation to medical care Eyeglasses

Tobacco cessation counseling for pregnant women Chiropractic services

Tobacco cessation, Other practitioner services

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

www.governing.com/news/state/gov-Study-
Medicaid-Anti-Smoking-Programs-Lead-to-
Significant-Savings.html

Private duty nursing services

Personal care

Hospice

Case management

Services for individuals age 65

or older in an Institution for

Mental Disease (IMD)

Services in an intermediate

care facility for the mentally

retarded

State plan home-and-

community based services

1915(i)

Self-directed personal

assistance services 1915(i)

Community first choice option

1915(k)

Inpatient psychiatric services

for individuals under age 21

Health homes for enrollees with

chronic conditions—Section

1945

Other services approved by the

secretary*

*This includes services furnished in a religious nonmedical healthcare institution,
inpatient psychiatric services for individuals under age 21, emergency hospital services

by a non-Medicare certified hospital, and critical access hospital (CAH).

Mandatory & Optional Medicaid Benefits. Retrieved from

https://www.medicaid.gov/medicaid/benefits/list-of-benefits/index.html

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

For children under 21, the mandatory coverage of Early and
Periodic Screening, Diagnostic, and Treatment (EPSDT) benefit
provides a very comprehensive set of services to correct or
ameliorate acute and chronic physical and mental health
conditions. The services covered under the EPSDT benefit are
broader than most private insurance plans and are especially
important for children with disabilities.

Also not widely provided under private health insurance are the
long-term services and support provided under Medicaid, although
individuals can purchase long-term care policies privately.
Medicaid includes services provided in skilled and intermediate-
level nursing homes, as well as such community-based services
as home health, rehabilitation therapy, medical equipment, adult
daycare, and respite care for caregivers, to enable individuals to
live as independently as possible. Medicaid is the largest public
payer of mental health care, and Medicaid also covers about two-
thirds of all nursing home residents and about 40% of individuals
with HIV.

15.2.2.3 Financing Medicaid
The federal-state partnership organizational structure of Medicaid
results in financing also shared between the two. There is a
statutory formula that dictates how the federal government
matches the spending of each state. The federal match rate,
FMAP, is based on a state’s per capita income relative to the
national average—the lower a state’s per capita income, the
higher the rate paid by the federal government. There is not a limit
on total Medicaid expenditures, but expenditures are limited by the
ability of the state to generate its share of the expenses. This
creates a barrier for many states that are required to balance their
budgets, because states must first spend the Medicaid monies
paying providers and then get reimbursed retrospectively from the
federal government for their share.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

The Basic Health Program was part of the ACA and provides
states an option to establish health benefit programs for low-
income residents who would otherwise be eligible to purchase
coverage through the health insurance marketplace. The Basic
Health Program is designed to provide affordable coverage and
better continuity of care for people whose income fluctuates above
and below Medicaid and CHIP levels. States may offer coverage
to individuals with incomes between 133% and 200% of the
federal poverty level.

For most states, Medicaid is the largest source of federal revenue
for the state, while it tends to be the second-largest sector of a
state’s budget, behind education. Because most states must
balance their budgets, generating revenue to support Medicaid
can be difficult, especially in economic downturns, when state
revenues decline while the enrollment in Medicaid increases.
However, because increased Medicaid spending by the state
results in an influx of federal dollars, it increases the multiplier
effect of those dollars, as businesses and residents generate
successive rounds of earnings and purchases. This influx of
federal dollars into the state’s economy provides an incentive for
states to focus on health care and not necessarily reduce
coverage of their populations, although states are forced to control
costs to balance their budget.

15.2.3 Paying the Providers

15.2.3.1 Fee-For-Service
There are two generic types of healthcare financial coverage for
providers under Medicare: fee-for-service and per capita (or
capitation) payment, although recently Medicare has implemented
a blended strategy combining the two types of payment. In the fee-
for-service plan, the Medicare program sets prices for individual
patient contacts or encounters. Medicare has developed systems

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

for classifying services of providers for most types of care
supplied; these systems now include inpatient hospitalization,
outpatient care, home care, and skilled-nursing facility care. Any
classification system can divide cases or patients into groups of
patients or encounters; the patients within each group are
assumed to use a similar amount of resources. Each group is
assigned a relative weight, and a dollar value is assigned to a
weighted unit. Medicare adjusts the monetary prices for a variety
of factors, including whether the provider is in an urban or rural
area, area wage and cost-of-living levels, and provider
characteristics (e.g., teaching versus nonteaching units). The
result is a complex array of prices that are being paid for patients
with the same diagnosis.

The inpatient hospital stays under Medicare Part A are paid a
prospectively set rate and the payments system is referred to as
the inpatient prospective payment system (IPPS). Under IPPS,
hospitals are paid according to the Medicare Severity Diagnosis
Related Group (MS-DRG) system. The original DRG system was
implemented in 1983, with 467 DRGs; the system was modified to
incorporate the severity of cases within the DRGs in 2007, with
over 700 groups established. In 2019 there were over 750 groups
established. Each group is assigned a basic weighted rate that is
then multiplied by the conversion rate to obtain the amount paid
for patients hospitalized in that group. The group reflects the
average resources used to treat Medicare patients in that MS-
DRG.

This payment rate is divided into two components: labor-related
and nonlabor-related, with proportions based on the wage index.
In defining the service area of hospitals to be used in the labor-
related adjustment, a commuting ratio of workers commuting from
home to work is used in defining the hospital’s labor market. For
2020, the base rate was $5654.75 per admission. If the wage

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

index was greater than one, then the labor share accounted for
68.3% of the relative weight, or $3862.19 per unit, and the
nonlabor share accounted for 31.7%, or $1792.56 per unit. If the
wage index was equal to or less than one, then the labor share
was 62.0%, or $3505.95 per unit, and the nonlabor share was
38.0%, or $2148.80 per unit. These base rates are multiplied by
the relative weight of the MS-DRG to obtain the amount the
hospital will receive for a patient hospitalized with that diagnosis.

Under programs established by the ACA, additional adjustments to
the labor and nonlabor wage index numbers are made. For
hospitals that submitted quality data and were a meaningful user
of an electronic health record (EHR) then the amounts they were
paid for the labor and nonlabor wage index components were
increased by 2.2%. If the hospitals submitted quality data but were
not a meaningful user of an EHR, their amounts were increased by
0.35%. If the hospitals did not submit quality data but were a
meaningful EHR user, the amounts were increased by 1.85%. For
hospitals that did not submit quality data and were not a
meaningful user of an EHR, their amounts were decreased by
0.4%.

Hospitals may receive an add-on payment to the base payment if
they treat a high percentage of low-income patients, known as the
disproportionate share hospital (DSH) adjustment. The ACA
modified how hospitals are reimbursed for serving a
disproportionate share of low-income patients. Beginning in FY
2014, hospitals receive 25% of the amount they previously would
have received under the current statutory formulas for Medicare
DSH. The remaining 75% of what would have been paid as
Medicare DSH becomes available for uncompensated care
payments after the amount is reduced for changes in the
percentage of individuals that are uninsured in the hospital’s
service area.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

If a hospital is an approved teaching hospital, then it receives an
indirect medical education (IME) adjustment percentage add-on
payment. This rate depends upon the ratio of residents-to-beds for
operating costs and on the ratio of residents to average daily
census for capital costs.

The final adjustment is made for unusually costly patients—the
outlier adjustment. This adjustment is designed to protect hospitals
from unusually expensive cases. The total payment hospitals
receive for a patient in a MS-DRG then, reflects the base payment
plus DSH adjustment, plus IME adjustment, plus outlier
adjustment (see
https://www.cms.gov/AcuteInpatientPPS/01_overview.asp#TopOfPage).
Hospitals can also receive additional payments for treating
patients with certain new expensive technologies under the capital
payment rate. For 2020 the national rate was $462.61.

The IPPS payment to hospitals is also adjusted for the hospitals
participating in the value-based purchasing (VBP) program, the
hospital readmission reduction program (HRRP), and the hospital-
acquired conditions (HAC) reduction program. The hospital’s VBP
can result in the rate being adjusted upward, downward, or
remaining neutral based on the performance on a set of quality
measures. The VBP program provides incentive payments to
participating hospitals that exceed performance standards and/or
improve performance during the period. Beginning in 2017 the
reduction to base operating MS-DRG payment amounts
decreased by 2.0% for those hospitals not meeting the standards.

The HRRP allows an adjustment to the base payment to hospitals
to account for excessive readmissions for the conditions of acute
myocardial infarction, heart failure, pneumonia, chronic obstructive
pulmonary disease (COPD), total hip/knee arthroplasty, and
coronary artery bypass graft surgery (CABG). Hospitals ranking in
the lowest performing hospital-acquired conditions (HAC)

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

reduction program quartile will receive payment equal to 99% of
what the IPPS would normally pay the hospital.

Medicare has also implemented a prospective payment system for
post-acute home care. A classification system was developed that
is based on the patient’s diagnosis, clinical factors, functional
factors, and on therapeutic needs (physical therapy [PT], speech-
language pathology therapy [SLP], and occupational therapy
[OT]), medical social services, routine and nonroutine medical
supplies, and home health services (Liu, Gage, Harvell,
Stevenson, & Brennan, 1999; Medicare Learning Network,
2018). As with inpatient care, a weight is assigned to each group
in the class, and a price per weighted unit is set. There were 153
case-mix groups in 2018 and the rate is established to cover a 60-
day period. The Medicare home care payment system replaced a
system by which home care providers billed for individual services.
It thus represents a bundling of services, in comparison with the
payment system prior to 1999, when the prospective payment
system was introduced. The price includes a wage adjustment
factor. Outliers are also permitted for additional payment. The ACA
places an limit on home health services so that no more than 1%
of a home health agency’s (HHA’s) total payments are paid as
outliers.

Unlike hospital and home care reimbursement, the payment for
physicians under Medicare remains on an individual service basis.
Physicians are paid by fee category, called Current Procedural
Terminology (CPT). There are over 10,000 CPT codes currently.
Each service is assigned a weight; currently, the weighting system
is called the Resource-Based Relative Value System (RBRVS).
The RBRVS contains separate component weights that reflect
work performed, practice expenses, liability insurance, and
regional cost variations. A dollar value is assigned by Medicare,
which converts the resource-based weights to dollar payments. In

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

2019, this conversion figure was $36.0391. CMS has established
89 physician fee schedule (PFS) localities reflecting geographical
cost variation to adjust the payment rates for physicians.

15.2.3.2 Additional ACA Programs
In July 2014, the Medicaid Innovation Accelerator Program (IAP)
began. This program is a collaboration between the Center for
Medicaid and CHIP Services (CMCS) and the Center for Medicare
and Medicaid Innovation (CMMI). Under this program, support is
provided to state Medicaid agencies to build capacity in key
program functional areas by offering targeted technical support,
tool development, and cross-state learning opportunities. The
programs in which technical support is being offered include:
reducing substance use disorder; improving care for Medicaid
beneficiaries with complex care needs and high cost; promoting
community integration through long-term services and supports;
and supporting physical and mental health integration. IAP also
works with states through its functional areas for Medicaid delivery
system reform: data analytics, performance improvement, quality
measurement, and value-based payment of financial simulations.

Another feature of the ACA was the creation of the Health
Insurance Marketplace, also known as the Health Insurance
Exchange program. The health insurance marketplace program is
a service that helps people shop for and enroll in affordable health
insurance. These are plans offered by private insurance
companies with a range of prices and features accessed through
the federal government, although some states operate their own
program. Individuals who qualify may be eligible for a premium tax
credit and other savings that would lower monthly insurance bills
and allow extra savings for out-of-pocket costs like deductibles,
coinsurance, and copayments. The premiums under the health
insurance marketplace program are based on estimated income of
the enrollee.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

Under the Medicare Shared Savings Program providers that
participate in an Accountable Care Organization (ACO) continue to
receive traditional Medicare fee-for-service payments under Parts
A and B. However, the ACO may be eligible to receive a shared
savings payment if it meets specified quality and savings
requirements. This program was a one-sided program in that the
ACOs could receive bonus payments, but were not at risk for
excess costs. Under the new Pathways to Success Program the
direction of the shared savings program is redesigned to
encourage participating ACOs to transition to a two-sided model.
Under this new model, ACOs continue to be able to share in
savings, but are now accountable for repaying shared losses.

The objectives of the Pathways to Success Program are to:
increase savings for the Trust Fund and mitigate losses, reduce
gaming opportunities, promote flexible regulatory requirements,
and promote free-market principles. Under this program, CMS
introduced additional access to telehealth services provided in a
patient’s place of residence (home or long-term care facility). Also,
the ACO can offer new incentive payments to beneficiaries for
taking steps to achieve better health. For the ACOs taking on the
risk for spending increases above the cost targets, they are held
responsible for paying back to CMS up to at least 2% of the
revenue or 1% of their cost targets. In return for accepting the risk,
they are eligible for higher levels of shared savings.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.3 Uncovered Care

Despite the existence of Medicare, Medicaid, the Medicaid
expansion program, and the mandated health insurance
requirement, many individuals either have no health insurance
coverage at all or have large gaps in coverage. According to
estimates by the U.S. Bureau of the Census, 16.3% of all
individuals (about 49.9 million) had no insurance coverage in 2010
(DeNavas-Walt, Proctor, & Smith, 2011). In 2017, the number of
uninsured increased to 28.0 million from the 27.3 million in 2016,
still much lower than the 49.9 million in 2010 (Berchick, 2018).
Most uninsured individuals (84.6%) were 19–64 years of age. The
uninsured were disproportionately located in the south, where
participation in Medicaid expansion was low. The uninsured have
lower education and are more likely to live in poverty than the
insured population. Most uninsured have at least one individual in
the family working, which poses a problem because employment
is the usual route through which health insurance is obtained.

It should be pointed out that uninsured is not the same thing as
unserved. Many individuals with no insurance still receive medical
care: they either pay the full price for this care or receive
subsidized or charity care. What is likely, however, is that they
receive less care than they would if they had insurance coverage.

In addition to those with no coverage, a substantial number of
individuals have gaps in coverage. The Medicare deductibles and
copayments can add up to a substantial amount, and individuals
who are covered by Medicare but do not have additional private
(Medigap) or Medicaid coverage can, if they become ill, incur
substantial out-of-pocket costs. This is especially true for
individuals who need nursing home care. There is very little in the
way of long-term care insurance coverage at present, although

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

private policies are available, and so individuals in nursing homes
(especially intermediate-care facilities) will be required to pay for
such care themselves, unless they “spend down” to the point at
which, if married, both incomes (less medical expenses) and their
assets are below the state Medicaid limits.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.4 Some Trends in Public Health
Insurance

In recent years, several public insurance trends have captured
interest in the public policy arena. In this section, these trends are
reviewed briefly.

15.4.1 Disbursements of the Hospital Insurance Trust
Fund
Medicare’s HI funding is tied to the growth of the portion of the
Social Security tax that is earmarked for the Hospital Insurance
Trust Fund. However, there is no automatic link between the
growth of trust fund revenues and the growth of fund expenditures,
which primarily go to reimburse hospitals (Iglehart, 1999;
Wolkstein, 1984). The revenues are based on a percentage of
payrolls and so cannot be increased by more than the increase in
payrolls, unless the Social Security tax rate is increased or, as
happened recently, the base on which the tax is levied is
increased (i.e., employment and wages have increased). In the
absence of such increases in tax revenues, large deficits in the
fund had been experienced, and until very recently, increasingly
large deficits had been predicted.

According to the 2018 Annual Report of the Board of Trustees of
the Federal Hospital Insurance and Federal Supplementary
Medical Insurance Trust Funds, expenditures from the HI Trust
Fund exceeded revenues by $1.8 billion. Deficits in the Trust Fund
are projected to continue, requiring redemption of Trust Fund
assets to pay expenditures. It is estimated that Trust Fund assets
will be depleted/exhausted in 2026.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.4.2 Medicare’s SMI Revenues and Expenditures
SMI funds come from two main sources: premiums paid directly by
the enrollees (or by Medicaid for those qualifying for Medicaid
coverage) for Parts B and D revenue funds and from general
revenue funds. Parts B and D are maintained in separate accounts
in the SMI. Originally, the premium rate for Part B was set so that
premium revenues of the SMI trust fund were one-half of all
revenues. From 1973, the growth of premiums was mandated to
be no greater than the growth of Social Security cash benefits. As
a result, since then, the premium share of total fund revenues in
Part B has fallen to about 30%. The nature of financing for both
Parts B and D is similar, with premiums and the transfer from
general revenues for each part established annually at a level
sufficient to cover the following year’s estimated expenditures.
Accordingly, each account within SMI is automatically financially
balanced each year. As in the case of the Hospital Insurance Trust
Fund, this growth in expenditures has been a major cause of
concern. However, unlike Hospital Insurance Trust Fund outlays,
Medical Insurance Trust Fund expenditures can be increased by
government appropriations.

According to the Trustee’s Report (2019), expenditures for Parts B
and D grew at an average annual rate of 6.6% and 3.6%,
respectively, over the past 5 years. Part B cost increases are
projected to grow at an annual rate of 8.3% and Part D costs are
projected to grow at an annual rate of 7.3% over the next 5 years.
A “hold harmless” provision does not allow Part B premium
increases to cause a beneficiary’s net Social Security benefits to
decrease, limiting the amount of revenue generated from
premiums.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.5 Goals of Medicare

In order to discover what the policy issues are with Medicare, the
social goals of Medicare need to be examined. It was relatively
recently that these goals were stated explicitly (Cutler, 2000; U.S.
General Accounting Office, 1999). Among these stated goals
were affordability, equity, adequacy, feasibility, and acceptance.
The definitions of these concepts given here are those of the U.S.
Government Accounting Office (GAO), which differ from the
standard economic definitions.

Affordability refers to the total costs incurred by the program.
When stating this goal, the GAO is referring to the public
component of the program and its burden on public spending.
Equity refers to the burden of payments on specific groups.
Individuals can be viewed as paying too much if they don’t have
sufficient coverage or if their premiums are too high. Individuals
can also be paying too little for premiums and copayments; with
low direct costs, they would be using too much care (from a strict
efficiency viewpoint). Adequacy refers to the availability of care.
Feasibility refers to the ability of Medicare to actually implement
changes in policy. Acceptance refers to the acceptability of the
program to consumers, intermediaries, and providers.

These goals bear some resemblance to the following very general
economic goals of health policy: economic efficiency (which has
demand, technical efficiency, and adequacy-of-supply aspects),
equity in utilization and equity in payment, quality of care, and
public expenditure control. The economic goal of public
expenditure control translates into the GAO goal of affordability.
The economic goal of equity of payment translates into the GAO
goal of equity. The economic goals of equity in utilization and
adequacy of supply translate into the GAO goal of adequacy. The

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

economic goals of quality of care and technical efficiency are not
directly addressed in the GAO goals, although quality assurance
activities are a very important component of Medicare activities
(Medicare Payment Advisory Commission, 2000, 2019). The
GAO goals of feasibility and acceptance are not directly addressed
in the general economic goals.

In order to assess Medicare policies, Medicare performance must
be evaluated in light of the policy goals. The major issues facing
Medicare include rising expenditures, hospital trust-fund deficits,
and large out-of-pocket payments for some groups of
beneficiaries. These phenomena are related to the goals of
affordability, equity of payment, and adequacy of supply. Most
importantly, the goals may well conflict with each other (otherwise
there would not be an economic problem). In the late 1990s, the
Health Care Financing Administration (the agency that
administered Medicare at that time) and the Congress instituted a
series of reforms designed to address the goal achievement
balance under Medicare. The policy initiatives were Medicare Part
C and the Balanced Budget Act of 1997. In the following section,
an overview of the policies that are available to Medicare is
provided.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.6 Policy Alternatives for Medicare

15.6.1 Economic Analysis and Alternative Solutions
Six basic types of policies can be identified that can be used to
help achieve policy goals. The first set of policies deals with the
setting of the broad outline of the program. For example, Medicare
can change who is entitled to benefits or what benefits individuals
receive. The second set of policies deals with health insurance
premiums. Medicare can change Part B premiums, and it can
change the out-of-pocket price of supplementary private insurance
premiums. As well, Medicare can arrange for supplementary
coverage in other programs, such as Medicaid.

The third set deals with the direct price of care. Medicare can
change the deductibles and copayments paid by enrollees and, in
the process, impact the demand for care (subject, of course, to the
purchase of supplementary insurance). The fourth set deals with
provider reimbursement. Medicare can change the basis of
reimbursement. For example, home health care was formerly
funded on the basis of individual services. Most recently, Medicare
developed a home healthcare classification system that bundled
individual services within diagnostic and needs-based groups. In
addition to changing the definition of what output they will cover,
Medicare can change the rate of payment. Fifth, Medicare can
introduce competitive practices into its reimbursement mechanism.
It can fund care on the basis of vouchers, encouraging individuals
to shop around for their care. And sixth, Medicare can regulate the
behavior of providers (i.e., make them provide care based on
specific norms set by the program).

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.6.2 The Scope of the Program
Currently, Medicare’s main line of business is to provide insurance
coverage for persons 65 years of age and older. In 1997,
Congress set up the Medicare Payment Advisory Commission to
make recommendations about policies that could affect the future
of Medicare. One of the policies recommended by the two
committee chairs was to increase the age of Medicare
beneficiaries to 67 to have it in line with the age requirement for
Social Security benefits. This proposal did not achieve policy
status, but it is an obvious way of changing the number of
beneficiaries in the system. One proposal intended to extend the
Medicaid mandate to Medicare was to provide prescription drug
insurance coverage (Davis, Poisal, Chulis, Zarabozo, & Cooper,
1999; Soumerai & Ross-Degnan, 1999). Prescription drug
coverage was implemented in 2006 with a wide variety of features,
including additional premiums, copayments and deductibles,
prescription limits, and so forth. Its inclusion added a new
dimension to the program, and administrative costs increased
considerably.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.6.3 Insurance Premiums
Individuals and groups have proposed policies that would both
increase and decrease health insurance premiums. Concern over
the growth in first-dollar coverage has led some observers to
propose a premium tax on Medigap policies. The introduction of
such a tax would raise the price of Medigap coverage and reduce
the amount of coverage purchased. The reduction in such
coverage would lead to a reduction in the use of medical services
in the short run.

There is a premium only for Parts B and D Medicare. The
premiums under Part C are set by the insurance plans in which the
beneficiaries are enrolled. About one-quarter of Part B revenues
come from this premium and the rest from general government
revenues. The Balanced Budget Act of 1997, which overhauled
Medicare’s finances, did not substantially increase the premium;
however, the premium is based on Social Security payments, and
as such payments increase, so will the Part B premium. In 2000,
the premium was $45.50 per month; by 2012, it increased to
$99.90 (or $115.40 for those not under the Social Security cap). In
2019, the base premium was $135.50, with individuals having
higher incomes paying between $54.10 and $325.00 more per
month. An increase in the premium influences the goal of equity in
payment.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.6.4 Copayments, Coinsurance, and Deductibles
Copayments, coinsurance, and deductibles serve to regulate
demand for covered healthcare services and to reduce
government expenditures. Coinsurance is fixed as a percentage of
medical charges, and it increases as charges rise. Copayments
and deductibles are based on usage and are not always
predictable. Individuals seek predictability by purchasing Medigap
insurance coverage, which pays for the copayments and
deductibles. The deductible in 2019 was $1364 for Part A and
$185 for Part B. There was also 20% coinsurance for Part B.
These payments have increased annually, but they have not been
a major part of Medicare’s cost-cutting plans. Higher copayments,
deductibles, and coinsurance reduce availability.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.6.5 Provider Payments
In 1983, Medicare began paying for inpatient hospitalization on a
DRG basis, and expanded to MS-DRG in 2007. A price is applied
to the MS-DRG weighted units to obtain a given price per
weighted unit, which is what the hospitals receive. Every year, this
price is increased by a given update factor in order to account for
inflation and technological change. The update factor is supposed
to cover changes in capital input prices, technology changes, and
any real changes in the case-mix factor. The Balanced Budget Act
of 1997 made changes to Medicare that were projected to result in
$116 billion in savings between 1998 and 2002. Two-thirds of
these savings were to come from limits in the update factors for
inpatient care (Moon, Gage, & Evans, 1997). For the first year,
there was a freeze on payment rates (Levit et al., 2000).

The Medicare Part A payment strategy also included a switch from
fee-for-service to prospective payment systems for home health
care and outpatient care. Classification systems have been
developed for home health care (Goldberg, Delargy, Schmitz,
Moore, & Wrobel, 1999) and outpatient care (Health Care
Financing Administration, 2000). Such systems are expected to
increase control over spending in these areas by Medicare. They
may also reduce availability.

15.6.6 Managed Care and Competition
In the original Medicare scheme for HMO coverage, the fees paid
to HMOs were based on total medical care expenditures per
beneficiary. Using the adjusted average per capita cost (AAPCC)
method of rate setting, fees were set at 95% of the total medical
costs for persons in the geographic area (usually the county).
Included in the rate was the enrollee’s Part B premium. The health
plan decided on any benefit package in excess of the standard
Medicare A and B coverage (e.g., whether to include drug
coverage), additional premiums (if any), and copayments for

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

medical visits. The basic rate was risk-adjusted for age, gender,
eligibility for Medicaid supplemental coverage, and whether the
enrollee was institutionalized.

In 1998, Congress enacted a new Part C of Title XVIII of the Social
Security Act, creating the Medicare + Choice program. The
program had two new features. First, it created a blended national-
regional rate for the managed care premium. In this rate, Medicare
combined a national rate ($398 per month) with the county rates
(the old AAPCC rates). There was to be a floor below which no
county-specific rate would fall. This resulted in a severing of the
link between fee-for-service costs and managed care rates
(McClellan, 2000).

Second, Congress instituted a new risk-adjustment variable, called
the Principal Inpatient Diagnostic Cost Group (PIP-DCG).
According to the PIP-DCG, a patient who is hospitalized in the
previous year for a specific (serious) condition will fall into a higher
risk category, and the HMO will receive a higher rate adjustment
for this patient. The intent of these changes was to encourage
HMOs to establish programs in areas that are now poorly served
and to accept higher risk patients who have been hospitalized for
serious conditions. Other features of the Medicare risk system
remained. These include the variable benefits package, additional
premiums tied to the benefits package, and consumer premiums
and copayments.

In 2003, the Medicare Modernization Act renamed Medicare +
Choice to Medicare Advantage (MA). The focus of MA became
one of expanding access to private plans and providing additional
benefits to private plan enrollees rather than cost control. The
result is that Medicare pays more per enrollee in these plans than
it does per enrollee in the traditional Medicare plan. In 2010, the
Health Reform Act caused another shift by beginning to reduce
payments to MA plans in an effort to bring their costs back in line

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

with the fee-for-service Medicare system. A bonus system was
also introduced into the MA program in which bonuses would be
paid according to quality ratings for the plan. In addition, by 2014,
the plans would be required to maintain a medical loss ratio of at
least 85%, limiting administrative expenses and profits to 15%. By
2018, 21.1 million beneficiaries were enrolled in the MA plans. In
electing to enroll in an MA, individuals are making the
determination that such a plan is best for them.

Medicare Advantage plans are paid a capitated amount to provide
all Parts A and B benefits. A separate amount is paid to cover Part
D. The rate paid is established in a bidding process based on
estimated costs per enrollee for covered services. All bids that
meet the necessary condition are accepted. The bids are
compared to a benchmark amount, and the benchmarks become
the maximum amount Medicare will pay a plan in a given area. If
the bid from a plan is higher than the benchmark, then enrollees
pay the difference in the form of a monthly premium. If it is lower,
the plan and Medicare split the difference. The plan’s share is
known as a rebate and must be used to offer supplemental
benefits to enrollees. Medicare’s payments to plans reflect the
enrollees’ risk profile. The 2010 health reform law reversed the
methodology for paying plans and reduced the benchmarks. The
amount of the rebate in the future will depend upon the quality
rating of the plan.

In the coming years, there will be many reform proposals seeking
to push Medicare toward becoming a competitive system. It is
questionable whether such reforms would solve the problems
associated with introducing managed care principles into the
Medicare program. Medicare enrollees still join HMOs individually
and have high and variable costs. The very significant incentive to
select healthier cases will remain as long as the risk-adjustment
tools do not permit the identification of high-risk individuals.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

As well, any attempt to regulate competitive practices will result in
an extremely complex set of rules. However, the set of rules may
not be any more complex than the set of current fee-for-service
rules, in which a multitude of prices and adjustments have been
introduced within a complicated regulatory framework. Further, the
definition and regulation of the basic product characteristics will
prove to be a daunting task. Medical care is a service with many
aspects, and the between-patient and between-provider
differences are very subtle.

A successful capitation program will better allow Medicare to
achieve a greater degree of control over public expenditures.
Competition should lead to a greater degree of efficiency in the
market. The achievement of the other social goals may be more
controversial. The ability of Medicare to ensure uniformly high-
quality services is still open to question. And the availability of care
may be hampered by the continual attempt by managed care
plans to enroll low-cost patients. Nevertheless, any system must
be judged by comparing it to other feasible systems. Currently,
fee-for-service is the alternative to Medicare Advantage. Fee-for-
service may perform better in terms of availability and quality of
care, but it is lacking in regard to the goals of efficiency and
expenditure control. In the end, the policy maker is faced with a
trade-off, and the choice of system will depend on the degree of
importance given to each of the social goals.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.7 Policy Alternatives for Medicaid

Medicaid programs are run by the states under federal
requirements and financed by states and the federal government.
Individual states have a great deal of discretion in the policies they
institute to govern the programs, which indeed exhibit substantial
variability. Part of this variability is due to the fact that Medicaid
serves several very different populations, including the poor aged,
poor families with dependent children, and the blind and disabled.

Medicaid’s problems are somewhat different from those of
Medicare. To begin with, there are a number of uninsured children
in the United States who are eligible for coverage under the
Accountable Care Act but who have not been enrolled for one
reason or another. In addition, there are many persons 65 years of
age and older who have low incomes but no supplementary
coverage and who are thus at risk for considerable out-of-pocket
expenditures. In 2018, about 15% of the Medicaid population was
65 years old and older and had joint Medicare-Medicaid coverage
(Berchick, Barnett, & Upton, 2019).

Until 1990, the growth in total expenditures for Medicaid was
moderate. However, beginning in 1990, following the expansion of
the program to cover children and women whose incomes were
above the poverty level but still low, the growth in expenditures
was substantial, although in 1996 and 1997, expenditure growth
leveled off. At its inception, the Medicaid program accounted for
2.9% of all national health expenditures. In 2017 state and federal
outlays for Medicaid totaled $581.9 billion, accounting for 16.7% of
the nation’s health expenditures.

15.7.1 Scope of the Program
Until 1987, only low-income women (under age 65 and not blind or
disabled) and their children who were receiving Aid to Families

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

with Dependent Children (AFDC) payments were eligible for
Medicaid enrollment. The Medicaid program expanded eligibility in
1987 to include low-income women and children who were not on
the AFDC program. At their discretion, states could offer coverage
to families whose incomes reached 185% of the poverty level. This
expansion of coverage led to a rapid increase in Medicaid
enrollment and expenditures beginning in 1990 (Cutler & Gruber,
1996a, b). If states enrolled in the Medicaid expansion program,
then all individuals with incomes at or below 138% of the federal
poverty level are eligible for Medicaid. This increased the number
of individuals enrolled in Medicaid in those states, leaving a
substantial number of individuals uninsured in the states not
enrolling in Medicaid expansion.

Medicaid’s scope of coverage is very broad. It usually includes
outpatient drugs and dental care. Because the breadth of
coverage is wider than that for Medicare, Medicaid also enrolls
low-income Medicare enrollees who do not have supplementary
coverage.

Although the variety of services was not affected, the state of
Oregon instituted a benefit limitation policy in 1994. It created a
ranking of the costs and benefits of alternative medical procedures
and proposed to pay for only those procedures whose cost–benefit
ratios ranked above a certain cut-off point. Near the top of the list
were treatments for disorders such as bone cancer and multiple
sclerosis, which, it was claimed, yield substantial benefits per
dollar of cure. Lower on the list were disorders whose treatments
have a lower rate of return, including chronic ulcers and sleep
disorders. Thus, the scope of the services was to be limited by
type of treatment. This program was quite controversial and has
generated a great deal of discussion.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.7.2 Copayments
Generally, Medicaid does not charge recipients for their services.
However, states can institute a copayment for some services. As
of 2004, some 41 states had copayments for prescription drugs,
usually ranging from $0.50 to $1.00 per prescription. In addition,
some states have mandated limits on the quantity of drugs
prescribed and the number of refills. After the enrollee reaches
these limits, the drugs are no longer covered. There is evidence
that these copayments affect the utilization of drugs, and there is
only limited evidence that health status is adversely affected
(Stuart & Zacker, 1999).

15.7.3 Provider Payments
Medicaid programs are noted for the low levels of fees paid to
providers (Gruber, 1997). Low fee levels discourage providers
from serving Medicaid enrollees and thus reduce availability. This
is a problem often noted when Medicaid is discussed.

15.7.4 Competitive Bidding by Suppliers
Competitive bidding, which has been implemented by the
California and Arizona Medicaid programs, has the objective of
providing cost-effective care for indigents. If the buyer has a
considerable degree of market power, it can extract a lower price
from competitive sellers, and if there is any room for cost
reductions, either through increasing efficiency or lowering quality,
the reductions will be incorporated into the providers’ bids.
However, the bidding process is a complex one and may not
automatically lead to savings.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.7.5 Managed Care
Many states are looking to managed care programs in order to
consolidate their efforts at provision of services to their
populations. In 1998, about 53% of the Medicaid population was
enrolled in managed care plans, while by 2017, approximately
83% were enrolled in some type of managed care plan. The
proportion of persons who were enrolled in managed care varied
by group.

Many older individuals receive long-term care coverage through
Medicaid (as well as through their Medicare coverage). Long-term
care utilization, for those who need it, is less controllable than
other types of care (acute care), and long-term care is thus less
amenable to managed care-type coverage. Older Medicaid long-
term care patients would therefore tend not to be enrolled in a
Medicaid managed care plan. Indeed, only 4.9% of Medicaid
enrollees who are served by managed care are age 65 or older.
The majority of Medicaid-managed care enrollees are children and
parents.

Under Medicaid, managed care organizations face the same
issues as under Medicare. There is a wide variation in fee-setting
practices and in fees among states (Holahan, 1999). In addition,
as in the fee-for-service sector, managed care rates in general are
quite low (Bruen & Holahan, 1999). As well, risk-adjustment
factors have not been well developed, and so biased selection in
membership may be a problem. In short, Medicaid has problems
enrolling members and maintaining the provision of care for these
individuals. Since managed care organizations are paid a
capitated fee per enrolled member per month, the movement of
individuals on and off the Medicaid roles makes it difficult to keep
track of and manage the care of these individuals. This policy has
the effect of reducing the availability of care for these populations.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

15.8 Pay-For-Performance Initiatives

A number of different pay-for-performance (P4P) models have
been proposed and tried in recent years. The Centers for
Medicare and Medicaid Services (CMS) have supported a number
of demonstration projects to evaluate their effectiveness in
improving quality and decreasing costs. The health reform law
also calls for a number of additional demonstrations to incorporate
value-based purchasing into the payment system.

Basically, P4P links the payment system to the accomplishment of
predefined performance measures. These performance measures
can contain either positive incentives or disincentives. An example
of a positive incentive is to link the amount paid to the provider to
the documented achievement of a certain level of preventive
services performed (e.g., the percentage of women in the practice
over age 50 who have received mammography screenings in the
last 2 years). The provider receives higher payment if his/her
practice percentage is equal to or greater than the desired,
predefined percentage. A disincentive establishes a penalty for the
occurrence or nonoccurrence of certain events (Cromwell,
Trisolini, Pope, Mitchell, & Greenwald, 2011). For example,
Medicare has established a policy that it will no longer pay
providers for the increased costs associated with medical errors or
hospital-acquired infections. Another area being carefully
scrutinized currently is the rate of readmission to hospitals in less
than 30 days, especially for the same diagnosis or for diagnoses
related to the original admission.

An issue that needs to be carefully considered in the development
of incentives and/or disincentives is the potential negative impacts
on patients. Will a P4P incentive encourage adverse selection of
patients that will assist the provider in reaching the desired goal?

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

How will patients who have serious and complex conditions be
treated in a P4P system when the patient interacts with multiple
providers in multiple locations. Will a P4P system decrease access
to care for the sickest, most vulnerable populations? In the
complex, fragmented delivery system, can a P4P model be
developed that can accurately and appropriately attribute
responsibility for the outcome of care for complex patients?

Pay-for-performance models and demonstration projects have
been undertaken and supported by CMS in an effort to transform
itself from a passive payer for services delivered to its
beneficiaries to an active, value-based purchaser of higher quality,
affordable healthcare services. To become a value-based
purchaser, CMS is attempting to establish incentives and
disincentives designed to change the behavior of providers by
linking effective resource utilization and clinical measures to a
redesigned payment system, increasing joint clinical and financial
accountability in the healthcare system.

When evaluating the transformation of the system to achieve value
in the healthcare system, Christianson, Leatherman, and
Sutherland (2007) provide a number of issues that require
consideration and answers. First, is the goal of the
incentive/disincentive to achieve improvement or attainment? If the
goal is improvement, then rewarding change may maximize the
potential improvements in quality, because the low-performing
providers can improve the most. On the other hand, rewarding
achievements would tend to focus and reward the providers who
were delivering superior care.

The second issue revolves around deciding if the goal is to reward
achievement of an absolute value or standard or to achieve a
relative rating or percentage of a target. Establishing an absolute
value to be achieved can be difficult and expensive to establish
the correct benchmark and keep it up to date. It can also be

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

expensive, if most providers surpass the threshold established. A
relative rating (such as using quartiles), can be easier to calculate,
but may not be very informative if there is very little variation
among the providers; if the first quartile and the fourth quartile are
clustered close together, then differentiating between them for
payment is relatively worthless.

Third, how should risk adjustments or exemptions/exclusions be
handled? Risk adjustments are typically undertaken to reflect
differences in case mix or severity of patients in a panel or
practice. Determining and appropriately measuring the risk and
establishing a valid adjustment factor is difficult, or even not
applicable to certain metrics (e.g., immunizations). On the other
hand, if exemptions or exclusions for certain patients or providers
are allowed based on predetermined/prespecified conditions or
characteristics, then opportunities for gaming the system are
increased.

Another issue encountered in applying P4P criteria to individual
physicians is the small sample size of eligible patients or
procedures. If a practice has very few patients, procedures, or
conditions eligible to be scored in the metric, then a single outlier
can significantly impact the results, making them uninformative. As
a result, these providers can either be excluded from the P4P
system, or multiple years of data combined to achieve larger
numbers. A problem with using multiple years is that it may
camouflage important changes over time.

When patients see multiple providers, it is especially difficult to
obtain outcome measures that can be attributed to an individual
provider. This ties into the next issue of obtaining physician
engagement to improve care processes: if the physician doesn’t
see the relevancy to their own activities, it is hard to get him/her
motivated to participate and change behavior.

P4P may also have unintended consequences. For example, the
Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

selection of the measurement criteria may lead to better
documentation rather than an actual improvement in the outcome
being measured. Physicians could also either move practices or
select patients that are more likely to manage their own care,
thereby reducing access to services for certain groups of patients.
Providers could also focus on the areas that are included in the
incentives and let other areas decline because they are not being
measured. Coordination of care could also decrease for patients
with multiple conditions, and administrative costs could increase,
as additional time is needed to comply with the quality metrics,
document care provided, or track rewards to individual providers in
a group.

As this discussion indicates, implementing a value-based, pay-for-
performance system is not without problems. However, careful
evaluation of incentives/disincentives created will enable Medicare
and other purchasers to become more prudent purchasers, not
just payers.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

Exercises
1. What populations and what services are covered by

Medicare?
2. What are the major sources of funding for Medicare?
3. What populations and what services are covered by

Medicaid?
4. What are the major sources of funding for Medicaid?
5. What is Medigap and what purpose does it serve?
6. What are the goals of Medicare?
7. List five policies for Medicare and identify what goal(s) each

address.
8. What are the most important problems faced by Medicaid

and what policies might be used to help solve them?

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

Bibliography

2011 Annual Report of the Boards of Trustees of the
Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds.
Retrieved from https://www.cms.gov/Research-
Statistics-Data-and-Systems/Statistics-Trends-
and-
Reports/ReportsTrustFunds/downloads/tr2011.pdf

2019 Annual Report of the Boards of Trustees of the
Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds.
Retrieved from https://www.cms.gov/Research-
Statistics-Data-and-Systems/Statistics-Trends-
and-
Reports/ReportsTrustFunds/Downloads/TR2019.pdf

Berchick, E. (2018). Most uninsured were working age
adults. Washington, DC: U.S. Census Bureau.

Berchick, E., Barnett, J. C., & Upton, R. D. (2019). Health
insurance coverage in the United States: 2018.
Washington, DC: U.S. Government Printing Office.

Bruen, B., & Holahan, J. (1999). Slow growth in Medicaid
spending continues in 1997. Issue paper. Washington,
DC: Kaiser Commission on Medicaid and the
Uninsured.

Centers for Medicare and Medicaid Services. (2018).
Chronic conditions charts. Retrieved from
www.cma.gov/Research-Statistics-Data-and-
Systems/Statistics-Trends-and-Reports/Chronic-
Conditions/Chartbook_Charts.html

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

Christianson, J. B., Leatherman, S., & Sutherland, K.
(2007). Paying for quality: Understanding and
assessing physician pay-for-performance initiatives.
Princeton, NJ: Robert Wood Johnson Foundation, The
Synthesis Project, Issue 13.

Cromwell, J., Trisolini, M. G., Pope, G. C., Mitchell, J. B.,
& Greenwald, L. M. (2011). Pay for performance in
health care: Methods and approaches. Research
Triangle Park, NC: RTI Press Publications. Retrieved
January 26, 2012, from https://www.rti.org/pubs/bk-
0002-1103-mitchell.pdf

Cubanski, J., Neuman, T., & Freed, M. (2019, August 20).
The facts on Medicare spending and finance. Issue
Brief. San Francisco: KFF.org.

Cutler, D. M. (2000). Walking the tightrope on Medicare
reform. Journal of Economic Perspectives, 14, 45–56.

Cutler, D. M., & Gruber, J. (1996a). The effect of Medicaid
expansions on public insurance, private insurance,
and redistribution. American Economic Review, 86,
378–383.

Cutler, D. M., & Gruber, J. (1996b). Does public insurance
crowd out private insurance? Quarterly Journal of
Economics, 110, 391–426.

Data.Medicaid.Gov. (2019). 2017 managed care
enrollment summary. Retrieved from
https://data.medicaid.gov/Enrollment/2017-
Managed-Care-Enrollment-Summary/uw3d-3r25

Davis, M., Poisal, J., Chulis, G., Zarabozo, C., & Cooper,
B. (1999). Prescription drug coverage, utilization, and
spending among Medicare beneficiaries. Health
Affairs, 18(1), 231–243.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

DeNavas-Walt, C., Proctor, B. D., & Smith, J. C. (2011).
US census bureau, current population reports, P60-
239, income, poverty, and health insurance coverage
in the United States: 2010. Washington, DC: US
Government Printing Office.

Doty, M. M., Collins, S. R., Robertson, R., & Garber, T.
(2011). Realizing health reform’s potential: When
unemployed means uninsured: The toll of job loss on
health coverage, and how the affordable care act will
help. Issue Brief (Commonwealth Fund), 18, 1–18.

Goldberg, H. B., Delargy, D., Schmitz, R. J., Moore, T., &
Wrobel, M. (1999). Case mix adjustment for a national
home health prospective payment system: Second
interim report. Cambridge, MA: Abt Associates.

Gruber, J. (1997). Medicaid and uninsured women and
children. Journal of Economic Perspectives, 11, 199–
208.

Health Care Financing Administration. (2000, April 7).
Medicare program prospective payment system for
hospital outpatient services. Final rule. Federal
Register, 65(68), 18433–18820.

Holahan, J. (1999). Medicaid managed care payment
methods and capitation rates. Washington, DC: Urban
Institute.

Iglehart, J. K. (1999). The American health care system
−Medicaid. New England Journal of Medicine, 340(5),
403–408.

Kaiser Family Foundation. (2019). State health facts.
Retrieved from www.kff.org/state-
category/Medicare/

Levit, K., Cowan, C., Lazenby, H., Sensenig, A.,
McDonnell, P., Stiller, J., … Health Accounts Team.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

(2000). Health spending in 1998: Signals of change.
Health Affairs, 19(1), 124–132.

Liu, K., Gage, B., Harvell, J., Stevenson, D., & Brennan,
N. (1999). Medicare’s post-acute care benefit.
Washington, DC: Urban Institute.

McClellan, M. (2000). Medicare reform: Fundamental
problems, incremental steps. Journal of Economic
Perspectives, 14, 21–44.

Medicaid.gov. (2019). Mandatory and optional Medicaid
benefits. Retrieved from
https://www.medicaid.gov/medicaid/benefits/list-
of-benefits/index.html

Medicare Learning Network. (2018, March). Home health
prospective payment system. Washington, DC: U.S.
Department of Health and Human Services.

Medicare Payment Advisory Commission. (2000). Report
to Congress. Washington, DC: Medicare Payment
Advisory Commission.

Moon, M., Gage, B., & Evans, A. (1997). An examination
of key Medicare provisions in the balanced budget act
of 1997. Washington, DC: Urban Institute.

Potetz, L., Cubanski, J., & Neuman, T. (2011). Medicare
spending and financing: A primer. Menlo Park, CA:
The Henry J. Kaiser Family Foundation.

Soumerai, S., & Ross-Degnan, D. (1999). Inadequate
prescription drug coverage for Medicare enrollees.
New England Journal of Medicine, 340, 722–728.

Stuart, B., & Zacker, C. (1999). Who bears the burden of
Medicaid drug copayment policies? Health Affairs,
18(2), 201–212.

U.S. Bureau of the Census. (1999). Health insurance
coverage, 1998. Washington, DC: U.S. Bureau of the

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

Census.
U.S. General Accounting Office. (1999). Medicare and

budget surpluses (Publication No.
GAO/TAIMD/HEHS-99-113). Washington, DC:
Government Accounting Office.

Wolkstein, I. (1984). Medicare’s financial status: How did
we get here? Milbank Quarterly, 62, 183–206.

Hicks, Lanis. Economics of Health and Medical Care, Jones & Bartlett Learning, LLC, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/undip-ebooks/detail.action?docID=6031666.
Created from undip-ebooks on 2021-04-12 20:40:11.

C
o
p
yr

ig
h
t
©

2
0
2
0
.
Jo

n
e
s

&
B

a
rt

le
tt
L

e
a
rn

in
g
,
L
L
C

.
A

ll
ri
g
h
ts

r
e
se

rv
e
d
.

COMMENTARY Open Access

Health care financing and the sustainability
of health systems
Lycourgos Liaropoulos1 and Ilias Goranitis2*

Abstract

The economic crisis brought an unprecedented attention to the issue of health system sustainability in the
developed world. The discussion, however, has been mainly limited to “traditional” issues of cost-effectiveness,
quality of care, and, lately, patient involvement. Not enough attention has yet been paid to the issue of who pays
and, more importantly, to the sustainability of financing. This fundamental concept in the economics of health
policy needs to be reconsidered carefully. In a globalized economy, as the share of labor decreases relative to that
of capital, wage income is increasingly insufficient to cover the rising cost of care. At the same time, as the cost of
Social Health Insurance through employment contributions rises with medical costs, it imperils the competitiveness
of the economy. These reasons explain why spreading health care cost to all factors of production through
comprehensive National Health Insurance financed by progressive taxation of income from all sources, instead of
employer-employee contributions, protects health system objectives, especially during economic recessions, and
ensures health system sustainability.

Introduction
Health systems appeared after 1950, as Europe was heal-
ing from the 2nd World War. With a political shift to the
left [1], governments responded to public demands for af-
fordable health services accessible to all. Until the 1970’s,
health systems shared one concern: how to funnel an aver-
age 7 % of national Gross Domestic Product (GDP) col-
lected through taxes and labor contributions into health
care services. Two major types of public health systems
emerged, named after their political instigators:

� Bismarck systems based on social insurance, with a
multitude of public insurance funds, financed by
employer-employee contributions, independent of
health care provision. Examples are Belgium, France
and Germany.

� Beveridge systems, where public financing and health
care delivery are handled within one tax-financed
structure, such as the National Health Service
(NHS) in the UK and in some Nordic states.

Since then, there has been intense debate over the two
generic types of systems, with the discussion centered
on access, quality and cost. Financing was a “function of
a health system concerned with the mobilization, accu-
mulation and allocation of money to cover the health
needs of the people, individually and collectively” [2]. In
the 2000 report of the World Health Organization
(WHO) we find that the purpose of health financing was
“to make funding available, as well as to set the right fi-
nancial incentives to providers to ensure that all individ-
uals have access to effective public health and personal
health care” [2]. The definition was expanded in 2007 as
follows: “A good health financing system raises adequate
funds for health, so that people can use needed services
protected from financial catastrophe or impoverishment
associated with having to pay for them. It provides in-
centives for providers and users to be efficient” [3].
In both WHO definitions, the main concern was about

raising adequate funds, sidestepping the implications for
payers and for the economy. With recent recessions,
however, universal coverage, a main pillar of social cohe-
sion and welfare is endangered, with profound implica-
tions on equity1 and financial protection. The willingness
of society to disburse the necessary funds in developing
countries has been discussed since the 1980s [4], and sus-
tainable development remains pertinent in light of social,

* Correspondence: [email protected]
2Health Economics Unit, Public Health Building, University of Birmingham,
Birmingham B15 2TT, UK
Full list of author information is available at the end of the article

© 2016 Liaropoulos and Goranitis. Open Access This article is distributed under the terms of the Creative Commons
Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution,
and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link
to the Creative Commons license, and indicate if changes were made. The Creative Commons Public Domain Dedication
waiver (http://creativecommons.org/publicdomain/zero/1.0/) applies to the data made available in this article, unless otherwise
stated.

Liaropoulos and Goranitis International Journal for Equity in Health (2015) 14:80
DOI 10.1186/s12939-015-0208-5

demographic and epidemiological changes [5]. In the de-
veloped world, however, the ability to finance society’s
health care needs is a “child” of the 21st century. The inci-
dence of financing and health system viability has only re-
cently become a major topic of health policy [6], not only
in Europe [7] and the UK [8] but also in the US [9] and
Canada [10].
The Organization for Economic Co-operation and

Development (OECD) opened the debate on financial
sustainability in 20132, along with other initiatives at a
European Union (EU) level referring to “sustainable
health care”3. Non-profit organizations, patient advocates
as well as the pharmaceutical industry organize workshops
and conferences on “access to care” and “patient em-
powerment” [11]. The 2014 OECD Meeting, held on
24–25 April in Paris, aimed to identify and disseminate
good practices in managing health care budgets4, and a
publication on the fiscal sustainability of health systems is
under development. This shall examine drivers of health
expenditure, policies to manage spending and improve
value for money. Although these are mostly supply-side
concerns, the request from the 2013 OECD Meeting was
that the 2014 Meeting must also focus on “the politics of
reform in health care”, including the issue of demand.
It is difficult to think of a more “political” issue than

the source of financing health care. This fundamental,
but rather overlooked, concept in the economics of
health policy needs to be actively debated as sustainable
development goals gain traction in post-2015 policy
agenda. This paper discusses the implications of the way
health care resources are raised, pooled and spent. Finan-
cial sustainability as a major health care issue in the 21st

century world is also discussed.

The debate on sustainability: new challenges in the 21st

century
The evolution of health financing during the last half
century reveals a fundamental shift in core issues. After
1950, health systems were designed for populations ex-
pected to live for an average of 65–70 years. With retire-
ment at 60–65 and near full employment, lifetime
earnings and savings were more or less sufficient to fi-
nance a decent health system, while rising health ex-
penditure meant welfare gains for all. In the 21st

century, average life expectancy rose above the age of
80, and health science and technology improved quality
of life even at a very old age. Although desirable, the
prolongation of life in good health costs, a reality that
no democratic society can ignore for long.
The real political, economic and ethical question is the

source of the required financing. Very rich countries5

can still afford to rely largely on private health insurance
despite the serious equity issues involved. Most devel-
oped and developing countries, however, finance their

more or less developed welfare state through taxation
and labor contributions. It is in these countries that
globalization is bringing increasing economic inequality
and economic uncertainty has caused a major debate on
the sustainability of health financing.

Globalization and income inequality
Globalization has profoundly affected the distribution of
income both among and within countries. The seminal
work of Thomas Piketty in 2014 [12] showed that
globalization favors capital relative to other sources of
income, such as labor and rents. Increased capital mobility
pulled many countries out of poverty, but the benefits
favor the rich capital owning countries [13]. Globalization
also increased income inequality within countries with top
income brackets absorbing a larger share of national GDP
[14]. Besides being a moral and political question, growing
inequality is also an economic one since, beyond a certain
point, it can be a source of significant economic ills
[15]. For example, the failure to tax income reduces the
effectiveness of welfare and safety nets and undermines
the competitiveness of the economy [16]. This point is
particularly important for developing countries now de-
veloping their health systems.

Recession and economic uncertainty
Another phenomenon that makes this century different
is frequent recessions as income inequality causes a drop
in demand [15]. Unemployment and economic distress
put a strain on public budgets, increase the demand for
public health services, and limit access to private services
[17]. Such extreme pressures, as after the 2008-economic
crisis, introduced financial sustainability in the health pol-
icy debate. Although the debate is still centered on fund-
ing and value for money, it now includes the ability of a
society to fulfill its implicit or explicit promise to satisfy
need-based demand for health care [18].

Financing sustainable health care: who must pay and
how?
The answer to the question of who must pay for health
care and how lies in the moral fabric and the value sys-
tem of a society. It is a deeply ideological and political
question with undertones of social involvement, personal
responsibility, and freedom of choice. Big changes in
health care financing happen rarely, usually after major
events6, and are more likely to take place in countries
with social cohesion high on their value scale7. This is
possibly why discussions on health system sustainability
continue to “finesse” the question of financing, and per-
haps to avoid two uncomfortable truths. One, that reli-
ance on out-of-pocket expenditure is not acceptable on
equity and financial protection grounds. Two, that only

Liaropoulos and Goranitis International Journal for Equity in Health (2015) 14:80 Page 2 of 4

some kind of income transfer, such as taxation, can
cover the increasing cost of health care.
The moral determinant of “who pays” and “how” must

now gain importance, as ageing societies, technological
advances, globalization, and economic recessions put a
strain on the sustainability of financing sources. The
question therefore should now focus, not only on
whether society as a whole will bear the cost but also on
how to obtain and manage the needed savings, and on
the efficiency and competitiveness of the economy which
must produce them.
For the increasing cost of care many “blame” the

demographic factor, although the major part of life-time
health cost occurs in the last two years of life [19]. Life
expectancy indeed rose significantly in the last fifty years
together with total lifetime cost [20]. The average retire-
ment age, however, remained more or less the same at
around 65. There are, therefore, twenty years in which a
citizen incurs health costs without producing income as
“insurance”. People of working age today must finance
the health needs of their children, themselves and,
mainly, the 3rd and 4th generation. Labor contributions
legislated thirty years ago are clearly not enough for to-
day’s medical costs8, while contributions sufficient to
cover health costs thirty years from now would make
labor extremely expensive. Therefore, only savings in the
form of taxes on all incomes produced by society, in-
cluding wealth and capital, appear to be a sustainable
source of funding in the long-term.
In addition, cyclical fluctuations are now common

events rather than rare occurrences. Health financing
may determine how pressures on health systems are
weathered without loss of equity, quality and financial
protection. Social Health Insurance has been found to
have negative labor market effects [21] and to hurt com-
petitiveness [7] due to higher labor costs. This is crucial
in monetary unions where devaluation during economic
crises is not an option and competitiveness gains are the
only way for the economy to adjust to pre-crisis levels.
In addition, as unemployment increases, incomes decline
and pressures on health budget and public infrastructure
are pushed to extremes, evidence has indicated that public
health systems financed through taxation can be more
responsive to economic pressures and more effective in
health expenditure consolidation [22]. Although conclu-
sive evidence is lacking, the experiences of Canada and
Greece may be indicative.
Evidence from Canada, where health is financed mainly

through taxation, suggests that patient satisfaction, hos-
pital performance and health outcomes were maintained
despite the financial strain [23]. Concerns that reliance on
taxation may be associated with higher private payments,
especially during economic downturns [22], or that cor-
ruption may inhibit administrative capacity to collect taxes

[24], may be put to rest by the fact that during economic
turmoil individuals become more price-sensitive and
administrative capacity tends to improve.
In Greece, Social Insurance historically covered approxi-

mately 40 % of health care cost. In the face of severe un-
employment (27 %) caused by 25 % GDP contraction,
reliance on employer-employee contributions proved an
inadequate funding base for health care. Between 2009
and 2012,9 Social Insurance expenditure declined by
29.3 %, with the fairness of the system and quality of
care severely affected [25, 26]. Greece is now a country
where the need of re-orientation of health care finan-
cing is pressing [25, 27].
In conclusion, employment contributions as a source

of health financing are incompatible with universal cover-
age, quality of services, and rising life expectancy. A move
towards general taxation to meet health care needs can
boost economic growth through increased competitive-
ness, and achieve major non-health objectives, like equity,
financial protection, quality and responsiveness even dur-
ing economic downturns. Health system sustainability, as
a system objective, must turn to financing through pro-
gressive taxation of all types of income. “Uncomfortable”
as this may appear, it is a reality not to be overlooked. Pol-
itical concerns associated with economic imperatives as
well as moral considerations may force changes in health
services financing in both the developed and developing
world. National health insurance financed through tax-
ation should gain momentum in the quest for more sus-
tainable and responsive health systems.

Endnotes
1In this paper we treat the concept of Equity-in-Health

as implying equal treatment for equal needs, regardless
of income or financial ability

2OECD 2nd Meeting of the joint Network on Fiscal
Sustainability of Health Systems, Paris, 25–26 March
2013

3A conference was organized in Brussels on May 26–27,
2013, as a multi-stakeholder public debate entitled “From
Crisis to Recovery: how to drive sustainable healthcare
together?”. The full Report will be submitted to the
European Parliament in early 2015.

4OECD 3rd Meeting of the Joint DELSA/GOV Network
on Fiscal Sustainability of Health Systems, Paris, 24–25
April 2014.

5Such as the US and Switzerland.
6For example, the British government in 1947 assumed

the full burden of the National Health Service as “a reward
to the British people after the pain and devastation of the
war” [1].

7The importance of the moral determinant is clear in a
comparison of post-war UK, with the US, a country with
similar cultural background, fifty years later. The Affordable

Liaropoulos and Goranitis International Journal for Equity in Health (2015) 14:80 Page 3 of 4

Care Act – (ACA) of President Obama, although presented
as a major health reform, is only a mere extension of
government financing to meet the health needs of the
15 % of uninsured poor Americans. Even so, it has become
the main issue in the ideological and political warfare in
the US.

8Medical progress is desirable, but it is also expensive
and not predictable.

92012 is the last year for which official data exist.

Competing interests
The authors declare that they have no competing interests

Authors’ contributions
LL conceived the idea for the paper. Both authors contributed to the write
up of the manuscript and approved the final version.

Author details
1Center for Health Services Management and Evaluation, Faculty of Nursing,
University of Athens, 123 Papadiamantopoulou Street, 11527 Athens, Greece.
2Health Economics Unit, Public Health Building, University of Birmingham,
Birmingham B15 2TT, UK.

Received: 17 December 2014 Accepted: 31 August 2015

References
1. Judt T. Postwar: A history of Europe since 1945. London: Random House; 2010.
2. World Health Organization (WHO). The World health report, 2000. Health

systems: improving performance. Geneva: WHO; 2000. Available at
http://www.who.int/whr/2000/en/whr00_en.pdf?ua=1.

3. World Health Organization (WHO). Everybody’s business-strengthening
health systems to improve health outcomes: WHO’s framework for action.
Geneva: WHO; 2007. Available at http://www.who.int/healthsystems/
strategy/everybodys_business.pdf.

4. Olsen IT. Sustainability of health care: a framework for analysis. Health Policy
Plan. 1998;13:287–95.

5. von Schirnding Y, Mulholland C. Health in the context of sustainable
development. In: WHO Meeting “Making Health Central to Sustainable
Development: Planning the Health Agenda for the World Summit on
Sustainable Development”. Oslo. 2002. Available at http://www.who.int/
mediacentre/events/HSD_Plaq_02.6_def1.pdf.

6. Hsiao WC. Why is a systemic view of health financing necessary? Health Aff.
2007;26:950–61.

7. Thomson S, Foubister T, Mossialos E. Financing health care in the European
Union: challenges and policy responses. Copenhagen: WHO Regional Office
for Europe and European Observatory on Health Systems and Policies; 2009.

8. Pencheon D. Developing a sustainable health and care system: lessons for
research and policy. J Health Serv Res Policy. 2013;18:193–4.

9. Nichols L. A sustainable health system for all Americans. Washington, DC:
New America Foundation; 2007.

10. Canadian Health Services Research Foundation (CHSRF). Myth: Canada’s
system of healthcare financing is unsustainable. Mythbusters. 2007.
Available at http://www.cfhi-fcass.ca/sf-docs/default-source/mythbusters/
mythbusters_FinancialSustain_en_FINAL.pdf?sfvrsn=0.

11. Björnberg A. Health consumer powerhouse, Euro Health Consumer Index
[Online]. Health Consumer Powerhouse. 2013;23. Available at http://
www.healthpowerhouse.com/files/ehci-2013/ehci-2013-report.pdf.

12. Piketty T. Capital in the Twenty-first Century. Cambridge, MA: Harvard
University Press; 2014.

13. Stiglitz JE. Globalization and its discontents. New York: W.W. Norton; 2002.
14. Stiglitz J. The price of inequality. New York: Allen Lane; 2012.
15. Wolf M. Why inequality is such a drag on economies. In: Financial Times.

2014.
16. The Economist. Emerging-market indicators: “Competitiveness”. 2006. p. 114.
17. Mladovsky P, Srivastava D, Cylus J, Karanikolos M, Evetovits T, Thomson S,

McKee M. Health policy responses to the financial crisis in Europe.
Copenhagen: WHO Regional Office for Europe and European Observatory
on Health Systems and Policies; 2012.

18. World Health Organization (WHO). The financial crisis and global health:
report of a high-level consultation. Geneva: WHO; 2009. Available at
http://www.who.int/mediacentre/events/meetings/2009_financial_crisis_
report_en_.pdf.

19. Zweifel P, Felder S, Meiers M. Ageing of population and health care
expenditure: a red herring? Health Econ. 1999;8:485–96.

20. Heady C. The Effects of Ageing on the Financing of Social Health Provision.
In 2nd meeting of the Joint network on Fiscal Sustainability of Health Systems,
Paris, 25–26 March, 2013 Available at http://www.oecd.org/gov/budgeting/D2-
PM%20-%20S7%20-%20Chris%20HEADY%20-%20UK%20Expert.pdf.

21. Wagstaff A. Social health insurance reexamined. World Bank Policy Research
Working Paper 4111. 2007.

22. Evans RG. Financing health care: taxation and the alternatives. In: Mossialos
EDA, Figueras J, Kutzin J, editors. Funding health care: options for Europe.
Maidenhead: Open University Press; 2002. p. 31–58.

23. Roos NP. The disconnect between the data and the headlines. Can Med
Assoc J. 2000;163:411–2.

24. Roberts M, Hsiao W, Berman P, Reich M. Getting health reform right: a
guide to improving performance and equity. New York: Oxford university
press; 2008.

25. Goranitis I, Siskou O, Liaropoulos L. Health policy making under information
constraints: an evaluation of the policy responses to the economic crisis in
Greece. Health Policy. 2014;117:279–84.

26. Simou E, Koutsogeorgou E. Effects of the economic crisis on health and
healthcare in Greece in the literature from 2009 to 2013: a systematic
review. Health Policy. 2014;115:111–9.

27. Liaropoulos L. Greek economic crisis: not a tragedy for health. Br Med J.
2012;345.

Submit your next manuscript to BioMed Central
and take full advantage of:

• Convenient online submission

• Thorough peer review

• No space constraints or color figure charges

• Immediate publication on acceptance

• Inclusion in PubMed, CAS, Scopus and Google Scholar

• Research which is freely available for redistribution

Submit your manuscript at
www.biomedcentral.com/submit

Liaropoulos and Goranitis International Journal for Equity in Health (2015) 14:80 Page 4 of 4

Longo et al. BMC Health Services Research (2015) 15:152
DOI 10.1186/s12913-015-0800-9

RESEARCH ARTICLE Open Access

A framework to assess welfare mix and service
provision models in health care and social welfare:
case studies of two prominent Italian regions
Francesco Longo, Elisabetta Notarnicola* and Stefano Tasselli

Abstract

Background: The mechanisms through which the relationships among public institutions, private providers and
families affect care and service provision systems are puzzling. How can we understand the mechanisms in these
contexts? Which elements should we explore to capture the complexity of care provision? The aim of our study
is to provide a framework that can help read and reframe these puzzling care provision mechanisms in a welfare
mix context.

Methods: First, we develop a theoretical framework for understanding how service provision occurs in care
systems that are characterised by a variety of relationships between multiple actors, using an evidence-based
approach that looks at both public and private expenditures and the number of users relative to the level of
needs coverage and compared with declared values and political rhetoric. Second, we test this framework in two
case studies built on data from two prominent Italian regions, Lombardy and Emilia-Romagna. We argue that
service provision models depend on the interplay among six conceptual elements: policy values, governance
rules, resources, nature of the providers, service standards and eligibility criteria.

Results: Our empirical study shows that beneath the relevant differences in values and political rhetoric between
the case studies of the two Italian regions, there is a surprising isomorphism in service standards and the levels of
covering the population’s needs.

Conclusion: The suggested framework appears to be effective and feasible; it fosters interdisciplinary approaches
and supports policy-making discussions. This study may contribute to deepening knowledge about public care
service provision and institutional arrangements, which can be used to promote more effective reforms and may
advance future research. Although the framework was tested on the Italian welfare system, it can be used to
assess many different systems.

Keywords: Systems of care, Service provision models, Welfare systems, Health and social care services

Background
Beveridge-based systems of health and social care are
characterised by the provision of a complex mix of pub-
lic and private services that are aimed at enhancing the
population’s health and well-being. Although these sys-
tems were created with the goal of pursuing universal
coverage through public service provision, they are dra-
matically changing because of both financial constraints

* Correspondence: [email protected]
CERGAS – Health and Social Care Management Research Center, Public Policy
Analysis and Management Department,Bocconi University, Via Roentgen 1,
20135 Milan, Italy

© 2015 Longo et al.; licensee BIoMed Central.
Commons Attribution License (http://creativec
reproduction in any medium, provided the or
Dedication waiver (http://creativecommons.or
unless otherwise stated.

and societal pressures. The traditional Beveridge-driven
configuration of public welfare regimes as being solely
responsible for social security has been replaced, par-
ticularly in Europe, by institutional networks of various
actors with a varied allocation of resources and respon-
sibilities [1,2]. Private and non-profit organisations, to-
gether with families, are becoming increasingly more
involved in planning and providing health care and so-
cial welfare services [3]. Determining how the relation-
ships between these categories of actors affect service
provision and progressively shape the nature of welfare
systems is a major challenge for both managerial and

This is an Open Access article distributed under the terms of the Creative
ommons.org/licenses/by/4.0), which permits unrestricted use, distribution, and
iginal work is properly credited. The Creative Commons Public Domain
g/publicdomain/zero/1.0/) applies to the data made available in this article,

Longo et al. BMC Health Services Research (2015) 15:152 Page 2 of 12

policy research (cf. Esping-Andersen [4,5]). In this light, the
current paper aims to develop a theoretical framework for
understanding how service financing and provision occur
in health and social care systems that are characterised by a
variety of relationships between different actors. We then
test the suggested framework on two cases of social welfare
and community health care in two prominent Italian re-
gions, Lombardy and Emilia-Romagna. Building on both
theoretical and empirical insights, we suggest new direc-
tions for welfare policy and management. We focus on the
broad policy field of health care and social welfare service
provision because it represents one of the most critical is-
sues faced by aging European societies and thus may be
representative of the overall welfare system [6,7]. This
policy field traditionally features a high level of interaction
between public, private, and non-profit organisations and
families for both service financing and provision, seeking to
address problems such as poverty, elderly-related issues,
caring for people with disabilities, child protection, home-
lessness, mental disease, and substance abuse.
The regions selected for our case study, Lombardy and

Emilia-Romagna, have 10 million and 4.4 million inhabi-
tants, respectively, which represents 24% of the Italian
population and approximately 30% of Italy’s gross in-
come product (500 billion euros). These two regions
have consolidated and mature welfare systems that
have experienced national social reforms since the
early 2000s. Politically embedded in a liberal-Catholic
culture, Lombardy’s welfare system is strongly based,
at least in its inspiration, on a purchaser-provider split
that is achieved by contracting out services to private
providers and on users’ free choice between service
providers. The social-democratic political background
of Emilia-Romagna led to a more inclusive welfare sys-
tem that has a strong focus on public planning and
community work. We use the case study method to
verify the validity of an emerging theory proposed by
Eisenhardt [8] and Eisenhardt and Graebner [9]. These
two case studies provide evidence for the efficacy and
feasibility of the proposed theoretical framework in
assessing welfare systems.

Welfare mixes: Which mix can move the paradigm
forward?
The welfare state has long been a research subject, and
its intrinsic complexity has been addressed by a number
of disciplines that have adopted a range of perspectives
[10]. In addition to the rich literature on different wel-
fare systems and distinct models of health and social
care provision [3,11], investigations of the crisis faced by
the traditional welfare models have increased in intensity
in recent decades [12,13]. In Europe in particular, com-
parative welfare state research has focused on three main

branches of models and changes: categorisation, retrench-
ment, and convergence [14].
Although different conclusions have been reached by

different branches of research on the modelling and cri-
sis of welfare, there is general agreement that theory and
research have shifted from investigating welfare states to
investigating welfare systems [15], adding to the trad-
itional analysis of public institutions that have been his-
torically devoted to welfare the analysis of other public
and private actors with the idea of the community as a
whole. The natural consequence of this evolution is that
service management in the health and social service sec-
tor is no longer limited to public-sector dominance but
involves a wide network of actors that includes families
and private, public, and non-profit organisations for
both service financing and provision [16,17].
This issue has been debated in both social policy ana-

lysis (since Esping-Andersen [4]) and social administra-
tion and public management, where it has also been
addressed as “dualisation” [18] or “dualisation of social
services” [19], although neither a unique definition nor a
systematic interpretation has yet been provided.
Studying welfare systems is therefore a very challenging

task. Comprehensive approaches are so rare that many at-
tempts may be similar to “describing an elephant touching
only its hide, its foot or its trunk” ([10], p. 153).
The first step in solving this puzzle requires identifying

theoretical categories to provide more conceptual clarity.
What is meant by “welfare mix,” with its specific focus on
health and social care services? More to the point, what
are the key issues that need to be analysed to identify the
peculiarities and explain the variance between different
health and social care systems? If a well-considered defin-
ition of welfare mix is “the combined, interdependent way
in which welfare is produced and allocated between state,
market, family and the third sector” [3], we should explore
how to investigate these interdependences and on which
issues we should focus our analysis.
Building from the previous literature on welfare mix in

the field of health and social care provision, we distin-
guished between different theoretical approaches that were
summarised from the literature. Each of these approaches
moves from different items of analysis to highlight welfare
mix features and identify a set of items that define welfare
systems in modern times. The choices of different variables
and the ways they are put together produce differences be-
tween the three conceptualisations that we synthesised as
1) welfare provision; 2) regulation and governance; and 3)
norms, values and relations (for a synthesis of these ap-
proaches, see Table 1).

Welfare provision
In the welfare provision approach, the concept of wel-
fare mix is studied only with regard to the supply and

Longo et al. BMC Health Services Research (2015) 15:152 Page 3 of 12

production of welfare services in the context of mixed-
market theories. Therefore, welfare is analysed from a
market or quasi-market perspective that considers only
the provision of in-kind services. Different industrial
models and features of these forms of service delivery
are used to describe welfare regimes, and reasons that
push private actors to enter some public markets are
also investigated [20,21]. Here, social risk coverage is
associated with production [22]. Esping-Andersen [23]
categorised welfare regimes based on how they pool
and cover social risks. The key variable that is used is
thus the “nature and geography of providers,” meaning
analysing different production models, the characteris-
tics of single providers, and market access systems and
regulating the public sector.

Regulation and governance
Under the regulation and governance approach, welfare
mix networks are viewed from a wider perspective by add-
ing other dimensions to the definition of welfare provision.
This evolution may be exemplified by Barr [24], who de-
fines welfare provision as the combination of funding, pro-
duction, delivery, and regulation of supply and demand.
Not only the presence of different actors in a welfare econ-
omy but also institutional frameworks and governance are
considered [25,26]. Welfare is analysed through a broader
perspective, extending beyond providing in-kind services to
include policy making and system financing. Multiple vari-
ables are used in this case: “Nature and geography of pro-
viders,” as in the previous approach, as well a “Governance
rules,” “Resources,” and “Service features and standards.”
Governance issues address the allocation of functions (such

Table 1 Theoretical approaches to welfare mix: definitions an

Approach Authors Welfare mix

Welfare
provision

Esping Andersen 1999 [23]; Vogel 1999 [20];
Powell and Barrientos 2004 [22]; Dahlberg
2005 [21].

Welfare mix c
of welfare se

– Mixed mark

– Different in
forms are u

– Reasons lea
also investig

Regulation
and
Governance

Goodin and Rein 2001 [32]; Ascoli e Ranci
2003 [25]; Barr 2004 [22]; Bode 2006 [33];
Theobald 2012 [26].

Welfare mix i
by combinin
supply and d
governance p

Norms, values
and
relationships

Evers and Laville 2004 [27]; Zimmer 2000 [28];
Borgonovi 2002 [29]; Pavolini 2003 [30].

Welfare mix i
generate wel
relationships
decision-mak

as regulation, planning, and monitoring) between public
and private actors. Resource issues focus on analysing the
mix of public and private resources but also on the systems’
financing mechanisms. Service issues bring together the
perspectives of users and citizens to explore the coverage of
their needs and the peculiarities of guaranteed benefits.

Norms, values, and relationships
In the third research stream, scholars analyse the cir-
cumstances that induce public and private actors to par-
ticipate in the welfare mix by examining the norms and
values that generate welfare participation [27]. Other au-
thors focus on the relationships between welfare actors
[28-30]. In addition, decision processes and participation
mechanisms are considered relevant. The principal vari-
able used here is “Policy definition and values”, where
policies are defined as the different policy-making styles
that lead to policy processes and where values represent the
ideological backgrounds and norms that inspire welfare.
These existing contributions help advance the debate

and theory on welfare service provision and widen the
traditional research focus. Both families and non-profit,
private and public organisations are given more room
for action. Moreover, it is increasingly recognised that deci-
sions are made not at the central level but by a plurality of
actors at the local level [31].
At the same time, a unique and clear definition in

the literature of what is included in the welfare mix
approach is missing, and there is a lack of identifica-
tion of the variables that determine a mix. A welfare
mix is often considered an abstract concept, and it is
not always clear whether it is defined as a determinant

d key variables

definition and features Variables used
to investigate
welfare mix

oncept is applied only to the supply and production
rvices:

“Nature and
geography of
providers”

et theories;

dustrial models and features of services delivery
sed to describe welfare regimes;

ding private actors to enter some public markets are
ated.

s defined as a network in which welfare is providing
g funding, production, delivery and regulation of
emand. In addition, institutional frameworks and
rocedures are considered.

“Nature and
geography of
providers”

“Governance rules”
“Resources”

“Services features
and standards”

s defined as moving from norms and values that
fare participation. It is also investigated considering
and interactions among different actors as well as
ing processes and participation mechanisms.

“Policy definition
and values”

Longo et al. BMC Health Services Research (2015) 15:152 Page 4 of 12

or a result of welfare systems. Some studies conclude
that the mix of different actors is derived from welfare
characteristics, whereas others conclude that the mix
influences welfare outputs and determines its peculiar-
ities [22,32]. In addition, welfare mix studies may be
victims of rhetoric and value judgments concerning
the roles of families, the third sector, and communities
in general. Finally, the qualitative methods that are
used in the welfare literature that uses qualitative ap-
proaches are often supported by simultaneous and in-
tegrated quantitative analysis [13,14].
Despite the importance of the welfare mix approach

and the relevance for modern welfare studies of studies
based on this approach, the existing literature provides
fragmented contributions that in turn are subject to the
risks of providing only generic representations of welfare
systems. To guarantee the robustness of this research
stream and to realise the potential of the welfare mix ap-
proach, this theoretical gap must be filled with clearly
identified variables that can define the policy field bor-
ders and capture the main features of welfare mixes with
an effective methodological framework to analyse mod-
ern welfare systems, which is what we provide in the
following paragraphs. The assumptions that we derived
from the extant literature are summarised in previous
paragraphs: welfare mix is the best theoretical model for
representing the structure of modern welfare systems;
the most significant variables that define welfare mixes re-
late to institutional arrangements and governance (alloca-
tion of functions and responsibilities and decision-making
processes) and in particular, regulation, provision, financing,
resource allocation and inspiration of welfare systems;
managing welfare service provision means focusing not
only on production models but also on service features and
user needs. An analysis based on these premises should
match qualitative information with evidence-based data.
For this reason, our suggested framework adds a set of data
to complete the qualitative description that can help repre-
sent emerging welfare characteristics rather than declared
ones for an in-depth analysis.

A framework for comparing and assessing welfare
systems
The analytical framework we suggest and test in this
paper is built on the strengths of existing contributions
and seeks to fill their information gaps and design a
comprehensive approach for comparing and assessing
health and social care systems. The aim of the frame-
work is to design a systematic checklist to analyse and
compare welfare systems that strikes a balance among
completeness, depth, and research feasibility in terms
of effort and possible results. We examine national and
regional systems and refer to welfare by considering its
social and community health care components. Social

and community health care has been recognised and
acknowledged as representative of welfare regimes be-
cause of this type of care’s intrinsic relevance and in-
creasing importance, especially in aging societies [6].
In discussing social and community health care, we
include all personal services and benefits (cash or in-
kind) that are targeted for inclusion and protection,
and we exclude services related to acute health care,
pension, or education systems.
Building on the theoretical models discussed in the lit-

erature on welfare mixes, we provide a set of variables
aimed at capturing and interpreting the different models.
From the welfare provision perspective [20,21], we in-
clude variables that describe service-provision modes
and their funding mixes (formal provider features, infor-
mal caregiving features, and relevance). We consider all
regulation and governance approach items [25,32,33],
but we adopt a wider perspective to analyse system fi-
nancing, resource allocation, service planning, and
public-purchasing modes. We use norms and values
[27] to analyse the welfare perimeter and examine tar-
geted individual and social rights. We include formal
and informal welfare resources and services and at-
tempt to capture the overall interaction between actors
[29] to assess possible synergies or gaps. Finally, we
add two missing perspectives: (1) service features and
related access mechanisms and the levels of needs
coverage and (2) the explicit criteria or implicit mecha-
nisms for users’ selection. We are interested in service
features, in particular in the way services are provided,
and we focus on quality and service standards because
they may explain the costs and welfare intensity per
user. This approach is closely related to eligibility cri-
teria and needs coverage.
To summarise, these elements led us to produce a

comprehensive framework that comprises six sets of
items: (1) a formal policy field definition and its ideo-
logical background and values; (2) institutional govern-
ance; (3) the public and private resources involved; (4)
the nature and geography of providers; (5) the types of
service features, standards (service intensity per user),
and provision; and (6) users’ access mechanisms, implicit
and de facto selection criteria, and needs coverage.
To apply this framework, an evidence-based approach

is suggested to obtain integrated and parallel quantita-
tive and qualitative data and to produce more valuable
policy proposals [34,35]. Our analysis aims to capture
both emergent substantial facts and declared formal
mechanisms: for this reason, it relies on empirical data
and observations and formal documents and statements.
Any gap between declared rules or policy programs
and emerging welfare characteristics will be considered
part of the framework results. The interpretation of
data and evidence is more robust if a comparative and

Longo et al. BMC Health Services Research (2015) 15:152 Page 5 of 12

longitudinal perspective is possible because it sheds
light on the similarities and divergences.
The research methodology suggested here therefore re-

lies on a mixed approach: a qualitative analysis of formal
declared policies, governance structures, rules, values and
quantitative data about resources, service standards and
costs, provider features, selection criteria, and needs cover-
age, which capture the emergent policies.
We test the efficacy and feasibility of this framework by

comparing two Italian regional social and health commu-
nity care systems that are historically based on opposing
declared ideologies.

Comparison between the welfare systems of the
Lombardy and Emilia-Romagna regions
We chose Emilia-Romagna and Lombardy not only be-
cause they are two of the most important Italian re-
gions because of their sizes but also because they were
among the first to implement comprehensive social
care reforms. Moreover, they are representative of two
polar welfare systems because of their sociopolitical
and rhetorical assumptions. Lombardy has been driven
by a liberal-Catholic cultural approach towards enhan-
cing focus on public–private–non-profit collaborative
competition in the provision of health care and social
welfare services and a leading emphasis on citizens’ free-
dom of choice in selecting services providers. Emilia-
Romagna has been driven by a post-social-democrat ap-
proach, with an emphasis on the role of public actors as
key players in both analysing and discovering relevant citi-
zens’ needs and providing publicly funded services.
It may be useful to emphasise the current settings in

the Italian social care sector that drove our decision to
explore regional rather than national systems. With
the approval of Law 328/2000 [36], regions were dele-
gated to implement welfare policies; as a result: “re-
gional and local governments have followed different
pathways in the implementation of the reform, in some
cases even contradicting the guidelines of the national
legislator” [37]. Today, regions are responsible for
their governance structures, in particular for managing
the public budget devoted to health and social care
and for governing the network of public, private, and
non-profit actors who provide care to citizens.

Methods
We used our proposed framework to build and assess two
case studies. We collected data from multiple sources and
mixed qualitative research with evidence-based, quantita-
tive data to achieve completeness and to provide triangula-
tion for our findings [38]. Data collection was conducted
in five separate steps in 2012, which took approximately
eight months. The data were collected specifically for this
research because all of the data are unpublished, and they

were provided and elaborated by participating institutions
(the Emilia-Romagna and Lombardy health and social wel-
fare regional directorates) in adherence with public data
protection guidelines. Specifically, we followed the ethical
regulations defined by the “Decreto Legislativo 231/2001”,
an Italian national law that regulates the access to and use
of public data by public administrations, hospitals, and
other public institutions.
Data collection and analysis consisted of four separate

steps. First, we collected data through in-depth inter-
views with a research panel composed of social care
managers from the regional directorates for both
Lombardy and Emilia-Romagna. During these inter-
views, we asked the managers about the specific re-
gional documents that contained data or information
that could be relevant for our analysis. Subsequently,
the managers sent us the official documents regarding
social and community health care policies in the two re-
gions in the last year (from 2000 to 2012), including le-
gislative and normative documents, official regional
reports, regional strategic plans, regional accounts, and
budgeting documents. These documents helped us to
collect information concerning formal rules, values, gov-
ernance mechanisms, and official data about financial
expenditures and numbers of users served.
Second, we defined a list of detailed indicators that

could help our analysis (including data about the mix-
ture of financial resources available, the numbers of
users, the average cost of social care intervention per
user, and provider characteristics). All of the data were
already available from the public organisations (munici-
palities and local health authorities [LHAs]). The strong
commitment of the regional governments allowed for an
optimal return rate of the requested data at both the re-
gional and local levels: this allowed us to improve and
better understand the aggregate regional information
and to integrate the information with local and analytical
perspectives.
Third, we used the epidemiological and statistical

prevalence of dependency to assess the potential needs
for different social targets and then determine the levels
of needs coverage granted by the two welfare systems.
Fourth, the data and evidence were discussed in two

focus groups (one for Lombardy and one for Emilia-
Romagna). The participants were chosen from among
the most important social care managers and civil ser-
vants at both the regional and local levels. The focus
groups were conducted similarly to half-day research
seminars; the case studies were presented and the results
validated and discussed by regional key players. The par-
ticipants were managers and practitioners from the re-
gional level, and they all provided us with consent
statements for both the focus groups and the interviews.
Considering that no patients were enrolled in the focus

Longo et al. BMC Health Services Research (2015) 15:152 Page 6 of 12

group and no sensible information was discussed during
them, no ethical statement was required because none
was necessary. By focus group, in this paper, we mean
participant observation of a meeting of professionals and
managers who shared perceptions, opinions, beliefs, and
attitudes towards their work activity. For this purpose,
we obtained the consensus of all of the individual pro-
fessionals and managers who participated in the focus
group and of their home institutions, following the
“Decreto legislative 231/2001“cited above.
Next, a number of individual interviews were con-

ducted in each region with single key players to better
understand the social care systems (with a focus on the
distance between formal and emerging characteristics)
and deepen the analysis of certain critical issues that
arose within the focus groups.
The data regarding Emilia-Romagna refer to 2012,

whereas the data concerning Lombardy refer to 2011.
When complete regional data were not available, we re-
lied on data on Bologna and Milan, the most important
metropolitan areas in the two regions. We also provide a
special focus on long-term care (LTC) for the elderly
and disabled given the importance of these interventions
for the aging European population.
In the next paragraphs, we present the Lombardy and

Emilia-Romagna case studies through the lens of the six
variables we defined in our framework.

Results
Policy field definition and values
Emilia-Romagna and Lombardy have very different wel-
fare values that come from two traditions of opposing
political settings: characterised by a strong liberal envir-
onment, Lombardy is more family and market oriented,
whereas Emilia-Romagna has a social-democrat back-
ground and is more community oriented, with an em-
phasis on public planning.
Lombardy places a focus on public and private part-

nership in service provision and individuals’ options to
select their specific service mixes. In contrast, Emilia-
Romagna is characterised by an emphasis on considering
public actors to be responsible for planning and satisfy-
ing citizens’ needs, with an ancillary role played by pri-
vate actors.
Emilia-Romagna’s social care system may be charac-

terised as having four core values [39]: (a) centrality of
the local community: individuals, institutions, families
and non-profit organisations are responsible for imple-
menting social policy; (b) prevention and social pro-
motion rather than compensation for social risks; (c)
personal autonomy and independent living are the
main welfare goals; (d) integration between different
policy fields (social, health, labour, gender, and educa-
tion). Public actors are supposed to collaborate with

rather than delegate to private actors and are perceived
as directors of the system. Families are recognised as
sites of social relations and caring and must be
sustained.
In Lombardy [40], the social care system was defined

as a network of family-centred interventions and policies
that provided choices from among different commercial
providers and that featured horizontal and vertical sub-
sidiarity together with quasi-markets. Public actors act
as regulators, whereas private actors (for-profit or non-
profit) provide services in a quasi-market regime. This
approach is based on the notion that a welfare society is
superior to public institutions alone.
In recent years, both systems have introduced changes

in their orientations: Emilia-Romagna has reinforced the
goal of integrating social and community health policies,
and Lombardy has introduced elements of integration
between different social actors and made explicit the need
for forms of pooling between public and family resources.

Governance rules
Local municipalities in Emilia-Romagna play a strong
role in both health and social care, with a general push
towards decentralisation at the local level. The result is a
strong interaction between the social care and health
care components. Social care is embedded in municipal-
ities, whereas health care is provided by LHAs, which
are branches of the national health care system. General
strategies and guidelines are defined at the regional level.
At the local level, the most important actors are the so-
cial and community health care districts, which adminis-
ter both social and community health care. Resource
administration is managed by LHAs, which balance the
stronger policy role of municipalities. The system is thus
highly decentralised and based on cooperation between
public social and community health programs and pro-
viders, which are often non-profit organisations.
In Lombardy, the Regional Directorate is responsible for

defining the policies, strategies, and guidelines for social
care interventions together with community health care
programs. The local system is directly steered by the re-
gional government and has a silo-based structure. The local
authorities that are responsible for social care are the social
districts, administrative aggregations of local governments
with coordination and management tasks. Community
health care programs are steered by LHAs, which are actu-
ally an operational arm of the regional government with
weak coordination with social care.
Financing is provided by a combination of different

sources: national financial resources (specific funds dedi-
cated to welfare interventions such as the National Fund
for Social Policies); regional resources; and local resources
(municipalities’ budgets). Today, national funds are highly

Longo et al. BMC Health Services Research (2015) 15:152 Page 7 of 12

irrelevant given the important reductions made in 2010
[41] that made them residual resources.
Resource allocation mechanisms differ based on the

different flows of resources. In Emilia-Romagna, for ex-
ample, the regional social fund is transferred to local
municipal authorities with per-capita criteria adjusted by
redistribution mechanisms that consider demographic
and social factors (i.e., number of resident immigrants;
number of children; dependency ratio), whereas the re-
gional LTC fund is transmitted on a per-capita basis to
the LHAs, which manage it.
In Lombardy, the social fund is allocated to the social dis-

tricts following a combination of historical expenditure cri-
teria and per-capita criteria. This fund is allocated first to
the LHAs, who then transmit it to the social districts and
also have an ex ante and ex post monitoring role. The
health care component of community health interventions
is transmitted to LHAs and managed directly by them
without any form of coordination with municipalities and
social districts.

Resources
The two systems are similar in terms of the public budget
allocated to welfare interventions, with the total per-capita
social care expenditures being 1.125 euro in Lombardy and
1.121 euro in Emilia-Romagna. These values are the sums
of the different cash and in-kind interventions that are pro-
vided to families from the different public actors who are
part of the social and community care systems. In both re-
gions, families receive, directly from the National Social
Insurance Institute, many cash allowances that can be used
to finance informal care and other form of assistance re-
lated to dependency and disability, with a significant per-
capita distribution, near 735 euro in Lombardy and 720
euro in Emilia-Romagna (data publicly available from the
website of the National Social Insurance Institute). Other
interventions are promoted from the regional and local
levels. In Lombardy in 2011, 390 euro per capita were made
available by these actors: 169 euro from the region, 123
euro from the municipalities, 5 euro from the province, and
93 euro paid directly by the citizens through copayments
for in-kind services. In Emilia-Romagna, the per-capita ex-
penditure on social care in 2012 amounted to 407 euro:
151 euro from the region, 187 euro from the municipalities,
9 euro from the province, and 54 euro paid directly by the
citizens through copayments for in-kind services.
This finding is noteworthy because the breakdown of

resources (money governed by public actors vs. money
provided by citizens through private resources or na-
tional cash allowances) shows similar patterns in the two
regions (see Table 2). In Lombardy, 74% of overall re-
sources are made directly available to citizens (828 euro,
of which 89% is offered through disability allowances
and the remaining through out-of-pocket expenditures

for copayment), and only 28% are controlled by public
actors (40% by municipalities, 59% by the region, and
only 1% by the province). In Emilia-Romagna, 69% of re-
sources are controlled directly by users (774 euro, of
which 85% is provided through disability allowances and
the remainder through out-of-pocket expenditures for
copayment) and only 31% by public institutions (50% by
municipalities, 40% by the region, and 10% by the
province). This evidence is particularly relevant if it is
interpreted with respect to policy definition and values:
although common wisdom and the dominant rhetoric in
the Italian debate on the welfare system posit that Lom-
bardy prioritises citizens’ welfare expenditure copayments
while Emilia-Romagna prioritises the public provision of
welfare services to citizens, the two systems are impres-
sively similar in their resource mix allocations.

Nature and geography of providers
With regard to the nature of the providers, and focusing
on the specific case of structures for LTC and disability,
in Lombardy 50,124 of the overall 62,249 existing beds
are owned and managed by private providers (80%). A
total of 95% of these beds are accredited by the region
(i.e., they meet defined quality requirements and deliver
services within a public scheme), and thus, they are fi-
nanced with regional and local funds for an average of
44% of the monthly cost per patient (on average, the
public revenues are 1,500 euro per patient per month),
whereas the other 56% are co-funded by patients them-
selves through copayment fees (1,650 euro per patient).
Quite surprisingly, with reference to the premises pre-

sented in the policy field definition and values paragraph,
private providers play a significant role in Emilia-Romagna.
In the province of Bologna, which is the most populous
and important province in Emilia-Romagna, 51% of the
existing beds in LTC structures are not contracted to any
public scheme and thus are entirely financed by users, for
an average required monthly family contribution of nearly
2,300 euro. The remaining 49% of beds are accredited and
contracted by public programs, which require users to pay
a fee amounting to approximately 45% of the monthly ser-
vice costs. This evidence stands in contrast to the values
declared by the two regional governments.
In both regions, public and private providers are gener-

ally characterised by small sizes and hyper-fragmentation,
mainly in dependency and disability residential care and
day care.
Here, we must highlight a typical Italian phenomenon,

namely, the existence of an important grey market of in-
formal caregivers for dependent elderly. Our evaluations
reveal that there are between 28,000 and 32,000 informal
caregivers in the Milan area (where the number of esti-
mated dependent elderly is approximately 40,000), with
private expenditures of 320 million euro per year, and

Table 2 Resources: per capita expenditures in the two regions

Mix of public and private resources – euro per capita Emilia-Romagna Percentage Lombardy Percentage

Regional funds € 151 13,47% € 169 15,02%

Municipal funds € 187 16,68% € 123 10,93%

Province funds € 9 0,80% € 5 0,44%

National cash allowances to families € 720 64,23% € 735 65,33%

Out-of-pocket expenditures € 54 4,82% € 93 8,27%

Total € 1.121 100,00% € 1.125 100,00%

Longo et al. BMC Health Services Research (2015) 15:152 Page 8 of 12

23,000 informal caregivers in the Bologna area (where
the number of estimated dependent elderly is 42,926),
with private expenditures of 280 million euro per year
(see Tables 3 and 4).

Service features and standards
With regard to service provision and standard defini-
tions, a number of elements may be considered (Table 5).
In Emilia-Romagna, social districts retain the purchasing
function for community interventions that are financed
with public resources. Providers may be contracted by
municipalities for social services and by LHAs. Public
production is frequent, and it is often realised by public
social service companies that are active in many social
care fields in both the residential and home care sectors.
Similarly, in Lombardy, social districts are responsible

for purchasing social care services, whereas LHAs con-
tract for community health services. Users (or citizens)
may be free to choose between different alternative pro-
viders from among those that have been contracted by
local authorities. Contracting out to private for-profit or
non-profit producers is preferred. Concerning the re-
gional intervention mix, we again found similarities. In
both regions, the expenditure is primarily dedicated to
dependent elderly (57% in Lombardy and 53% in Emilia-
Romagna), then to disabled adults (31% and 35%) and
families and children (6% and 10%).
In Lombardy, the average cost per user differs substan-

tially across regional areas: in the disability day care field,
for example, the annual cost incurred by families and public
actors may vary between 7,000 and 18,000 euro with an
average regional cost of 8,500 euro. For nursing homes for
the elderly, the annual cost incurred by families is 20,800
euro on average (out-of-pocket expenditure without con-
sidering public contribution). In Emilia-Romagna, the an-
nual cost of nursing care for families varies from 23,000 to
32,000 euro for non-contracted structures (51% of the total)

Table 3 Nature and geography of providers: financing mix

Service financing mix

Services managed by private providers

Providers who receive public funding

Cost per patients covered by public funding

and 18,000 euro per year for public contracted structures
(49% of the total) without considering public contributions.

Eligibility criteria and needs coverage
Eligibility criteria in both Emilia-Romagna and Lombardy
vary not only between different care fields but also between
different regional areas. Different social districts may use
different eligibility criteria, based, for example, on personal
income, family income, health conditions, or employment
status. If we consider the number of dependent elderly liv-
ing in the two regions (which we have estimated using the
national statistical prevalence index of dependency), we
discover that there are approximately 40,000 dependent
elderly in the Milan area and 43,000 in the Bologna area. If
we consider elderly who receive some type of service from
the public social care system, we find that this number cor-
responds to 25% of the potential dependent elderly in
Milan and 26% in Bologna. Making the same estimation
for disabled adults living in these two areas, we found that
only 20% in Milan and 28% in Bologna receive any type of
services from the public system.
Another major issue concerns the mechanism of ser-

vice provision in terms of the mixture of home, day, and
institutional care services. Lombardy’s system empha-
sises institutionalising patients who need LTC, with
more than 62,000 beds available (for 9.8 million inhabi-
tants). Home care is less prevalent, serving fewer than
15% of LTC patients. Emilia-Romagna shows a similar
endowment of structures dedicated to institutionalisa-
tion, offering 36,000 beds (for 4.4 million inhabitants).
Home care services are more prevalent in this region
and cover on average 28% of the need expressed by eld-
erly patients. The broad need that is unmet by publicly
funded services is primarily covered by informal care,
provided by either relatives or professional caregivers,
with very similar patterns found in both regions.

Emilia-Romagna Lombardy

51% 80%

49% 95%

55% 44%

Table 4 Nature and geography of providers: Informal care

Informal care Emilia-Romagnav Lombardy

Bologna area Milan area

Number of informal caregivers 23.000 28.000–32.000

Families’ out-of-pocket expenditures 280.000.000 euro per year 320.000.0000 euro per year

Longo et al. BMC Health Services Research (2015) 15:152 Page 9 of 12

Overall, the above analysis of the fragmentation in
financing and expenditures reveals similar conditions in
Lombardy’s and Emilia-Romagna’s care systems (see
Table 6). Most of the coordination activity that integrates
the service networks is conducted by families, who must
combine different types of public and private expenditures
to organise assistance for relatives who need care.

Discussion
The proposed framework helps us to compare the health
and social care systems in two prominent Italian regions:
Lombardy and Emilia-Romagna. These two regions have
highly different declared welfare values. Lombardy has
traditionally determined an overall accountability mech-
anism based on consumer choice and related financial
incentives to selected competitive providers. Meanwhile,
in Emilia-Romagna, there is a firm belief in the commu-
nity and in public planning to guide public interventions
towards creating partnerships.
Because of these differences in values, heterogeneous

governance structures have been implemented. Lom-
bardy has a more centralised system, whereas there is
more room for local governments in Emilia-Romagna.
Lombardy features a classic “silo”-based organisational
structure that separates social care and that is operated by
inter-municipal networks from community health care
and managed by LHAs. The community-based approach
used in Emilia-Romagna leaves room for local government
initiatives and the promotion of social capital. Public plan-
ning is crucial, and some room is also left for public pro-
viders. Integration between community health and social
care policies and budget management is regarded as a
means to fostering local government networks and co-
operation within communities.
Different values and governance arrangements are not

related to significant differences in resource allocation

Table 5 Service features and standards

Emilia-

Public actor in charge of service purchasing Social d

Service provision Public

Regional Government % of expenditure for dependent elderly 53%

Out of pocket expenditure of families for nursing homes 23.000–

for public welfare programs, and nor are they related to
differences in needs coverage. Ultimately, these different
systems invest the same amount of public resources, de-
fine comparable priorities, and register similar outcomes.
The collected evidence about the gaps between declared
values and policy rhetoric and the emergent system fea-
tures, is relevant to the proposed framework because the
findings suggest the importance of studying and compar-
ing public discourses and emergent policies to be able to
discuss their correlations.
We found that the suggested welfare assessment frame-

work used in this exercise was comprehensive and effi-
cient in capturing all of the relevant issues while at the
same time also establishing clear borders for the investi-
gated policy field to better understand its internal correla-
tions and dynamics. Combining values with governance
structures, providers and service features, per inhabitant
and per user expenditures, and the needs coverage levels
helps to build a complete view of welfare policies while
remaining sufficiently efficient and feasible for researchers
or policy analysts to be put into action.
Assessing welfare systems is broad and complex. There is

always the risk of being too general or losing sight of the
details. With the proposed framework, analysts and readers
obtain a general overview of welfare policies along with
some insights into crucial issues such as needs coverage,
the opportunity to consider different causal correlations,
and the ability to explore specific areas in depth while
retaining the opportunity to return quickly to the general
picture. To conclude, in the following paragraph, we discuss
the main pillars of our proposed framework and their im-
plications for policy analysis and design.

A tool box to assess welfare system: policy
recommendations and managerial issues
In synthesis, the two case studies show that significant ele-
ments of local welfare systems can be efficiently available for

Romagna Lombardy

istricts Social Districts for issues related to social care.

Local Health authorities for issues related to
community care

production is frequent Contracting out is frequent

57%

32.000 euro per year 20.800 euro per year

Table 6 Coverage of needs

Emilia-Romagna Lombardy

Bologna area Milan area

Number of resident dependent elderly Approximately 43.000 Approximately 40.000

Coverage of elderly (age > 65) dependents’ needs 26% 25%

Informal professional caregivers 23.000 30.000

Coverage of disabled adults (age 18–65) with needs 28% 20%

Longo et al. BMC Health Services Research (2015) 15:152 Page 10 of 12

policy makers and researchers who are interested in social
and community care if the proposed dimensions are used as
an interpretative framework.
Each of the proposed dimensions alone is useful for

shedding light on a specific issue, but crossed interpreta-
tions are also significant. Specifically:

1) The policy field dimension is needed to clearly
assess the boundaries of the welfare mission and, in
particular, which individual, citizen, and community
rights are protected. Moreover, this variable is
needed to clearly assess the system’s inspiring
theoretical assumptions and therefore its declared
orientation: Is the welfare system oriented towards
specific target groups or is it universalist? Is it
centred on community, family, or individuals?
Having a clear understanding of the system’s
assumptions and declared premises can help to
interpret the other welfare features and to find the
gap between formal and emerging welfare
arrangements.

2) The institutional governance of the policy field
dimension analyses the role of each public actor
within various governance arrangements. By
comparing the formal roles assigned to public actors
with the funding and provision mixes, we may better
understand the emergent institutional settings.
Previous research has explained that institutional
governance regulates four different items [22]: who
pools resources and how; how resources are
allocated and redistributed in the welfare system;
who plans and controls the structural providers and
the facility landscape and how; who purchases and
controls providers’ services or distributes cash to
users and how.

3) Resource mix entails a mix of public and private
financial resources and informal resources. This
approach helps researchers and policy makers to
understand the true importance of each actor
involved. Specifically, we consider all types of
resources that are dedicated by welfare systems to
meet individual or community rights: public and
private expenditures and financial and nonfinancial
resources. Examining the total amount of resources
available in a policy field helps in understanding the

overall potential of welfare interventions and the
mix between public and private expenditures, which
can be compared with the declared policy values.

4) The nature of service providers dimension
investigates public and private provider features: are
they for-profit or non-profit, formal or informal,
concentrated or fragmented? In addition, it relates
to the financing mix of private production to under-
stand the actual role of public and private actors.
Formal providers may be large and concentrated or
small and fragmented. They may have rich and
complete service portfolios that autonomously offer
integrated service bundles, or they may be very spe-
cialised and focused on limited care phases or pro-
cesses within a disintegrated service landscape. They
may be public, non-profit, or for-profit organisa-
tions. They may have different revenue mixes funded
by public agencies or private expenditures. Informal
providers may be relatives, friends, or even
individual caregivers paid by users. All of these fea-
tures can influences care arrangements and thus are
strategic issues to be monitored by policy makers.

5) The service features dimension analyses both
institutional settings with regard to service provision
and the realised mixture of interventions. This
variable is useful for understanding how policies are
implemented and which types of services are then
provided to citizens. Services may differ in their
quality standards and intervention intensity. Support
to users may be realised through cash or in-kind ser-
vices. Cash benefits may be used autonomously
without any oversight, or they may be discussed or
reported to a supporting agency. Services differ in
their contents and settings (home, day facilities,
institutions), and they may be offered on an
individual basis or through user groups.

6) With the coverage of needs dimension, we seek to
shed light on the effectiveness of social care systems
in meeting social needs, defined using
epidemiological baselines rather than solely
formalised demands. We take for granted the
assumption that social care eligibility criteria may
differ. They may be explicit and allow a broad range
of potential users to select only the appropriate gate
or program, or they may be implicit and slightly

Longo et al. BMC Health Services Research (2015) 15:152 Page 11 of 12

opaque, which reduces the number of potential
users who can make such a selection. Coverage of
needs, measured as the percentage of potential users
who benefit from public interventions, is a measure
of welfare inclusiveness.

Combining the perspectives on declared values and of-
ficial governance structures with a focus on expendi-
tures, service features, and needs coverage helps to
reveal both alignments and unexpected misalignments
between regional systems and between their declared
values and emerging strategies. In our exercise, two re-
gional governments that have always been considered
opposites in terms of their values, institutional arrange-
ments and results reveal similarities when their expendi-
tures, resource allocations, and outcomes are explored.
Using both case study research methods to investigate

these regions’ values and institutional arrangements with
hard evidence regarding cost per user, resource alloca-
tion, and needs coverage, among other areas, allows us
to better understand the dynamics of the two regional
systems. Under our approach, the case-study-based in-
terpretation of welfare policies is grounded in facts and
figures, and the data are selected and processed in light
of a strong research hypothesis based on declared pro-
grams and values to be verified [6]. In this light, the
proposed welfare assessment tool may incentivise inter-
disciplinary collaboration between welfare experts with
different backgrounds because they all converged into a
common analytical framework.
The framework is sufficiently flexible to allow for its

use in a very deep and analytic approach, when there is
an abundance of time and resources to perform the as-
sessment, but it may also be executed using a simplified
version by running only a few indicators for each of the six
suggested perspectives. This framework can be applied at
different levels of government (national, regional, local)
and can be used to compare two or many cases in a static
or, even better, longitudinal perspective. Collected data
may be easily used to promote focus groups and discussion
panels between welfare actors, scholars, and policy makers.

Conclusion
The aim of this paper was to empirically test the heuris-
tic efficacy of the proposed framework that was used to
analyse the complex relationships between public and
private actors in a mature welfare mix setting. Through
a theoretical framework and two case studies (the
Lombardy and Emilia-Romagna regions in Italy), we
showed that a double perspective is needed in these
sorts of analyses: a qualitative perspective to investigate
governance characteristics and typologies of services
delivered to citizens and a quantitative, evidence-based
perspective to examine the provided descriptions and

underline the possible differences between the planned
interventions, service geography, and needs coverage.
We demonstrated that public service provision de-

pends not only on declared values and formalised policy
programs but also on the interaction between different
actors, the allocation of governance functions (e.g., regu-
lations, financing, or service access), provider features
and the implicitly emergent perimeter of welfare.
The suggested assessment framework appears to be effi-

cient and feasible; it fosters interdisciplinary approaches
and supports policy-making discussions. This study may
contribute to building a deeper understanding of public
service provision and institutional arrangements to pro-
mote more effective reforms. The opportunity to apply
this assessment framework to many other different welfare
systems may advance future research.

Competing interests
The authors declare that they have no competing interests and attest to
their adherence to ethical standards. One of the authors, Stefano Tasselli, is
an associate editor at BMC Health Services Research. In our data collection
and analysis, we followed the regulations of the “Decreto Legislativo 231/
2001”, an Italian national law that regulates access to and the use of public
data by public administrations, hospitals, and other public institutions.

Authors’ contributions
All authors read and approved the final manuscript.

Acknowledgements
We would like to acknowledge the significant support received from
Giovanni Fosti, Andrea Rotolo, Monica Minelli, Eno Quargnolo, Cosimo
Palazzo, Rosella Petrali. They provided valuable contributions in discussing
the topics and objectives of this paper.

Received: 9 June 2014 Accepted: 18 March 2015

References
1. Heitzmann K. A new welfare Mix? Theory and evidence for the policy field of

poverty relief. University of Bremen: Working Paper, ESPAnet Conference; 2006.
2. Chatterjee P, Miller D, Chatterjee MA. Visions of Health Policy: A Comparative

Case Study of Seven Modern Countries. Soc Dev Issues. 2013;35(3):18–37.
3. Powell M, Barrientos A. An audit of the welfare modelling business. Soc Pol

Admin. 2011;2011(45–1):69–84.
4. Esping-Andersen G. The Three Worlds of Welfare capitalism. Cambridge:

Cambridge University Press; 1990.
5. Bouckaert G, Peters BG, Verhoest K. The coordination of public sector

organizations: Shifting patterns of public management. London: Palgrave
Macmillan; 2010.

6. Daly M, Lewis J. The concept of social care and the analysis of contemporary
Welfare States. Br J Sociol. 2000;51–2:281–29.

7. Jensen C. Worlds of welfare services and transfers. J Eur Soc Pol. 2008;18:151–62.
8. Eisenhardt K. Building Theories from Case Study Research. Acad Manag Rev.

1989;14–4:532–50.
9. Eisenhardt K, Graebner M. Theory Building from Cases: Opportunities and

Challenges. Acad Manag Rev. 2007;50–1:25–32.
10. Øverbye E. Disciplinary Perspectives. In: Castles FG, Leibfried S, Lewis J,

Obinger H, Pierson C, editors. The Oxford Handbook Of The Welfare State.
Oxford: Oxford University Press; 2012. p. 152–66.

11. Abrahamson P. The Welfare Modelling Business. Soc Pol Admin.
1999;33–4:394–415.

12. Powell M, Hewitt M. Welfare State And Welfare Change. Buckingham: Open
University Press; 2002.

13. Castles FG. The Future Of The Welfare State. Crisis Myths And Crisis Realities.
Oxford: Oxford University Press; 2004.

Longo et al. BMC Health Services Research (2015) 15:152 Page 12 of 12

14. Schubert K, Hegelich S, Bazant U. Current State Of Research And Some
Theoretical Considerations. In: Schubert K, Hegelich S, Bazant U, editors. The
Handbook Of European Welfare Systems. London: Routledge; 2009. p. 3–28.