James Richardson Professor Lewis Health Policy Over the past 30 years, the American healthcare system has been plagued by the continuous rise of healthcare costs. These costs include but are not limited to insurance premiums, co-payments as well as prescription drugs. One of the significant reasons for the increase in healthcare costs is that nowadays people are living longer lives than they did in the past and the prevalence rates of contracting chronic diseases and developing life threatening injuries are causing the United States healthcare system to suffer a financial crisis.
There are three major industries in the healthcare sector: (1) The healthcare service industry consisting of providers such as medical practices, hospitals, clinics, nursing homes and home health care agencies; (2) The healthcare insurance industry consisting of both government programs such as Medicare and commercial insurers; and (3) The managed healthcare industry consisting of organizations such as health maintenance organizations (HMOs) that incorporate both insurance and provider functions. (Gapenski, 1999). Currently, citizens of the United States spend 15 percent of income expenditures on healthcare.
It is estimated that these expenditures are likely to rise to about 29 percent of Gross Domestic Product (GDP) by the year 2040. (Fogel, 2009). On the other hand, the major funder of healthcare costs in the U. S. is the Medicare program. Medicare is an insurance program created in the mid-1960s to cover medical services (such as hospital, institutional, and other home care) for the elderly that is funded by a payroll system. (Butler, Lave & Reischauer, 1998). The Medicare program of healthcare for the elderly currently costs more than $5,000 per enrollee, a national cost of more than $200 billion annually.
The portion of the health care bill paid by the governmental agency is calculated as the costs of Medicare. There are four basic modes of paying for healthcare: (1) out of pocket payment, (2) individual private insurance, (3) employment-based group private insurance, and (4) government financing. Out of pocket payment is made directly from patient to provider. With the cost of medical services and the unpredictability of health care needs, most people do not know if or when they may become severely ill or injured or what the cost of care will be.
Nowadays, the medical costs ofa serious injury or illness usually exceeds a middle-class familys savings. (Bodenheimer & Grumbach, 2008). With that being said, out of pocket payment is the rarest mode of payment used for healthcare services. Individual private insurance is when a third party, the insurance/health plan is added to the equation and turns the payment process into a financing component and reimbursement component. Individual private insurance came into being because the out of pocket payment for health services became difficult for patients and was not meeting the needs of hospitals and physicians to be paid.
Private insurance requires two transactions- premium paid from the individual to an insurance/health plan and a reimbursement ayment from the insurance plan to the provider. (2008). Patients receive assistance in case of an illness in return for paying a monthly sum. Similar to out of pocket payment, individual private insurance is not a dominant method of paying for healthcare because of its large administrative costs. Employment-based group private insurance is the process by which employers pay most of the premium that purchases health insurance for its employees.
For the sake of federal taxes, the government views employer premium payments as a tax-deductible business expense. The insurance premium paid by employers’ results in a reduction in taxes ollected and the government subsidizes employer-sponsored health insurance. In 2006, this subsidy was an estimated $200 billion. (2008). In general, if a patient is insured by employment- based group private insurance companies, the patient will use more services than someone who must pay for care out of pocket. Employment- based group private insurance is one of the more popular forms of healthcare payment.
In 2003, the Medicare Modernization Act made two significant changes to the Medicare program. It expanded the role of private health plans (the Medicare Advantage program) and stablished a prescription drug benefit program (Medicare Part D). The newly established Medicare Advantage program allows enrollees to receive care from health care providers who are connected with the plan, unlike the previous Medicare Plus Choice program. The previous Medicare Plus Choice program allowed private Medicare HMO plans to contract with the federal government to receive a lump sum payment for each enrollee per month.
The main problem with the program was that the private Medicare HMO plans were costing the government more than publicly administered Medicare because the HMOs enrolled healthy Medicare beneficiaries, ut were paid at a rate based on the annual medical costs incurred by Medicare for an average enrollee. Because of this overpayment, Congress reduced payments to Medicare HMOs, resulting in many of the HMOs leaving the program and forcing more than 200 billion enrollees to lose or seek other supplementary coverage. (2008).
The prescription drug benefit program (Medicare Part D) is one that is controversial and causes confusion for enrollees, physicians, and pharmacists while adding a very high cost to the program. The Medicare Advantage and Part D programs created billions of dollars in new costs for the already unstable Medicare program. Currently, the Obama Administration has proposed a Medicare Reform that will provide healthcare coverage for over 32 million uninsured citizens. The funding of this reform will come from new taxes and fees on healthcare services.